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U.S. Securities and Exchange Commission

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 41633 / July 21, 1999
Admin. Proc. File No. 3-9624

In the Matter of the Application of

IMAGING DIAGNOSTIC SYSTEMS, INC.
c/o Lerner & Pearce, P. A.
2888 East Oakland Park Boulevard
Fort Lauderdale, FL 33306

For Review of Action Taken by the

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

OPINION OF THE COMMISSION
REGISTERED SECURITIES ASSOCIATION -- DENIAL OF NASDAQ SMALLCAP MARKET LISTING

Failure to Meet Conditions for Listing

Registered securities association acted in accordance with its rules and the purposes of the federal securities laws in granting listing in Nasdaq Smallcap Market only subject to certain conditions. Held, review proceeding is dismissed. APPEARANCES:

Allan M. Lerner, of Lerner & Pearce, P.A., for Imaging Diagnostic Systems, Inc.

Robert E. Aber, Sara Nelson Bloom, and Arnold P. Golub, for the Nasdaq Stock Market, Inc.

Appeal filed: June 11, 1998
Last brief filed: September 24, 1998

I.

      Imaging Diagnostic Systems, Inc. ("IDS" or the "Company") seeks review of a decision of the National Association of Securities Dealers, Inc. ("NASD") granting its application to include the Company's securities on the Nasdaq SmallCap Market subject to two conditions: first, that the bid price of the securities meet the minimum required for listing and second, that the Company demonstrate that it possessed at least $5,000,000 in net tangible assets. The NASD imposed these conditions because it found that IDS' common stock failed to meet the minimum bid price required for listing and because the Company did not demonstrate its ability to comply with the net tangible assets requirement. 1 The Company characterized the NASD's action as a conditional denial of the company's application. We base our findings on an independent review of the record.

II.

      IDS is a development stage company engaged in researching and developing a breast-imaging device for the detection of cancer. The Company was incorporated in Florida in December 1993. When it applied, IDS met the specified initial listing requirements of the Nasdaq SmallCap Market, 2 but the staff initially denied IDS' application because of concerns about the regulatory history of a 5.26% stockholder. 3 The stockholder had a record of fifteen separate disciplinary infractions. The staff also expressed doubt as to the Company's ability to continue as a going concern and to comply with the continued listing criteria, but did not include this as grounds for its denial. The Company appealed to the Qualifications Panel ("Panel"), which affirmed the staff's decision based on the stockholder's regulatory history ("Panel Decision I"). In addition, the Panel expressed concern about the financial condition of the Company, although this was not a basis for its decision.

      The Panel noted that the Company had not generated revenues since its inception in 1993 and had sustained losses of $860,345 and $3,829,528 for its fiscal years ending June 30, 1995, and June 30, 1996, respectively. At the time of Panel Decision I, the Company reported an accumulated deficit, from inception through June 30, 1996, of $4,756,824. In its subsequent Form 10-KSB for the period ended June 30, 1997, the Company revised its financial statements to report an accumulated deficit of $8,186,146 as of June 30, 1996, and reported an accumulated deficit of $16,288,314 as of June 30, 1997. The company, in its original application to Nasdaq, projected that expenditures would exceed revenue by approximately $200,000 to $225,000 per month and noted that the Company expected this rate to "approximately double" when manufacture of the product commenced. 4

      The Company appealed Panel Decision I to the Nasdaq Listing and Hearing Review Committee ("Review Committee"). On February 5, 1997, the Review Committee reversed and remanded ("Remand Decision") the Panel's decision with instructions to work with the Company to implement the Company's proposal to insulate itself from the stockholder with the disciplinary history. The Review Committee noted that none of the stockholder's violations involved fraudulent conduct, the violations occurred "some time ago," the stockholder was not an officer or director of the Company, and his only continuing relationship with the Company was as a stockholder. The Review Committee also noted that the Company had met all initial inclusion criteria and that the uncertainty of its financial condition did not warrant a denial of listing.

      After remand, the Company submitted a detailed plan to implement its proposal concerning the stockholder. On March 31, 1997, less than three weeks after the Company submitted this plan, an article published in Barron's inaccurately reported that the NASD had determined not to list the Company's securities on the SmallCap Market. Within two days, the stock's bid price dropped below the minimum initial bid price required, although it stayed above the continued listing requirement of $1.00 per share. Barron's printed a retraction later; however, the Company's bid price continued to fall.

      Approximately one week after the Barron's article, NASD staff contacted the Company to express concerns about the stock's bid price. The staff waited an additional two months, during which (except on two days in April) the Company's bid price remained below $3.00. On June 13, 1997, the staff informed the Company that its application for listing would be denied because the stock was below the $3.00 minimum bid requirement. As of September 10, 1998, the Company's closing bid price was $0.52.

      The Company again appealed the staff's decision to the Panel. The Panel approved the Company for initial listing on the Nasdaq SmallCap Market but imposed two conditions. First, the Panel required the Company to comply with the amended minimum bid requirement of $4.00. 5Although the Panel's decision suggested this had to be accomplished by a reverse stock split, the Panel indicated in a later clarification that the Company could either rely on market forces to raise the bid price or effect a reverse stock split. Second, the Panel required the Company to provide evidence that it possessed at least $5,000,000 in net tangible assets. This amount exceeded the $4,000,000 initial listing requirement specified in the amended NASD rules. The Panel stated that the additional amount was necessary to allay concerns about the Company's ability to maintain long-term compliance with the continued listing requirement of $2,000,000 in net tangible assets. The renamed Nasdaq Listing and Hearing Review Council ("Review Council") affirmed the Panel in all respects ("Final Decision"). 6The Company seeks Commission review of this decision.

III.

      The Company requests the Commission to vacate the Review Council's decision and to direct the NASD to list the Company's securities on the Nasdaq SmallCap Market. To sustain this NASD action, we must find that the specific grounds for imposing certain conditions for inclusion exist in fact. We also must find that the action at issue is in accordance with applicable NASD rules, and that these rules are and were applied in a manner consistent with the purposes of the securities laws. 7

      We find that the specific grounds identified as the basis for imposing certain conditions for inclusion existed in fact. 8 The record is uncontroverted, and the Company concedes in its brief on appeal to us, that the Company did not meet either the former $3.00 or the amended $4.00 initial minimum bid price requirement both when the Panel and when the Review Council considered its application after remand. The Company's financial data, which indicated a large and growing accumulated deficit, support the NASD's additional concern that the Company may not be able to maintain compliance with the net tangible assets requirement.

      We also find that the action taken by the NASD was in accordance with applicable rules and that these rules were applied in a manner consistent with the purposes of the securities laws. When the Company initially applied for listing in March 1996, it met the $3.00 minimum bid price then in effect. However, by April 2, 1997, the bid price of its shares had fallen below the $3.00 minimum bid price to $2-7/8 per share. The bid price continued to fall, reaching $1-1/16 per share by the time of the Review Council's decision in May 1998. It had by then been well below the applicable initial minimum bid price requirement -- $4.00 -- for over one year. The NASD's staff monitored the bid price long after Barron's printed its retraction and the stock remained below the minimum bid.

      The Company contends that, under the circumstances, it should have been granted an exception to the initial listing requirement. In IDS' view, it was "patently unfair to require the Company to maintain a minimum $3 bid price for the entire review period" for two reasons. First, the Company argues that the Remand Decision did not authorize an "additional initial inclusion requirement" of a minimum bid price of $3.00. Rather, the Review Committee reversed and remanded Panel Decision I with instructions to list the Company's securities upon implementation of the Company's plan to insulate the shares of the stockholder with the disciplinary history.

      We disagree. Listing standards, including the minimum bid requirement, serve an important screening function "to provide listed status only to bona fide companies with sufficient float, investor base, and trading interest to maintain fair and orderly markets." 9We recognize that a stock's bid price may drop during the application process. We also recognize that any delays in that process while the applicant attempts to fulfill listing requirements may create uncertainty about the prospects for ultimate success in obtaining listing, thereby further depressing the stock price. Nonetheless, Rule 4310(c)(4) requires a listing applicant's common or preferred stock to have a certain minimum bid price at the time of initial inclusion. 10

      The Company also argues that it met the $3.00 minimum bid for 14 consecutive trading days immediately after it filed its plan to isolate the stockholder from IDS. It believes that, "[t]here was no reason for the Staff to monitor the Company's bid price beyond the ten days," which IDS claims is the NASD staff's "customary" monitoring period. We do not believe that the NASD is constrained to consider such a limited period. Approximately three weeks after the Company fulfilled its obligation to supply additional information to the NASD, the price of IDS' stock suddenly dropped below the minimum bid requirement. Since the Company's bid price did not recover during the phase-in of the new minimum bid requirement, the Panel appropriately required the Company to meet the new $4.00 minimum bid. 11

      Although Rule 4330(d) allows the NASD to waive the minimum bid requirement "where [the NASD] deems it appropriate," we do not believe that the NASD erred here in requiring the Company to meet the initial inclusion minimum bid price. By the time of the Final Decision, the bid price had fallen to $1-1/16 per share. The persistent downward trend in the stock's bid price indicates that a waiver of the minimum bid requirement was not appropriate.

      The Company further contends that the decision to deny a listing based upon the decline in the shares' bid price was arbitrary and capricious. It claims that on each of the "significant" dates relating to the listing process the Company's common stock has always closed at $3.00 or above. 12 On each of the dates cited by the Company in its brief, the Company's common stock did close above $3.00; however, on a number of those dates the shares' bid price, the relevant determinant, remained below the $3.00 minimum required for listing.

      The Company next challenges the requirement that it have $5,000,000 in net tangible assets. Pursuant to its authority under Rule 4330 to apply additional or more stringent criteria for initial inclusion of securities, the NASD imposed a higher net tangible asset requirement than the $4,000,000 contained in amended Rule 4310(c)(2). The Final Decision indicated that the Company's "history of losses, which appear to have accelerated since [the Remand Decision]," brought into question the Company's long term compliance with the continued listing requirement of $2,000,000 in net tangible assets.

      We have stated that the NASD has broad discretion to consider whether a company will be able to maintain the listing requirements. 13 Moreover, the burden is on the Company to demonstrate its ability to maintain compliance with listing requirements. 14 Despite the Company's apparent ability to meet the $4,000,000 initial requirement, the NASD did not act unreasonably in questioning the Company's ability to keep its net tangible assets above the $2,000,000 continued listing requirement. The Company had sustained large losses and had not generated any revenues according to the most recent information in the record. Accordingly, we find that the NASD did not exceed its authority under Rule 4330(a)(3) when it concluded that a more stringent requirement of $5,000,000 in net tangible assets would provide greater assurance that the Company will be able to comply with the continued listing requirement.

IV.

      We find that a sufficient factual basis exists to impose certain conditions for inclusion of IDS' common stock in the Nasdaq SmallCap Market, and that the NASD acted in accordance with its rules which it applied in a manner consistent with the purposes of the securities laws. Accordingly, this review proceeding shall be dismissed.

An appropriate order will issue. 15

By the Commission (Chairman LEVITT and Commissioners JOHNSON, HUNT, CAREY and UNGER).

Jonathan G. Katz
Secretary

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.

SECURITIES EXCHANGE ACT OF 1934
Rel. No. 41633 / July 21, 1999

Admin. Proc. File No. 3-9624


In the Matter of the Application of

IMAGING DIAGNOSTIC SYSTEMS, INC.
c/o Allan M. Lerner, Esq.
2888 East Oakland Park Boulevard
Fort Lauderdale, Florida 33306

For Review of Action Taken by the

NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC.

ORDER DISMISSING REVIEW PROCEEDING

     On the basis of the Commission's opinion issued this day, it is

     ORDERED that the application for review filed by Imaging Diagnostic Services, Inc. be, and it hereby is, dismissed.

     By the Commission.

Jonathan G. Katz
Secretary


FOOTNOTES

-[1]-The NASD invoked its authority under NASD Marketplace Rules 4300 and 4330. Rule 4300 provides that the NASD exercises "broad discretionary authority" over initial inclusion in the Nasdaq SmallCap Market. Rule 4330 provides that the NASD may "deny inclusion or apply additional or more stringent criteria for the initial . . . inclusion of particular securities" if the NASD "deems it necessary to prevent fraudulent and manipulative acts and practices, to promote just and equitable principles of trade, or to protect investors and the public interest."

-[2]- Two versions of the listing requirements are at issue. When IDS applied for listing, Rule 4310(c)(4) provided that: "For initial inclusion, common or preferred stock shall have a minimum bid price of $3 per share." Rule 4310(c)(2) required the issuer to have "total assets" of at least $4,000,000. On August 22, 1997, we approved amendments to the NASD rules increasing the minimum bid to $4.00 per share, and changing the $4,000,000 requirement from total assets to net tangible assets. Securities Exchange Act Rel. No. 38961 (August 29, 1997), 62 Fed. Reg. 45895 (Aug. 9, 1998) ("Listing Release"). According to the proposing release, issuers with pending applications had until July 1, 1997 to commence Nasdaq trading under the old rules. Securities Exchange Act Rel. No. 38469 (April 2, 1997), 62 Fed. Reg. 17262.

-[3]- The staff cited the public interest issues set forth in Rules 4300 and 4330.

-[4]- According to the Company's Form 10-QSB filed with the Commission on November 13, 1998, the Company still has not sold any of its breast-imaging devices.

-[5]- See n. 2, supra.

-[6]- The Panel's decision gave the Company until May 11, 1998, to meet the two conditions. Although the Review Council's decision "affirm[ed] the Panel's decision", it was issued on May 19, 1998, after the end of the exception period granted by the Panel, without specifying a new exeption period. We construe the effect of the Review Council decision to be a denial of the listing application by the Company.

-[7]-Section 19(f) of the Securities Exchange Act of 1934 ("Exchange Act"), 15 U.S.C. 78s(f). In addition, we must find that the NASD's action imposes no undue burden on competition. IDS does not claim, and the record does not show, that the NASD's action has imposed an undue burden on competition. See Creative Medical Development, Inc., Securities Exchange Act Rel. No. 37611 (August 27, 1996), 62 SEC Docket 1954, 1958.

-[8]-The NASD filed a motion while this appeal was pending seeking to adduce additional evidence into the record pertaining to developments in IDS's financial status occurring after the NASD's final decision. Because our review is limited to determining whether the NASD's decision was based on facts existing when that decision was made, we deny the NASD's motion.

-[9]- Listing Release at 45898 n. 38 (reiterating the NASD's belief that raising the maintenance minimum bid is an important component in providing a safeguard against certain market activity associated with low priced securities).

-[10]- See, e.g., DHB Capital Group, Inc., Securities Exchange Act Rel. No. 37069 (April 5, 1996), 61 SEC Docket 2049, 2053 n.8 (noting that applicant's "common stock bid price consistently was below the [ ] minimum bid price during the pendency of the application"). See also Listing Release at 45897 ("The NASD states that the purpose of [changing the Nasdaq national market bid requirements to match those for the SmallCap market] is to . . . ensure that issuers be in compliance with the bid price requirement at the time of listing, and not just at the time coinciding with the filing of the application.").

-[11]- See Listing Release at 45898 n. 44 (new listing requirements retroactively apply to pending applications).

-[12]-According to the Company, these "significant dates" include the filing of IDS' application, the dates on which the NASD's staff and review panels announced decisions, and the date of the Barron's article.

-[13]-Gunther International Ltd., Securities Exchange Act Rel. No. 37073 (Apr. 5, 1996), 61 SEC Docket 2081, 2087.

-[14]-Biorelease Corp., Securities Exchange Act Rel. No. 35575 (April 6, 1995), 59 SEC Docket 84, 90.

-[15]-All of the arguments advanced by the parties have been considered. They are rejected or sustained to the extent that they are inconsistent or in accord with the views expressed herein.

http://www.sec.gov/litigation/opinion/34-41633.htm


Modified:02/10/1998