[ LETTERHEAD OF REGISTRANT ]
June 7, 2005
VIA EDGAR AND UPS RED
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Gary Todd, Reviewing Accountant
Securities and Exchange Commission
Division of Corporate Finance
Mail Stop 03-06
450 Fifth Street, N.W.
Washington, D.C. 20549-0306
Re: Imaging Diagnostic Systems, Inc.
Form 10-K for the Fiscal Year Ended June 30, 2004
Filed September 17, 2004
Quarterly Report on Form 10-Q for the period ended
December 31, 2004
File No.: 000-26028
Dear Mr. Todd:
In connection with the review of the above-captioned Form 10-K and Form
10-Q for Imaging Diagnostic Systems, Inc. (the "Company"), we are responding to
your comments set forth in your letter dated April 7, 2005, to Allan L.
Schwartz, Executive Vice President and Chief Financial Officer of the Company,
which was received in our office by Fax on April 8, 2005. We have enclosed the
following documents to assist you in expediting our review:
1. This cover letter
2. Original letter containing supplemental information - Confidential
Version
3. Copy of letter containing supplemental information - Redacted Version
4. Copy of FOIA Confidential Treatment Request Letter
5. Marked copy of Amendment No. 1 to our Form 10-K showing changes from
their filing date (without exhibits)
6. Marked copy of Amendment No. 1 to our Form 10-Q showing changes from
their filing date (without exhibits)
This cover letter, the redacted supplemental information letter and our amended
Form 10-K and Form 10-Q have been filed with the Commission via EDGAR earlier
today.
Form 10-K for the Fiscal Year Ended June 30, 2004
Item 7. Management's Discussion and Analysis of Financial Condition and Results
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of Operations - Page 27
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Results of Operations - Page 27
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Securities and Exchange Commission
Division of Corporate Finance
June 7, 2005
Page 2
Balance Sheet Data - Page 28
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1. We have revised our MD&A to expand our discussion and quantify
significant factors where the result in each line item has been
impacted by more than one factor.
2. We have revised our MD&A to more fully describe our inventory, which
consists of raw materials, work in process and finished goods. We have
also revised Note 5, "Inventories," to conform to these three
categories. Our raw materials consist of parts, most of which are not
readily available because of long lead times from manufacturers or
distributors, and custom fabricated parts and assemblies, which always
have a long lead-time. Examples of some of our costly parts and
assemblies which have long-lead times are laser diodes, custom
aluminum frames, precision machined parts, custom fiberglass
enclosures, and custom printed circuit boards.
As a medical device manufacturer, we must adhere to very high
standards of control and quality assurance. Our sole product, the
CTLM(R), is a CT scanner, which, when completed, must undergo
extensive in-house inspection and testing. We have revised our
disclosure to include "completed units under testing" as a component
of work in process. Once inspection and testing of a CTLM(R) has been
completed, it will be deemed finished goods.
All of the current inventory consisting of raw materials and work in
process will, during the normal course of manufacturing the CTLM(R),
result in finished goods available for sale. We are in the process of
international globalization and have appointed distributors to sell
our product and have placed systems for demonstration and clinical
collaboration to create awareness of our product. All of these systems
will be available for sale and the carrying costs of these systems
have been and will continue to be written down to the lower of cost or
market on a quarterly basis. We expect to recover our investment
because the CTLM(R) is new technology and is currently the only CT
scanner dedicated to breast imaging capable of producing three
dimensional images using a laser beam instead of ionizing X-ray. Our
international marketing program is underway and we have reported the
sale of three CTLM(R) systems in the quarter ending March 31, 2005. We
had ramped up our inventory of finished goods during the fiscal year
ended June 30, 2004, because we were anticipating more sales in China,
which did not occur, and we expected during that fiscal year to
receive FDA approval to sell the CTLM(R) system in the U.S. market.
We have revised our MD&A to disclose that some CTLM(R) systems in
finished goods will be used as demonstrators or for clinical
collaboration and at the conclusion of the demonstration or clinical
collaboration period may be sold at reduced prices. Raw materials used
for research and development or other purposes are expensed and not
included in inventory. We have revised our disclosure in conformance
with SAB Topic 5-BB to include our end of quarter methods and
procedures to write down our carrying costs of inventory based on its
Securities and Exchange Commission
Division of Corporate Finance
June 7, 2005
Page 3
utility, physical obsolescence, changes in price levels or other
causes. We have expanded our disclosure to explain why we believe our
inventories are recoverable.
3. We have revised our MD&A, Item 7 to include a section on Critical
Accounting Policies pertaining to inventory.
4. We have revised our disclosure to include "completed units under
testing" as a component of work in process and added finished goods as
a new component. All units, whether completed and undergoing final
testing in our factory or finished goods, are units available and held
for sale. The CTLM(R) is a production unit manufactured by our Company
and is currently being sold in the International market. Any new
designs, construction and testing of pre-production prototypes and
models would be expensed as Research and Development in accordance
with FAS 2, paragraph 9.
Financial Statements - Page 35
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5. We have revised our Form 10-K to include the selected quarterly
financial data required by Item 302 of Regulation S-K.
Statement of Cash Flows - Page F-14
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6. We have corrected the typographical errors in the placement of
brackets in the working capital liability line items in our Statement
of Cash Flows. These revisions will present our cash flows in
accordance with FAS 95.
7. We have revised our cash flow statement to reflect the "Inventory
valuation adjustment" as a reconciling item to net loss and the
inventory change has now been reflected as a cash outflow.
8. We have corrected the typographical errors of duplicating the entry of
$492,701 in both the cash and non-cash sections regarding proceeds
from exercise of stock options by deleting the non-cash entry. We have
revised our cash flow statement to comply with the requirements of FAS
95. Further details are provided in a supplemental response.
Note 2(b) Revenue Recognition - Page F-17
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9. A supplemental narrative is provided regarding our policies and
procedures for sales and matters pertaining to revenue recognition.
10. An additional supplemental response is provided regarding our
policies, terms and conditions with our distributors. We have expanded
the disclosure of our revenue recognition policy in note 2(b) to
clarify our conformance to the guidance provided in SAB 104.
Securities and Exchange Commission
Division of Corporate Finance
June 7, 2005
Page 4
Note 2(e) Prototype Equipment - Page F-18
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11. Our initial pre-production models were manufactured one at a time by
our engineering group and, upon completion, were deemed prototypes
because they were original models and were to set the standard for
future production. They were not expensed as a period cost to research
and development because they were full-scale fully functional units to
be used as demo units to gather indications of interest from the
medical community. From 1994 to 1998, it was management's opinion that
prototypes could be sold after the demonstration period. Richard J.
Grable, our late co-founder, invented the first CT laser breast
scanner in 1989. There already existed a basis in science for Computed
Tomography (CT) dating back to 1972 and published scientific
literature supported the use of lasers in medical optical imaging.
These combined facts were pervasive evidence that technological
feasibility was established prior to our manufacture of the units thus
supporting the capitalization of the pre-production models as
prototypes. It was also management's opinion that the pre-production
models could not be deemed inventory because they were made one at a
time, the design was not finalized and we had not obtained the initial
approvals from UL, ISO or CE.
A chronology was presented in Note 2 (e) "Prototype Equipment"
disclosing that certain items in the prototypes were re-classed to
research and development expense and computer and lab equipment.
During the fiscal year ended June 30, 1998, a decision by management
was made to re-class various pre-production units available for sale
to inventory and the remaining costs were expensed to research and
development. Any costs associated with new design or development were
and currently are being expensed to research and development in
accordance with FAS 2. We have revised note 2 (e) "Prototype
equipment" in our amended 10-K as it no longer has relevance in the
presentation of our financial statements.
Note 2(m) Intangible Assets - Page F-21
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12. The useful lives of our UL and CE approvals, which were obtained
through the use of outside consulting firms, are infinite. We
determined that the costs associated with obtaining these initial
approvals for our CTLM(R) Model 1020 represent a core expenditure
having an infinite life. The costs associated with maintenance fees,
upgrades or inspection fees are expensed as period costs. We have
expanded our disclosure in note 7 "Other Assets", to include relevant
information as provided in the guidance of FAS 142. Further disclosure
regarding these approvals has been included in our supplemental
response.
13. We have provided our rationale as to why our UL and CE approvals are
intangible assets in a supplemental response.
Securities and Exchange Commission
Division of Corporate Finance
June 7, 2005
Page 5
14. The core costs of obtaining the initial UL and CE approvals have an
infinite life, and intangible assets having an infinite life are not
amortized at the point of acquisition or subsequent to point of
acquisition in accordance with the guidance of FAS 142. We have
faithfully followed the guidance provided in a paradigm, Figure 23-1:
Summary of Accounting for Intangible Assets by FAS-142, in which
questions are asked relative to infinite life, asset impairment and
whether assumption of infinite life is still valid. For the fiscal
year ended June 30, 2004, we determined that our assumption of
infinite life was still valid. Thus, the intangible asset was not
subject to amortization. This intangible asset is tested for
impairment annually, and should it be deemed impaired, the scope of
its impairment will be determined and the appropriate charge to
expense will be recorded.
Note 4. Going Concern - Page F-24
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15. We have revised our Going Concern disclosure to further explain that,
while we have commenced our planned principal operations, we are a
development stage enterprise because we have not yet produced
significant revenues. FAS 7 does not provide guidance on what
constitutes "significant" revenue; therefore, we must use our judgment
in determining whether our Company is a development stage enterprise.
In accordance with the guidance provided in FAS 7, par. 9, we deem
ourselves a development stage enterprise because:
1. Our revenues are very small relative to our cash requirements.
2. We rely on our Fourth Private Equity Credit Agreement for raising
capital.
3. We are developing markets through the appointment of
international distributors.
4. We are training distributors in the sales and service of our
product.
We would be able to exit FAS 7 reporting upon having sufficient
revenues for two successive quarters where we would not have to
utilize our Fourth Private Equity Credit Agreement or other financing
for capital to cover our quarterly operating expenses.
Note 9. Other Current Liabilities - Page F-27
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16. We have explained the nature and origin of the accrued liability and
the accounting theory used in recording the accrued compensation as a
liability for stock options. We have added a footnote to note 9 "Other
Current Liabilities" clarifying our disclosure. We are adopting FASB's
Statement of Financial Accounting Standards No. 123R commencing with
our fiscal year beginning July 1, 2005.
Note 14. Income Taxes - Page F-31
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17. We have revised note 14 to include additional disclosure to state that
there is no limitation as to the utilization of the net operating
losses in future years
Securities and Exchange Commission
Division of Corporate Finance
June 7, 2005
Page 6
resulting from issuance of additional common stock during the fiscal
year ended June 30, 2004. We have provided further explanation in a
supplemental response.
Item 9A. Controls and Procedures - Page 36
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18. We have revised our disclosure of Controls and Procedures in Item 9A
in accordance with Item 307 of Regulation S-K and have amended our
filing to disclose management's conclusion regarding the effectiveness
of disclosure controls and procedures as of the end of the period
covered by the annual report.
19. We have revised our disclosure in accordance with Item 308(c) of
Regulation S-K. In this regard we have added "...that occurred during
our fourth fiscal quarter...".
Exhibits 31.1 and 31.2
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20. We have revised our certifications filed as Exhibits 31.1 and 31.2 to
the exact form prescribed by Item 601(b)(31) in Regulation S-K. These
revised certifications are filed with our amended Form 10-K and Form
10-Q for the quarter ending December 31, 2004.
Form 10-Q for the Quarterly Period Ended December 31, 2004
Item 2. Management's Discussion and Analysis of Financial Condition and Results
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of Operations - Page 9
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21. We have revised our disclosure to explain the reasons for changes in
our expense categories. This explanation is presented in our Results
of Operations and states that we have changed the format of our
management discussion and analysis of financial condition and results
of operations (MD&A) to better disclose and discuss the three most
significant categories of expenses, i.e., general and administrative
(G&A), research and development (R&D), and sales and marketing (S&M).
We have quantified and discussed each significant factor within each
of these expense categories. We have further disclosed the other
expense items that are included in each of the three most significant
categories of expenses.
Item 4. Controls and Procedures - Page 12
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22. We have revised our disclosure to include the language required by
Exchange Act Rule 13a-15(e).
Securities and Exchange Commission
Division of Corporate Finance
June 7, 2005
Page 7
23. We have revised and expanded our disclosure to comply with Item 307
and to incorporate the definition of disclosure controls and
procedures provided in Exchange Act Rule 13a-15(e).
Imaging Diagnostic Systems, Inc. (the "Company"), acknowledges that we are
responsible for the adequacy and accuracy of the disclosure in the filings made
in response to this comment letter. The Company also acknowledges that staff
comments or changes to disclosure in response to staff comments do not foreclose
the Commission from taking any action with respect to the filings and the
Company also acknowledges that it may not assert staff comments as a defense in
any proceeding initiated by the Commission or any person under the federal
securities laws of the United States.
Sincerely,
IMAGING DIAGNOSTIC SYSTEMS, INC.
/s/ Allan L. Schwartz
Allan L. Schwartz
Executive Vice President
And Chief Financial Officer
Enclosure
c: Timothy B. Hansen, CEO
Patrick J. Gorman, Chairman, Audit Committee
Barry A. Fink, CPA
Robert B. Macaulay, Esq.