SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended: September 30, 2005
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _____to______
Commission file number: 0-26028
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Name of small business issuer in its charter)
Florida 22-2671269
------- ----------
(State of incorporation) (IRS employer Ident. No.)
6531 N.W. 18th Court, Plantation, FL 33313
------------------------------------ -----
(address of principal office) (Zip Code)
Registrant's telephone number: (954) 581-9800
Indicate by check mark whether the Registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes _X__ No_____
The number of shares outstanding of each of the issuer's classes of equity
as of September 30, 2005: 205,994,394 shares of common stock, no par value. As
of September 30, 2005, the issuer had no shares of preferred stock outstanding.
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Development Stage Company)
PART I - FINANCIAL INFORMATION
------------------------------
Item 1. Financial Statements
Page
----
Condensed Balance Sheet (Unaudited) -
September 30, 2005 and June 30, 2005 3
Condensed Statement of Operations (Unaudited) -
Three months ended September 30,
2005 and 2004, and December 10,
1993 (date of inception) to September 30, 2005 4
Condensed Statement of Cash Flows (Unaudited) -
Three months ended September 30,
2005 and 2004, and December 10, 1993 (date of inception)
to September 30, 2005 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Financial Condition and Results 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 13
Item 4. Controls and Procedures 13
PART II - OTHER INFORMATION
---------------------------
Item 1. Legal Proceedings 15
Item 2. Changes in Securities 15
Item 3. Defaults Upon Senior Securities 15
Item 4. Submission of Matters to a Vote of
Security Holders 15
Item 5. Other Information 15
Item 6. Exhibits and Reports on Form 8-K 22
Signatures 23
2
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Development Stage Company)
Condensed Balance Sheet
Assets
Sept. 30, 2005 Jun. 30, 2005
-------------- -------------
Current Assets: Unaudited *
Cash $ 348,565 $ 765,523
Accounts receivable 754,270 264,535
Loans receivable 19,001 14,576
Inventory 2,018,593 2,020,498
Prepaid expenses 84,877 34,187
------------ -----------
Total Current Assets 3,225,306 3,099,319
------------ -----------
Property and equipment, net 2,142,211 2,166,920
Intangible assets, net 333,221 341,765
------------ -----------
$ 5,700,738 $ 5,608,004
============ ===========
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses $ 790,216 $ 783,966
Customer deposits 30,000 30,000
Short term debt 21,500 21,500
------------ -----------
Total Current Liabilities 841,716 835,466
------------ -----------
Stockholders Equity:
Common Stock 88,384,619 87,150,773
Additional paid-in capital 1,861,083 1,597,780
Deficit accumulated during development stage (85,386,680) (83,976,015)
------------ -----------
Total stockholders' equity 4,859,022 4,772,538
------------ -----------
$ 5,700,738 $ 5,608,004
============ ===========
* Condensed from audited financial statements.
The accompanying notes are an integral part of these condensed financial
statements.
3
IMAGING DIAGNOSTIC SYSTEMS, INC.
A Development Stage Company
(Unaudited)
Condensed Statements of Operations
Three Months Ended Since Inception
September 30, (12/10/93) to
2005 2004 Sept. 30, 2005
------------ ------------- ---------------
Net Sales $ 671,750 $ - $ 1,963,998
Cost of Sales 277,264 - 807,820
------------ ------------ -------------
Gross Profit 394,486 - 1,156,178
------------ ------------ -------------
Operating Expenses:
General and administrative $ 717,528 $ 710,519 $ 44,304,272
Research and development 417,606 533,091 14,668,453
Sales and marketing 242,466 248,127 4,769,746
Inventory valuation adjustments 34,740 122,236 3,768,935
Stock option expense - 123(R) 263,304 - 263,304
Depreciation and amortization 41,402 47,832 2,462,510
Amortization of deferred compensation - - 4,064,250
------------ ------------ -------------
1,717,046 1,661,805 74,301,470
------------ ------------ -------------
Operating Loss (1,322,560) (1,661,805) (73,145,292)
Gain on sale of fixed assets - - 5,585
Interest income 1,531 1,021 276,048
Other income - - 409,962
Interest expense (89,636) (176,559) (6,085,223)
------------ ------------ -------------
Net Loss (1,410,665) (1,837,343) (78,538,920)
Dividends on cumulative Pfd. stock:
From discount at issuance - - (5,402,713)
Earned - - (1,445,047)
------------ ------------ -------------
Net loss applicable to
common shareholders $ (1,410,665) $ (1,837,343) $(85,386,680)
============= ============= =============
Net Loss per common share:
Basic and Diluted:
Net loss per common share $ (0.01) $ (0.01) $ (1.00)
============= ============= =============
Weighted avg. no. of common shares 201,835,198 176,855,811 85,035,492
============= ============= =============
The accompanying notes are an integral part of these condensed financial
statements.
4
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Development Stage Company)
Condensed Statement of Cash Flows
Three Months Since Inception
Ended September 30, (12/10/93) to
2005 2004 Sept. 30, 2005
------------- ------------- ---------------
Cash flows from operations:
Net loss $ (1,410,665) $ (1,837,343) $ (78,538,920)
Changes in assets and liabilities (137,937) 103,568 25,296,936
------------- ------------- --------------
Net cash used in operations (1,548,602) (1,733,775) (53,241,984)
------------- ------------- --------------
Cash flows from investing activities:
Proceeds from sale of property & equipment - - 29,857
Capital expenditures (12,526) (4,473) (7,241,698)
------------ ------------ ------------
Net cash used in investing activities (12,526) (4,473) (7,211,841)
------------ ------------ ------------
Cash flows from financing activities:
Repayment of capital lease obligation - - (50,289)
Other financing activities - NET - - 5,835,029
Proceeds from issuance of preferred stock - - 18,039,500
Net proceeds from issuance of common stock 1,144,171 1,950,508 36,978,150
----------- ----------- -----------
Net cash provided by financing activities 1,144,171 1,950,508 60,802,390
----------- ----------- -----------
Net increase (decrease) in cash (416,958) 212,260 348,565
Cash, beginning of period 765,523 554,354 -
---------- ---------- -----------
Cash, end of period $ 348,565 $ 766,614 $ 348,565
============ ============ ===========
The accompanying notes are an intergral part of these condensed financial
statements.
5
IMAGING DIAGNOSTIC SYSTEMS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
We have prepared the accompanying unaudited condensed financial statements of
Imaging Diagnostic Systems, Inc. in accordance with generally accepted
accounting principles for interim financial information and pursuant to the
instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the
financial statements do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In our opinion, all adjustments, consisting of normal recurring
adjustments, considered necessary for a fair presentation have been included.
Operating results for the three month period ended September 30, 2005 are not
necessarily indicative of the results that may be expected for any other interim
period or for the year ending June 30, 2006. These condensed financial
statements have been prepared in accordance with Financial Accounting Standards
No. 7 (FAS 7), Development Stage Enterprises, and should be read in conjunction
with our condensed financial statements and related notes included in our Annual
Report on Form 10-K filed on September 13, 2005.
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires that management make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amount of expenses incurred during the
reporting period. Actual results could differ from those estimates.
NOTE 2 - GOING CONCERN
Imaging Diagnostic Systems, Inc. (IDSI) is currently a development stage
enterprise and our continued existence is dependent upon our ability to resolve
our liquidity problems, principally by obtaining additional debt and/or equity
financing. IDSI has yet to generate a positive internal cash flow, and until
significant sales of our product occur, we are mostly dependent upon debt and
equity funding. See Item 2 "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
In the event that we are unable to obtain debt or equity financing or we are
unable to obtain such financing on terms and conditions acceptable to us, we may
have to cease or severely curtail our operations. This would materially impact
our ability to continue as a going concern. In the event that we are unable to
draw on our private equity line, alternative financing would be required to
continue operations. Management has been able to raise the capital necessary to
reach this stage of product development and has been able to obtain funding for
capital requirements to date. There is no assurance that, if and when Food and
Drug Administration ("FDA") marketing clearance is obtained, the CTLM(R) will
achieve market acceptance or that we will achieve a profitable level of
operations.
We have commenced our planned principal operations of the manufacture and sale
of our sole product, the CTLM(R), CT Laser Mammography System. We are continuing
to appoint distributors and are installing systems under our clinical
collaboration program as part of our global commercialization program. We have
sold 13 systems as of September 30, 2005; however, we continue to operate as a
development stage enterprise because we have yet to produce significant
revenues, we rely on raising capital through our Fourth Private Equity Credit
Agreement and we have to create product awareness as a foundation for developing
markets through an international distributor network. We would be able to exit
FAS 7 Development Stage Enterprise reporting upon having sufficient revenues for
two successive quarters such that we would not have to utilize other funding to
meet our quarterly operating expenses.
6
NOTE 3 - INVENTORY
Inventories included in the accompanying condensed balance sheet are stated at
the lower of cost or market as summarized below:
Sept. 30, 2005 June 30, 2005
-------------- -------------
Raw materials consisting of purchased
parts, components and supplies $ 641,453 $ 577,211
Work-in-process including units
undergoing final inspection and testing $ 232,338 $ 105,902
Finished goods $ 1,144,802 $ 1,337,385
Total Inventory $ 2,018,593 $ 2,020,498
NOTE 4 - REVENUE RECOGNITION
We recognize revenue in accordance with the guidance presented in the SEC's
Staff Accounting Bulletin No. 104. We sell our medical imaging products, parts,
and services to independent distributors and in certain unrepresented
territories directly to end-users. Revenue is recognized when persuasive
evidence of a sales arrangement exists, delivery has occurred such that title
and risk of loss have passed to the buyer or services have been rendered, the
selling price is fixed or determinable, and collectibility is reasonable
assured. Unless agreed otherwise, our terms with international distributors
provide that title and risk of loss passes F.O.B. origin.
NOTE 5 -RECENT ACCOUNTING PRONOUNCEMENTS
On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123(R)"), which is a
revision of SFAS No. 123, and supersedes APB Opinion No. 25. SFAS No. 123(R)
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements based on their fair
values, beginning with the next fiscal year that begins after June 15, 2005. In
addition, SFAS No. 123(R) will cause unrecognized expense related to previously
issued options vesting after the date of initial adoption to be recognized as a
charge to results of operations over the remaining vesting period. We are
required to adopt SFAS No. 123(R) in our first quarter of fiscal year 2006. The
FASB has concluded that companies may adopt the new standard in one of two ways:
the modified prospective transition method and the modified retrospective
transition method. Under the modified retrospective transition method, prior
periods may be retroactively adjusted either as of the beginning of the year of
adoption or for all periods presented. The modified prospective transition
method requires that compensation expense be recorded for all unvested stock
options and share awards at the beginning of the fiscal period of adoption of
SFAS No. 123(R), while the retrospective method would record compensation
expense for all unvested stock options and share awards beginning with the
fiscal period retroactively adjusted. The Company adopted SFAS 123(R) on July 1,
2005 and elected to use the modified prospective transition method.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" ("SFAS 151"),
an amendment of ARB No. 43, Chapter 4. SFAS 151 clarifies the accounting for
abnormal amounts of idle facility expense, freight, handling costs and wasted
material. SFAS 151 is effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not believe adoption of SFAS
will have a material effect on its financial position, results of operations or
cash flows.
7
NOTE 6 - STOCK BASED COMPENSATION
We previously accounted for stock-based compensation issued to our employees
using the intrinsic value method. Accordingly, compensation cost for stock
options issued was measured as the excess, if any, of the fair value of our
common stock at the date of grant over the exercise price of the options. The
pro forma net earnings per share amounts as if the fair value method had been
used are presented below for the quarter ended September 30, 2004 and the actual
net earnings per share are presented below for the quarter ended September 30,
2005 in accordance with the Company's adoption of SFAS 123(R) effective July 1,
2005.
For purposes of the following disclosures during the transition period of
adoption of SFAS 123(R), the weighted-average fair value of options has been
estimated on the date of grant using the Black-Scholes options-pricing model
with the following weighted-average assumptions used for grants for the three
months ended September 30, 2005, and 2004: no dividend yield; expected
volatility of 119%; risk-free interest rate of 4%; and an expected ten-year term
for options granted. Had the compensation cost for the quarter ended September
30, 2004 been determined based on the fair value at the grant, our net income
(loss) and basic and diluted earnings (loss) per share would have been reduced
to the pro forma amount for that period indicated below. For the quarter ending
September 30, 2005, the net income and earnings per share reflect the actual
deduction for option expense as compensation.
Three Months Ended September 30
-------------------------------
2005 2004
---- ----
Net income (loss) - as reported $(1,147,361) $(1,837,343)
Less: stock-based employee
compensation determined under the
Fair value method, net of income tax effect (263,304) (158,511)
------------- --------------
Net income (loss) - Actual $(1,410,665) Proforma $(1,995,854)
============ ============
Basic and Diluted earnings (loss)
per share-as reported $ (0.01) $ (0.01)
Basic and Diluted earnings (loss)
per share-pro forma $ (0.01) $ (0.01)
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the financial condition and results of operations of
Imaging Diagnostic Systems, Inc. should be read in conjunction with the
Management's Discussion and Analysis of Financial Condition and Results of
Operations; the Condensed Financial Statements; the Notes to the Financial
Statements; and the Risk Factors included in our Annual Report on Form 10-K for
the fiscal year ended June 30, 2005. This quarterly report on Form 10-Q contains
forward looking statements within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, including statements using terminology such as "may," "will,"
"expects," "plans," "anticipates," "estimates," "potential," or "continue," or
the negative or other comparable terminology regarding beliefs, plans,
expectations, or intentions regarding the future. Forward-looking statements
include disclosures made in Results of Operations, Regulatory Matters, Clinical
Collaboration Sites Update and Other Recent Events. These forward-looking
statements involve risks and uncertainties and actual results could differ
materially from those discussed in the forward-looking statements. These risks
and uncertainties include, but are not limited to, those described under the
headings below and in Item 5, Other Information. All forward-looking statements
and risk factors included in this document or incorporated by reference from our
Annual Report on Form 10-K for the fiscal year ended June 30, 2005 are made as
of the date of this report based on information available to us as of the date
of this report, and we assume no obligation to update any forward-looking
statement or risk factors.
OVERVIEW
Imaging Diagnostic Systems, Inc. ("IDSI") is a development stage medical
technology company. Since its inception in December 1993, we have been engaged
in the development and testing of a Computed Tomography Laser Breast Imaging
System for detecting breast cancer (CT Laser Mammography or, "CTLM(R)"). We are
currently in the process of commercializing the CTLM(R) in certain international
markets.
Although the CTLM(R) system is a CT-like scanner, its energy source for imaging
is a laser beam and not ionizing radiation such as is found in conventional
x-ray mammography or CT scanners. The advantage of imaging without ionizing
radiation may be significant in our markets. X-ray mammography is a
well-established method of imaging the structures within the breast. Ultrasound
is often used as an adjunct to mammography to help differentiate tumors and
cysts. The CTLM(R) is being marketed as an adjunct to mammography and will not
compete directly with X-ray mammography. CTLM(R) is, however, an emerging new
modality offering the potential of molecular functional imaging, which can
visualize the process of angiogenesis which may be used to distinguish between
benign and malignant tissue.
We believe that the adjunctive use of CT laser breast imaging will improve early
diagnosis, reduce diagnostic uncertainty, and decrease the number of biopsies
performed on benign lesions. The CTLM technology is unique and patented. IDSI
intends to develop our technologies into a family of related products. We
believe these technologies and clinical benefits constitute substantial markets
for our products well into the future.
As of the date of this report we have had no substantial revenues from our
operations and have incurred net losses applicable to common shareholders since
inception through September 30, 2005 of approximately $85,386,680 after
discounts and dividends on preferred stock. We anticipate that losses from
operations will continue for at least the next 12 months, primarily due to an
anticipated increase in marketing and manufacturing expenses associated with the
international commercialization of the CTLM(R), expenses associated with our FDA
Pre-Market Approval ("PMA") process, and the costs associated with advanced
product development activities. There can be no assurances that we will obtain
the PMA, that the CTLM(R) will achieve market acceptance or that sufficient
revenues will be generated from sales of the CTLM(R) to allow us to operate
profitably.
9
RESULTS OF OPERATIONS
SALES AND COST OF SALES
- -----------------------
On October 12th we reported that we sold a record five CTLM(R) systems in the
quarter ending September 30, 2005. We believe that these sales reflect the
increasing effectiveness of our global commercialization program and growing
market acceptance of the CTLM(R) system. We are also pleased to report that two
of our clinical partnership sites have purchased their CTLM(R) systems after
gaining experience with our new technology. These two sales were part of the
total of five sold for the quarter. We will continue to pursue clinical partners
and attempt to grow our distributor network worldwide. Revenues for the three
months ended September 30, 2005, were $671,750 representing an increase of
$671,750 from the corresponding period for 2004. The increase in revenues was a
direct result of selling five CTLM(R) systems compared to no sales being
recorded in the three months ended September 30, 2004.
Cost of Sales for the three months ended September 30, 2005, were $277,264
representing an increase of $277,264 from the corresponding period for 2004. The
increase in Cost of Sales was a direct result of no sales recorded in the three
months ended September 30, 2004.
REPORTING FORMAT FOR EXPENSES
- -----------------------------
We are in the process of commercializing our operations and as part of our
transition plan to exit from FAS 7 reporting as a development stage enterprise,
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).
In our previous filings, the discussion of compensation and related benefits
only included salaries, payroll taxes and bonuses for two categories: 1)
administrative and engineering and 2) research and development. We expanded the
research and development category and are now combining engineering with
research and development under our new R&D discussion. We have renamed the
administrative and engineering category as general and administrative. We have
created an additional category, sales and marketing. Also in our previous
discussions, the costs of salaries, payroll taxes and bonuses for sales and
marketing were included in administrative and engineering.
In addition, we are expanding our discussion of health insurance and worker's
compensation insurance so that they fall into one of the three expense
categories, where we previously included them under insurance costs.
GENERAL AND ADMINISTRATIVE (G&A)
- --------------------------------
General and administrative expenses during the three months ended September 30,
2005, were $717,528 representing an increase of $7,009 or 1% from the
corresponding period in 2004. Of the $717,528 compensation and related benefits
comprised $419,294 (58%) compared to $461,901 (65%) during the three months
ended September 30, 2004.
The three-month increase of $7,009 is a net result which is primarily due to a
decrease of $42,607 G&A compensation and related benefits and an increase in
consulting of $42,889.
We do not expect a material increase in our general and administrative expenses
until we realize a significant increase in revenue from the sale of our product.
RESEARCH AND DEVELOPMENT (R&D)
- ------------------------------
Research and development expenses during the three months ended September 30,
2005, were $417,606 representing a decrease of $115,485 or 22% from the
corresponding period in 2004. Of the $417,606 compensation and related benefits
10
comprised $314,203 (75%) compared to $357,519 (67%) during the three months
ended September 30, 2004.
The three-month decrease of $115,485 was due primarily to a decrease in R&D
compensation and related benefits of $43,316, and decreases of $27,400 in Legal
patent expenses, $18,039 in clinical expenses and $19,588 in R&D expenses.
We expect a significant increase in our R&D expenses because of the costs
associated with conducting clinical trials in the United States required for our
PMA application. We also expect our consulting expenses and professional fees to
increase due to the costs associated with the preparation and submission of our
PMA application to the FDA at the conclusion of the U.S. clinical trials. See
Item 5. Other Information - "Recent developments, Regulatory Matters"
SALES AND MARKETING (S&M)
- -------------------------
Sales and marketing expenses during the three months ended September 30, 2005,
were $242,466 representing a decrease of $5,661 or 2% from the corresponding
period in 2004. Of the $242,466 compensation and related benefits comprised
$120,462 (50%) compared to $62,346 (25%) during the three months ended September
30, 2004.
The three-month decrease of $5,661 is a net result which is primarily due to an
increase in S&M compensation and related benefits of $58,116, and decreases of
$26,864 in certification expenses, $25,810 in travel expenses and $14,965 in S&M
consulting.
We expect commissions, advertising and promotion and travel and subsistence
costs to increase as we continue to implement our global commercialization
program.
AGGREGATED OPERATING EXPENSES
- -----------------------------
In comparing our total operating expenses (G&A, R&D, and S&M) in the three
months ended September 30, 2005 to expenses in the comparable periods in 2004,
we had a decrease of $114,137 or 8%.
The decrease in the three-month comparative period was due primarily to R&D
expenses decreasing by $115,485.
We continue to rely on outside consultants and attorneys for our regulatory
affairs. We expect to incur an increase in consulting expenses and professional
fees in the preparation and submission of our PMA application to the FDA.
Inventory Valuation Adjustments during the three months ended September 30,
2005, were $34,740 representing a decrease of $87,496 or 72% from the comparable
period in 2004. The decrease is due to the reduction in write-downs of obsolete
components that are no longer used in the manufacturing of the CTLM(R).
With the adoption of SFAS 123(R) effective July 1, 2005 we have recorded
compensation for the expense of options granted during the first quarter ending
September 30, 2005 of $4,597. We have also recorded compensation for the options
which remain unvested as of July 1, 2005 of $258,707 for the quarter ended
September 30, 2005.
Interest expense during the three months ended September 30, 2005, was $89,636
representing a decrease of $86,923 or 49% from the corresponding period in 2004.
The decrease is due primarily to having fewer draws on our equity credit line as
interest with Charlton Avenue, LLC ("Charlton"). See Item 5. Other Information -
"Financing/Equity Line of Credit"
11
BALANCE SHEET DATA
Our combined cash and cash equivalents totaled $348,565 as of September 30,
2005. This is a decrease of $416,958 from $765,523 as of June 30, 2005. During
the quarter ending September 30, 2005, we received a net of $1,144,171 from the
sale of common stock through our private equity agreement with Charlton. See -
"Financing/Equity Line of Credit"
We do not expect to generate a positive internal cash flow for at least the next
12 months due to limited expected sales and an anticipated increase in marketing
and manufacturing expenses associated with the international commercialization
of the CTLM(R), expenses associated with our FDA PMA process and the costs
associated with product development activities.
Property and Equipment was valued at $2,142,211 net as of September 30, 2005.
The overall decrease of $24,709 from June 30, 2005 to September 30, 2005 is due
primarily to the recorded depreciation.
LIQUIDITY AND CAPITAL RESOURCES
We are currently a development stage company and our continued existence is
dependent upon our ability to resolve our liquidity problems, principally by
obtaining additional debt and/or equity financing. We have yet to generate a
positive internal cash flow, and until significant sales of our product occur,
we are mostly dependent upon debt and equity funding from outside investors. In
the event that we are unable to obtain debt or equity financing or are unable to
obtain such financing on terms and conditions acceptable to us, we may have to
cease or severely curtail our operations. This would materially impact our
ability to continue as a going concern.
Since inception, we have financed our operating and research and product
development activities through several Regulation S and Regulation D private
placement transactions and with loans from unaffiliated third parties. Net cash
used for operating and product development expenses during the three months
ending September 30, 2005, was $1,548,602 primarily due to the costs of wages
and related benefits, legal and consulting expenses, research and development
expenses, clinical expenses, and travel expenses associated with clinical and
sales and marketing activities, compared to $1,733,775 in the same period ending
September 30, 2004. At September 30, 2005, we had working capital of $2,383,590
compared to working capital of $1,493,359 at September 30, 2004, and $2,263,853
at June 30, 2005.
During the first quarter ending September 30, 2005, we raised a total of
$1,144,171 after expenses through the sale of common stock to Charlton. We do
not expect to generate a positive internal cash flow for at least the next 12
months due to limited expected sales and the expected costs of commercializing
our initial product, the CTLM(R), in the international market and the expense of
continuing our ongoing product development program. We will require additional
funds for operating expenses, FDA regulatory processes, manufacturing and
marketing programs and to continue our product development program. Accordingly,
we plan to utilize the Fourth Private Equity Credit Agreement and any subsequent
financing agreements to raise the funds required prior to the end of fiscal year
2006 and thereafter in order to continue operations. In the event that we are
unable to utilize the Fourth Private Equity Credit Agreement we would have to
raise the additional funds required by either equity or debt financing,
including entering into a transaction(s) to privately place equity, either
common or preferred stock, or debt securities, or combinations of both; or by
placing equity into the public market through an underwritten secondary
offering. If additional funds are raised by issuing equity securities, dilution
to existing stockholders will result, and future investors may be granted rights
superior to those of existing stockholders. As of the date of this report, we
have $4,301,459 remaining to be drawn from the Fourth Private Equity Credit
Agreement and we have 7,779,589 shares remaining on our current S-2 registration
statement. Based on our estimated cash requirements necessary to complete the
FDA process and continue our international globalization programs we plan to
file another registration statement to utilize the remaining balance available
on the Fourth Private Equity Credit Agreement. We are currently negotiating a
new Private Equity Credit Agreement with Charlton to become effective upon the
completion of the Fourth Private Equity Credit Agreement.
12
Capital expenditures for the three months ending September 30, 2005, were
$12,526 as compared to approximately $4,473 for the three months ending
September 30, 2004. These expenditures were a direct result of purchases of
computer and miscellaneous equipment. We anticipate that the balance of our
capital needs for the fiscal year ending June 30, 2006, will be approximately
$65,000.
There were no other changes in our existing debt agreements other than
extensions, and we had no outstanding bank loans as of September 30, 2005. Our
fixed commitments, including salaries and fees for current employees and
consultants, rent, payments under license agreements and other contractual
commitments are substantial and are likely to increase as additional agreements
are entered into and additional personnel are retained. We will require
substantial additional funds for our product development programs, operating
expenses, regulatory processes, and manufacturing and marketing programs. Our
future capital requirements will depend on many factors, including the
following:
1) The progress of our ongoing product development projects;
2) The time and cost involved in obtaining regulatory approvals;
3) The cost of filing, prosecuting, defending and enforcing any patent
claims and other intellectual property rights;
4) Competing technological and market developments;
5) Changes and developments in our existing collaborative, licensing and
other relationships and the terms of any new collaborative, licensing
and other arrangements that we may establish;
6) The development of commercialization activities and arrangements; and
7) The costs associated with compliance to SEC regulations.
We do not expect to generate a positive internal cash flow for at least 12
months as sales remain limited and substantial costs and expenses continue due
principally to the international commercialization of the CTLM(R), activities
related to our FDA PMA process, and advanced product development activities. We
intend to use the Fourth Private Equity Credit Agreement as our principal source
of additional capital. There can be no assurance that this financing will
continue to be available on acceptable terms. We plan to continue our policy of
investing excess funds, if any, in a High Performance Money Market account at
Wachovia Bank N.A.
ISSUANCE OF STOCK FOR SERVICES/DILUTIVE IMPACT TO SHAREHOLDERS
We have issued and may continue to issue stock for services performed and to be
performed by consultants. Since we have generated no substantial revenues to
date, our ability to obtain and retain consultants may be dependent on our
ability to issue stock for services. From July 1, 1996, to the filing date of
this report, we have issued an aggregate of 2,306,500 shares of common stock to
consultants, which have been registered on Registration Statements on Form S-8.
The aggregate fair market value of the shares was $2,437,151. The issuance of
large amounts of common stock for services rendered or to be rendered and the
subsequent sale of such shares may depress the price of the common stock. In
addition, since each new issuance of common stock dilutes existing shareholders,
the issuance of substantial additional shares may effectuate a change in our
control.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
----------------------------------------------------------
As of the date of this report, we believe that we do not have any material
quantitative and qualitative market risks.
ITEM 4. CONTROLS AND PROCEDURES
-----------------------
We maintain disclosure controls and procedures that are designed to ensure that
the information required to be disclosed in the reports that we file under the
Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission's rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
our Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosures. In designing and evaluating the disclosure controls and
procedures, management recognized that any controls and procedures, no matter
how well designed and operated, can only provide reasonable assurance of
13
achieving the desired control objectives, and in reaching a reasonable level of
assurance, management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible controls and procedures.
As required by SEC Rule 13a-15(b), we carried out an evaluation, under the
supervision and with the participation of our management, including our Chief
Executive Officer and the Company's Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and
procedures as of the end of the quarter covered by this report. Based on the
foregoing, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures were effective at the reasonable
assurance level.
There has been no change in our internal controls over financial reporting
during our most recent fiscal quarter that has materially affected, or is
reasonably likely to materially affect, our internal controls over financial
reporting.
14
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
See Item 5. "Other Information" - FINANCING/EQUITY LINE OF CREDIT.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
On October 26, 2005 we held our annual meeting of stockholders at our corporate
offices at 6531 NW 18th Court, Plantation, Florida for the following purposes:
1. To elect six directors;
2. To ratify the appointment by the Board of Directors of Sherb and Co.,
LLP as independent auditors of the Company for the fiscal year ending
June 30, 2006.
For proposal no. 1, the stockholders elected six incumbent directors with the
voting as follows:
Timothy B, Hansen FOR 184,718,445 WITHHELD 10,188,566
Allan L. Schwartz FOR 190,917,465 WITHHELD 3,989,546
Sherman Lazrus FOR 191,370,991 WITHHELD 3,536,020
Patrick J. Gorman FOR 191,527,466 WITHHELD 3,379,545
Edward Rolquin FOR 191,404,532 WITHHELD 3,502,479
Jay S. Bendis FOR 191,499,207 WITHHELD 3,407,804
For proposal no. 2, the stockholders voted to ratify the Board of Directors'
action of its appointment of Sherb & Co., LLP as independent auditors of the
Company for the fiscal year ending June 30, 2006 with the following votes:
FOR 185,495,885 AGAINST 8,708,376 ABSTAIN 702,750
ITEM 5. OTHER INFORMATION
Letter to Shareholders
We enclosed our annual report with our proxy statement sent to all shareholders
for the annual meeting held on October 26, 2005. The annual report featured a
letter to shareholders written by Tim Hansen, Chief Executive Officer which is
included below:
Fellow Shareholders,
Since I joined the Company in July 2004, we have strengthened our clinical
position and begun an aggressive commercialization effort. Bringing a
revolutionary new medical imaging technology to market is always challenging,
but we are especially encouraged by the growing trend toward a multidisciplinary
approach to handling breast disease. We believe the molecular imaging
capabilities of the CTLM system being demonstrated at clinical sites, industry
meetings, and in ongoing research have positioned IDSI for success in this new
environment.
15
Achieving US marketing approval for the CTLM system is our number one priority.
In FY05, we altered our FDA course to take full advantage of numerous CTLM
technical advances and user training improvements. We are currently aligning a
number of clinical sites to use these new systems and methods to collect data
for the PMA submission.
Meanwhile, our program to develop international markets by establishing luminary
referral and research sites has created clinical and market interest and will be
expanded in FY06. Our new clinical partners are helping CTLM gain needed
recognition; one site published IDSI's first peer-reviewed clinical publication
in the June issue of Investigative Radiology. Our China initiative, although off
to a slow start, remains very promising. Overall, CTLM clinical exam volume has
risen above 6,000 and is growing rapidly. This clinical momentum and our
expanding geographic coverage should translate into commercial growth in FY06
and beyond.
Throughout FY05 we strategically increased the strength of the IDSI team. In
addition to my experience, IDSI now includes the talents of an accomplished
international sales executive; a second MD radiologist, who is also a bio-med
PhD; another credentialed PhD in our algorithm development team; a PhD with deep
optical physics experience; a veteran imaging industry service manager; a QA
director with medical device experience; and a strong technical marketing
specialist.
I am very proud of our team and our commitment to bring the full value of CT
Laser Mammography to women and medical professionals throughout the world. On
behalf of our employees, customers, distributors, and clinical partners, I would
like to thank you, our shareholders, for your ongoing support. I look forward to
fulfilling our vision of "Scanning for Life" together.
Recent Developments
Regulatory Matters
In order to sell the CTLM(R) commercially in the United States, we must obtain
marketing clearance from the Food and Drug Administration. A Pre Market Approval
(PMA) application must be supported by extensive data, including pre-clinical
and clinical trial data, as well as extensive literature to prove the safety and
effectiveness of the device. Under the Food, Drug, and Cosmetic Act, the FDA has
180 days to review a PMA application, although in certain cases the FDA may
increase that time period through requests for additional information or
clarification of existing information.
In our initial PMA application we followed the guidelines of the "Standardized
Shell for Modular Submission" for the FDA approval process. We filed four
modules from September 2000 to May 2001, which were accepted, and then filed our
PMA application in April 2003. In June 2003 we received notification from FDA
that an initial review of our PMA had been conducted and was sufficiently
complete to permit a substantive review and was, therefore, suitable for filing.
An in-depth evaluation of the safety and effectiveness of the device would be
conducted to determine the final approval of the PMA application.
We filed a new application with Health Canada in June 2003 because of new
clinical data. On June 18, 2003 we received notification from the Medical Device
Bureau of Health Canada that our application had been accepted for review. On
November 14, 2003 we announced that we received notification from the Medical
Device Bureau of Health Canada that our application for a "New Medical Device"
license was approved. The license was issued in accordance with the Medical
Device Regulations, Section 36. Furthermore, we possess the CAN/CSA ISO
13485-1998 certification, which is an additional regulatory requirement that is
evidence of compliance to the quality system of the medical device.
In August 2003, we received a letter from the FDA stating that it had completed
its review of our PMA. The FDA, in its letter, outlined deficiencies in the PMA
application, which must be resolved before the FDA's review could be completed.
16
The FDA stated that until these deficiencies are resolved, the PMA application
was not approvable in its current form. The FDA identified measures to make the
PMA approvable, and we worked with our FDA counsel and consultants to prepare an
amendment to our PMA application to address the deficiencies noted in the
letter.
In February 2004, we received a warning letter from the FDA specifically
regarding the biomonitoring section of an inspection conducted August 13th
through August 18th, 2003 at our facility. We submitted our response to this
letter to the FDA on February 9, 2004. On March 29, 2004, we announced in an 8-K
filing that our responses to the FDA's warning letter regarding the
bio-monitoring inspection addressed each of the issues and no further response
to the FDA was required at that time.
In March 2004, we received an extension of time to respond to the FDA's August
22, 2003 letter regarding our pre-market approval application.
In September 2004, we announced that our CT Laser Mammography System, CTLM(R),
had received Chinese State Food and Drug Administration (SFDA) marketing
approval. The People's Republic of China SFDA issued the registration
"Certificate for Medical Device". The medical device registration number is
20043241646.
In October 2004, we issued a press release of a shareholder letter written by
our new CEO, Tim Hansen, detailing the steps he had taken in FDA and other
corporate development matters during his first three months as CEO of the
Company. In the letter he stated among other things, the following: "the PMA
involves a process which has, unfortunately, taken far longer than expected. We
have been working on amending the PMA application at the request of the FDA. Our
team recommended rephrasing the Computed Tomography Laser Mammography System
(CTLM(R)) intended use statement and modifying the patient study protocols. They
also recommended adding more clinical cases. Meanwhile the PMA clock was ticking
and these well advised changes would have taken more time to complete. Also, as
we earlier reported, our PMA amendment and processes were briefly interrupted by
a bio monitoring inspection audit of our clinical trials and subsequent warning
letter and, although that matter was resolved, the sum of these influences
caused serious delays in our filings.
These are complex matters, but after conferring with the FDA and our outside
consultants, I recently made the decision to simply withdraw our current PMA
application and resubmit the entire package in a simpler and more clinically and
technically robust filing. Consequently, IDSI will submit a new PMA application
with a rephrased intended use statement better supported by our data, the
inclusion of new clinical cases to improve the biometrics, and with a new
clinical protocol to fully support the adjunctive use of CTLM(R) in clinical
mammography settings.
The key factor in my decision was the belief that re-filing should not
additionally delay our previous schedule. The schedule should remain unchanged
because the FDA indicated that Modules 1 through 4 would be `grandfathered' so
to speak, and because our clinical case read program will continue in its
current form. We are not starting over in any sense of the word. We will,
however, submit a fresh and concise PMA application without amendments or
extensions. Of course, this approach requires another filing fee but we believe
it yields a higher confidence scenario. So, to be very clear, we will submit a
new PMA application and there should be no additional delays in our overall
schedule. You have all waited patiently for CTLM(R) to become a US market
reality, and I would appreciate your continuing support through this next
important phase. I am very satisfied with this new approach."
In November 2004, we received a letter from the FDA stating that it has
determined that the CTLM(R) proposed clinical investigation is a non-significant
risk (NSR) device study because it does not meet the definition of a significant
risk (SR) device under section 812.3(m) of the investigational device exemptions
(IDE) regulation 21 CFR 812.
In January 2005 we issued a press release of a shareholder letter entitled,
"Imaging Diagnostic Systems, Inc. Releases Letter to Shareholders" written by
Tim Hansen, CEO. The letter contained a brief status update of the three top
priorities stated in Mr. Hansen's initial letter to shareholders released in
October 2004. Specific to our PMA activities, the letter stated, "...we are
altering course. The clinical study we had analyzed and which we intended to
submit to the FDA did not, in our opinion, adequately reflect the capabilities
of CTLM(R) as an adjunctive mammography tool. Our clinical cases were collected
17
on CTLM(R) systems dating back to 2001. Since that time IDSI has developed
significant improvements in the scanning subsystems, image reconstruction and
image display software. We have also improved quality assurance routines to
ensure better operator and physician training, and improved image quality
control. These enhancements were routinely implemented as they became validated
on our international CTLM(R) shipments, but the same changes were not made to
the 2001 units in order to maintain our PMA modules in their original forms. We
now intend to collect data using our latest systems because we believe the
results will yield a stronger study to support our PMA application.
Consequently, we will install updated CTLM(R) systems in the U.S. to collect
data under a new protocol. Our plan will extend the time to actual PMA
submission from what we were anticipating in October 2004, but we believe this
approach will better support the application."
Clinical Collaboration Sites Update
CTLM(R) Systems have been installed and patients are being scanned under
clinical collaboration agreements as follows:
1. Schering AG (Three Units)
o Robert-Rossle Clinic, Berlin, Germany
o University of Muenster, Muenster, Germany
o Humboldt University of Berlin, Charite Hospital, Berlin, Germany
2. The University of Vienna, Allgemeines Hospital, Vienna, Austria
3. Humboldt University of Berlin, Charite Hospital, Berlin, Germany
4. The Comprehensive Cancer Centre, Gliwice, Poland (Two Systems)
5. Catholic University Hospital, Rome, Italy
6. Charles University Hospital, Prague, Czech Republic
7. Gazi University Hospital, Ankara, Turkey
8. Friendship Hospital, Beijing, Peoples Republic of China
In September 2004, we announced that we have installed a third CTLM(R) as part
of Schering AG's Phase 1 clinical study of the fluorescent imaging compound
SF64. The third system was installed in the prestigious Charite Hospital in
Berlin. We had previously announced that CTLM(R) Systems were installed at the
Robert-Rossle Clinic and at the University of Muenster.
In November 2004, we announced that the Comprehensive Cancer Centre in Gliwice,
Poland signed a clinical collaborative agreement to gather data to expand
diagnostic and therapeutic applications of the CTLM(R) system. The system was
shipped to Poland in December 2004 and installed in January 2005.
In December 2004, we announced that the Catholic University in Rome, Italy
signed a clinical collaboration agreement and that a CTLM(R) system had been
shipped to their Department of Radiology and installed in January 2005. This
agreement marked the sixth out of eight targeted European sites for our clinical
collaboration program.
In February 2005, we announced that Charles University Hospital in Prague, Czech
Republic had signed a clinical collaborative agreement to gather data and expand
the proprietary applications of the CTLM(R). The system was shipped to the Czech
Republic in March. This agreement marked the seventh out of eight targeted
European sites for our clinical collaboration program.
In April 2005, we announced that we would fulfill a request by the Institute of
Oncology, Center of Oncology, of the Maria Sklodowska-Curie Memorial Institute
in Poland for a second CTLM(R) system. This institute is part of the
Comprehensive Cancer Centre in Gliwice, Poland. The first system was installed
in January 2005 under a clinical collaborative agreement to gather data to
expand diagnostic and therapeutic applications of the CTLM(R) system.
18
In May 2005, we announced the installation of a CTLM(R) system at Gazi
University Hospital in Ankara, Turkey, where researchers have already begun
breast scanning procedures. This system was shipped to the hospital in March
2005.
We have been commercializing the CTLM(R) in many global markets and we
previously announced our plans to set up this network to foster research and to
promote the technology in local markets. We will continue to support similar
programs in China and in other regions. These investments may accelerate CTLM(R)
market acceptance while providing valuable clinical experiences.
Other Recent Events
In July 2005, we announced that a study demonstrating the potential of CTLM(R)
to characterize benign and malignant tumors was featured in the June issue of
Investigative Radiology.
In August 2005, we announced that our Polish distributor, EDO Med Sp. Z.o.o.
purchased the two CTLM(R) systems installed for use in research projects at
Institute of Oncology at the Comprehensive Cancer Centre in Gliwice, Poland.
In August 2005, we announced the appointment of Leomedics Co., Ltd. as the
exclusive distributor of the CTLM(R) in South Korea.
In September 2005, we participated in the 51st Argentinean Congress of Radiology
and Diagnostic Imaging in Buenos Aires, Argentina. Jose A. Cisneros, M.D. Ph.D.,
our Associate Director of Clinical Research presented two medical sessions:
"Angiogenesis and Its Role in the Early Detection of Breast Cancer" and "Physics
and Instrumentation in Computed Tomography Laser Mammography (CTLM)."
In October 2005, Jose Cisneros, M.D., Ph.D., our Associate Director of Clinical
Research presented two lectures at the Tenth Venezuelan Congress of Radiology
and Diagnostic Imaging in Maracaibo, Venezuela.
In October 2005, we announced that a CT Laser Mammography (CTLM(R)) system would
be installed at the prestigious European Institute of Oncology (EIO) in Milan,
Italy. Studies will be performed under the auspices of Professor Umberto
Veronesi, Scientific Director.
On November 3, 2005, we filed an 8-K to report the voluntary resignation of Ed
Horton as Chief Operating Officer of the Company.
On November 7, 2005, we announced that Steve Ponder, PhD., our Director of
Advanced Development has been invited to join the Florida International
University (FIU) Biomedical Engineering Partnership Program (BMEPP) Advisory
Board.
On November 8, 2005, we announced that we will display our new clinical results
and feature the CTLM(R) System at RSNA 2005 from November 27th to December 2nd
in Chicago, IL. Tim Hansen, CEO stated, "We have made impressive clinical
progress since last year's RSNA. Our results underscore our extensive experience
and leadership in laser optical breast imaging."
19
FINANCING/EQUITY LINE OF CREDIT
- -------------------------------
We will require substantial additional funds for working capital, including
operating expenses, clinical testing, regulatory processes and manufacturing and
marketing programs and our continuing product development programs. Our capital
requirements will depend on numerous factors, including the progress of our
product development programs, results of pre-clinical and clinical testing, the
time and cost involved in obtaining regulatory approvals, the cost of filing,
prosecuting, defending and enforcing any patent claims and other intellectual
property rights, competing technological and market developments and changes in
our existing research, licensing and other relationships and the terms of any
new collaborative, licensing and other arrangements that we may establish.
Moreover, our fixed commitments, including salaries and fees for current
employees and consultants, and other contractual agreements are likely to
increase as additional agreements are entered into and additional personnel are
retained.
Since July 17, 2000, Charlton Avenue LLC ("Charlton") has provided all of our
necessary funding through the private placement sale of convertible preferred
stock with a 9% dividend and common stock through various private equity credit
agreements. We initially sold Charlton 400 shares of our Series K convertible
preferred stock for $4 million and subsequently issued an additional 95 Series K
shares to Charlton for $950,000 on November 7, 2000. We paid Spinneret Financial
Systems Ltd. ("Spinneret"), an independent financial consulting firm
unaffiliated with the Company and, according to Spinneret and Charlton,
unaffiliated with Charlton, $200,000 as a consulting fee for the first tranche
of Series K shares and five Series K shares as a consulting fee for the second
tranche. The total of $4,950,000 was designed to serve as bridge financing
pending draws on the Charlton private equity line provided through the various
private equity credit agreements described in the following paragraphs.
From November 2000 to April 2001, Charlton converted 445 shares of Series K
convertible preferred stock into 5,600,071 common shares and we redeemed 50
Series K shares for $550,000 using proceeds from the Charlton private equity
line. Spinneret converted 5 Series K shares for $63,996. All Series K
convertible preferred stock has been converted or redeemed and there are no
convertible preferred shares outstanding.
Prior Equity Agreements
- -----------------------
From August 2000 to February 2004, we obtained funding through three Private
Equity Agreements with Charlton. Each equity agreement provided that the timing
and amounts of the purchase by the investor were at our sole discretion. The
purchase price of the shares of common stock was set at 91% of the market price.
The market price, as defined in each agreement, was the average of the three
lowest closing bid prices of the common stock over the ten day trading period
beginning on the put date and ending on the trading day prior to the relevant
closing date of the particular tranche. The only fee associated with the private
equity financing was a 5% consulting fee payable to Spinneret. In September 2001
Spinneret proposed to lower the consulting fee to 4% provided that we pay their
consulting fees in advance. We reached an agreement to pay Spinneret in advance
as requested and paid them $250,000 out of proceeds from a put.
From the date of our first put notice, January 25, 2001 to our last put notice,
February 11, 2004, under our Third Private Equity Credit Agreement, we drew a
total of $20,506,00 and issued 49,311,898 shares to Charlton. As each of the
obligations under these prior agreements was satisfied, the agreements were
terminated. The Third Private Equity Agreement was terminated on March 4, 2004
upon the effectiveness of our first Registration Statement for the Fourth
Private Equity Credit Agreement.
The Fourth Private Equity Credit Agreement
- ------------------------------------------
On January 9, 2004, we, and Charlton entered into a new "Fourth Private Equity
Credit Agreement" which replaced our prior private equity agreements. The terms
of the Fourth Private Equity Credit Agreement are more favorable to us than the
terms of the prior Third Private Equity Credit Agreement. The new, more
favorable terms are: (i) The put option price is 93% of the three lowest closing
bid prices in the ten day trading period beginning on the put date and ending on
20
the trading day prior to the relevant closing date of the particular tranche,
while the prior Third Private Equity Credit Agreement provided for 91%, ii) the
commitment period is two years from the effective date of a registration
statement covering the Fourth Private Equity Credit Agreement shares, while the
prior Third Private Equity Credit Agreement was for three years, (iii) the
maximum commitment is $15,000,000, (iv) the minimum amount we must draw through
the end of the commitment period is $1,000,000, while the prior Third Private
Equity Credit Agreement minimum amount was $2,500,000, (v) the minimum stock
price requirement is now controlled by us as we have the option of setting a
floor price for each put transaction (the previous minimum stock price in the
Third Private Equity Credit Agreement was fixed at $.10), (vi) there are no fees
associated with the Fourth Private Equity Credit Agreement; the prior private
equity agreements required the payment of a 5% consulting fee to Spinneret,
which was subsequently lowered to 4% by mutual agreement in September 2001, and
(vii) the elimination of the requirement of a minimum average daily trading
volume in dollars. The previous requirement in the Third Private Equity Credit
Agreement was $20,000. The conditions to our ability to draw under this private
equity line, as described above, may materially limit the draws available to us.
We intend to make sales under the Fourth Private Equity Credit Agreement from
time to time in order to raise working capital on an "as needed" basis. Based on
our current assessment of our financing needs, we expect to draw the full
$15,000,000 available under the Fourth Private Equity Credit Agreement. As of
the date of this report, under the Fourth Private Equity Credit Agreement we
have drawn down $10,698,541 and issued 40,220,411 shares of common stock. We are
currently negotiating a new Private Equity Credit Agreement with Charlton to
become effective upon the completion of the Fourth Private Equity Credit
Agreement.
As of the date of this report, since January 2001, we have drawn an aggregate of
$31,204,541 in gross proceeds from our equity credit lines with Charlton and
have issued 89,532,309 shares as a result of those draws.
There can be no assurance that adequate financing will be available when needed,
or if available, will be available on acceptable terms. Insufficient funds may
prevent us from implementing our business plan or may require us to delay, scale
back, or eliminate certain of our research and product development programs or
to license to third parties rights to commercialize products or technologies
that we would otherwise seek to develop ourselves. To the extent that we utilize
our Private Equity Credit Agreements; or additional funds are raised by issuing
equity securities, especially convertible preferred stock and convertible
debentures, dilution to existing shareholders will result and future investors
may be granted rights superior to those of existing shareholders. Moreover,
substantial dilution may result in a change in our control.
21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
31.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section
1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
(b) Reports on Form 8-K
A Form 8-K was filed on September 22, 2005 to report the dismissal of
Margolies, Fink and Wichrowski as the Company's independent registered
public accounting firm. The decision to change auditors was made by the
Audit Committee. The committee selected Sherb & Co., LLP and the
Company's Board of Directors approved their appointment.
A Form 8-K was filed on October 3, 2005 to report the engagement of
Sherb & Co., LLP ("Sherb") to serve as the Company's independent
registered public accounting firm, effective October 3, 2005. The
selection of Sherb, with offices in New York and Florida, was made by
the Audit Committee and their appointment was approved by the Company's
Board of Directors.
A Form 8-K was filed on October 12, 2005 reporting the issuance of a
press release entitled, "Imaging Diagnostic Systems reports strong
first quarter revenue".
A Form 8-K was filed on November 3, 2005 to report the voluntary
resignation of Ed Horton as Chief Operating Officer of the Company and
to report the results of the Annual Meeting of Shareholders held at the
Company's corporate offices on October 26, 2005.
22
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report on Form 10-Q to be signed on its behalf
by the undersigned thereunto duly authorized.
Dated: November 9, 2005 Imaging Diagnostic Systems, Inc.
By: /s/ Timothy B. Hansen
---------------------
Timothy B. Hansen
Chief Executive Officer
By: /s/ Allan L. Schwartz
---------------------
Allan L. Schwartz,
Executive Vice-President and
Chief Financial Officer
(PRINCIPAL ACCOUNTING OFFICER)
23