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, 2004
or
[ ] 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 Securities Exchange Act of
1934 during the preceding 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
The number of shares outstanding of each of the issuer's classes of equity
as of September 30, 2004: 180,229,694 shares of common stock, no par value. As
of September 30, 2004, 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 -
September 30, 2004 and June 30, 2004 3
Condensed Statement of Operations -
Three months ended
September 30, 2004 and 2003, and December 10,
1993(date of inception) to September 30, 2004 4
Condensed Statement of Cash Flows -
Three months ended September 30, 2004 and
2003, and December 10, 1993(date of inception)
to September 30, 2004 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 8
Item 3. Quantitative and Qualitative Disclosures About Market Risk 10
Item 4. Controls and Procedures 10
Part II - Other Information
Item 1. Legal Proceedings 12
Item 2. Changes in Securities 12
Item 3. Defaults Upon Senior Securities 12
Item 4. Submission of Matters to a Vote of
Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
2
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Development Stage Company)
Condensed Balance Sheet
Assets
Sept. 30, 2004 Jun. 30, 2004
-------------- -------------
Current Assets: Unaudited *
Cash $ 766,614 $ 554,354
Accounts Receivable 22,072 28,925
Inventory 2,319,505 2,357,864
Prepaid expenses 146,391 64,579
Other current assets 370 570
------------ ------------
Total Current Assets 3,254,952 3,006,292
------------ ------------
Property and Equipment, net 2,266,280 2,301,095
Other Assets 797,699 806,244
------------ ------------
$ 6,318,931 $ 6,113,631
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable and
Accrued Expenses $ 1,054,649 $ 1,172,527
Customer Deposits 40,000 40,000
Short term debt 300,407 300,407
Other current liabilities 1,014,486 1,014,486
------------ ------------
Total Current Liabilities 2,409,542 2,527,420
------------ ------------
Stockholders Equity:
Common Stock 81,396,232 79,235,712
Additional paid-in capital 1,597,780 1,597,780
Deficit accumulated during
development stage (79,084,623) (77,247,281)
------------ ------------
Total stockholders' equity 3,909,389 3,586,211
------------ ------------
$ 6,318,931 $ 6,113,631
============ ============
* 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 Statement of Operations
3 Months Ended Since Inception
September 30, (12/10/93) to
2004 2003 Sept. 30, 2004
------------- ------------- ----------------
Net Sales $ - $ - $ 917,296
Cost of Sales - - 363,871
------------- ------------- -------------
Gross Profit - - 553,425
------------- ------------- -------------
Operating Expenses:
General and administrative $ 710,520 $ 1,192,445 $ 42,296,949
Research and development 533,091 91,007 12,230,371
Sales and marketing 248,127 58,281 3,261,399
Inventory valuation adjustments 122,236 - 3,357,237
Depreciation and amortization 47,832 38,165 2,281,401
Amortization of deferred compensation - - 4,064,250
------------- ------------- -------------
1,661,806 1,379,898 67,491,607
------------- ------------- -------------
Operating Loss (1,661,806) (1,379,898) (66,938,182)
Gain on sale of fixed assets - - 5,585
Interest income 1,021 5,106 269,858
Interest expense (176,558) (312,122) (5,574,124)
------------- ------------- -------------
Net Loss (1,837,343) (1,686,914) (72,236,863)
Dividends on cumulative Pfd. stock:
From discount at issuance - - (5,402,713)
Earned - - (1,445,047)
------------- ------------- -------------
Net loss applicable to
common shareholders $(1,837,343) $ (1,686,914) $(79,084,623)
============= ============== ==============
Net Loss per common share:
Basic and Diluted:
Net loss per common share $ (0.01) $ (0.01) $ (1.05)
============ ============= ============
Weighted avg. no. of common shares 176,855,811 165,289,775 75,097,204
============ ============ ============
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
2004 2003 Sept. 30, 2004
--------------- -------------- -------------------
Cash provided by (used for) Operations:
Net loss $ (1,837,343) $ (1,686,914) $(72,236,864)
Changes in assets and liabilities 103,568 (497,630) 25,782,672
------------ ------------ ------------
Net cash used by operations (1,733,775) (2,184,544) (46,454,192)
------------ ------------ ------------
Investments
Proceeds from sale of property & equipment - - 29,857
Capital expenditures (4,473) (198,132) (7,210,004)
------------ ------------ ------------
Cash used for investments (4,473) (198,132) (7,180,147)
------------ ------------ ------------
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 1,950,508 2,674,989 30,576,713
------------ ------------ ------------
Net cash provided by financing activities 1,950,508 2,674,989 54,400,953
------------ ------------ ------------
Net increase (decrease) in cash 212,260 292,313 766,614
Cash, beginning of period 554,354 1,361,507 -
------------ ------------ ------------
Cash, end of period $ 766,614 $ 1,653,820 $ 766,614
============ ============ ============
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
The financial information included has been condensed from financial statements
prepared as of September 30, 2004. The results of operations for the three-month
period ended September 30, 2004, are not necessarily indicative of the results
to be expected for the full year.
NOTE 2 - GOING CONCERN
Imaging Diagnostic Systems, Inc. (IDSI) is 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. 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 FDA
marketing clearance is obtained, the CTLM(R) will achieve market acceptance or
that we will achieve a profitable level of operations.
NOTE 3 - INVENTORY
Inventory consists primarily of raw materials and work-in-process and amounted
to $2,319,505 as of September 30, 2004, compared to $2,357,864 as of June 30,
2004.
NOTE 4 - REVENUE RECOGNITION
Revenue from sales of medical imaging products is recorded for international
sales upon the passing of title and risks of ownership, which occurs upon the
shipment of goods. In the U.S. market, when PMA approval is received, revenue
will be recorded upon installation of the CTLM(R) System and acceptance by the
customer.
NOTE 5 - NEW ACCOUNTING PRONOUNCEMENTS
In December 2002, the FASB issued Statement No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123"
("SFAS 148"). SFAS 148 amends FASB Statement No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123"), to provide alternative methods of
transition for an entity that voluntarily changes to the fair value based method
of accounting for stock-based employee compensation. It also amends the
disclosure provisions of SFAS 123 to require prominent disclosures about the
effects on reported net income of an entity's accounting policy decisions with
respect to stock-based employee compensation. SFAS 148 also amends Accounting
Principles Board Opinion No. 28, "Interim Financial Reporting," to require
disclosures about those effects in interim financial information. The amendments
to SFAS 123 in paragraphs 2(a)-2(e) of the statement are effective for financial
statements for fiscal years ending after December 15, 2002. The amendment to
SFAS 123 in paragraph 2(f) of the statement and the amendment to Opinion 28 in
paragraph 3 are effective for financial reports containing condensed financial
statements for interim periods beginning after December 15, 2002. The Company
currently accounts for its stock-based compensation awards to employees and
directors under the accounting prescribed by Accounting Principles Board Opinion
6
No. 25 and provides the disclosures required by SFAS 123. The Company adopted
the additional disclosure provisions of SFAS 148 during the quarter ended
September 30, 2003.
NOTE 6 - STOCK BASED COMPENSATION
The Company accounts for stock-based compensation issued to its employees using
the intrinsic value method. Accordingly, compensation cost for stock options
issued is measured as the excess, if any, of the fair value of the Company's
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 purposes of the following pro forma disclosures, 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, 2004 and 2003: no dividend
yield; expected volatility of 119%; risk-free interest rate of 4%; and an
expected five-year term for options granted. Had the compensation cost been
determined based on the fair value at the grant, the Company's net income (loss)
and basic and diluted earnings (loss) per share would have been reduced to the
pro forma amounts indicated below:
Three Months Ended September 30
2004 2003
---- ----
Net income (loss) - as reported (1,837,343) (1,686,914)
Less: stock-based employee compensation determined under
the Fair value method, net of income tax effect (158,511) 189,857
----------- ----------
Net income (loss) - proforma (1,995,854) (1,497,057)
=========== ===========
Basic and Diluted earnings (loss) per share-as reported $ (0.01) $ (0.01)
Basic and Diluted earnings (loss) per share-proforma $ (0.01) $ (0.01)
7
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS. ACTUAL RESULTS AND EVENTS COULD
DIFFER MATERIALLY FROM THOSE PROJECTED AS A RESULT OF THE RISKS AND
UNCERTAINTIES SET FORTH UNDER THE CAPTION "CAUTIONARY STATEMENTS REGARDING
FORWARD-LOOKING STATEMENTS", IN OUR FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30,
2004.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Imaging Diagnostic Systems, Inc. is a development stage company, which, since
inception, has been engaged in research and development of its Computed
Tomography Laser Mammography System (CTLM(R)). The CTLM(R) is a breast-imaging
device for the detection of cancer which utilizes laser technology and
proprietary computer algorithms to produce three dimensional cross section slice
images of the breast. As of the date of this report we have had no substantial
revenues from our operations.
We have incurred net losses applicable to common shareholders since inception
through September 30, 2004 of approximately $79,084,623 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
commercialization of the CTLM(R), expenses associated with our FDA PMA process,
and the costs associated with advanced product development activities. There can
be no assurances 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.
RESULTS OF OPERATIONS
There were no revenues for the three months ended September 30, 2004.
As we transition from a development stage company to an operating company we are
now reporting expenses under three categories; General and administrative,
Research and development, and Sales and marketing. This new format of reporting
will better reflect the focus of our expenses as we commercialize the Company.
General and administrative expenses during the three months ended September 30,
2004, were $710,520 representing a decrease of $481,925 or 40% from $1,192,445
when compared to the corresponding period in 2003. Of the $710,520, compensation
and related benefits comprised $461,901 (65%).
Research and development expenses during the three months ended September 30,
2004, were $533,091 representing an increase of $442,084 or 486% from $91,007
when compared to the corresponding period in 2003. Of the $533,091, compensation
and related benefits comprised $357,519 (67%).
Sales and marketing expenses during the three months ended September 30, 2004,
were $248,127 representing an increase of $189,846 or 326% from $58,281 when
compared to the corresponding period in 2003. Of the $248,127, compensation and
related benefits comprised $62,346 (25%).
Interest expense during the three months ended September 30, 2004, was $176,558
representing a decrease of $135,564 or 43% from $312,122 for the corresponding
period for 2003. The decrease is due primarily to the reduction from 9% to 7% of
the discount taken on our equity credit line with Charlton Avenue, LLC
("Charlton"). See Item 5. Other Information - "Financing/Equity Line of Credit"
8
BALANCE SHEET DATA
Our combined cash and cash equivalents totaled $766,614 as of September 30,
2004. This is an increase of $212,260 from $554,354 as of June 30, 2004. During
the quarter ending September 30, 2004, we received $1,950,508 from the sale of
common stock through our private equity agreement with Charlton and the exercise
of employee stock options. 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 the expected costs of commercializing our initial product, the
CTLM(R), and the time required for homologations from certain countries.
Property and Equipment was valued at $2,266,280 net as of September 30, 2004.
The overall decrease of $34,815 from June 30, 2004 is due primarily to
depreciation recorded for the first quarter ended September 30, 2004.
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 first quarter
ending September 30, 2004, was $1,733,775 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 $2,184,544 in the same quarter
ending September 30, 2003. At September 30, 2004, we had working capital of
$845,410 compared to working capital of $1,980,270 at September 30, 2003, and
$478,872 at June 30, 2004.
During the first quarter ending September 30, 2004, we were able to raise a
total of $1,950,000 less 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 the expected costs of commercializing our initial product, the
CTLM(R), and the expense of our continuing 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 to raise the funds required prior to the end of fiscal year 2005 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.
Capital expenditures for the first quarter ending September 30, 2004, were
$4,473 as compared to approximately $198,132 for the first quarter ending
September 30, 2003. These expenditures were a direct result of purchases of
computer and miscellaneous office equipment. We anticipate that the balance of
our capital needs for the fiscal year ending June 30, 2005, will be
approximately $70,000.
There were no other changes in our existing debt agreements other than
extensions, and we had no outstanding bank loans as of September 30, 2004. 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
9
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 now have issued and outstanding 183,369,662 shares of common stock out
of 200,000,000 authorized shares. In addition, we have reserved 8,779,017 shares
to cover outstanding options (after waivers by some of our executive officers
and directors of the reserve requirement for options to purchase 3,800,000
shares held by them which are unvested, unexercisable and/or out of the money).
Therefore, given our ongoing need to issue substantial amounts of new shares to
raise capital under our Fourth Private Equity Credit Agreement with Charlton, we
will need to soon obtain shareholder approval of an amendment to our articles of
incorporation approving a substantial increase in our authorized common stock.
There can be no assurance that our shareholders will approve such an increase.
If they do not, then we will have to seek alternative sources of funding, which
may not be available on commercially reasonable terms. Consequently, a failure
to obtain such shareholder approval could have a material adverse impact on
IDSI.
We do not expect to generate a positive internal cash flow for at least 12
months as substantial costs and expenses continue due principally to the
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, from time to time, have issued and may continue to issue stock for services
rendered by consultants, all of whom have been unaffiliated. Since we have
generated no significant revenues to date, our ability to obtain and retain
consultants may be dependent on our ability to issue stock for services. Since
July 1, 1996, we have issued an aggregate of 2,306,500 shares of common stock
according to registration statements on Form S-8. The aggregate fair market
value of the shares when issued was $2,437,151. The issuance of large amounts of
our common stock, sometimes at prices well below market price, for services
rendered or to be rendered and the subsequent sale of these shares may further
depress the price of our common stock and dilute the holdings of our
shareholders. In addition, because of the possible dilution to existing
shareholders, the issuance of substantial additional shares may cause a
change-in-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
The term "disclosure controls and procedures" is defined in Rules 13a-15(e) and
15d-15(e) of the Securities Exchange Act of 1934 (the "Exchange Act"). These
rules refer to the controls and other procedures of a company that are designed
to ensure that the information required to be disclosed by a company in the
reports that it files under the Exchange Act is recorded, processed, summarized
10
and reported within required time periods. Our Chief Executive Officer and our
Principal Financial Officer have evaluated the effectiveness of our disclosure
controls and procedures as of the end of the period covered by the report (the
"Evaluation Date"), and have concluded that, as of the Evaluation Date, our
disclosure controls and procedures are effective in providing them with material
information relating to the Corporation known to others within the Corporation
which is required to be included in our periodic reports filed under the
Exchange Act.
There have been no changes in the Corporation's internal controls over financial
reporting that occurred during the period this Form 10-Q was being prepared that
has materially affected, or is reasonably likely to materially affect, the
Corporation's internal control over financial reporting.
11
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.
None.
ITEM 5. OTHER INFORMATION
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 PreMarket Approval
application (PMA) 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.
We are following the guidelines of the "Standardized Shell for Modular
Submission" for the FDA approval process. The FDA assigned a Modular Shell
Control Number and a general description of items required for the submission.
Below is a table indicating the status of our FDA Modular Submission:
Module # Description of Module Submission Date Filed Date Accepted
- ------- -------------------------------- ---------- -------------
Module 1 General Information & Safety 9/27/2000 1/7/2002
Module 2 Software 4/17/2001 6/12/2001
Module 3 Non-Pivotal Clinical 5/1/2001 8/13/2001
Module 4 Manufacturing & Quality Systems 1/2/2001 9/25/2001
PMA PMA Submission 4/29/2003 Voluntarily Withdrawn
on 9/24/2004
PMA* PMA Re-Submission* Pending
* See "On October 15, 2004,..." below for further information regarding the
PMA Re-Submission.
On April 29, 2003, we announced that we submitted our Premarket Approval
Application (PMA) with the U.S. Food and Drug Administration (FDA) seeking
marketing approval for our Computed Tomography Laser Mammography System, the
CTLM(R).
12
On June 18, 2003, we announced that we received notification from the Food and
Drug Administration that an initial review of our Premarket Approval Application
(PMA) has been conducted and is sufficiently complete to permit a substantive
review and is, therefore, suitable for filing. An in-depth evaluation of the
safety and effectiveness of the device will 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.
On August 27, 2003, we announced in an 8-K filing that 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 submission, which must be resolved
before the FDA's review could be completed. The FDA stated that until these
deficiencies are resolved, the PMA application is not approvable in its current
form. The FDA identified measures to make the PMA approvable and we will amend
our PMA application to address the deficiencies in the letter. We are working
with our FDA counsel and consultants to correct these deficiencies.
On February 2, 2004, we announced in an 8-K filing that 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. We are
continuing to prepare supplementary information to support our PMA application.
On February 10, 2004, we announced in an 8-K filing that we had submitted our
response to the warning letter and 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 is required at this time.
On March 25, 2004, we announced in an 8-K filing that the FDA agreed with our
request for an extension of time to respond to the FDA's August 22, 2003 letter
regarding our pre-market approval application. We are seeking PreMarket approval
from the FDA for this intended use: "The Imaging Diagnostic's Computed
Tomography Laser Mammography (CTLM(R)) scanner is intended for use as an adjunct
to mammography in patients who have equivocal mammographic findings within ACR
BI-RADS categories 3 or 4. In particular, it is not intended for use in cases
with clear mammographic or non-mammographic indications for biopsy. This device
provides the radiologist with additional information to guide a biopsy
recommendation". We are continuing to work closely with the FDA and our new
regulatory consultants to address the deficiencies and to submit an amendment to
our PMA application.
On September 27, 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. On September 29, 2004 we filed an 8-K report announcing this press
release and attached it as an exhibit.
On October 15, 2004, we issued a press release of a shareholder letter written
by our new CEO, Tim Hansen, detailing the steps he has taken in FDA and other
corporate development matters during his first three months as CEO of the
Company. In the letter he stated 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
biomonitoring 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.
13
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." On October 18,
2004 we filed an 8-K report announcing this press release and attached it as an
exhibit.
Clinical Update
Patients are continuing to be scanned at our various collaboration sites,
including the University of Vienna, Allgemeines Hospital, the Humboldt
University of Berlin, Charite Hospital and at Policlinico Paolo Giancone
Hospital in Palermo, Italy.
We have completed all of the clinical studies required for our PMA application.
In this regard we have removed CTLM(R) Systems used in the studies from the
following locations:
o University of Virginia Health System in Charlottesville, Virginia
o The Women's Center for Radiology in Orlando, Florida
o The Don and Sybil Harrington Cancer Center ("Harrington") in Amarillo,
Texas
o The Instituto Nacional de Cancerologia (National Cancer Institute) in
Mexico City, Mexico
o Elizabeth Wende Breast Clinic in Rochester, New York
Other Recent Events
In June 2004, we announced that we were granted a Chinese Patent for "DIAGNOSTIC
TOMOGRAPHIC LASER IMAGING APPARATUS" as Chinese Patent No. ZL95197940X. The
patent was issued in the name of Richard J. Grable for a period of 20 years from
the date of filing until July 10, 2015 and is exclusively licensed to Imaging
Diagnostic Systems, Inc. See "Patent Licensing Agreement".
In July 2004, we announced that Tim Hansen was appointed by the Board of
Directors to serve as the new Chief Executive Officer and Board member. Mr.
Hansen has served in top-level executive positions in the medical imaging
industry over a 30-year period and was notably President of Picker Medical
Systems, a leading company in the diagnostic imaging market. Most recently, Mr.
Hansen was with Cardinal Health, Inc. as the general manager of the Radiation
Management Services, a leading provider of medical imaging quality assurance
instruments and solutions. On July 14, 2004 we filed an 8-K report announcing
this press release and attached it as an exhibit.
In August 2004, we announced that we were granted a European Patent for
"APPARATUS FOR DETERMINING THE PERIMETER OF THE SURFACE OF AN OBJECT BEING
SCANNED" as European Patent No. 1003419. This is the European equivalent of U.S.
Patent No. 6,044,288, which protects a key element in the optical technique used
to determine the perimeter of an object being scanned.
In September 2004, we announced that Janusz Ostrowski has joined IDSI as Vice
President, International Sales. He will be responsible for implementing and
14
managing the distribution network outside of the U.S. Mr. Ostrowski has over 20
years of experience as an imaging equipment industry executive who has spent his
career introducing new products and services to global markets.
In September 2004, we announced that we have installed a third CT Laser
Mammography System, 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 September 2004, we announced that we signed a multi-year agreement with China
Far East International Trading Corporation (CFETC) for the exclusive sale of our
CTLM(R) in the People's Republic of China. The new agreement also includes
clinical research and collaboration programs and supersedes our previous
distribution contract with CFETC. On September 29, 2004 we filed an 8-K report
announcing this press release and attached it as an exhibit.
In October 2004, we issued a press release entitled "Shareholder Letter from
Imaging Diagnostic Systems, Inc." written by our new CEO, Tim Hansen. The letter
stated Mr. Hansen's three top priorities: first, get the U.S. FDA Pre Market
Approval (PMA) completed; second, launch a global commercialization program; and
third, lay out a roadmap to enhance the long-term growth of the Company. On
October 18, 2004 we filed an 8-K report announcing this press release and
attached it as an exhibit.
15
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.
On July 17, 2000 we sold to Charlton in a private placement 400 shares of our
Series K convertible preferred stock for $4 million. We issued an additional 95
Series K shares to Charlton for $950,000 on November 7, 2000. The total of
$4,950,000 was designed to serve as bridge financing pending draws on the
Charlton private equity line (described below). We paid Spinneret Financial
Systems Ltd. ("Spinneret"), an independent financial consulting firm
unaffiliated with us 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. We were
obligated to pay a 9% dividend on the Series K convertible preferred in cash or
common stock at our option semi-annually on June 30 and December 31 of each
calendar year or upon the conversion date. Under the Series K Certificate of
Designations, we had the option of redeeming the remaining convertible preferred
(except for the Spinneret shares) solely through the use of the private equity
line by paying cash with the following redemption premiums.
Days from closing 0-120 121-180 180
Redemption price
As a % of Principal 105% 107.5% 110%
In the event that, for whatever reason, we did not redeem the convertible
preferred according to the above schedule, the holder had the right to convert
the convertible preferred into common stock at a per share price equal to the
lower of $1.29 (115% of the closing bid price on the day prior to the initial
issuance) or 87.5% of the average of the three lowest closing bid prices (which
need not be consecutive) of the 20 consecutive trading days prior to the
conversion date. In November 2000, Charlton converted 25 Series K shares plus
accrued dividends into 197,349 restricted shares of common stock. In January
2001, Charlton converted $3,950,000 (395 shares) of Series K convertible
preferred stock into an aggregate of 4,935,412 common shares and Spinneret
converted $50,000 (5 shares) of Series K convertible preferred stock into an
aggregate of 63,996 common shares. On December 12, 2000, we registered 5,720,605
common shares underlying the 500 shares of Series K convertible preferred stock.
The shares registered included only 58,140 shares underlying the Spinneret
Series K preferred so we had to issue 5,856 common shares with a restrictive
legend. Those shares were registered in February 2001. Of the remaining 100
shares of Series K preferred stock, 50 shares were converted into 664,659 shares
of common stock in April 2001 and 50 shares were redeemed for $550,000 using
proceeds from the Charlton private equity line in April 2001.
On August 17, 2000, we entered into a $25 million private equity credit
agreement with Charlton. On November 29, 2000, prior to any draws under the
initial private equity agreement, we terminated that agreement and the initial
agreement was replaced by an Amended Private Equity Credit Agreement dated
November 30, 2000 (the "Private Equity Agreement"). The Private Equity Agreement
committed Charlton to purchase up to $25 million of common stock subject to
certain conditions pursuant to Regulation D over the course of a commitment
period extending 12 months after the effective date of a registration statement
covering the Private Equity Agreement common shares. The timing and amounts of
the purchase by the investor were at our sole discretion. We were required to
draw down a minimum of $10 million from the credit line over the initial
12-month period. If the minimum amount was not sold, Charlton was entitled to
16
receive a payment equal to 9% of the difference between the $10,000,000 and the
amount drawn by us (the "Shortfall Payment"). The purchase price of the shares
of common stock was set at 91% of the market price. The market price, as defined
in the 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. If, subsequent to effectiveness, the registration statement was
suspended at any time, we would be obligated to pay liquidated damages of 1.5%
of the cost of all common stock then held by the investor for each 15-day period
or portion thereof, beginning on the date of the suspension. If such suspension
was cured within the first 15 days, the damages would not apply. 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 fee in advance. We reached an agreement
and paid them $250,000 out of proceeds from a put. On December 13, 2000 we
registered 7,089,685 shares of common stock underlying $10 million out of the
$25 million available in the Private Equity Agreement. Because of the decline in
our stock price, we did not have sufficient common shares registered to fulfill
our obligation under the Private Equity Agreement. To satisfy our obligation to
provide registered common shares to cover the $10 million minimum, we registered
9,875,000 additional shares on October 23, 2001. We paid Spinneret an additional
$186,235 in consulting fees relating to the Private Equity Agreement from
January to September 2001.
The New Private Equity Agreement
Because the average bid price of our common stock fell below the contractually
required $.50 during the 15-day period prior to puts and/or put closings from
time to time in the period beginning November 15, 2001, Charlton orally agreed
to waive the minimum price requirement. Further, because we drew only $5,825,000
of the $10,000,000 minimum by December 13, 2001, Charlton orally agreed to
extend the commitment period and thereby waived its right to receive a Shortfall
Payment based on our failure to timely draw the $10,000,000 minimum. On May 7,
2002, we and Charlton entered into a written amendment to the Private Equity
Agreement as of November 15, 2001, which (i) reduced the minimum stock price
requirement from $.50 to $.25, (ii) reduced the minimum average daily trading
volume to $50,000, and (iii) extended the commitment period to December 13,
2003. Between November 15, 2001, and April 24, 2002, Charlton accepted two puts
totaling $625,000 and 1,410,240 shares despite the relevant average bid price
having fallen below $.50. From December 14, 2001, to April 24, 2002, Charlton
accepted eight puts totaling $2,600,000 and 5,897,827 shares. Charlton has not
accepted any puts under the prior Private Equity Agreement since April 24, 2002.
Charlton agreed to the waivers sought by us in connection with the prior Private
Equity Agreement because of our good working relationship and the mutually
beneficial nature of the relationship. During the initial one-year commitment
period, we drew only $5,825,000 of the $10,000,000 minimum because we did not
require all of the funds and wanted to avoid unnecessary dilution of our
shareholders and unnecessary sales of our stock, which could have depressed its
market price. Charlton has never rejected any of our puts. From January 25, 2001
to April 9, 2002 we drew $8,425,000 and issued 15,015,479 shares to Charlton
under the prior Private Equity Agreement.
On May 15, 2002, we and Charlton entered into a new private equity agreement,
which replaced the prior Private Equity Agreement (the "New Private Equity
Agreement"). The terms of the New Private Equity Agreement are substantially
equivalent to the terms of the prior agreement, except that (i) the commitment
period is three years from the effective date of a registration statement
covering the New Private Equity Agreement shares, (ii) the minimum amount we
must draw through the end of the commitment period is $2,500,000, (iii) the
minimum stock price requirement has been reduced to $.20, and (iv) the minimum
average trading volume has been reduced to $40,000. The conditions to our
ability to draw under the Charlton private equity line, as described above, may
materially limit the draws available to us.
Since we did not yet have an effective registration statement covering shares to
be sold pursuant to the New Private Equity Agreement, in May 2002, Charlton
loaned us $350,000 in order to partially cover our short-term working capital
needs. This loan was evidenced by a promissory note dated May 29, 2002, due
August 1, 2002, and bearing interest at a rate of 2% per month. The loan was
secured by a pledge of 1,000,000 shares of our common stock, 500,000 each by our
Chief Executive Officer, Linda Grable, and by our Executive Vice President and
17
Chief Financial Officer, Allan Schwartz, and was personally guaranteed by Ms.
Grable and Mr. Schwartz. Charlton orally agreed to extend the due date of the
note, and we have paid it back in full with proceeds of puts under the New
Private Equity Agreement between July and December 2002.
On May 17, 2002 we filed a registration statement on Form S-2 to register
10,000,000 shares underlying the New Private Equity Agreement, which was
declared effective by the SEC on July 24, 2002. We intend to make sales under
the New Private Equity Agreement from time to time in order to raise working
capital on an "as needed" basis. We may sell additional shares pursuant to the
New Private Equity Agreement through subsequent registration statement(s),
provided that our stock price remains above that agreement's minimum. As of the
date of this report under the New Private Equity Agreement we have drawn down
$2,076,000 and issued 9,989,319 shares of common stock.
The Third Private Equity Credit Agreement
On October 29, 2002, we and Charlton entered into a new "Third Private Equity
Credit Agreement" with which we intend to supplement the prior New Private
Equity Agreement. The terms of the Third Private Equity Credit Agreement are
substantially equivalent to the terms of the prior agreement, except that (i)
the commitment period is three years from the effective date of a registration
statement covering the Third Private Equity Credit Agreement shares, (ii) the
maximum commitment is $15,000,000, (iii) the minimum amount we must draw through
the end of the commitment period is $2,500,000, (iv) the minimum stock price
requirement has been reduced to $.10, and (v) the minimum average trading volume
in dollars has been reduced to $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 new Third 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 intend to draw in excess of
the $2,500,000 minimum but substantially less than the $15,000,000 maximum under
the new Third Private Equity Credit Agreement; however, if those needs change we
may draw up to the $15,000,000 maximum. As of the date of this report under the
Third Private Equity Credit Agreement we have drawn down $7,805,000 and issued
21,756,177 shares of common stock.
The Fourth Private Equity Credit Agreement
On January 9, 2004, we and Charlton entered into a new "Fourth Private Equity
Credit Agreement" which replaces 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
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, 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 trading volume 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.
On January 30, 2004, we filed a registration statement with respect to 5,000,000
shares of our common stock to be issued pursuant to the Fourth Private Equity
Credit Agreement. This registration statement became effective March 4, 2004, at
which time the Third Private Equity Credit Agreement was terminated and we began
drawing under the Fourth Private Equity Credit Agreement. On June 21, 2004 we
18
filed a registration statement with respect to 9,800,000 shares of our common
stock to be issued pursuant to the Fourth Private Equity Credit Agreement. This
registration statement became effective June 29, 2004. We intend to make sales
under the new 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 intend to draw in excess of the $1,000,000
minimum but substantially less than the $15,000,000 maximum under the new Fourth
Private Equity Credit Agreement; however, if those needs change we may draw up
to the $15,000,000 maximum. As of the date of this report, under the Fourth
Private Equity Credit Agreement we have drawn down $4,862,500 and issued
13,654,093 shares of common stock.
As of the date of this report, since January 2001, we have drawn an aggregate of
$25,106,000 in gross proceeds from our equity credit lines with Charlton and
have issued 62,263,932 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. If we utilize the new Fourth
Private Equity Credit Agreement 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.
19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
31.1 Certification by 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 by 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 by 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 by 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 July 13, 2004, stating that Tim Hansen was
appointed by the Board of Directors to serve as the new Chief Executive
Officer and Board member. Mr. Hansen has served in top-level executive
positions in the medical imaging industry over a 30-year period and was
notably President of Picker Medical Systems, a leading company in the
diagnostic imaging market. Most recently, Mr. Hansen was with Cardinal
Health, Inc. as the general manager of the Radiation Management
Services, a leading provider of medical imaging quality assurance
instruments and solutions.
A Form 8-K was filed on September 28, 2004, announcing that our CT
Laser Mammography System (CTLM(R)) had received Chinese State Food and
Drug Administration (SFDA) marketing approval. The Peoples Republic of
China SFDA issued the registration "Certificate for Medical Device".
The medical device registration number is 20043241646.
A Form 8-K was filed on September 29, 2004, announcing that we signed a
multi-year agreement with China Far East International Trading
Corporation (CFETC) for the exclusive sale of our CT Laser Mammography
System (CTLM(R)) in the People's Republic of China. The new agreement
also includes clinical research and collaboration programs and
supersedes our previous distribution contract with CFETC.
A Form 8-K was filed on October 18, 2004 announcing the issuance of a
press release entitled, "Shareholder Letter From Imaging Diagnostic
Systems, Inc." written by Tim Hansen, CEO. The letter detailed the
three top priorities chosen by Mr. Hansen and the Board of Directors.
First, get the U.S. FDA Pre Market Approval (PMA) completed; second,
launch a global commercialization program; and third, lay out a roadmap
to enhance the long-term growth of the Company.
20
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: November 8, 2004 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)
21