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: March 31, 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 March 31, 2005: 190,092,725 shares of common stock, no par value. As of
March 31, 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 -
March 31, 2005 and June 30, 2004.................................. 3
Condensed Statement of Operations -
Nine months and three months ended March 31,
2005 and 2004, and December 10,
1993 (date of inception) to March 31, 2005........................ 4
Condensed Statement of Cash Flows -
Nine months ended March 31, 2005 and 2004,
and December 10, 1993 (date of inception)
to March 31, 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................................. 9
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 13
Item 4. Controls and Procedures......................................... 13
PART II - OTHER INFORMATION
Item 1. Legal Proceedings............................................... 14
Item 2. Changes in Securities........................................... 14
Item 3. Defaults Upon Senior Securities................................. 14
Item 4. Submission of Matters to a Vote of
Security Holders ............................................... 14
Item 5. Other Information............................................... 14
Item 6. Exhibits and Reports on Form 8-K................................ 21
Signatures ............................................................. 23
2
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Development Stage Company)
Condensed Balance Sheet
Assets
Mar. 31, 2005 Jun. 30, 2004
------------ ------------
Current Assets: Unaudited *
Cash $ 364,434 $ 554,354
Accounts Receivable 378,964 28,925
Inventory 2,211,693 2,357,864
Prepaid expenses 17,868 64,579
Other current assets 4,399 570
------------ ------------
Total Current Assets 2,977,358 3,006,292
------------ ------------
Property and Equipment, net 2,201,167 2,301,095
Other Assets 780,611 806,244
------------ ------------
$ 5,959,136 $ 6,113,631
============ ============
Liabilities and Stockholders' Equity
Current Liabilities:
Accounts Payable and
Accrued Expenses $ 936,396 $ 1,172,527
Customer Deposits 30,000 40,000
Short term debt 300,407 300,407
Other current liabilities 1,014,486 1,014,486
------------ ------------
Total Current Liabilities 2,281,289 2,527,420
------------ ------------
Stockholders Equity:
Common Stock 85,060,799 79,235,712
Additional paid-in capital 1,597,780 1,597,780
Deficit accumulated during
development stage (82,980,732) (77,247,281)
------------ ------------
Total stockholders' equity 3,677,847 3,586,211
------------ ------------
$ 5,959,136 $ 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
Nine Months Ended Three Months Ended Since Inception
March 31, March 31, (12/10/93) to
2005 2004 2005 2004 Mar. 31, 2005
---- ---- ---- ---- -------------
Net Sales $ 374,952 $ 552,983 $ 374,952 $ 552,983 $ 1,292,248
Cost of Sales 166,685 193,163 166,685 193,163 530,556
----------- ----------- ----------- ----------- -------------
Gross Profit 208,267 359,820 208,267 359,820 761,692
----------- ----------- ----------- ----------- -------------
Operating Expenses:
General and administrative 2,285,921 4,807,120 792,326 1,700,307 43,872,350
Research and development 1,997,347 410,780 557,739 214,473 13,694,627
Sales and marketing 871,136 357,485 284,177 107,283 3,884,408
Inventory valuation adjustments 212,339 - 44,971 - 3,447,340
Depreciation and amortization 139,286 129,903 43,623 45,989 2,372,855
Amortization of deferred compensation - - - - 4,064,250
----------- ----------- ----------- ----------- -------------
5,506,029 5,705,288 1,722,836 2,068,052 71,335,830
----------- ----------- ----------- ----------- -------------
Operating Loss (5,297,762) (5,345,468) (1,514,569) (1,708,232) (70,574,138)
Gain/Loss on sale of fixed assets - (5,302) - - 5,585
Interest income 3,915 8,981 978 1,362 272,752
Interest expense (439,605) (595,363) (125,584) (152,302) (5,837,171)
----------- ----------- ----------- ----------- -------------
Net Loss (5,733,452) (5,937,152) (1,639,175) (1,859,172) (76,132,972)
Dividends on cumulative Pfd. stock:
From discount at issuance - - - - (5,402,713)
Earned - - - - (1,445,047)
------------- ------------ ------------ ------------ -------------
Net loss applicable to
common shareholders $ (5,733,452) $ (5,937,152) $ (1,639,175) $ (1,859,172) $ (82,980,732)
============= ============= ============= ============= =============
Net Loss per common share:
Basic and Diluted:
Net loss per common share $ (0.03) $ (0.04) $ (0.01) $ (0.01) $ (1.04)
============= ============== ============= ============= =============
Weighted avg. no. of common shares 182,558,775 167,082,265 187,800,485 167,197,384 80,015,131
============= ============== ============= ============= =============
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
Nine Months Since Inception
Ended March 31, (12/10/93) to
2005 2004 Mar. 31, 2005
------------- ------------- --------------
Cash provided by (used for) Operations:
Net loss $ (5,733,452) $ (5,937,152) $ (76,132,972)
Changes in assets and liabilities 285,534 842,204 25,964,638
------------- ------------- --------------
Net cash used by operations (5,447,918) (5,094,948) (50,168,334)
------------- ------------- --------------
Investments
Proceeds from the sale of property & equipment - - 29,857
Capital expenditures (18,180) (329,803) (7,223,711)
-------- --------- -----------
Cash used for investments (18,180) (329,803) (7,193,854)
-------- --------- -----------
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 5,276,178 4,940,000 33,902,383
---------- ---------- ----------
Net cash provided by financing activities 5,276,178 4,940,000 57,726,623
---------- ---------- ----------
Net increase (decrease) in cash (189,920) (484,751) 364,435
Cash, beginning of period 554,354 1,361,507 -
----------- ----------- ----------
Cash, end of period $ 364,434 $ 876,756 $ 364,434
=========== =========== ===========
The accompanying notes are an integral 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 and nine-month period ended March 31, 2005 are
not necessarily indicative of the results that may be expected for any other
interim period or for the year ending June 30, 2005. 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 17, 2004.
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 a total of eight systems as of March 31, 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
to developing our markets through our existing distributor network and through
the additional appointment of distributors and the training of their field
service engineers. 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 our Fourth Private Equity Credit Agreement for
capital to cover 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. The following is a summary of inventories:
March 31, 2005 June 30, 2004
-------------- -------------
Raw materials consisting of purchased
parts, components and supplies $ 1,336,015 $ 1,100,112
Work-in-process including completed units
undergoing final inspection and testing $ 197,071 $ 93,869
Finished goods $ 678,607 $ 1,163,883
Total Inventory $ 2,211,693 $ 2,357,864
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
In December 2004, the Financial Accounting Standards Board, or FASB, issued a
revision of Financial Accounting Standards No. 123, or SFAS 123(R), which
requires all share-based payments to employees, including grants of employee
stock options, to be recognized in the income statement based on their values.
We expect to calculate the value of share-based payments under SFAS 123(R) on a
basis substantially consistent with the fair value approach of SFAS 123. We will
adopt SFAS 123(R) effective July 1, 2005. We expect the adoption of SFAS 123R
will have an impact on our financial statements; however, we are still
evaluating whether the adoption of this standard will be material.
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 currently account for stock-based compensation issued to our 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 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 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 and nine months ended March 31, 2005, and 2004: 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, our 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 Nine Months Ended
March 31 March 31
2005 2004 2005 2004
---- ------ ---- ----
Net income (loss) - as reported $(1,639,175) $(1,859,172) $(5,733,452) $(5,937,152)
Less: stock-based employee
compensation determined under the
Fair value method, net of income tax effect 168,619 454,839 437,130 839,928
------------ ------------ ----------- -----------
Net income (loss) - pro forma $(1,470,556) $(1,404,333) $(5,296,322) $(5,097,224)
============ ============ ============ ============
Basic and Diluted earnings (loss)
per share-as reported $ (0.01) $ (0.01) $ (0.03) $ (0.03)
Basic and Diluted earnings (loss)
per share-pro forma $ (0.01) $ (0.01) $ (0.03) $ (0.03)
8
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 tomographic 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 March 31, 2005 of approximately $82,980,732 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.
RESULTS OF OPERATIONS
Revenues for the three and nine months ended March 31, 2005, were $374,952
representing a decrease of $178,031 or 32% for the corresponding periods for
2004. The revenues reported were the same for both the three and nine-month
periods in each of 2005 and 2004, as the sales in each year occurred in our
third quarter. The decrease in revenues was a result of special unit pricing
granted to distributors for market development.
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 and nine months ended March
31, 2005, were $792,326 and $2,285,92,1 representing decreases of $907,981 or
53% and $2,521,199 or 52%, respectively, from the corresponding periods for
2004. Of the $792,326 and $2,285,921, compensation and related benefits
comprised $477,828 (60%) and $1,400,112 (61%), respectively.
The three-month decrease of $907,981 was due primarily to the reallocation of
$288,869 in salaries and payroll taxes, $303,669 of the $382,950 in holiday
9
bonuses, $39,234 in health insurance, $80,319 in travel and subsistence, $48,120
in consulting and $68,086 in professional fees to the appropriate R&D and S&M
expense categories.
The nine-month decrease of $2,521,199 was due primarily to a $450,000 one-time
settlement expense in the prior year and the reallocation of $1,151,790 in
salaries and payroll taxes, $303,669 of the $382,950 in holiday bonuses,
$107,716 in health insurance, $254,431 in travel and subsistence, $269,510 in
consulting and $68,086 in professional fees to the appropriate R&D and S&M
expense categories.
The significant items not listed above that are now included in our G&A expense
category are: property and casualty insurance; directors' and officers'
liability insurance; professional fees associated with our corporate and
securities attorneys and independent auditors; maintenance of our current
patents; corporate governance expenses; stockholder expenses; utilities;
maintenance; telephones; office supplies and sales and property taxes.
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 and nine months ended March
31, 2005, were $557,739 and $1,997,347, representing increases of $343,266 or
160% and $1,586,567 or 386%, respectively, for the corresponding periods for
2004. Of the $557,739 and $1,997,347, compensation and related benefits
comprised $414,283 (74%) and $1,153,861 (58%), respectively.
The three-month increase of $343,266 was due primarily to the reallocation of
$264,961 in salaries and payroll taxes, $39,016 in health insurance, $21,863 in
consulting and $31,366 in outside legal services from the G&A expense category.
The nine-month increase of $1,586,567 was due primarily to clinical expenses
increasing by $376,953 as a result of PMA study expenses and the reallocation of
$757,595 in salaries and payroll taxes, $114,089 in health insurance, $53,311 in
consulting and $141,006 in outside legal services from the G&A expense category.
The significant items not listed above that are now included in our R&D expense
category are: legal and consulting fees associated with our PMA application:
costs associated with materials and components we use to make product
enhancements to the CTLM(R); materials and components for new product research;
professional fees associated with the research and applications for new patents;
and the costs associated with the shipping, training, installing and servicing
of our clinical collaboration sites.
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 and nine months ended March 31,
2005, were $284,177 and $871,136 representing increases of $176,894 or 165% and
$513,651 or 144%, respectively, for the corresponding periods for 2004. Of the
$284,177 and $871,136, compensation and related benefits comprised $95,732 (34%)
and $253,398 (29%), respectively.
The three-month increase of $176,894 was due primarily to the reallocation of
$80,470 in salaries and payroll taxes, $6,443 in health insurance and $81,284 in
travel and subsistence expenses from the G&A expense category.
10
The nine-month increase of $513,651 was due primarily to the reallocation of
$226,708 in salaries and payroll taxes, $17,186 in health insurance, $40,321 in
consulting and $214,044 in travel and subsistence expenses from the G&A expense
category. The increases were further due to the international travel expenses
associated with developing our distributor network.
The significant items not listed above that are now included in our S&M expense
category are: costs associated with advertising and promotion; trade show
expenses; certification expenses; commissions; and product liability insurance.
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 and
nine months ended March 31, 2005 to expenses in the comparable periods in 2004,
we had decreases of $387,821 or 19% and 420,981 or 8%, respectively.
The decrease in the three-month comparative period was due to the fair market
value of the 2004 holiday bonus given to the employees in January 2005 of
$75,850, which was $307,100 less than the 2003 holiday bonus given in January
2004 of $382,950.
The significant decreases in the nine-month comparative period were due
primarily to a $450,000 one-time settlement expense and the legal fees
associated with the Ladenburg case, and the fair market value of the 2004
holiday bonus given to the employees in January 2005, which was $307,100 less
than the 2003 holiday bonus given in January 2004. .There was a reduction of
consulting expenses during this nine-month comparative period because we hired a
vice president of international sales in September 2004, which eliminated our
need for an international marketing consultant. However, we will continue to use
other consultants in certain countries to assist our vice president of
international sales. There was also a reduction in consulting fees due to the
termination of our financial advisor concurrent with the termination of the
Third Private Equity Credit Agreement.
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.
Interest expense during the three and nine months ended March 31, 2005, was
$125,854 and $439,605 representing decreases of $26,718 or 18% and $155,758 or
26% from the corresponding period for 2004. The decreases are due primarily to
the amount of the draws and the recording of the 7% and 9% discounts on our
equity credit line as interest with Charlton Avenue, LLC ("Charlton"). See Item
5. Other Information - "Financing/Equity Line of Credit"
BALANCE SHEET DATA
Our combined cash and cash equivalents totaled $364,434 as of March 31, 2005.
This is a decrease of $189,920 from $554,354 as of June 30, 2004. During the
quarter ending March 31, 2005, we received a net of $1,560,274 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 $2,201,167 net as of March 31, 2005. The
overall decrease of $99,928 from June 30, 2004 to March 31, 2005 is due
primarily to the recorded depreciation.
11
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 nine months
ending March 31, 2005, was $5,447,918 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 $5,094,948 in the same nine months
ending March 31, 2004. At March 31, 2005, we had working capital of $696,069
compared to working capital of $1,385,539 at March 31, 2004, and $478,872 at
June 30, 2004.
During the third quarter ending March 31, 2005, we were able to raise a total of
$1,560,274 after expenses through the sale of common stock to Charlton. We do
not expect to generate an 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 to raise the funds
required prior to the end of fiscal year 2005 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.
Capital expenditures for the nine months ending March 31, 2005, were $18,180 as
compared to approximately $329,803 for the nine months ending March 31, 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, 2005, will be approximately $7,500.
There were no other changes in our existing debt agreements other than
extensions, and we had no outstanding bank loans as of March 31, 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;
12
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.
We are currently being funded by Charlton through our private equity line. 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.
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
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.
13
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 February 23, 2005 we held a special meeting of stockholders at our corporate
offices at 6531 NW 18th Court, Plantation, Florida for the following purpose:
To consider and act upon a proposal to amend the Company's Articles of
Incorporation to increase the number of authorized shares from 200,000,000
to 300,000,000;
The stockholders voted in favor of the proposal. The affirmative vote of a
majority of the outstanding shares of the Common Stock present in persons or
represented by Proxy at the Special Meeting and entitled to vote were required
to approve the proposal to amend the Company's Articles of Incorporation to
increase the number of authorized shares from 200,000,000 to 300,000,000;
Votes were cast as follows:
FOR 168,515,781 AGAINST 8,635,541 ABSTAIN 424,879
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 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
14
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.
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
15
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
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 with the following hospitals:
1. Schering AG (Three Systems)
o Robert-Rossle Clinic, Berlin, Germany
o University of Muenster, Muenster, Germany
o 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 (A second CTLM(R)
system will be installed in May 2005)
5. Catholic University Hospital, Rome, Italy
6. Charles University Hospital, Prague, Czech Republic
7. Gazi University Hospital, Ankara, Turkey
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
16
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.
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 global regions. These investments may accelerate
CTLM(R) market acceptance while providing valuable clinical experiences.
17
Other Recent Events
In January 2005, we announced that Kurt & Kurt, Inc. was appointed the exclusive
Distributor in Turkey for the CTLM(R).
In January 2005, we announced the receipt of six international orders for
CTLM(R) systems. The orders reflect our new emphasis on global commercialization
and recent efforts to strengthen our international distribution network
supported by our clinical luminary partnerships.
In January 2005, we issued a press release entitled "Imaging Diagnostic Systems,
Inc. Releases Letter to Shareholders" written by our CEO, Tim Hansen. The letter
gave a brief status update of the three top priorities stated in Mr. Hansen's
initial letter to shareholders released in October 2004. On January 27, 2005 we
filed an 8-K report announcing this press release and attached it as an exhibit.
In January 2005, we announced that we sold a CTLM(R) system to our Italian
distributor, Biomedical International, Snc., for installation at the Hospital
Civile di Teramo, Teramo, Italy. The CTLM(R) system will be used in the
hospital's oncology department. Revenue for the sale will be reported in our
third quarter ending March 31, 2005.
In February 2005, we announced that we sold a CTLM(R) system to our distributor,
Abu Dhabi International Medical Services of Abu Dhabi, United Arab Emirates, for
installation at Al Salama Hospital, Abu Dhabi, U.A.E. Revenue for the sale will
be reported in our third quarter ending March 31, 2005.
In February 2005, we announced that we sold a CTLM(R) system to our Italian
distributor, Biomedical International, Snc., originally planned for installation
at the Biomedical Mammography Center, Alba Adriatica, Teramo, Italy. Our
distributor has advised us that he plans to install it in another facility in
Italy. Revenue for the sale will be reported in our third quarter ending March
31, 2005.
In February 2005, we announced that we attended the 30th annual Arab Health
Exhibition and Congress in Dubai, United Arab Emirates. Last year a total of
1,422 exhibitors from 50 countries displayed their healthcare products and
services to over 30,000 visitors. As part of our plan of globalization, we will
continue to exhibit directly or through our distributors at select medical and
radiology conferences to introduce and build relationships with potential
customers.
A Special Meeting of Shareholders was held at our corporate headquarters on
February 23, 2005 at which our shareholders approved a proposal to amend our
Articles of Incorporation to increase the number of authorized shares of our
common stock from 200,000,000 to 300,000,000.
In March 2005, we announced that the CTLM(R) was featured at the 11th annual
European Congress of Radiology conference in Vienna, Austria. A key symposium
entitled: "CTLM And 3-D Absorption And Fluorescence Optical Molecular Imaging Of
Human Breast Cancer," moderated by Professor Eric Milne, Director of Clinical
Research at IDSI, was held on March 6th.
In March 2005, we announced that we featured results from the CTLM(R) at the
National Consortium of Breast Centers, Inc. 15th Annual National
Interdisciplinary Breast Center Conference in Las Vegas, Nevada.
In March 2005, we announced that we signed distribution agreements for 20
additional territories. These agreements were a result of our participation at
the Arab Health Expo and the European Congress of Radiology conference. The new
territories added were Palestine, Jordan, Iran, Egypt, Libya, Tunisia,
Azerbaijan, Tajikistan, Kazakhstan, Uzbekistan and Georgia in the Middle East/
N. African Region and Portugal, Slovenia, Latvia, Lithuania, Slovak Republic,
Hungary, Ukraine and Byelorussia in the European Region. The Middle East/N.
Africa Region will be served by a hub in Ankara, Turkey and includes existing
distributors in Turkey, United Arab Emirates and Saudi Arabia. The European
Region includes distributors in Italy, Poland, Czech Republic and Bulgaria.
18
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
19
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. We have
already drawn well in excess of the $1,000,000 minimum and, based on our current
assessment of our financing needs, we expect to draw up to the $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
$7,622,774 and issued 23,397,183 shares of common stock.
As of the date of this report, since January 2001, we have drawn an aggregate of
$28,128,774 in gross proceeds from our equity credit lines with Charlton and
have issued 72,909,081 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.
20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
3.19 Amendment to Articles of Incorporation to increase the number of
authorized shares of our common stock, no par value, from 200,000,000 to
300,000,000 is incorporated by reference to our Registration Statement on
Form S-2, File Number 333-123197 filed on March 8, 2005.
3.20 Restated Articles of Incorporation dated April 20, 2005.
10.67 Stock Option Agreement with Timothy B. Hansen, Chief Executive Officer,
dated February 23, 2005 is incorporated by reference to our Registration
Statement on Form S-2, File Number 333-123197 filed on March 8, 2005.
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
21
(b) Reports on Form 8-K
A Form 8-K was filed on January 27, 2005 reporting the issuance of a
press release entitled, "Imaging Diagnostic Systems, Inc. Releases
Letter to Shareholders" written by Tim Hansen, CEO. The letter is a
brief status update of the three top priorities stated in Mr. Hansen's
initial letter to shareholders released in October 2004.
A Form 8-K was filed on February 24, 2005 to report that our
shareholders, at a Special Meeting held on February 23rd, approved a
proposal to amend our Articles of Incorporation to increase the number
of authorized shares of the our common stock, no par value, from
200,000,000 to 300,000,000.
A Form 8-K was filed on February 24, 2005 to report that we entered
into a Stock Option Agreement, pursuant to our 2004 Non-Statutory Stock
Option Plan, to provide as an added incentive to our Chief Executive
Officer, Timothy B. Hansen, an option to purchase 1,500,000 shares at
an option exercise price of $.32, which was the fair market value on
the date of the grant. The shares will vest over a three-year period in
accordance with a schedule included in the agreement.
22
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: May 10, 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