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EX-31.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 302 - IMAGING DIAGNOSTIC SYSTEMS INC /FL/exhibit31-2.htm
EX-32.2 - CERTIFICATION OF CFO PURSUANT TO SECTION 906 - IMAGING DIAGNOSTIC SYSTEMS INC /FL/exhibit32-2.htm
EX-31.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 302 - IMAGING DIAGNOSTIC SYSTEMS INC /FL/exhibit31-1.htm
EX-32.1 - CERTIFICATION OF CEO PURSUANT TO SECTION 906 - IMAGING DIAGNOSTIC SYSTEMS INC /FL/exhibit32-1.htm
 


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-K/A

[Mark One]
x           ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: June 30, 2011
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

IDSI Logo

IMAGING DIAGNOSTIC SYSTEMS, INC.
(Exact name of registrant as specified in its charter)

Florida
 22-2671269
(State of incorporation)
(IRS employer Ident. No.)

5307 NW 35th Terrace, Fort Lauderdale, FL.
33309
(address of principal office)
(Zip Code)

Registrant's telephone number, including area code: (954) 581-9800

Securities registered under Section 12(b) of the Exchange Act:
None

Securities registered under Section 12(g) of the Exchange Act:
Common Stock, no par value
(Title of class)

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 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  xNo  o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non- accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.

¨  Large accelerated filer
¨  Accelerated filer
¨  Non Accelerated filer
x  Smaller reporting company
(Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in rule 12b-2 of the act). Yes  o     No  x

Based on the average closing bid and asked prices of the common stock on the latest practicable date, September 20, 2011, the aggregate market value of the voting stock held by non-affiliates of the registrant was $11,552,313.

The number of shares outstanding of each of the issuer’s classes of common stock, as of September 20, 2011 was 985,468,507.  As of September 20 2011, the issuer had 20 shares of preferred stock outstanding.
 
Documents Incorporated By Reference
[None]
 
 
 
 

 

 
Explanatory Note

We are filing this Amendment No. 1 on Form 10-K/A (this “Amendment”) to our Annual Report on Form 10-K for the fiscal year ending June 30, 2011, which was filed on September 22, 2011 (the “Original Form 10-K”), to amend the Report of our Independent Registered Public Accounting Firm dated September 22, 2011; to add the word “Unaudited” in the inception to date column where applicable in our Financial Statements, and to revise our Liquidity section and Note 25 Commitments and Contingencies to address the accrued payroll taxes, interest and penalties disclosure.  This Amendment does not amend any other information set forth in the Original Form 10-K, and we have not updated the disclosures contained herein to reflect any events that may have occurred at a date subsequent to the date of the Original Form 10-K.


 
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THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934.  ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED AS A RESULT OF THE “KNOWN UNCERTAINTIES” AS SET FORTH IN ITEM 7 “MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS-CAUTIONARY STATEMENTS.”



 
 
 
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The following selected financial data should be read in conjunction with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Item 8. Financial Statements"


 
   
Year Ended
   
Year Ended
   
Year Ended
   
Year Ended
   
Year Ended
 
   
June 30, 2011
   
June 30, 2010
   
June 30, 2009
   
June 30, 2008
   
June 30, 2007
 
                               
Sales
  $ 55,118     $ 181,172     $ 70,617     $ 39,647     $ 65,136  
Gain (Loss) on sale of fixed assets
    -       -       1,181,894       1,609,525       -  
Cost of Sales
    15,265       22,512       20,546       20,944       17,870  
                                         
Gross Profit
    39,853       158,660       1,231,965       1,628,228       47,266  
                                         
Operating Expenses
    4,638,901       4,872,107       4,505,908       6,232,663       7,123,347  
                                         
Operating Loss
    (4,599,049 )     (4,713,447 )     (3,273,943 )     (4,604,435 )     (7,076,081 )
                                         
                                         
Interest income
    1,438       995       636       13,377       11,455  
Other income
    110,858       118,796       5,909       7,827       250,001  
Derivative (expense) income
    -       (64,524 )     -       -       -  
Change in fair value of derivative liability
    273,037       (137,631 )     -       -       -  
Interest expense
    (1,663,809 )     (175,904 )     (677,031 )     (40,447 )     (387,697 )
                                         
Net Loss
    (5,877,525 )     (4,971,715 )     (3,944,429 )     (4,623,678 )     (7,202,322 )
                                         
Dividends on cumulative Pfd. stock:
                                       
From discount at issuance
    -       -       -       -       -  
Earned
    -       -       -       -       -  
                                         
Net loss applicable to
                                       
     common shareholders
  $ (5,877,525 )   $ (4,971,715 )   $ (3,944,429 )   $ (4,623,678 )   $ (7,202,322 )
                                         
                                         
Net Loss per common share
  $ (0.01 )   $ (0.01 )   $ (0.01 )   $ (0.01 )   $ (0.03 )
Weighted avg. no. of common shares,
                                       
    Basic & Diluted
    885,074,029       758,622,934       424,330,162       318,673,749       271,667,256  
                                         
                                         
Cash and Cash Equivalents
  $ 189,135     $ 73,844     $ 12,535     $ 49,433     $ 477,812  
Total Assets
    870,653       980,360       1,134,580       1,583,356       4,365,427  
Deficit accumulated during
                                       
    the development stage
    (117,758,407 )     (111,880,882 )     (106,909,167 )     (102,964,738 )     (98,341,059 )
Stockholders' Equity
    (4,729,168 )     (2,715,156 )     (1,129,222 )     (468,761 )     3,441,322  
 

 
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Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis should be read in conjunction with the “Selected Financial Data” and the Condensed Financial Statements included elsewhere in this report and the information described under the caption “Risk Factors” below.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the U.S.  The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including those related to inventories, and intangible assets.  We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that may not be readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.
 
 
Inventory

Our inventories consist of raw materials, work-in-process and finished goods, and are stated at the lower of cost (first-in, first-out) or market.  As a designer and manufacturer of high technology medical imaging equipment, we may be exposed to a number of economic and industry factors that could result in portions of our inventory becoming either obsolete or in excess of anticipated usage.  These factors include, but are not limited to, technological changes in our markets, our ability to meet changing customer requirements, competitive pressures in products and prices and reliability, replacement and availability of key components from our suppliers.  We evaluate on a quarterly basis, using the guidance provided in ASC 330 (“Inventory”), our ability to realize the value of our inventory based on a combination of factors including the following: how long a system has been used for demonstration or clinical collaboration purpose; the utility of the goods as compared to their cost; physical obsolescence; historical usage rates; forecasted sales or usage; product end of life dates; estimated current and future market values; and new product introductions.  Assumptions used in determining our estimates of future product demand may prove to be incorrect, in which case excess and obsolete inventory would have to be adjusted in the future.  If we determined that inventory was overvalued, we would be required to make an inventory valuation adjustment at the time of such determination.  Although every effort is made to ensure the accuracy of our forecasts of future product demand, significant unanticipated changes in demand could have a significant negative impact on the value of our inventory and our reported operating results. Additionally, purchasing requirements and alternative usage avenues are explored within these processes to mitigate inventory exposure.
 
 
Stock-Based Compensation

The computation of the expense associated with stock-based compensation requires the use of a valuation model.  ASC-718, (“Compensation-Stock Compensation”) is a very complex accounting standard, the application of which requires significant judgment and the use of estimates, particularly surrounding Black-Scholes assumptions such as stock price volatility, expected option lives, and expected option forfeiture rates, to value equity-based compensation.  The Company currently uses a Black-Scholes option pricing model to calculate the fair value of its stock options.  The Company primarily uses historical data to determine the assumptions to be used in the Black-Scholes model and has no reason to believe that future data is likely to differ materially from historical data.  However, changes in the assumptions to reflect future stock price volatility and future stock award exercise experience could result in a change in the assumptions used to value awards in the future and may result in a material change to the fair value calculation of stock-based awards.  ASC-718 requires the recognition of the fair value of stock compensation in net income.  Although every effort is made to ensure the accuracy of our estimates and assumptions, significant unanticipated changes in those estimates, interpretations and assumptions may result in recording stock option expense that may materially impact our financial statements for each respective reporting period.

 
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Impact of Derivative Accounting

As a result of recent financing transactions we have entered into, our financial statements for the year ended June 30, 2011 and future periods have and will be impacted by the accounting effect of the application of derivative accounting.  The application of EITF 07-05 “Determining Whether an Instrument (or Embedded Feature) is Indexed to a Company's Own Stock,” which was effective on January 1, 2009 will significantly affect the application of ASC Topic 815 and ASC Topic 815-40 for both freestanding and embedded derivative financial instruments in our financial statements.  Generally, warrants, conversion features in debt, and similar terms that include “full-ratchet” or reset provisions, which mean that the exercise or conversion price adjusts to pricing in subsequent sales or issuances, no longer meet the definition of indexed to a company's own stock and are not exempt from equity classification provided in ASC Topic 815-15.  This means that instruments that were previously classified in equity are reclassified to liabilities and ongoing measurement under ASC Topic 815.  The amount of quarterly non-cash gains or losses we will record in future periods will be based upon the fair market value of our common stock on the measurement date.


Results of Operations

In the continuing process of commercializing our operations and as part of our transition plan to exit from reporting as a development stage enterprise, we continue to use the format established for the fiscal year ending June 30, 2005 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, research and development, and sales and marketing.

Beginning with the fiscal year ending June 30, 2005 we also expanded our discussion of health insurance and worker’s compensation insurance so that they fell into compensation and related benefits for one of the three expense categories, where previously they were included under insurance costs.  For the fiscal year ending June 30, 2006, we expanded our compensation and related benefits disclosure to include the non-cash compensation related to the expensing of stock options in the three expense categories.


Twelve Months Ended June 30, 2011 and June 30, 2010
 
SALES AND COST OF SALES
Revenues during the year ended June 30, 2011, were $55,118 representing a decrease of $126,054 or 70% from $181,172 during the year ended June 30, 2010.  The decrease in revenues is primarily a result of recording the installment sale of our CTLM® system to one of our distributors in fiscal 2011 compared to the sale of a CTLM® system to our distributor in Malaysia in fiscal 2010.

The Cost of Sales during the year ended June 30, 2011, was $15,265 representing a decrease of $7,247 or 32% from $22,512 during the year ended June 30, 2010.  The decrease in Cost of Sales is primarily a result of recording the installment sale of our CTLM® system to one of our distributors in fiscal 2011 compared to the a sale of a CTLM® system to our distributor in Malaysia in fiscal 2010.


GENERAL AND ADMINISTRATIVE

Our general and administrative expenses include compensation and related benefits for employees in administration, finance, human resources and information technology.  Also included are travel/subsistence related to general and administrative activities; property and casualty insurance; directors’ and officers’ liability insurance; professional fees associated with our corporate and securities attorneys and independent auditors; patent maintenance; corporate governance expenses; stockholder expenses; consulting; utilities; maintenance; telephones; office supplies and sales and property taxes.

General and administrative expenses during the year ended June 30, 2011, were $3,096,209 representing a decrease of $488,399 or 14% from $3,584,608 during the year ended June 30, 2010.  Of the $3,096,209 and $3,584,608, compensation and related benefits comprised $1,638,657 (53%) and $1,768,030 (49%), respectively, representing a decrease of $129,374 or 7%.  Of the $1,638,657 and $1,768,030 compensation and related benefits, $354,399 (22%) and $578,961 (33%), respectively, were due to non-cash compensation associated with expensing stock options.

 
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The general and administrative decrease of $488,399 is due primarily to a decrease of $720,500 in loan cost expenses as a result of a reduction of the issuance of restricted shares in connection with short-term loans; $96,877 in premium expenses associated with short-term loans; $129,374 in compensation and related benefits as a result of non-cash compensation associated with the expensing of stock options, $26,705 in travel related expenses; and $37,500 for a call option fee associated with obtaining a medium term bank bond to be used as collateral for a bank loan in fiscal year 2010.

The total decrease is partially offset by increases of $295,883 in payroll tax penalty & interest, $63,351 in proxy service expenses for the processing and preparation of proxy materials for our annual meeting which was held in July 2011; $50,000 in additional consideration and $49,000 in placement fees associated with our Long-Term Promissory Notes with JMJ Financial; $43,610 in settlement expense associated the settlement agreement with Shraga Levin (see Item 3 Legal Proceedings); $18,237 in directors and officers liability insurance; and $6,990 in legal expenses involving corporate and securities matters.

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

We incur research and development expenses to develop significant enhancements to our sole product, the CTLM®.  These expenses consist primarily of compensation and related benefits; clinical, legal and consulting fees associated with our FDA application; costs of materials and components we use to make product enhancements; new product research; professional fees associated with the research and applications for new patents; and the costs associated with the travel/subsistence, shipping, training, installing and servicing clinical collaboration sites.

Research and development expenses during the year ended June 30, 2011, were $893,879 representing an increase of $158,936 or 22% from $734,943 during the year ended June 30, 2010.  Of the $893,879 and $734,943, compensation and related benefits comprised $735,047 (82%) and $643,315 (88%), respectively, representing an increase of $91,732 or 14%.  Of the $735,047 and $643,315 compensation and related benefits, $17,435 (2%) and $9,552 (1%), respectively, were due to non-cash compensation associated with expensing stock options.

The research and development increase of $158,936 is due primarily to an increase of $91,732 in compensation and related benefits as a result of non-cash compensation associated with the expensing of stock options; $48,200 in FDA Legal expenses; and $27,782 in consulting expenses due to the work performed by our consulting radiologist.

Clinical expenses during the year ended June 30, 2011, were $1,751 representing a decrease of $3,904 or 69% from $5,655 as a result of concluding costs associated with our FDA clinical trials.

We expect a significant increase in our research and development expenses during the fiscal year ending June 30, 2012 due to increased costs associated with conducting the clinical trial and preparing the FDA application for Pre-Market Approval and submitting it to the FDA.  We also expect our consulting expenses and professional fees to increase due to the costs associated with conducting the clinical trial and preparing the FDA application.  See Item 1. Our Business - “CTLM® Development History, Regulatory and Clinical Status”.


SALES AND MARKETING

Our sales and marketing expenses consist primarily of compensation and related benefits for employees in the areas of sales, marketing, sales support and sales administration.  Also included are the expenses associated with advertising and promotion; representative office expense; trade shows; conferences; promotional and training costs related to marketing the CTLM®; commissions; travel/subsistence; consulting; certification expenses; and product liability insurance.

Sales and marketing expenses during the year ended June 30, 2011, were $452,967 representing an increase of $112,534 or 33% from $340,433 during the year ended June 30, 2010.  Of the $452,967 and $340,433, compensation and related benefits comprised $77,131 (17%) and $762 (0%), respectively, representing an increase of $76,369 or 10,023%.  Of the $77,131 and $762 compensation and related benefits, $3,870 (5%) and $0 (0%), respectively, were due to non-cash compensation associated with expensing stock options.

 
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The sales and marketing increase of $112,534 was due primarily to an increase in compensation and related benefits of $76,369 as a result of the increase in staff; $30,723 in regulatory expenses; $26,375 in travel related expenses; $12,147 in freight expenses.

The total increase is partially offset by decrease of $26,241 in trade show expense.

We expect a significant increase in our sales and marketing expenses during the fiscal year ending June 30, 2012 due to the continued implementation of our global commercialization program.  We expect commissions, trade show expenses, advertising and promotion and travel and subsistence costs to increase due to this program.


AGGREGATED OPERATING EXPENSES

Total operating expenses (general and administrative, research and development, sales and marketing, inventory valuation adjustments and depreciation and amortization) during the year ended June 30, 2011, were $4,638,901 representing a decrease of $233,206 or 5% from $4,872,107 when compared to the operating expenses during the year ended June 30, 2010.  The overall decrease in expenses was a result of the reduced costs associated with short-term loans.

Compensation and related benefits during the year ended June 30, 2011, were $2,450,835 representing an increase of $38,728 or 2% from $2,412,107 during the year ended June 30, 2010 due to an increase in staff which was partially offset by a decrease in stock option expense.  Of the $2,450,835 and $2,412,107 compensation and related benefits, $375,704 (15%) and $588,483 (24%), respectively, were due to non-cash compensation associated with expensing stock options.  The net increase of $38,728 was due to a $251,507 increase in cash compensation which was partially offset by a decrease of $212,779 in the recording of non-cash compensation related to the expensing of stock options.

Inventory valuation adjustments during the year ended June 30, 2011, were $95,096 representing an increase of $27,418 or 41% from $67,678 during the year ended June 30, 2010.  The increase is due to the additional write-down of systems that have lost value due to usage as demonstrators on consignment.  See “Critical Accounting Policy – Inventory”.

Depreciation and amortization during the year ended June 30, 2011, were $100,751 representing a decrease of $43,694 or 30% from $144,445 during the year ended June 30, 2010.

Interest expense during the fiscal year ended June 30, 2011, was $1,663,809 representing an increase of $1,487,905 or 846% from $175,904 during the year ended June 30, 2010.  The increase of $1,487,905 is primarily due to the recording of the $771,845 discount to the fair value at the debt to equity conversion of promissory notes that were originally issued with collateral shares of our common stock; $716,729 is the amortization of the debt discount on our convertible promissory notes; and $117,193 is imputed interest associated with our equity credit line with Southridge as per the terms and conditions of our private equity credit agreement.  Our utilization of the equity credit line decreased during fiscal 2010 compared to the prior period.  See Item 5.  Market for Registrant’s Common Equity and Related Stockholder Matters – “Financing/Equity Line of Credit”

Other income during the year ended June 30, 2011, was $110,858 representing a decrease of $7,938 or 7% from $118,796 during the year ended June 30, 2010.  Of the $110,858 other income, $91,482 represented an adjustment to the allowance for doubtful accounts and $13,010 represented the extinguishment of debt.

We previously presented the gain on the sale of our Plantation property as a non-operating expense item.  We have reviewed the guidance provided by ASC and have determined that the gain should be presented in the income section of our Statement of Operations.


Twelve Months Ended June 30, 2010 and June 30, 2009
 
SALES AND COST OF SALES
Revenues during the year ended June 30, 2010, were $181,172 representing an increase of $110,555 or 157% from $70,617 during the year ended June 30, 2009.  The increase in revenues is a result of a sale of a CTLM® system to our distributor in Malaysia.

 
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The Cost of Sales during the year ended June 30, 2010, was $22,512 representing an increase of $1,966 or 10% from $20,546 during the year ended June 30, 2009.  The increase in Cost of Sales is a result of a sale of a CTLM® system to our distributor in Malaysia.
 
 
GENERAL AND ADMINISTRATIVE

Our general and administrative expenses include compensation and related benefits for employees in administration, finance, human resources and information technology.  Also included are travel/subsistence related to general and administrative activities; property and casualty insurance; directors’ and officers’ liability insurance; professional fees associated with our corporate and securities attorneys and independent auditors; patent maintenance; corporate governance expenses; stockholder expenses; consulting; utilities; maintenance; telephones; office supplies and sales and property taxes.

General and administrative expenses during the year ended June 30, 2010, were $3,584,608 representing an increase of $1,205,496 or 51% from $2,379,112 during the year ended June 30, 2009.  Of the $3,584,608 and $2,379,112, compensation and related benefits comprised $1,768,030 (49%) and $1,465,548 (63%), respectively, representing an increase of $302,482 or 21%.  Of the $1,768,030 and $1,465,548 compensation and related benefits, $578,961 (33%) and $116,319 (9%), respectively, were due to non-cash compensation associated with expensing stock options.

The general and administrative increase of $1,205,496 is due primarily to increases of $302,482 in compensation and related benefits as a result of non-cash compensation associated with expensing stock options; $465,500 in loan costs expense associated with the issuance of additional consideration for short-term loans; $357,000 in loan costs expense to record one month of amortization of the debt discount; $438,144 in premium expenses associated with the short-term loans; $37,500 for a call option fee associated with obtaining a medium term bank bond to be used as collateral for a bank loan.

The total increase is partially offset by decreases of $81,103 in rent expense as a result of recording the rent holiday associated with the lease on our former Plantation facility in the prior fiscal year; $64,000 in placement fees and $7,467 in liquidated damage expense associated with the sale of Convertible Debentures in August and November 2008; $69,429 in proxy service expenses as no Annual Meeting was held in fiscal year 2010; $66,797 in legal expenses involving corporate and securities matters; $32,975 as a result of reducing or canceling several of our insurance policies; $24,819 in real estate taxes, $22,901 in maintenance and repairs, $14,101 in utilities as a result of our move to a smaller facility in August 2008 that we rent rather than own; and $17,640 in freight expenses.

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

We incur research and development expenses to develop significant enhancements to our sole product, the CTLM®.  These expenses consist primarily of compensation and related benefits; clinical, legal and consulting fees associated with our FDA application; costs of materials and components we use to make product enhancements; new product research; professional fees associated with the research and applications for new patents; and the costs associated with the travel/subsistence, shipping, training, installing and servicing clinical collaboration sites.

Research and development expenses during the year ended June 30, 2010, were $734,943 representing a decrease of $491,775 or 40% from $1,226,718 during the year ended June 30, 2009.  Of the $734,943 and $1,226,718, compensation and related benefits comprised $643,315 (88%) and $755,348 (62%), respectively, representing a decrease of $112,033 or 15%.  Of the $643,315 and $755,348 compensation and related benefits, $9,552 (1%) and $12,939 (2%), respectively, were due to non-cash compensation associated with expensing stock options.

The research and development decrease of $491,775 is due primarily to a decrease of $112,033 in compensation and related benefits as a result of a reduction in staff; $174,432 in consulting expenses due to our decreased use of consultants in the field of scientific and clinical disciplines, in consulting expenses primarily associated with the monitoring and data management of our FDA process and various consultants involved with design engineering, software engineering and research by our consulting radiologist; $136,058 in clinical expenses; $45,848 in freight expenses; $2,941 in legal patent expenses associated with patent applications; and $17,715 in travel related expenses due to reduced travel to our U.S. clinical sites and to our International clinical collaboration sites.

 
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Clinical expenses during the year ended June 30, 2010, were $5,655 representing a decrease of $136,058 or 96% from $141,713 as a result of concluding costs associated with our FDA clinical trials.

We expect a significant increase in our research and development expenses during the fiscal year ending June 30, 2011 due to increased costs associated with preparing our FDA application and submitting it to the FDA.  We also expect our consulting expenses and professional fees to increase due to the costs associated with our FDA application.  See Item 1. Our Business - “Clinical Collaboration Sites Update”.


SALES AND MARKETING

Our sales and marketing expenses consist primarily of compensation and related benefits for employees in the areas of sales, marketing, sales support and sales administration.  Also included are the expenses associated with advertising and promotion; representative office expense; trade shows; conferences; promotional and training costs related to marketing the CTLM®; commissions; travel/subsistence; consulting; certification expenses; and product liability insurance.

Sales and marketing expenses during the year ended June 30, 2010, were $340,433 representing a decrease of $275,015 or 45% from $615,448 during the year ended June 30, 2009.  Of the $340,433 and $615,448, compensation and related benefits comprised $762 (0%) and $111,743 (18%), respectively, representing a decrease of $110,982 or 99%.  Of the $762 and $111,743 compensation and related benefits, $0 (0%) and $2,069 (2%), respectively, were due to non-cash compensation associated with expensing stock options.

The sales and marketing decrease of $275,015 was due primarily to a decrease in compensation and related benefits of $110,982 as a result of the reduction in staff; $116,053 in representative office expense as a result of closing our representative office in Beijing, China in the prior fiscal year as part of our cost savings initiative; $18,640 in regulatory expenses, $11,250 in public relations expense as a result of a reduction in the issuances of press releases during the year; $9,871 in advertising and promotion; and $5,416 in freight expenses.

After we file our FDA application, we expect commissions, trade show expenses, advertising and promotion and travel and subsistence costs to increase as we continue to implement our global commercialization program.


AGGREGATED OPERATING EXPENSES

Total operating expenses (general and administrative, research and development, sales and marketing, inventory valuation adjustments and depreciation and amortization) during the year ended June 30, 2010, were $4,872,107 representing an increase of $366,199 or 8% from $4,505,908 when compared to the operating expenses during the year ended June 30, 2009.  The overall increase in expenses was a result of the costs associated with short-term loans.

Compensation and related benefits during the year ended June 30, 2010, were $2,412,107 representing an increase of $79,468 or 3% from $2,332,639 during the year ended June 30, 2009 due to an increase in stock option expense partially offset by a reduction in staff.  Of the $2,412,107 and $2,332,639 compensation and related benefits, $588,483 (24%) and $131,327 (6%), respectively, were due to non-cash compensation associated with expensing stock options.  The net increase of $79,468 was due to a $457,156 increase in the recording of non-cash compensation related to the expensing of stock options which was partially offset by a decrease of cash compensation of $377,688.

Inventory valuation adjustments during the year ended June 30, 2010, were $67,678 representing a decrease of $14,609 or 18% from $82,286 during the year ended June 30, 2009.  The decrease is due to previous reductions in the write-down of systems that have lost value due to usage as demonstrators on consignment.  See “Critical Accounting Policy – Inventory”.

Depreciation and amortization during the year ended June 30, 2010, were $144,445 representing a decrease of $57,889 or 29% from $202,344 during the year ended June 30, 2009.

Interest expense during the fiscal year ended June 30, 2010, was $175,904 representing a decrease of $501,127 or 74% from $677,031 during the year ended June 30, 2009.  The decrease is due to the recording of the amortization of the debt discount on our convertible debentures and the imputed interest in the prior fiscal year.  Of the $175,904, $24,792 is imputed interest

 
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associated with our old equity credit line with Charlton Avenue, LLC (“Charlton”) and $102,754 is imputed interest associated with our new equity credit line with Southridge Partners II, LLP (“Southridge”) as per the terms and conditions of our private equity credit agreement(s); and $35,532 is the amortization of the debt discount on our convertible debentures.  Our utilization of the equity credit line decreased during fiscal 2010 compared to the prior period.  See Item 5.  Market for Registrant’s Common Equity and Related Stockholder Matters – “Financing/Equity Line of Credit”

Other income during the year ended June 30, 2010, was $118,796 representing an increase of $112,821 or 1,888% from $5,975 during the year ended June 30, 2009.  Of the $118,796 other income, $98,829 represented the extinguishment of debt.

We previously presented the gain on the sale of our Plantation property as a non-operating expense item.  We have reviewed the guidance provided by ASC and have determined that the gain should be presented in the income section of our Statement of Operations.


Balance Sheet Data
We have financed our operations since inception by the issuance of equity securities with aggregate net proceeds of approximately $70,271,248 and through loan transactions in the aggregate net amount of $5,137,994.  Furthermore, we issued equity securities for the conversion of all outstanding convertible debentures in the aggregate net amount of $4,040,000.

Our combined cash and cash equivalents totaled $189,135 at June 30, 2011.  We do not expect to generate a positive internal cash flow for at least the next 12 months due to our efforts to obtain FDA marketing clearance, the expected costs of commercializing our initial product, the CTLM®, and the time required for homologations from certain countries.

Our inventory, which consists of raw materials, work in process (including completed units under testing), finished goods less Inventory Reserve, totaled $322,562 at June 30, 2011 and $436,110 at June 30, 2010.  Raw materials used for research and development or other purposes are expensed and not included in inventory.  This decrease is primarily due to inventory valuation adjustments of $95,096 and $15,265 to Cost of Goods Sold.  We expect to recover our investment because the CTLM® represents a new technology for imaging the breast using a laser beam instead of ionizing x-ray to produce three dimensional images.  During fiscal year 2011, we continued to receive encouraging results and scientific clinical papers from our various clinical collaboration sites worldwide.  We continue to believe that over time the CTLM® will gain worldwide acceptance in the medical community because computed tomography has a strong basis in science.  (See Note 6 “Inventories”).

Our property and equipment, net, totaled $161,713 at June 30, 2011 and $221,763 at June 30, 2010.  The overall decrease of $60,050 is due primarily to depreciation during fiscal year 2011 (See Note 7 – Property and Equipment).

Our Intangible assets (formerly “Other assets”) totaled $136,706 at June 30, 2011 compared to $170,882 at June 30, 2010.  This decrease is due to the amortization of a patent licensing agreement.

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.

We have financed our operating and research and development activities through several private placement transactions.  Net cash used for operating and product development expenses, which include our purchase of additional materials to continue the manufacture of CTLM® Systems in anticipation of receiving orders from our distributors in certain countries where permitted by law was $2,451,709 during fiscal 2011, compared to net cash used by operating activities and product development of the CTLM® and related software development of $2,785,910 during fiscal 2010.  At June 30, 2011, we had negative working capital of ($4,424,145) compared to negative working capital of ($2,555,647) at June 30, 2010.

If and when we receive approval from the FDA, which cannot be assured, we believe that, based on our current business plan approximately $10 million will be required above and beyond normal operating expenses over the next year to fully complete all necessary stages in order for us to market the CTLM® in the United States and foreign countries. 

 
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The $10 million will be used to purchase inventory, sub-contracted components, tooling and manufacturing templates and pay non-recurring engineering costs associated with preparation for full capacity manufacturing and assembly and marketing, advertising and promotion, training, ongoing regulatory expenses, and other costs associated with product launch.  We expect to use our Amended Private Equity Agreement with Southridge and/or alternative financing facilities to raise the additional funds required to continue operations.  In the event that we are unable or elect not to utilize the Amended Private Equity Agreement with Southridge or any successor agreement(s) on comparable terms, 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, whether to Southridge or other investors, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders.  See “Item 5. Market for Registrant’s Common Equity and Related Stockholder Matters/Financing/Equity Line of Credit”.

During fiscal 2011, we raised a total of $1,385,000 less expenses, through private placement transactions pursuant to our Amended Private Equity Credit Agreement with Southridge dated January 7, 2010.  We do not expect to generate a positive internal cash flow for at least the next 12 months due to limited expected sales and the expected costs of commercializing our initial product, the CTLM®, 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.  We expect to use our Amended Private Equity Agreement with Southridge and/or alternative financing facilities to raise the additional funds required to continue operations.  In the event that we are unable or elect not to utilize the Amended Private Equity Agreement with Southridge or any successor agreement(s) on comparable terms, 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, whether to Southridge or other investors, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders.  In the event we are unable to draw from this new private equity line, alternative financing will be required to continue operations, and there is no assurance that we will be able to obtain alternative financing on commercially reasonable terms.  There is no assurance that, if and when Food and Drug Administration (“FDA”) marketing clearance is obtained, the CTLM® will achieve market acceptance or that we will achieve a profitable level of operations.

As of the date of this report, since January 2001, we have drawn an aggregate of $45,199,650 in gross proceeds from our equity credit lines with Charlton and Southridge and have issued 532,408,149 shares as a result of those draws.

As of the date of this report, we have issued and outstanding 985,468,507 shares of common stock out of 2,000,000,000 authorized shares.  In addition, we have reserved 36,047,254 shares to cover outstanding options.  We had anticipated that revenues would have been a significant source of cash by the date of this report, but commercialization has been slower than expected largely due to the delay in obtaining FDA approval, which we believe has depressed our stock price.  We previously used the proceeds of the sale of our building and the proceeds of the sale of convertible debentures for working capital.  In May 2008, we returned to equity funding through our Private Equity Credit Agreement(s).  From November 2009 through September 2011 we relied on short-term loans from private investors for working capital (“See Issuance of Stock in Connection with Short-Term Loans”).  From February 2011 through  October 2011, we also relied on long-term loans from private investors for working capital (“See Issuance of Stock in Connection with Long-Term Loans”).
 
A claim could be made by the IRS for immediate payment of our accrued payroll taxes, interest and penalties, which total $1,141,967 as of June 30, 2011, and continue to grow; however, we hope to work with the IRS to formulate and implement a viable payment plan.  We have hired special counsel to handle this matter and hope to have a reasonable time to resolve it without jeopardizing operations.  We intend to fully satisfy our tax obligations and are seeking long-term financing in this regard.

We intend to use our counsel to handle negotiations and settlements with the IRS.  No discussions have occurred to date with the IRS.  We expect these discussions to commence once the IRS sends a formal collection demand.  After the formal collection demand, we hope to negotiate a settlement agreement and make installment payments to satisfy outstanding taxes, penalties and interest due; however, there can be no assurance that we will be able to negotiate a settlement agreement with a payment plan that matches our ability to pay.
 

 
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During fiscal 2011 and through September 22, 2011, we have not made any cash payments to reduce the balance of accrued payroll taxes.  The increase of $295,883 in payroll tax penalty and interest were due to the recording of calendar year 2010 penalties and interest in fiscal 2011.

If we ultimately are unable to pay the outstanding tax, penalties and interest on a timetable satisfactory to the IRS, then we may have to cease operations.

Issuance of Stock in Connection with Short-Term Loans
In November 2009, we borrowed a total of $237,500 from four private investors pursuant to short-term promissory notes.  These notes were due and payable in the amount of principal plus 20% premium, so that the total amount due was $285,000.  In addition, we issued to the investors 70 shares of restricted common stock for each $1 lent so that a total of 16,625,000 shares of stock were issued to the investors.  The aggregate fair market value of the 16,625,000 shares of stock when issued was $465,500.  As of the date of this report, we have repaid an aggregate principal and premium in the amount of $148,500 on these short-term notes and owe a balance of $180,100 of which $100,000 is the principal remaining from one note and $80,100 is the balance of premium due from three notes.  The original due date of December 21, 2009, was first extended to February 28, 2010, with a second extension to June 15, 2010, a third extension to September 30, 2010 and a fourth extension to October 31, 2010.  Further extensions of the $100,000 note were made through September 30, 2011 for 3% additional premium per month.  In connection with all of the extensions, a total of $43,600 of additional premium was accrued as of the date of this report.
 
In December 2009, we borrowed a total of $400,000 from a private investor pursuant to three short-term promissory notes.  These notes were payable from March 10 through March 15, 2010 in the amount of principal plus 15% premium, so that the total amount due was $460,000.  In addition, we issued to the investor 24,000,000 shares of restricted common stock as collateral.  These shares are to be returned and cancelled upon payment of the notes.  The original due date of March 15, 2010 was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010.  Further extensions of the notes were made through July 31, 2011 for 3% additional premium per month on each note.  In connection with these extensions a total of $137,800 of additional premium was accrued for the December 2009 notes as of the date of this report.  In April 2011, Southridge purchased a total of $200,000 in principal value of promissory notes from the private investor.  Southridge converted $100,000 principal and $55,600 premium into 20,746,666 shares of our common stock that was previously issued as collateral.

On January 8, 2010, we borrowed a total of $600,000 from a private investor pursuant to two short-term promissory notes.  These notes were payable April 6, 2010 in the amount of principal plus 15% premium, so that the total amount due was $690,000.  In addition, we issued to the investor 31,363,637 shares of restricted common stock as collateral.  These shares are to be returned and cancelled upon payment of the notes. The original due date of April 6, 2010 was first extended to June 15, 2010, with a second extension to September 30, 2010 and a third extension to October 31, 2010.  Further extensions of the notes were made through July 31, 2011 for 3% additional premium per month on each note.  In January 2011, Southridge purchased a total of $600,000 in principal value of promissory notes from the private investor.  As of the date of this report, Southridge has converted $425,000 principal and $200,051 premium into 32,397,016 shares of our common stock of which 31,056,108 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.  Although we are in technical default of these two notes, the holder, Southridge has elected to convert these notes into common shares.  In connection with these prior extensions and the accrual of the additional premiums through September 30, 2011, a total of $232,500 of additional premium was accrued for the January 2010 notes as of the date of this report.

On February 25, 2010, we borrowed $350,000 from a private investor pursuant to a short-term promissory note.  We issued to the investor 35 shares of Series L Convertible Preferred Stock as collateral.  This note had a maturity date of April 30, 2010; however, the investor gave us notice of conversion to the collateral shares on March 31, 2010.  The Note was cancelled upon this conversion.  The 35 shares of Series L Convertible Preferred Stock accrue dividends at an annual rate of 9% and are convertible into an aggregate of 16,587,690 shares of common stock (473,934 shares of common stock for each share of preferred stock).  Pursuant to the Certificate of Designation, Rights and Preferences for the Series L Convertible Preferred Stock, we are obligated to reduce the conversion price and reserve additional shares for conversion if we sold or issued common shares below the price of $.0211 per share (the market price on the date of issuance of the Preferred Stock).  In October 2010, we obtained a waiver from the private investor holding the 35 shares of Series L Convertible Preferred Stock in which the investor agreed to convert no more than the 16,587,690 common shares currently reserved as we do not have sufficient authorized common shares to reserve for further conversions pursuant to the Certificate of Designation, Rights and Preferences.  The investor agreed to a conversion floor price of $.015, which required us to reserve

 
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an additional 6,745,643 common shares.
 
On January 6, 2011, the investor converted 15 shares of the Series L Convertible Preferred Stock into 10,000,000 shares of common stock.  As of the date of this report, the investor holds 20 shares of the Series L Convertible Preferred Stock.

On December 13, 2010, we borrowed a total of $60,000 from a private investor pursuant to a short-term promissory note.  The note is payable on or before January 31, 2011.  As consideration for this loan, we were obligated to pay back his principal, $10,800 in premium and issue 3,000,000 restricted shares of common stock upon the approval by our shareholders of an increase in authorized common stock at our annual meeting to be held on July 12, 2012.  On September 9, 2011, we issued the 3,000,000 common shares pursuant to Rule 144.  We received an extension of maturity date to September 30, 2011 for this note.

In November and December 2010, we received a total of $145,000 from Southridge pursuant to three short-term promissory notes.  All three notes provide for a redemption premium of 15% of the principal amount on or before March 31, 2011.  We received an extension of maturity date to September 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity.  Southridge may elect at an Event of Default to convert any part or all of the $145,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In January 2011, we received a total of $157,000 from Southridge pursuant to three short-term promissory notes.  All three notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011.  We received an extension of maturity date to September 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity.  Southridge may elect at an Event of Default to convert any part or all of the $157,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In February 2011, we received a total of $115,000 from Southridge pursuant to two short-term promissory notes.  Both notes provide for a redemption premium of 15% of the principal amount on or before May 31, 2011.  We received an extension of maturity date to September 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $115,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In March 2011, we received $60,000 from Southridge pursuant to a short-term promissory note.  The note provides for a redemption premium of 15% of the principal amount on or before May 31, 2011.  We received an extension of maturity date to September 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $60,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In April 2011, we received $165,000 from Southridge pursuant to two short-term promissory notes.  The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011.  We received an extension of maturity date to September 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $165,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the ten 10 trading days immediately prior to the date of the conversion notice.

In May 2011, we received $80,000 from Southridge pursuant to two short-term promissory notes.  The notes provide for a redemption premium of 15% of the principal amount on or before July 31, 2011.  We received an extension of maturity date to September 30, 2011 for these notes.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $80,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 90% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

 
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In July 2011, we received $150,000 from Southridge pursuant to a short-term promissory note.  The note provided for a redemption premium of 15% of the principal amount on or before December 31, 2011.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $150,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In August 2011, we received $82,500 from Southridge pursuant to two short-term promissory notes of which the principal on these notes were $100,000 and $7,500.  The $100,000 notes provided for a $25,000 discount upon issuance as additional consideration and both notes provided for a redemption premium of 15% of the principal amount on or before December 31, 2011.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $107,500 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.01 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In August 2011, we received $50,000 from OTC Global Partners, LLC pursuant to a short-term promissory note.  The note provided for a redemption premium of 15% of the principal amount on or before March 1, 2012.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  OTC Global Partners, LLC may elect at an Event of Default to convert any part or all of the $50,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.014 or (b) 65% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

In September 2011, we received $100,000 from Southridge pursuant to a short-term promissory note.  The note provided for a redemption premium of 15% of the principal amount on or before December 31, 2011.  Interest will accrue at 8% per annum until maturity above and beyond the premium.  Southridge may elect at an Event of Default to convert any part or all of the $100,000 Principal Amount of the Notes plus accrued interest into shares of our common stock at a conversion price equal to the lesser of (a) $0.0075 or (b) 70% of the average of the three lowest closing bid prices during the 10 trading days immediately prior to the date of the conversion notice.

On May 11, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated November 11, 2010 plus accrued interest of $3,174.  We issued Southridge 11,089,826 common shares pursuant to Rule 144 based on an agreed exchange price of $0.0075 per share.  We still owe Southridge $12,000 in premium associated with this note.

On July 13, 2011, Southridge executed a debt to equity conversion of a $14,000 short-term promissory note dated December 16, 2010 plus accrued interest of $641.  We issued Southridge 1,464,132 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $2,100 in premium associated with this note.

On July 13, 2011, Southridge executed a debt to equity conversion of a $51,000 short-term promissory note dated December 22, 2010 plus accrued interest of $2,269.  We issued Southridge 5,326,915 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $7,650 in premium associated with this note.

On July 21, 2011, Southridge executed a debt to equity conversion of a $55,000 short-term promissory note dated January 13, 2011 plus accrued interest of $2,278.  We issued Southridge 5,727,836 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $8,250 in premium associated with this note.

On July 21, 2011, Southridge executed a debt to equity conversion of a $22,000 short-term promissory note dated January 19, 2011 plus accrued interest of $882.  We issued Southridge 2,288,241 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $3,300 in premium associated with this note.

On August 24, 2011, Southridge executed a debt to equity conversion of a $80,000 short-term promissory note dated January 28, 2011 plus accrued interest of $3,647.  We issued Southridge 8,364,712 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $12,000 in premium associated with this note.

 
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On August 24, 2011, Southridge executed a partial debt to equity conversion of a $80,000 short-term promissory note dated February 7, 2011 in which they converted $20,000 principal plus accrued interest of $868.  We issued Southridge 2,086,795 common shares pursuant to Rule 144 based on an agreed exchange price of $0.01 per share.  We still owe Southridge $60,000 principal, $12,000 in premium and $2,906 in interest associated with this note.

From January 2011 to April 2011, Southridge acquired promissory notes from a private investor totaling $800,000 in principal and 55,363,907 shares of common stock which were issued as collateral.  Southridge proposed that we amend the conversion terms of the notes permitting the holder to convert the notes and we agreed to the amendment.  From January 12, 2011 to September 20, 2011, Southridge issued notices of conversion to settle $525,000 in principal plus accrued premiums totaling $255,651 into 53,143,682 shares of our common stock, of which 51,802,774 shares were collateral shares and 1,340,908 new shares were issued pursuant to Rule 144.

As of the date of this report, we owe a total of $2,061,944 of short term debt of which $1,437,444 is principal, $606,824 is accrued premium and $17,676 is accrued interest.  A promissory note totaling $60,000 in principal has been extended to September 30, 2011; five promissory notes totaling $575,000 in principal have a maturity date that has been extended to September 30, 2011; four promissory notes totaling $249,944 in principal have a maturity date of September 30, 2011; four promissory notes totaling $245,000 in principal have a maturity date of September 30, 2011; four promissory note totaling $357,500 in principal have a maturity date of December 31, 2011; and one promissory note totaling $50,000 in principal has a maturity date of March 1, 2012.  We have repaid aggregate principal and premium in the amount of $173,376 on these short-term notes and a total of $852,056 principal, $255,651 in premium, and $13,760 in interest has been converted into 89,492,139 shares of our common stock of which 51,802,774 shares were collateral shares and 37,689,365 new shares were issued pursuant to Rule 144.  Out of the original 55,363,637 shares of common stock held as collateral, a balance of 3,561,133 shares remains on the $475,000 principal of the remaining notes.

There can be no assurances that we will be able to pay our short-term loans when due.  If we default on any or all of the notes due to the lack of new funding, the holders could exercise their right to sell the remaining 3,561,133 collateral shares and could take legal action to collect the amount due which could materially adversely affect IDSI and the value of our stock.


Issuance of Stock in Connection with Long-Term Loans

On February 23, 2011, we entered into a Convertible Promissory Note Agreement with an unaffiliated third party, JMJ Financial (the “Lender” or “JMJ”), relating to a private placement of a total of up to $1,800,000 in principal amount of a Convertible Promissory Note (the “Note”) providing for advances of a gross amount of $1,600,000 in seven tranches.  Pursuant to the terms of a Registration Rights Agreement (the “Rights Agreement”) dated February 23, 2011, between the Company and JMJ, we are required to file within 10 days from the effective date of an increase of authorized shares approved by our shareholders, an S-1 Registration Statement (the “Registration Statement”) covering 130,000,000 shares of Company common stock to be reserved for conversion of the Note.

Although our shareholders on July 12, 2011, voted to increase our authorized shares to 2,000,000,000, we have not filed the registration statement as required by the Rights Agreement.

The Note provides for funding in seven tranches as stipulated in the Funding Schedule attached.  The first tranche of $300,000 was closed on February 24, 2011, and we received $258,000 after deductions of $30,000 for a 10% Finder’s Fee and $12,000 for an Origination Fee.  The second tranche of $100,000 closed on May 20, 2011, and we received $93,000 after deductions of $7,000 for a 7% Finder’s Fee.  The remaining five tranches are to be funded based on achievement of milestones relating to the Registration Statement, with the final tranche of $300,000 being available 150 days after effectiveness of the Registration Statement, which must be effective 120 days after the date of the Agreement.  For the remaining five tranches, we are obligated to pay a Finder’s Fee equal to 7% in cash at each closing date.  We may cancel the unfunded portion of the Agreement at a fee of 20% of the unfunded amount.  As of the date of this report, $1,400,000 in principal amount remains unfunded and if we choose to cancel we will have to pay JMJ $280,000 to terminate the agreement.

The Note, after the seven tranches are drawn, would generate net proceeds of $1,467,000 after payment of the Origination Fee and a 7% Finder’s Fee.  JMJ has the option to provide an additional $1,600,000 of funding on substantially the same terms as the first Agreement; however, we have the right to cancel, without penalty, the Note Agreement within five days of

 
16

 

JMJ’s execution.  Once executed and accepted by both parties and five days has passed, cancellation of unfunded payments is permitted at a fee of 20% of the unfunded amount.  Cancellation of funded portions is not permitted.

The funding schedule of the seven tranches is as follows:

§  
$300,000 paid to Borrower within 2 business days of execution and closing of the agreement.

§  
$100,000 paid to Borrower within 5 business days of filing of Definitive Proxy to increase authorized shares to 2,000,000,000 or more.

§  
$100,000 paid to Borrower within 5 business days of effective increase in authorized shares to 2,000,000,000 or more.

§  
$100,000 paid to Borrower within 5 business days of filing of registration statement, and that registration statement must be filed no later than 10 days from the effective increase of authorized shares.

§  
$400,000 paid to Borrower within 5 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.

§  
$300,000 paid to Borrower within 90 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.

§  
$300,000 paid to Borrower within 150 business days of notice of effective registration statement, and that registration statement must be effective no later than 120 days from the execution of the agreement.

The conditions to funding each payment are as follows:

§  
At the time of each payment interval, the Conversion Price calculation on Borrower’s common stock must yield a Conversion Price equal to or greater than $0.015 per share (based on the Conversion Price calculation, regardless of whether a conversion is actually completed or not).

§  
At the time of each payment interval, the total dollar trading volume of Borrower’s common stock for the previous 23 trading days must be equal to or greater than $1,000,000.  The total dollar volume will be calculated by removing the three highest dollar volume days and summing the dollar volume for the remaining 20 trading days.

§  
At the time of each payment interval, there shall not exist an event of default as described within any of the agreements between Borrower and Holder.

Prior to the maturity date of February 2, 2014, JMJ may convert both principal and interest into our common stock at 75% of the average of the three lowest closing prices in the 20 days previous to the conversion.  We have the right to enforce a conversion floor of $0.015 per share; however, if we receive a conversion notice in which the Conversion Price is less than $0.015 per share, JMJ will incur a conversion loss [(Conversion Loss = $0.015 – Conversion Price) x number of shares being converted] which we must make whole by either of the following options: pay the conversion loss in cash or add the conversion loss to the balance of principal due.  Prepayment of the Note is not permitted.

The Note has a 9% one-time interest charge on the principal sum.  No interest or principal payments are required until the Maturity Date, but both principal and interest may be included in conversions prior to the maturity date.

On August 24, 2011, JMJ executed a debt to equity conversion of $36,015 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 3,500,000 common shares pursuant to Rule 144 based on a conversion price of $0.0103 per share.

On August 31, 2011, JMJ executed a debt to equity conversion of $41,160 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 4,000,000 common shares pursuant to Rule 144 based on a conversion price of $0.01029 per share.

On September 15, 2011, JMJ executed a debt to equity conversion of $37,597 in principal of the first tranche of $300,000 which we closed on February 24, 2011.  We issued JMJ 4,100,000 common shares pursuant to Rule 144 based on a conversion price of $0.00917 per share.  As of the date of this report, we now owe JMJ a total of $249,728 of which $185,228 in principal,

 
17

 

$37,500 in consideration and $27,000 in interest associated with this first tranche.

As of the date of this report, we owe JMJ a total of $371,228 of which $285,825 is principal, $50,000 is consideration on the principal and $36,000 is interest.


Capital expenditures for fiscal 2011 were $0 as compared to $0 for the prior year.  During fiscal 2011, we reclassified the net realizable value of $6,525 of CTLM® systems in Inventory to Clinical equipment.  We anticipate that our capital expenditures for fiscal 2012 will be approximately $25,000.

During the year ending June 30, 2011, there were no changes in our existing debt agreements other than extensions and we had no outstanding bank loans as of June 30, 2011.  Our annual fixed commitments, including salaries and fees for current employees and consultants, rent, payments under license agreements and other contractual commitments are approximately $4 million, as of the date of this report, 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, which are presently estimated at an aggregate of approximately $350,000 per month.  The foregoing projections are subject to many conditions, most of which are beyond our control.  Our future capital requirements will depend on many factors, including the following: the progress of our product development projects, 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; 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; and the development of commercialization activities and arrangements.

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 international commercialization of the CTLM®, activities related to our FDA regulatory process, and advanced product development activities.  We expect to use our Amended Private Equity Agreement with Southridge and/or alternative financing facilities to raise the additional funds required to continue operations.  In the event that we are unable or elect not to utilize the Amended Private Equity Agreement with Southridge or any successor agreement(s) on comparable terms, 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, whether to Southridge or other investors, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders.  There is no assurance that, if and when Food and Drug Administration (“FDA”) marketing clearance is obtained, the CTLM® will achieve market acceptance or that we will achieve a profitable level of operations.  No assurances, however, can be given that this financing or any necessary future financing will be available or, if available, that it will be obtained on terms satisfactory to us.  Our ability to effectuate our business plan and continue operations is dependent on our ability to raise capital, structure a profitable business, and generate revenues.  If our working capital were insufficient to fund our operations, we would have to explore additional sources of financing.  In the absence of adequate funding, we will have to cease operations.

 
18

 

Item 7A.  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.


 
19

 


 
Index to Financial Statements
 
     
   
Page
     
21
     
Financial Statements
   
     
 
22
     
 
23
     
 
24
     
 
37
     
 
39

 
 
 



REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


 
To the Board of Directors and
Stockholders of Imaging Diagnostic Systems, Inc.

 
We have audited the accompanying balance sheets of Imaging Diagnostic Systems, Inc. (A Development Stage Enterprise) as of June 30, 2011 and 2010, and the related statements of operations, and cash flows for each of the years ended June 30, 2011 and 2010.   We have also audited the amounts presented for the period July 1, 2005 to June 30, 2011 included in the statements of stockholders’ equity (deficit) and in the total amounts presented in the statements of operations and cash flows for the period from December 10 1993 (inception) to June 30, 2011. We did not audit the financial statements for the period December 10, 1993 (date of inception) to June 30, 2005.  These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of June 30, 2011 and 2010 , and the results of its operations and cash flows for each of the years then ended June 30, 2011 and 2010 , and the amounts presented for the period July 1, 2005 to June 30, 2011 included in the statements of stockholders’ equity (deficit) and in the total amounts presented in the statements of operations and cash flows for the period from December 10 1993 (inception) to June 30, 2011 in conformity with generally accepted accounting principles in the United States of America.

The accompanying financial statements have been prepared assuming that Imaging Diagnostic Systems, Inc. will continue as a going concern.  As more fully described in Note 5, the Company has incurred recurring operating losses and will have to obtain additional capital to sustain operations.  These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans in regard to these matters are also described in Note 5.  The accompanying financial statements do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.
 
 
 
/s/  SHERB & CO, LLP

Certified Public Accountants

Boca Raton, Florida
September 22, 2011


 

IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(A Development Stage Company)
 
Balance Sheets
 
               
Assets
 
               
     
June 30, 2011
   
June 30, 2010
 
Current assets:
           
 
Cash
  $ 189,135     $ 73,844  
 
Accounts receivable, net of allowances for doubtful accounts
               
 
    of $23,500 and $57,982, respectively
    11,198       12,850  
 
Loans receivable, net of reserve of $0
               
 
    and $57,000, respectively
    -       3,796  
 
Inventories, net of reserve of $399,000 and $399,000, respectively
    322,562       436,110  
 
Prepaid expenses
    49,339       61,115  
                   
 
Total current assets
    572,234       587,715  
                   
Property and equipment, net
    161,713       221,763  
Intangible assets, net
    136,706       170,882  
                   
 
Total assets
  $ 870,653     $ 980,360  
                   
                   
Liabilities and Stockholders' (Deficit)
 
Current liabilities:
               
 
Accounts payable and accrued expenses
  $ 1,344,168     $ 1,538,748  
 
Accrued payroll taxes and penalties
    1,141,967       -  
 
Customer deposits
    112,563       98,114  
 
Short-term derivative liability
    691,663       -  
 
Short-term debt, net of debt discount of $78,925 and $0
    1,706,018       1,506,500  
                   
 
Total current liabilities
    4,996,379       3,143,362  
                   
Long-Term liabilities:
               
 
Long-term debt, net of debt discount of $184,967 and $0
    301,033       -  
                   
 
Total long-term liabilities
    301,033       -  
                   
Convertible preferred stock (Series L), 9% cumulative annual dividend,
               
     no par value, 20 and 35 shares issued, respectively
    200,000       350,000  
 
Long-term derivative liability
    102,409       202,155  
                   
Stockholders' (Deficit):
               
 
Common stock, no par value; authorized 950,000,000 shares,
               
 
 issued 942,196,924 and 837,087,622 shares, respectively
    107,476,957       105,927,719  
 
Common stock - Debt Collateral
    (73,970 )     (1,150,000 )
 
Additional paid-in capital
    5,626,252       4,388,006  
 
Deficit accumulated during development stage
    (117,758,407 )     (111,880,882 )
                   
 
Total stockholders' (Deficit)
    (4,729,168 )     (2,715,157 )
                   
 
Total liabilities and stockholders' (Deficit)
  $ 870,653     $ 980,360  
                   
                   
                   
                   
See accompanying notes to the financial statements.
 

 
 

IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(a Development Stage Company)
 
                   
Statements of Operations
 
               
From Inception
 
               
(December 10,
 
   
Year Ended
   
Year Ended
   
1993) to
 
   
June 30, 2011
   
June 30, 2010
   
June 30, 2011
 
                  Unaudited *  
Net Sales
  $ 55,118     $ 181,172     $ 2,379,782  
Gain on sale of fixed assets
    -       -       2,794,565  
Cost of Sales
    15,265       22,512       943,882  
                         
Gross Profit
    39,853       158,660       4,230,465  
                         
Operating Expenses:
                       
     General and administrative
    3,096,209       3,584,608       61,670,231  
     Research and development
    893,879       734,943       23,322,837  
     Sales and marketing
    452,967       340,433       9,566,221  
     Inventory valuation adjustments
    95,096       67,678       4,915,445  
     Depreciation and amortization
    100,751       144,445       3,402,425  
     Amortization of deferred compensation
    -       -       4,064,250  
                         
Total Operating Expenses
    4,638,902       4,872,107       106,941,409  
                         
Operating Loss
    (4,599,049 )     (4,713,447 )     (102,710,944 )
                         
Interest income
    1,438       995       310,834  
Other income
    110,858       118,796       994,046  
Other income - LILA Inventory
    -       -       (69,193 )
Derivative (expense) income
    -       (64,524 )     (64,524
Change in fair value of derivative liability
    273,037       (137,631 )     135,406  
Interest expense
    (1,663,809 )     (175,904 )     (9,506,272 )
                         
Net Loss
    (5,877,525 )     (4,971,715 )     (110,910,647 )
                         
Dividends on cumulative preferred stock:
                       
     From discount at issuance
    -       -       (5,402,713 )
     Earned
    -       -       (1,445,047 )
                         
Net loss applicable to
                       
     common shareholders
  $ (5,877,525 )   $ (4,971,715 )   $ (117,758,407 )
                         
Net Loss per common share:
                       
     Basic and diluted
  $ (0.01 )   $ (0.01 )   $ (0.54 )
                         
Weighted average number of
                       
   common shares outstanding:
                       
     Basic and diluted
    885,074,029       758,622,934       218,151,949  
                         
                         
* The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor.
 
                         
                         
See accompanying notes to the financial statements.
 


 
 
IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(a Development Stage Company)
 
 
 
Statements of Stockholders' (Deficit)
 
                                       
From December 10, 1993 (date of inception) to June 30, 2011 (Unaudited) *
 
                       
Deficit
             
                       
Accumulated
             
   
Preferred Stock (**)
 
Common Stock
 
Additional
 
During the
             
   
Number of
 
Number of
 
Paid-in
 
Development
 
Subscriptions
 
Deferred
     
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
 
Receivable
 
Compensation
 
Total
 
                                       
Balance at December 10, 1993 (date of inception)
   
-
 
$
-
   
-
 
$
-
 
$
-
 
$
-
 
$
-
 
$
-
 
$
-
 
                                                         
Issuance of common stock, restated for reverse
                                                       
stock split
   
-
   
-
   
510,000
   
50,000
   
-
   
-
   
-
   
-
   
50,000
 
                                                         
Acquisition of public shell
   
-
   
-
   
178,752
   
-
   
-
   
-
         
-
   
-
 
                                                         
Net issuance of additional shares of stock
   
-
   
-
   
15,342,520
   
16,451
   
-
   
-
         
-
   
16,451
 
                                                         
Common stock sold
   
-
   
-
   
36,500
   
36,500
   
-
   
-
         
-
   
36,500
 
                                                         
Net loss
   
-
         
-
   
-
   
-
   
(66,951
)
       
-
   
(66,951
)
                                                         
Balance at June 30, 1994
   
-
   
-
   
16,067,772
   
102,951
   
-
   
(66,951
)
 
-
   
-
   
36,000
 
                                                         
Common stock sold
   
-
   
-
   
1,980,791
   
1,566,595
   
-
   
-
   
(523,118
)
 
-
   
1,043,477
 
                                                         
Common stock issued in exchange for services
   
-
   
-
   
115,650
   
102,942
   
-
   
-
   
-
   
-
   
102,942
 
                                                         
Common stock issued with employment agreements
   
-
   
-
   
75,000
   
78,750
   
-
   
-
   
-
   
-
   
78,750
 
                                                         
Common stock issued for compensation
   
-
   
-
   
377,500
   
151,000
   
-
   
-
   
-
   
-
   
151,000
 
                                                         
Stock options granted
   
-
   
-
   
-
   
-
   
622,500
   
-
   
-
   
(622,500
)
 
-
 
                                                         
Amortization of deferred compentsation
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
114,375
   
114,375
 
                                                         
Forgiveness of officers' compensation
   
-
   
-
   
-
   
-
   
50,333
   
-
   
-
   
-
   
50,333
 
                                                         
Net loss
   
-
   
-
   
-
   
-
   
-
   
(1,086,436
)
 
-
   
-
   
(1,086,436
)
                                                         
Balance at June 30, 1995
   
-
   
-
   
18,616,713
   
2,002,238
   
672,833
   
(1,153,387
)
 
(523,118
)
 
(508,125
)
 
490,441
 
 
*The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor.
**See note 17 for a detailed breakdown by Series.
 
 See accompanying notes to the financial statements.

 
 

IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(a Development Stage Company)
 
 
 
Statements of Stockholders' (Deficit) (Continued)
 
                                       
From December 10, 1993 (date of inception) to June 30, 2011 (Unaudited) *
 
                       
Deficit
             
                       
Accumulated
             
   
Preferred Stock (**)
 
Common Stock
 
Additional
 
During the
             
   
Number of
 
Number of
 
Paid-in
 
Development
 
Subscriptions
 
Deferred
     
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
 
Receivable
 
Compensation
 
Total
 
                                       
Balance at June 30, 1995
   
-
   
-
   
18,616,713
   
2,002,238
   
672,833
   
(1,153,387
)
 
(523,118
)
 
(508,125
)
 
490,441
 
                                                         
Preferred stock sold, including dividends
   
4,000
   
3,600,000
   
-
   
-
   
1,335,474
   
(1,335,474
)
 
-
   
-
   
3,600,000
 
                                                         
Common stock sold
   
-
   
-
   
700,471
   
1,561,110
   
-
   
-
   
-
   
-
   
1,561,110
 
                                                         
Cancellation of stock subscription
   
-
   
-
   
(410,500
)
 
(405,130
)
 
-
   
-
   
405,130
   
-
   
-
 
                                                         
Common stock issued in exchange for services
   
-
   
-
   
2,503,789
   
4,257,320
   
-
   
-
   
-
   
-
   
4,257,320
 
                                                         
Common stock issued with exercise of stock options
   
-
   
-
   
191,500
   
104,375
   
-
   
-
   
(4,375
)
 
-
   
100,000
 
                                                         
Common stock issued with exercise of options
                                                       
for compensation
   
-
   
-
   
996,400
   
567,164
   
-
   
-
   
-
   
-
   
567,164
 
 
                                                       
Conversion of preferred stock to common stock
   
(1,600
)
 
(1,440,000
)
 
420,662
   
1,974,190
   
(534,190
)
 
-
   
-
   
-
   
-
 
 
                                                       
Common stock issued as payment of preferred
                                                       
stock dividends
   
-
   
-
   
4,754
   
14,629
   
-
   
(14,629
)
 
-
   
-
   
-
 
                                                         
Dividends accrued on preferred stock not
                                                       
yet converted
   
-
   
-
   
-
   
-
   
-
   
(33,216
)
 
-
   
-
   
(33,216
)
 
                                                       
Collection of stock subscriptions
   
-
   
-
   
-
   
-
   
-
   
-
   
103,679
   
-
   
103,679
 
                                                         
Amortization of deferred compentsation
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
232,500
   
232,500
 
                                                         
Forgiveness of officers' compensation
   
-
   
-
   
-
   
-
   
100,667
   
-
   
-
   
-
   
100,667
 
                                                         
Net loss (restated)
   
-
   
-
   
-
   
-
   
-
   
(6,933,310
)
 
-
   
-
   
(6,933,310
)
                                                         
Balance at June 30, 1996 (restated)
   
2,400
   
2,160,000
   
23,023,789
   
10,075,896
   
1,574,784
   
(9,470,016
)
 
(18,684
)
 
(275,625
)
 
4,046,355
 
 
*The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor. 
**See note 17 for a detailed breakdown by Series. 
 
 See accompanying notes to the financial statements.
 
 
 

IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(a Development Stage Company)
 
 
 
Statements of Stockholders' (Deficit) (Continued)
 
                                       
From December 10, 1993 (date of inception) to June 30, 2011 (Unaudited) *
 
                       
Deficit
             
                       
Accumulated
             
   
Preferred Stock (**)
 
Common Stock
 
Additional
 
During the
             
   
Number of
 
Number of
 
Paid-in
 
Development
 
Subscriptions
 
Deferred
     
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
 
Receivable
 
Compensation
 
Total
 
                                       
Balance at June 30, 1996 (restated)
   
2,400
   
2,160,000
   
23,023,789
   
10,075,896
   
1,574,784
   
(9,470,016
)
 
(18,684
)
 
(275,625
)
 
4,046,355
 
                                                         
Preferred stock sold, including dividends
   
450
   
4,500,000
   
-
   
-
   
998,120
   
(998,120
)
 
-
   
-
   
4,500,000
 
                                                         
Conversion of preferred stock to common stock
   
(2,400
)
 
(2,160,000
)
 
1,061,202
   
2,961,284
   
(801,284
)
 
-
   
-
   
-
   
-
 
                                                         
Common stock issued in exchange for services
   
-
   
-
   
234,200
   
650,129
   
-
   
-
   
-
   
-
   
650,129
 
                                                         
Common stock issued for compensation
   
-
   
-
   
353,200
   
918,364
   
-
   
-
   
-
   
-
   
918,364
 
                                                         
Common stock issued with exercise of stock options
   
-
   
-
   
361,933
   
1,136,953
   
-
   
-
   
(33,750
)
 
-
   
1,103,203
 
                                                         
Common stock issued to employee
   
-
   
-
   
(150,000
)
 
(52,500
)
 
-
   
-
   
-
   
-
   
(52,500
)
 
                                                       
Common stock issued as payment of preferred
                                                       
stock dividends
   
-
   
-
   
20,760
   
49,603
   
-
   
(16,387
)
 
-
   
-
   
33,216
 
                                                         
Dividends accrued on preferred stock not
                                                       
yet converted
   
-
   
-
   
-
   
-
   
-
   
(168,288
)
 
-
   
-
   
(168,288
)
                                                         
Stock options granted
   
-
   
-
   
-
   
-
   
1,891,500
   
-
   
-
   
(1,891,500
)
 
-
 
 
                                                       
Collection of stock subscriptions
   
-
   
-
   
-
   
-
   
-
   
-
   
16,875
   
-
   
16,875
 
                                                         
Amortization of deferred compentsation
   
-
   
-
   
-
   
-
   
-
   
-
   
-
   
788,000
   
788,000
 
                                                         
Net loss (restated)
   
-
   
-
   
-
   
-
   
-
   
(7,646,119
)
 
-
   
-
   
(7,646,119
)
                                                         
Balance at June 30, 1997 (restated)
   
450
   
4,500,000
   
24,905,084
   
15,739,729
   
3,663,120
   
(18,298,930
)
 
(35,559
)
 
(1,379,125
)
 
4,189,235
 
                                                         
*The numbers presented from inception December 10, 1993 to June 30, 2005 are unaudited by our current auditor.  
**See note 17 for a detailed breakdown by Series. 
                                                         
                                                         
See accompanying notes to the financial statements.
 
 
 

IMAGING DIAGNOSTIC SYSTEMS, INC.
 
(a Development Stage Company)
 
 
 
Statements of Stockholders' (Deficit) (Continued)
 
                                           
From December 10, 1993 (date of inception) to June 30, 2011 (Unaudited) *
 
                       
Deficit
                 
                       
Accumulated
                 
   
Preferred Stock (**)
 
Common Stock
 
Additional
 
During the
                 
   
Number of
 
Number of
 
Paid-in
 
Development
     
Subscriptions
 
Deferred
     
   
Shares
 
Amount
 
Shares
 
Amount
 
Capital
 
Stage
     
Receivable
 
Compensation
 
Total
 
                                           
Balance at June 30, 1997 (restated)
   
450
   
4,500,000
   
24,905,084
   
15,739,729
   
3,663,120
   
(18,298,930
)
       
(35,559
)
 
(1,379,125
)
 
4,189,235
 
                                                               
Preferred stock sold, including dividends
                                                             
and placement fees
   
501
   
5,010,000
   
-
   
-
   
1,290,515
   
(1,741,015
)
       
-
   
-
   
4,559,500
 
                                                               
Conversion of preferred stock to common stock
   
(340
)
 
(3,400,000
)
 
6,502,448
   
4,644,307
   
(1,210,414
)
 
-
         
-
   
-
   
33,893
 
                                                               
Common stock sold
   
-
   
-
   
500,000
   
200,000
   
-
   
-
         
-
   
-
   
200,000
 
                                                               
Common stock issued in exchange for services
   
-
   
-
   
956,000
   
1,419,130
   
-
   
-
         
-
   
-
   
1,419,130
 
                                                               
Common stock issued for compensation
   
-
   
-
   
64,300
   
54,408
   
-
   
-
         
-
   
-
   
54,408
 
                                                               
Common stock issued with exercise of stock options
   
-
   
-
   
65,712
   
22,999
   
-