SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[Mark One]
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended:
September 30, 1998
- ------------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _____to______
Commission file number: 0-26028
-------
IMAGING DIAGNOSTIC SYSTEMS, INC.
(Name of small business issuer in its charter)
Florida 22-2671269
------- ----------
(State of incorporation) (IRS employer Ident. No.)
6531 N.W. 18th Court, Plantation, FL 33313
- ------------------------------------ -----
(address of principal office) (Zip Code)
Registrant's telephone number: (954) 581-9800
Indicate by check mark whether the Registrant:(1) has filed all reports
required to be filed by Section 13 or 15(d) of the Exchange Act during the past
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes X No
---- ----
The number of shares outstanding of each of the issuer's classes of equity
as of November 9, 1998,:38,209,399 shares of Common Stock, no par value; and,
450 shares of Series B and 108 shares of Series H Preferred Convertible Stock,
no par value.
<PAGE>
IMAGING DIAGNOSTIC SYSTEMS, INC.
(A Developmental Stage Company)
Part I - Financial Information Page
- ------------------------------ ----
Condensed Balance Sheet -
September 30, 1998 and June 30, 1998.......................... 3
Condensed Statement of Operations -
Three months ended September 30,
1998 and 1997, and December 10,
1993(date of inception) to September 30, 1998................. 4
Condensed Statement of Cash Flows -
Three months ended September 30, 1998 and 1997,
and December 10, 1993(date of inception)
to September 30, 1998......................................... 5
Notes to Condensed Financial Statements ............................ 6
Management's Discussion and Analysis of
Financial Condition and Results..................................... 7
Part II - Other Information
Item 1, Legal Proceedings........................................ 10
Item 2, Changes in Securities.................................... 11
Item 3, Defaults Upon Senior Securities.......................... 11
Item 4, Submission of Matters To a Vote of
Security Holders ........................................ 11
Item 5, Other Information........................................ 12
Item 6, Exhibits and Reports on Form 8-K......................... 12
Signature .......................................................... 13
2
<PAGE>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
Condensed Balance Sheet
Assets
<TABLE>
<CAPTION>
September 30, 1998 June 30, 1998
------------------ ------------------
(Unaudited) *
Current Assets
<S> <C> <C>
Cash $ 99,249 $ 310,116
Inventory 3,549,357 3,214,045
Prepaid expenses 33,539 33,539
Other current assets 106,080 -
--------------- ---------------
Total Current Assets 3,788,225 3,557,700
--------------- ---------------
Property and Equipment, net 2,885,390 2,920,980
Other Assets 3,780,000 3,887,463
--------------- ---------------
Total Assets $ 10,453,615 $ 10,366,143
--------------- ---------------
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable
and Accrued Expenses $ 1,445,397 $ 880,478
Accrued Dividends Payable 540,241 483,288
Loans Payable 870,407 285,407
Current maturity of capital
lease obligation 9,923 9,715
Other current liabilities 1,900,233 2,155,978
--------------- ---------------
Total Current Liabilities 4,766,201 3,814,866
--------------- ---------------
Long-Term capital lease
obligation 22,644 26,134
--------------- ---------------
Stockholders' Equity
Convertible Preferred
(Series B) 7% cum. Div. 4,500,000 4,500,000
Convertible Preferred (Series D) 290,000 290,000
Convertible Preferred (Series E) 240,000 240,000
Convertible Preferred (Series H) 1,080,000 1,080,000
Common Stock 24,069,340 23,986,376
Additional paid-in-capital 4,799,881 4,799,881
Deficit accumulated during
development stage (28,324,533) (27,055,993)
--------------- ---------------
6,654,688 7,840,264
Less: subscription receivable (14,309) (14,309)
deferred compensation (975,609) (1,300,812)
--------------- ---------------
Total Stockholders' Equity 5,664,770 6,525,143
--------------- ---------------
Total Liabilities and
Stockholders' Equity $ 10,453,615 $ 10,366,143
--------------- ---------------
</TABLE>
* Condensed from audited financial statements
The accompanying notes are an integral part
of these condensed financial statements
3
<PAGE>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
(Unaudited)
Condensed Statement of Operations
<TABLE>
<CAPTION>
Three Months Ended Since Inception
September 30, (12/10/93) to
1998 1997 September 30,1998
------------------- -----------------
Operating Expenses:
Compensation and related
benefits:
<S> <C> <C> <C>
Administrative/Engineering $ 292,064 421,814 $ 6,767,302
Research and development 186,730 94,037 1,931,819
Research/Development expenses 46,775 155,837 2,965,669
Advertising/Promotion 6,749 25,083 880,590
Selling/General/Administrative 95,456 329,403 1,397,593
Clinical expenses 3,876 627 364,551
Consulting expenses 29,996 5,146 2,966,580
Insurance costs 45,015 48,117 373,806
Professional fees 40,030 116,990 1,391,865
Stockholder expenses - 52,833 96,510
Trade show expenses 41,643 39,730 547,101
Travel and subsistence costs 32,332 16,758 489,491
Rent expense 8,777 - 256,238
Interest expense 743 - 83,339
Depreciation and amortization 56,873 69,373 732,735
Amortization of
deferred compensation 325,203 39,375 2,879,016
Interest Income (674) (928) (198,091)
----------- ----------- ---------------
1,211,588 1,414,195 23,926,114
----------- ----------- ---------------
Net Loss ($1,211,588) ($1,414,926) ($23,926,114)
Dividends on cumulative Pfd. Stock:
From discount at issuance - (1,046,115) (3,793,947)
Earned (56,953) (79,397) (604,473)
----------- ----------- ---------------
Net loss applicable to common
shareholders ($1,268,541) ($2,539,707) ($28,324,534)
=========== =========== ===============
Primary net loss per common share ($.03) ($.10) ($1.25)
=========== =========== ===============
Weighted avg.
no. of common shares 37,459,191 25,198,562 22,602,960
=========== =========== ===============
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements
4
<PAGE>
Imaging Diagnostic Systems, Inc.
(A Developmental Stage Company)
(Unaudited)
Condensed Statement of Cash Flows
<TABLE>
<CAPTION>
Three Months Ended Since Inception
September 30, (12/10/93) to
1998 1997 September 30,1998
------------------------------- ----------------------------
<S> <C> <C> <C>
Cash provided by (used for)
Operations:
Net loss $(1,211,588) $(1,414,195) $(23,926,114)
Changes in assets and liabilities 357,322 870,534 11,824,816
------------- -------------- --------------
Net cash used by operations (854,266) (543,661) (12,101,298)
------------- -------------- --------------
Investments
Capital expenditures (21,283) (65,512) (6,481,308)
------------- -------------- --------------
Cash used for investments (21,283) (65,512) (6,481,308)
------------- -------------- --------------
Cash flows from financing activities:
Repayment of capital lease obligation (3,282) (2,188) (17,722)
Other financing activities 585,000 1,046,115 870,407
Proceeds from issuance of preferred stock - 2,100,000 12,659,500
Net proceeds from issuance of common stock 82,694 33,947 5,169,670
Net cash provided by financing activities 664,682 3,177,874 18,681,855
------------- -------------- --------------
Net increase(decrease) in cash (210,867) 1,527,664 99,249
Cash, beginning of period 310,116 383,223 -
------------- -------------- --------------
Cash, end of period $99,249 $1,910,887 $99,249
------------- -------------- --------------
</TABLE>
The accompanying notes are an integral part
of these condensed financial statements
5
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
NOTE 1 - BASIS OF PRESENTATION
The financial information included herein has been condensed from financial
statements prepared September 30, 1998. The results of operations for the
three-month period ended September 30, 1998 is not necessarily indicative of the
results to be expected for the full year.
NOTE 2 - GOING CONCERN
The Company is currently a development stage company and its continued existence
is dependent upon the Company's ability to resolve its liquidity problems,
principally by obtaining additional debt financing and/or equity capital. The
Company has yet to generate an internal cash flow, and until the sales of its
product begins, the Company is totally dependent upon debt and equity funding.
As a result of these factors, there exists substantial doubt about the Company's
ability to continue as a going concern. However, management of the Company is
continually negotiating with various outside entities for additional funding
necessary to complete the clinical testing phase of development, required before
they can receive FDA marketing clearance. Management has been able to raise the
capital necessary to reach this stage of product development and has been able
to obtain funding for capital requirements to date. There is no assurance that
once development of the CTLM(TM) prototype is completed and Drug Administration
marketing clearance is obtained, that the CTLM(TM) will achieve market
acceptance or that the Company will achieve a profitable level of operations.
Note 3 - FINANCING ACTIVITIES
The Company has secured financing through private placement of shares and units
consisting of shares and debt instruments and short-term loans as follows:
In October 1998, the Company sold one unit, consisting of a $250,000 promissory
note and 210,000 shares of common stock, to an unaffiliated third party,
pursuant to Regulation D for an aggregate purchase price of $210,000 At the time
the placement was concluded, the average bid and ask price of the Company's
common stock was approximately $.43 per share. The Note bears interest at the
rate of 12% per and is due and payable on November 19, 1998. The Note is
personally guaranteed by Linda B.
6
<PAGE>
Grable, the Company's President. In connection with the sale, the Company paid
the sum of $22,500 to LKB Financial LLC as a placement fee.
In November the Company issued 286,000 shares of common stock as partial
consideration for a $115,000 loan to the Company by an employee. The Company is
also obligated to repay the lender the sum of $50,000.00. There is no note
evidencing this debt. See " Selling Security Holders". At the time the shares
were issued the average bid and ask price of the Company's common stock was
approximately $.775 per share.
7
<PAGE>
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 THE COMPANY'S FORM
10-KSB FOR FISCAL YEAR ENDED 1997.
Item 2. Management's Discussion and Analysis of Financial
-------------------------------------------------
Condition and Results
---------------------
Imaging Diagnostic Systems, Inc. (the "Company") is a developmental stage
company which, since inception, has been engaged in research and development of
its Computed Tomography Laser Mammography ("CTLM(TM)"). The CTLM(TM) is a
breast-imaging device for the detection of cancer, utilizes laser technology and
proprietary computer algorithms to produce three dimensional cross section slice
images of the breast. Due to the fact that the Company is in the last stages of
the development of its cancer detection technology and its CTLM(TM), it has not
yet engaged in any marketing or distribution of it products and therefore has
had no revenue from its operations.
The Company has incurred net losses since inception through September 30, 1998
of approximately $28,324,534. The Company anticipates that loss from operations
will continue for at least the next year, primarily due to an anticipated
increase in marketing and manufacturing expenses associated with the
commercialization of the CTLM(TM) and other research and development activities.
There can be no assurances that the CTLM(TM) will achieve market acceptance or
that sufficient revenues will be generated from sales of the CTLM(TM) to allow
the Company to operate profitably.
RESULTS OF OPERATIONS
General and administrative expenses during the three months ended September 30,
1998, were $95,456, representing a decrease of $233,947 for the corresponding
period for 1997. The decrease during the three-month period ending September 30,
1998 was primarily due to certain reductions in General and administrative costs
associated with Advertising & Promotion expense, Public Relations expense, and
Printing expense. Also contributing to the decrease were the elimination of
Placement Fees and Annual Report expense for the current three-month period.
Compensation and related benefits during the three months ended September 30,
1998 were $478,794, representing a decrease of $37,057 for the corresponding
period for 1997. This decrease was primarily due to adjustments in the software
engineering department.
8
<PAGE>
Advertising and promotion expenses during the three months ended September 30,
1998, were $6,749 representing a decrease of $18,334 from $25,083 for the
corresponding period for 1997. The decrease is due primarily to the reduction of
advertising in domestic and foreign medical imaging and medical device
publications.
Consulting expenses during the three months ended September 30, 1998, were
$29,996 representing an increase of $24,850 from $5,146 for the corresponding
period for 1997. The increase is due primarily to the hiring of outside
consultants needed for special non-recurring projects required prior to placing
CTLM(TM) units into clinical trials. These special projects included an
operator's manual, service and parts manual, and risk factors assessment written
by technical writers. A laser physicist was hired to review and prepare a
special report on laser safety that was submitted to the FDA.
Professional expenses during the three months ended September 30, 1998, were
$40,030 representing a decrease of $76,960 from $116,990 for the corresponding
period for 1997. The decrease is due primarily to a reduction in legal fees on
matters handled in previous accounting periods.
There were no Stockholder expenses during the three months ended September 30,
1998, representing a decrease of $52,833 from $52,833. for the corresponding
period for 1997. The decrease is due to the fact that the Company did not do any
stockholder mailings during this quarter. However, the costs associated with
preparing and mailing the Company's annual report and Proxy Statement will be
recorded as a stockholder expense in a subsequent quarter.
Trade show expenses during the three months ended September 30, 1998, were
$41,643 representing an increase of $1,913 from $39,730. for the corresponding
period for 1997. The increase is due to an increase in fees for exhibiting at
the 1998 Radiological Society of North America's 84th Scientific Assembly and
Annual Meeting in Chicago, IL.
Travel and subsistence costs during the three months ended September 30, 1998,
were $32,332 representing an increase of $15,574 from $16,758 for the
corresponding period for 1997. This increase was primarily due to additional
travel and housing
9
<PAGE>
expenses for consultants and travel expenses for engineers attending seminars on
1. Risk Assessment and Hazard Analysis, 2. Design Control, the FDA & ISO, 3.
Validation Strategies, 4. Software, the FDA & ISO, and 5. The CE Mark: Technical
Requirements for Medical Devices.
Rent expense during the three months ended September 30, 1998, was $8,777
representing an increase of $8,777 from $-0- for the corresponding period for
1997. This increase was primarily due to the rental of a high-speed
oscilloscope.
Interest expense during the three months ended September 30, 1998, were $743
representing an increase of $743 from $-0- for the corresponding period for
1997. The increase is due to the allocation of the interest paid on the
telephone system lease.
BALANCE SHEET DATA
The Company's combined cash and cash equivalents totaled $99,249 as of September
30, 1998. This is a decrease of $210,867 from $310,116 for the year ended June
30, 1997. On August 3, 1998, Imaging Diagnostic Systems, Inc. finalized a
private placement transaction resulting in $60,000 in equity financing. See Item
5, Other Information. During the quarter ended September 30, 1998 the Company
obtained a total of $585,000 in short-term debt financing.
The Company does not expect to generate a positive internal cash flow for at
least the next twelve (12) months due to the expected increase in spending for
operation of its clinical site at Nassau County Medical Center and two
additional clinical sites to be announced, the continued research and
development and the expected costs of commercializing its initial product, the
CTLM(TM) device.
Property and Equipment was valued at $2,885,390 as of September 30, 1998. The
overall gross increase of $335,312 is due primarily to the purchase of
additional laboratory equipment.
Inventory was valued as of September 30, 1998, at $3,549,357. This represents an
increase of $335,312 from $3,214,045 for the year ended June 30, 1998. This
increase is due primarily to an increase in developmental and manufacturing
activities leading to the commercialization of the CTLM(TM) device.
10
<PAGE>
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
On July 10, 1997, the Company filed an action in the Circuit Court of the 17th
Judicial Circuit in and for Broward County, case no. 97-10533, against Dr. Valey
Kamalov ("Kamalov"). The complaint alleges that Kamalov, an ex-employee of the
Company, violated his employment agreement with the Company while employed and
after terminating his employment with the Company by violating non-compete,
confidentiality, and invention covenants of the agreement. Upon filing the
complaint, the Company sought and was granted injunctive relief against Kamalov
during the pendency of the proceedings. On November 19, 1997, after a hearing,
the Court granted Kamalov's motion to dissolve the injunction. On December 17,
1997, the Company filed a timely notice of appeal in the District Court of
Appeal of Florida, Fourth District, Appeal No. 98-58. Briefs have been filed by
both parties and the appeal is pending. Oral Argument has not been set as of the
date of this Report.
On October 7, 1998 a lawsuit was filed against the Company in the United States
District Court, Southern District of New York, by the Series B Holders (Case No.
98 Civ. 086). The Company was served on October 19, 1998. The lawsuit alleges
that the Company breached its contract of sale to the Series B Holders by, among
other this failing to convert the Series B Preferred Stock and failure to
register the common stock underlying the Preferred. The Series B Holders have
demanded damages in excess of $75,000, to be determined at trial, together with
interest costs and legal fees. The Company intends to defend this suit and has
obtained litigation counsel, who is in the processes of reviewing the case and
filing an answer. If the lawsuit is tried and a judgment is entered against the
Company, the Company estimates that the damages could be in excess of $4.5
million. The Company does not have the financial ability to rescind the
transaction and any award for damages would have a material adverse effect on
the Company and its ability to continue operations.
The Company is in technical default of the Registration Rights Agreement for the
Series H Preferred Shares, which required the Registration Statement to be
declared effective by October 2, 1998. No legal proceeding has been initiated or
threatened as of the date of this Report.
Pursuant to the Registration Right Agreement for the Series H Preferred Shares,
the Company is required to pay the Series H
11
<PAGE>
Holders, as liquidated damages for failure to have the Registration Statement
declared effective, and not as a penalty, two (2%) percent of the principal
amount of the Securities for the first thirty (30) days, and three (3%) percent
of the principal amount of the Securities for each thirty (30) day period
thereafter until the Company procures registration of the Securities The Company
is not aware of any other material legal proceedings, pending or contemplated,
to which the Company is, or would be, a party or of which any of its property
is, or would be, the subject.
Item 2. Changes in Securities.
None
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security-
Holders.
The Company has not submitted any matters to a vote of Security Holders. As of
July 10, 1998, Austost Anstalt Schaan, Balmore Funds S.A., Dominion Capital
Funds, Ltd., Canadian Capital Fund Ltd., Avalon Capital Ltd., Richard J. Grable,
Weyburn Overseas Limited, Linda B. Grable, Goodland International Investment
Ltd. and Allan L. Schwartz, (collectively "the Majority Shareholders"),
authorized, by written action, the Company's adoption of an Amendment to the
Company's Articles of Incorporation increasing the Company's authorized shares
from 48,000,000 shares to 100,000,000 shares.
Pursuant to Section 607.0704 Florida Statutes, any action to be taken at an
annual or special meeting of shareholders may be taken without a meeting,
without prior notice and without a vote if the action is taken by a majority of
the holders of outstanding stock of each voting group entitled to vote. The
Certificates of Designation of the Series B, D, E, and H Preferred Stock (the
"Certificates"), provide that, in the event there are insufficient shares to
effect a conversion, the Company is required to increase the number of
authorized shares to effect such conversion. Due to the decrease in the
Company's stock price, the Company no longer has an adequate number of common
shares authorized to meet its contractual obligations with regard to the
conversion of the Preferred Stock. The Certificates also provide that the
holders of the Preferred Shares shall be entitled to vote with the holders of
the Common Stock, as a
12
<PAGE>
single class, where each share of Preferred Stock shall be entitled to that
number of votes to which it would be entitled had all of its shares of Preferred
Stock been converted into shares of Common Stock were notice of conversion given
on the date of such vote.
On August 5, 1998, the Company filed an Information Statement with the
Securities and Exchange Commission (the "Commission") with regard to the Written
Action. On September 4, 1998, the Company received a comment letter from the
Commission and on October 29, 1998 filed a revised Information Statement
addressing the Commission's comments. The Majority Shareholders consent with
respect to the Amendment will take effect 20 days from the time that the
Commission advises the Company that it has no further comments.
Item 5. Other Information.
Clinical Site
The Company has selected Nassau County Medical Center (NCMC) of East Meadow,
Long Island, New York, to be its first independent clinical site. The Company
had previously submitted the IDE protocol to the hospital's Institutional Review
Board (IRB) and on November 11, 1998 received approval of the IDE protocol from
NCMC's IRB. The documents will be sent to the FDA for their approval. Once
approved by the FDA, the Company is granted permission to proceed with the
clinical trials described in the IDE protocol. The Company is still evaluating
clinical sites in Miami, Los Angeles and Boston.
Private Placement of Common Stock
In October 1998, the Company sold one unit, consisting of a $250,000 promissory
note and 210,000 shares of common stock, to an unaffiliated third party,
pursuant to Regulation D for an aggregate purchase price of $210,000 At the time
the placement was concluded, the average bid and ask price of the Company's
common stock was approximately $.43 per share. The Note bears interest at the
rate of 12% per and is due and payable on November 19, 1998. The Note is
personally guaranteed by Linda B. Grable, the Company's President. In connection
with the sale, the Company paid the sum of $22,500 to LKB Financial LLC as a
placement fee.
In November the Company issued 286,000 shares of common stock as partial
consideration for a $115,000 loan to the Company by an employee. The Company is
also obligated to repay the lender the sum of $50,000.00. There is no note
evidencing this debt. See " Selling Security Holders". At the time the shares
were issued
13
<PAGE>
the average bid and ask price of the Company's common stock was
approximately $.775 per share.
(a) Exhibits
Exhibits Description
- -------- -----------
(a)
None
(b) Reports on Form 8-K
None
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, who is duly
authorized to sign as an officer and as the principal financial officer of the
registrant.
Imaging Diagnostic Systems, Inc.
By: /s/Allan L. Schwartz
--------------------
Allan L. Schwartz
Executive Vice-President
Chief Financial Officer
Dated: November 13, 1998
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Jun-30-1998
<PERIOD-START> Jul-01-1998
<PERIOD-END> Sep-30-1998
<CASH> 99,249
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 3,549,357
<CURRENT-ASSETS> 3,788,225
<PP&E> 3,533,886
<DEPRECIATION> 648,496
<TOTAL-ASSETS> 10,453,615
<CURRENT-LIABILITIES> 4,766,201
<BONDS> 0
0
6,110,000
<COMMON> 24,069,340
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 10,453,615
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,211,588
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,268,541)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
</TABLE>
