UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
[Mark One]
For the quarterly period ended
or
For the transition period from _____to______
Commission file number:
(Exact name of registrant as specified in its charter)
| (State of Incorporation) | (IRS Employer Ident. No.) | |
| (Address of Principal Executive Offices) | (Zip Code) |
Registrant’s telephone number:
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non- accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer ☐ | Accelerated filer ☐ | Smaller reporting company |
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.)
Yes ☐ No
The number of shares outstanding of the issuer’s common stock
as of May 15, 2023:
i
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
IMAGING DIAGNOSTIC SYSTEMS, INC.
Balance Sheets
| (unaudited) | ||||||||
| March 31, 2023 | June 30, 2022 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | $ | ||||||
| Prepaid expenses and deposits | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | - | |||||||
| Total assets | $ | $ | ||||||
| Liabilities and Stockholders’ Deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | $ | ||||||
| Accrued payroll taxes and penalties | ||||||||
| Promissory notes, related party | ||||||||
| PPP loan payable | ||||||||
| Total current liabilities | ||||||||
| Total liabilities | ||||||||
| Commitment and Contingencies (Note 17) | ||||||||
| Temporary equity | ||||||||
| Convertible Preferred Stock -Series L | ||||||||
| Total temporary equity | ||||||||
| Stockholders’ Deficit: | ||||||||
| Preferred stock, par , | ||||||||
| Common stock, par value, | ||||||||
| Accumulated Deficit | ( | ) | ( | ) | ||||
| Total stockholders’ deficit | ( | ) | ( | ) | ||||
| Total liabilities and stockholders’ deficit | $ | $ | ||||||
See accompanying notes to the unaudited financial statements
1
IMAGING DIAGNOSTIC SYSTEMS, INC.
Statements of Operations
(unaudited)
| Three Months Ended | Three Months Ended | Nine Months Ended | Nine Months Ended | |||||||||||||
| March 31, 2023 | March 31, 2022 | March 31, 2023 | March 31, 2022 | |||||||||||||
| Total Revenue | $ | $ | $ | $ | ||||||||||||
| Cost of Sales | ||||||||||||||||
| Gross Profit | ||||||||||||||||
| Operating Expenses: | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Sales and marketing | ||||||||||||||||
| Consulting expenses (including share-based compensation) | ||||||||||||||||
| Total Operating Expenses | ||||||||||||||||
| Operating Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other Income (expense) | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Total Other Expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Preferred Stock Dividends | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Net Loss Available to Common Stockholders | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net Loss per common share: | ||||||||||||||||
| Basic and diluted | $ | $ | $ | $ | ||||||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
See accompanying notes to the unaudited financial statements
2
IMAGING DIAGNOSTIC SYSTEMS, INC.
Statements of Changes in Stockholders’ Deficit
For the three and nine months ended March 31, 2023 and 2022
(unaudited)
| Common Stock | Total | |||||||||||||||
| Number of | Accumulated | Stockholders’ | ||||||||||||||
| Shares | Amount | Deficit | Deficit | |||||||||||||
| Balance at June 30, 2022 | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Cummulative Dividend on Series L CV Preferred | - | ( | ) | ( | ) | |||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||
| Balance at September 30, 2022 | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Cummulative Dividend on Series L CV Preferred | - | ( | ) | ( | ) | |||||||||||
| Stock options expense | - | |||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||
| Balance at December 31, 2022 | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Cummulative Dividend on Series L CV Preferred | - | ( | ) | ( | ) | |||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||
| Balance at March 31, 2023 | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Balance at June 30, 2021 | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Cummulative Dividend on Series L CV Preferred | - | ( | ) | ( | ) | |||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||
| Balance at September 30, 2021 | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Cummulative Dividend on Series L CV Preferred | - | ( | ) | ( | ) | |||||||||||
| Stock options expense | - | |||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||
| Balance at December 31, 2021 | $ | $ | ( | ) | $ | ( | ) | |||||||||
| Cummulative Dividend on Series L CV Preferred | - | ( | ) | ( | ) | |||||||||||
| Stock options expense | - | |||||||||||||||
| Net loss | - | ( | ) | ( | ) | |||||||||||
| Balance at March 31, 2022 | $ | $ | ( | ) | $ | ( | ) | |||||||||
See accommpanying notes to the unaudited financial statements
3
IMAGING DIAGNOSTIC SYSTEMS, INC.
Statements of Cash Flows
(unaudited)
| Nine Months Ended | Nine Months Ended | |||||||
| March 31, 2023 | March 31, 2022 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock option expense | ||||||||
| Changes in assets and liabilities: | ||||||||
| Decrease in prepaid expenses and deposits | ||||||||
| Increase in accounts payable and accrued expenses | ||||||||
| Total adjustments | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from promissory notes, related party | ||||||||
| (Repayment) of Paycheck Protection Program Loan | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net (decrease) in cash | ( | ) | ( | ) | ||||
| Cash at the beginning of year | ||||||||
| Cash at end of the period | $ | $ | ||||||
| Supplemental Disclosure of cash flow information: | ||||||||
| Cash paid for interest | $ | $ | ||||||
| Cash paid for taxes | $ | $ | ||||||
| Non-cash investing and financing activities: | ||||||||
| Promissory notes issued in exchange for settlement of accounts payable | $ | $ | ||||||
See accompanying notes to the unaudited financial statements
4
IMAGING DIAGNOSTIC SYSTEMS, INC
Notes to Unaudited Financial Statements
March 31, 2023
(1) ORGANIZATION AND NATURE OF BUSINESS
Imaging Diagnostic Systems, Inc. (the “Company” or “IDSI”) is a medical technology company that has developed a new, non-invasive CT scanner called CTLM® that uses a laser beam in place of ionizing X-ray for breast imaging. This technology is called Diffuse Optical Tomography. The CTLM® will provide an adjunctive imaging modality to other methods of imaging the breast such as X-ray mammography, MRI and ultrasound.
Since inception in December 1993 as a Florida corporation and subsequently its reverse merger with Alkan Corp., a New Jersey Corporation on April 14, 1994, we continued operations and changed our state of incorporation from New Jersey to Florida, effective July 1, 1995.
(2) GOING CONCERN AND MANAGEMENT’S PLANS
The accompanying financial statements are prepared assuming the Company
will continue as a going concern. As of March 31, 2023, the Company had an accumulated deficit of $
During fiscal year 2023, we anticipate that losses from operations will continue until we begin to generate revenues through the sales of CTLM® systems in China. These losses will be primarily due to an anticipated increase in marketing, manufacturing and operational expenses associated with the international commercialization of the CTLM®, expenses associated with FDA approval processes, and the costs associated with advanced product development activities.
The Company’s next focus, after having obtained CFDA approval in China, is on obtaining marketing clearance of its CTLM® Breast Imaging System through the FDA. The premarket approval (“PMA”) process for U.S. marketing clearance is expected to take longer than the Chinese process, and we intend to resume this effort after achieving successful marketing and sales of CTLM® systems in China. Our sales and marketing efforts in China have been significantly hindered by the ongoing COVID-19 pandemic, and therefore we do not expect revenue from China in the foreseeable future. No sales in other countries are expected in the foreseeable future, as we do not intend to pursue sales in other countries until after obtaining FDA marketing clearance, as to which there can be no assurance.
5
IMAGING DIAGNOSTIC SYSTEMS, INC
Notes to Unaudited Financial Statements
March 31, 2023
(2) GOING CONCERN AND MANAGEMENT’S PLANS (Continued)
In analyzing the regulatory path forward, timeline, and costs associated with the level of effort required to upgrade the Company’s Quality Management System (QMS), we have decided not to renew our CE mark (required for sales in the European Union) for this year and to consider reapplying in 2 to 3 years to avoid these regulatory fees. Similarly, we will maintain our Quality Management System to be compliant to ISO 13485:2016 but not certify to ISO 13485:2016 by Underwriters Laboratories (UL) which will allow us to avoid fees associated with certification, travel, and hosting audits. Maintaining our QMS to be ISO 13485:2016 compliant will allow us to quickly schedule an audit with UL and become ISO 13485 certified when necessary.
On October 23, 2019, the Company entered into a consulting agreement (“the Agreement”) effective as of November 1, 2019, with Dr. Huabei Jiang to serve as IDSI’s Chief Scientific Consultant. Pursuant to the Agreement, Dr. Jiang is focused on improving the technical performance and image quality of IDSI’s Computed Tomography Laser Mammography (CTLM®) breast imaging device. Dr. Jiang has completed the first phase of image quality improvement and is currently collecting image data for evaluation and further technical improvement.
Xi’an IDI has been working with Yiling Hospital Management Group based in Beijing, China (“Yiling”) to evaluate CTLM®’s potential use and application. As of the date of this report, Xi’an IDI has loaned three CTLM® systems to Yiling and Yiling is at the stage of testing and data validation.
It is important that the effectiveness of the image quality improvements be established before Xi’an IDI can resume their sales and marketing efforts in China. Once the Company has substantial revenues and cash flow, it believes it will be able to raise the necessary funding to allow the Company to move forward with its various R&D and regulatory initiatives that have been put on hold due to the COVID-19 pandemic.
The Company’s ability to continue as a going concern and its future success are dependent upon its ability to raise additional capital in the near term to: (1) satisfy its current obligations, (2) continue its research and development efforts, and (3) successfully develop, market, and sell its products. Due to the difficulty of raising additional capital during the current COVID-19 crisis, the Company has been taking aggressive measures to reduce its operating costs in order to preserve cash. The Company’s ability to meet its cash flow requirements through fiscal 2023 and continue its development and commercialization efforts will be dependent on the length and severity of the COVID-19 crisis and the Company’s ability to secure additional funding. There can be no assurance that IDSI will generate sufficient revenue to provide positive cash flows from operations or that sufficient capital will be available, when required, to permit the Company to execute its plan of operations. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of presentation and use of estimates
The financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”). The unaudited interim financial information furnished herein reflects all adjustments, consisting only of normal recurring items, which in the opinion of management are necessary to fairly state the Company’s financial position, results of operations and cash flows for the dates and periods presented and to make such information not misleading. The preparation of financial statements in conformity with Generally Accepted Accounting Principles in the United States requires the Company to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions also include the valuations of certain financial instruments, stock-based compensation, deferred tax assets, the outcome of litigation and tax matters, and other matters that affect the statements of financial condition and related disclosures. Actual results could differ materially from these estimates.
6
IMAGING DIAGNOSTIC SYSTEMS, INC
Notes to Unaudited Financial Statements
March 31, 2023
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
These unaudited financial statements should be read in conjunction with the Company’s audited financial statements for the fiscal year ended June 30, 2022, contained in our Annual Report on Form 10-K as filed with the Securities and Exchange Commission (the “Commission”) on October 4, 2022. The results of operations for the nine months ended March 31, 2023, are not necessarily indicative of results to be expected for any other interim period or the fiscal year ending June 30, 2023.
(b) Revenue recognition
As of July 1, 2018, the Company adopted Revenue from Contracts with Customers (Topic 606) (“ASC 606”). The Company sells medical imaging products, parts, and services where permitted to independent distributors and in certain unrepresented territories directly to end-users. The Company recognizes revenue when obligations under the terms of a contract with the customer are satisfied. Product sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in customer incentives the Company offers to its customers and their customers. Any discounts, sales incentives or similar arrangements with the customer are estimated at time of sale and deducted from revenue. Sales taxes and other similar taxes are excluded from revenue.
The Company also receives royalties pursuant to a licensing relationship with Trifoil Imaging. Revenue is recognized in the reporting periods in which royalties are due to the Company. During the nine months ended March 31, 2023 and 2022, there was no income from royalties.
(c) Allowance for doubtful accounts
In the event that management determines that a receivable becomes uncollectible, or events or circumstances change, which result in a temporary cessation of payments from the distributor, we will make our best estimate of probable or potential losses in our accounts receivable balance using the allowance method for each quarterly period. Management will review the receivables at the end of each fiscal year and the appropriate allowance will be made based on current available evidence and historical experience.
Our allowance for doubtful accounts was $
(d) Cash and cash equivalents
Holdings of highly liquid investments with original maturities of three months or less and investment in money market funds are considered to be cash equivalents by the Company. There were no cash equivalents at March 31, 2023 and June 30, 2022.
(e) Concentration of Risk
Financial instruments that potentially subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and accounts receivable.
The Company places its cash and cash equivalents with high-quality
financial institutions. At times, balances in the Company’s cash accounts may exceed the Federal Deposit Insurance Corporation limit
of $
7
IMAGING DIAGNOSTIC SYSTEMS, INC
Notes to Unaudited Financial Statements
March 31, 2023
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company did not have any revenue for the nine months ended March 31, 2023 and 2022.
(f) Inventory
Inventories, consisting principally of raw materials, work-in-process (including completed units under testing), finished goods and units placed on consignment, are carried at the lower of cost and net realizable value. Cost is determined using the first-in, first-out (FIFO) method. Raw materials consist of purchased parts, components and supplies. Work-in-process includes completed units undergoing final inspection and testing. The Company periodically reviews the value of items in inventory and records write-downs or write-offs based on its assessment of obsolete inventory. The Company maintains an allowance for obsolete inventory and generally makes inventory value adjustments against the allowance.
(g) Property and equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation and amortization are computed using straight-line methods over the estimated useful lives of the related assets. Expenditures for renewals and betterments which increase the estimated useful life or capacity of the asset are capitalized; expenditures for repairs and maintenance are expensed when incurred.
(h) Research and development
Research and development expenses consist principally of expenditures for equipment and outside third-party consultants, raw materials which are used in testing and the development of the Company’s CTLM® device or other products and product software. The non-payroll related expenses include testing at outside laboratories, parts associated with the design of initial components and tooling costs, and other costs which do not remain with the developed CTLM® device.
(i) Net loss per share
The Company relies on the guidance provided by ASC 260, (“Earnings per Share”), which requires the reporting of both basic and diluted earnings per share. Basic net loss per share is determined by dividing loss available to common shareholders by the weighted average number of common shares outstanding for the period. Diluted loss per share reflects the potential dilution that could occur if options or other contracts to issue common stock were exercised or converted into common stock, as long as the effect of their inclusion is not anti-dilutive.
The Company had
(j) Stock-based compensation
In July 2018, the FASB issued ASU 2018-07, Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, an accounting standard update to improve non-employee share-based payment accounting. The accounting standard update more closely aligns the accounting for employee and non-employee share-based payments. The accounting standards update is effective as of the beginning of 2019 with early adoption permitted. We have elected to adopt this standard.
The Company has elected to use the Black-Scholes-Merton, or BSM, option-pricing model to estimate the fair value of its options and similar awards, which incorporates various subjective assumptions including volatility, risk-free interest rate, expected life, and dividend yield to calculate the fair value of outstanding and vested stock option awards. Compensation expense recognized in the statements of operations is based on awards ultimately expected to vest and reflects estimated forfeitures. ASC 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.
8
IMAGING DIAGNOSTIC SYSTEMS, INC
Notes to Unaudited Financial Statements
March 31, 2023
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rate, the Company analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If the Company’s actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what we have recorded in the current period. No stock options were granted during nine months ended March 31, 2023 and 2022. Stock options are being expensed pursuant to ASC 718.
The fair value concepts were not changed significantly in ASC 718; however, in adopting this Standard, companies were given the option to choose among alternative valuation models and amortization assumptions. We elected to continue to use the Black-Scholes option pricing model and expense the options as compensation over the requisite vesting period of the grant. We will reconsider use of the Black-Scholes model if additional information becomes available in the future that indicates another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model. See Note (16) Stock Options.
(k) Long-lived assets
The Company relies on the guidance provided by ASC 360 (“Property, Plant & Equipment”). ASC 360 requires companies to write down to estimated fair value long-lived assets that are impaired. The Company reviews its long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. In performing the review of recoverability, the Company estimates the future cash flows expected to result from the use of the asset and its eventual disposition. If the sum of the expected future cash flows is less than the carrying amount of the assets, an impairment loss is recognized.
The Company has determined that no impairment losses need to be recognized through the nine months ended March 31, 2023 and 2022.
(l) Income taxes
The Company accounts for income taxes pursuant to the provisions of ASC 740-10, “Accounting for Income Taxes,” which requires, among other things, an asset and liability approach to calculating deferred income taxes. The asset and liability approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and the tax bases of assets and liabilities. A valuation allowance is provided to offset any net deferred tax assets for which management believes it is more likely than not that the net deferred asset will not be realized.
The Company follows the provisions of the ASC 740 -10 related to, Accounting for Uncertain Income Tax Positions. When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. In accordance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any.
9
IMAGING DIAGNOSTIC SYSTEMS, INC
Notes to Unaudited Financial Statements
March 31, 2023
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
The Company has adopted ASC 740-10-25 Definition of Settlement, which provides guidance on how an entity should determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits and provides that a tax position can be effectively settled upon the completion of an examination by a taxing authority without being legally extinguished. For tax positions considered effectively settled, an entity would recognize the full amount of tax benefit, even if the tax position is not considered more likely than not to be sustained based solely on the basis of its technical merits and the statute of limitations remains open. As of the date these financials were available to be issued, tax years ended June 30, 2020 to 2022 are still potentially subject to audit by the taxing authorities.
(m) Warranty reserve
The Company warrants all products and parts supplied for a period of 12 months from the date of installation or 15 months from the date the products were shipped from IDSI, whichever occurs first. Although the Company tests its product in accordance with its quality programs and processes, its warranty obligation is affected by product failure rates and service delivery costs incurred in correcting a product failure. Based on the Company’s experience, the warranty reserve was estimated based on the replacement cost of the laser and certain electronic parts. Should actual product failure rates or service costs differ from the Company’s estimates, which are based on limited historical data, where applicable, revisions to the estimated warranty liability would be required. The Company had no warranty reserve balance as of March 31, 2023 or June 30, 2022.
(n) Impact of recently issued accounting pronouncements
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on our financial statements upon adoption.
(o) Fair Value of Financial Instruments
The carrying values of cash and cash equivalents, receivables, accounts payable, short-term debt and accrued liabilities approximated their fair values due to the short maturity of these instruments. After a review of our accounts receivable, the Company has not recorded an allowance for doubtful accounts. The fair value of the Company’s debt obligations is estimated based on the quoted market prices for the same or similar issues or on current rates offered to the Company for debt of the same remaining maturities. At March 31, 2023 and June 30, 2022, the aggregate fair value of the Company’s debt obligations approximated its carrying value. The Company relies upon the guidance of ASC 820 (“Fair Value Measurements and Disclosures”). ASC 820 defines fair value as the price that would be received from selling an asset or paid to transfer a liability in an orderly, transaction between market participants at the measurement date. When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the principal or most advantageous market in which it would transact and considers assumptions that market participants would use when pricing the asset or liability, such as inherent risk, transfer restrictions and risk of nonperformance. ASC 820 establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 establishes three levels of inputs that may be used to measure fair value:
Level 1 - Quoted prices in active markets for identical assets or liabilities
10
IMAGING DIAGNOSTIC SYSTEMS, INC
Notes to Unaudited Financial Statements
March 31, 2023
(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Level 2 - Observable inputs other than Level 1 prices such as quoted prices for similar assets or liabilities; quoted prices in markets with insufficient volume or infrequent transactions (less active markets); or model-derived valuations in which all significant inputs are observable or can be derived principally from or corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 - Unobservable inputs to the valuation methodology that are significant to the measurement of fair value of assets or liabilities.
To the extent that valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, for disclosure purposes, the level in the fair value hierarchy within which the fair value measurement is disclosed and is determined based on the lowest level input that is significant to the fair value measurement.
(4) REVENUE
The Company recognizes revenue when obligations under the terms of a contract with the customer are satisfied. Product sales occur once control is transferred upon delivery to the customer. Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring goods. The amount of consideration the Company receives and revenue the Company recognizes varies with changes in customer incentives the Company offers to its customers and their customers. Sales taxes and other similar taxes are excluded from revenue.
As of July 1, 2018, the Company adopted Revenue from Contracts with Customers (Topic 606) (“ASC 606”). The new guidance sets forth a new five-step revenue recognition model which replaces the prior revenue recognition guidance in its entirety and is intended to eliminate numerous industry-specific pieces of revenue recognition guidance that have historically existed in U.S. GAAP. The underlying principle of the new standard is that a business or other organization will recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects what it expects to receive in exchange for the goods or services. The standard also requires more detailed disclosures and provides additional guidance for transactions that were not addressed completely in the prior accounting guidance. The Company adopted the standard using the modified retrospective method and the adoption did not have a material impact on its financial statements. The Company expects that the impact to net income of the new standard will be immaterial on an ongoing quarterly and annual basis. The comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
The Company had no revenues during the nine months ended March 31, 2023 and 2022.
(5) RELATED PARTY TRANSACTIONS
Related party revenues
On March 22,
2018, the Board of Directors approved the execution of two agreements with Xi’an of China, an affiliated Company of IDSI. The agreements
are a Know How Transfer Contract and a CTLM® Know How Confidentiality
Agreement. The contract, having a term of
Related party fees
Erhfort, LLC earned a consulting fee of $
David Fong, who served as the Company’s
CFO through August 10, 2022 and as a consultant on an as needed basis thereafter, earned consulting fees of $
11
IMAGING DIAGNOSTIC SYSTEMS, INC
Notes to Unaudited Financial Statements
March 31, 2023
(5) RELATED PARTY TRANSACTIONS (Continued)
Related party payables and accrued expenses
As of March 31, 2023 and June 30, 2022, the amount
of interest on related party notes due to Erhfort, LLC, which is included in accounts payable, is $
As of March 31, 2023 and June 30, 2022, the amount
of consulting fees due to Ehrfort, LLC, which is included in accounts payable, is $
As March 31, 2023 and June 30, 2022, the amount
of consulting fees due to Fong & Associates, LLC, which is included in accounts payable and accrued expenses, is $
As of March 31, 2023 and June 30, 2022, the amount
of reimbursable expenses due to Fong & Associates, LLC, which is included in accounts payable, is $
As of March 31, 2023 and June 30, 2022, the amount
of interest on related party notes due to JM One Holdings, LLC, which is included in accrued expenses, is $
Related party debt
As of March 31, 2023 and June 30, 2022, the amount
in promissory notes due to related parties are $
(6) ROYALTY RECEIVABLE
On June 16, 2006, the Company entered into a Royalty Agreement with
Bioscan Inc. whereby the Company established a licensing relationship with Bioscan which granted Bioscan an exclusive sublicensable, royalty-bearing
license to make, use, offer for sale, import and otherwise develop and commercialize products in its territory. Bioscan Inc. was subsequently
purchased by TriFoil Imaging. During the nine months ended March 31, 2023 and 2022, there was no royalty income. As of March 31, 2023
and June 30, 2022, the Company had royalty receivable balances of $
(7) INVENTORIES
Inventories consisted of the following:
| March 31, 2023 | June 30, 2022 | |||||||
| Raw materials consisting of purchased parts, components and supplies | $ | $ | ||||||
| Finished goods | ||||||||
| Total Inventory | $ | $ | ||||||
| Allowance for Obsolete Inventory | ( | ) | ( | ) | ||||
| Net Inventory | $ | $ | ||||||
Due to the age of the inventory, lack of demand for parts and lack of sales the Company reserved for all inventory during the year ended June 30, 2017. The Company is not carrying any inventory purchased after June 30, 2017 and has booked an allowance for the entire value of its inventory.
12
IMAGING DIAGNOSTIC SYSTEMS, INC
Notes to Unaudited Financial Statements
March 31, 2023
(8) PREPAID EXPENSES AND DEPOSITS
The following is a summary of prepaid expenses:
| March 31, 2023 | June 30, 2022 | |||||||
| Prepaid Software | $ | $ | ||||||
| Rent Security Deposits | ||||||||
| Consulting Retainers | ||||||||
| Total Prepaid expenses and Deposits | $ | $ | ||||||
(9) PROPERTY AND EQUIPMENT
The following is a summary of property and equipment, less accumulated depreciation:
| March 31, 2023 | June 30, 2022 | Useful life | ||||||||
| Computers and Equipment | $ | $ | ||||||||
| Third Party Software | ||||||||||
| Clinical Equipment | ||||||||||
| Total Property & Equipment | $ | $ | ||||||||
| Less: accumulated depreciation | ( | ) | ( | ) | ||||||
| Total Property & Equipment - Net | $ | $ | ||||||||
Depreciation expense for the nine months ended March 31, 2023 and 2022
was $
(10) ACCOUNTS PAYABLE AND ACCRUED EXPENSES
As of March 31, 2023 and June 30, 2022, accounts payable and accrued
expenses totaled $
(11) ACCRUED PAYROLL TAXES AND PENALTIES
As of March 31, 2023 and June 30, 2022, the Company owed the IRS $
13
IMAGING DIAGNOSTIC SYSTEMS, INC
Notes to Unaudited Financial Statements
March 31, 2023
(12) PROMISSORY NOTES – RELATED PARTY
The following table is a summary of the outstanding note balances as of March 31, 2023 and June 30, 2022.
| Noteholder | Interest Rate | Maturity Date | March 31, 2023 | June 30, 2022 | ||||||||||
| Related Party Notes: | ||||||||||||||
| Erhfort, LLC | % | $ | $ | |||||||||||
| Erhfort, LLC | % | |||||||||||||
| JM One Holdings, LLC | % | |||||||||||||
| Erhfort, LLC | % | |||||||||||||
| Erhfort, LLC | % | |||||||||||||
| Erhfort, LLC | % | |||||||||||||
| Erhfort, LLC | % | |||||||||||||
| Erhfort, LLC | % | |||||||||||||
| Erhfort, LLC | % | |||||||||||||
| Erhfort, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Viable International Investments, LLC | % | |||||||||||||
| Xi’an IDI | % | |||||||||||||
| Total Related Party Notes | $ | $ | ||||||||||||
Erhfort, LLC and Viable International Investments, LLC own Company common stock directly and indirectly. JM One Holdings, LLC is an entity affiliated with the Company’s former CFO. Hence, these debts are considered related party debt. Xi’an IDI is affiliated with IDSI due to a licensing agreement.
During the nine months ended March 31, 2023,
the Company received loan proceeds of $
On March 31, 2023,
14
IMAGING DIAGNOSTIC SYSTEMS, INC
Notes to Unaudited Financial Statements
March 31, 2023
(13) LONG-TERM DEBT
The following table is a summary of the outstanding loan balances as of March 31, 2023 and June 30, 2022.
| Noteholder | Interest Rate | Maturity Date | March 31, 2023 | June 30, 2022 | ||||||||||
| Truist Bank | % | $ | $ | |||||||||||
| Total Debt | ||||||||||||||
| Current Portion of Debt | ( | ) | ( | ) | ||||||||||
| Total Long-term Debt | $ | $ | ||||||||||||
On May 9, 2020, the Company entered into a loan
with Truist Bank, a lender pursuant to the Paycheck Protection Program of the CARES Act as administered by the SBA in the amount of $
(14) CONVERTIBLE PREFERRED STOCK
The following schedule reflects the number of shares of preferred stock that have been issued, converted and are outstanding as of March 31, 2023:
| Security | Date Issued | No. of Shares | Amount | Date of Conversion | No. of Shares Converted | Amount Converted | Balance 3/31/2023 | |||||||||||||||||
| Series L Cv Pfd | 3/31/2010 | $ | $ | $ | ||||||||||||||||||||
| Dividends | ||||||||||||||||||||||||
| Total redemption value | $ | |||||||||||||||||||||||
| Total Series M Cv Pfd | Various | $ | $ | $ | - | |||||||||||||||||||
| Dividends | - | |||||||||||||||||||||||
| Total redemption value | $ | - | ||||||||||||||||||||||
15
IMAGING DIAGNOSTIC SYSTEMS, INC
Notes to Unaudited Financial Statements
March 31, 2023
(14) CONVERTIBLE PREFERRED STOCK (Continued)
Series L Convertible Preferred Stock
On March 31, 2010, a private investor converted a $
Series M Convertible Preferred Stock
The Company had previously sold
(15) COMMON STOCK
The Company has
The Company did not issue any shares of common or preferred stock during the nine months ended March 31, 2023 and 2022.
(16) STOCK OPTIONS
On December 4, 2016, the Board of Directors adopted the Company’s 2016 Equity Incentive Plan (the “2016 Plan”) which was subsequently approved and adopted by majority written consent in lieu of an annual meeting. The purpose of the 2016 Plan is to encourage and enable the officers, employees, directors and other key persons (including consultants) of the Company, upon whose judgment, initiative and efforts the Company largely depends for the successful conduct of its business, to acquire a proprietary interest in the Company. It is anticipated that providing such persons with a direct stake in the Company’s welfare will assure a closer identification of their interests with those of the Company and its stockholders, thereby stimulating their efforts on the Company’s behalf and strengthening their desire to remain with the Company.
16
IMAGING DIAGNOSTIC SYSTEMS, INC
Notes to Unaudited Financial Statements
March 31, 2023
(16) STOCK OPTIONS (Continued)
In computing the impact of stock option grants, the fair value of each option is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk-free interest rate; volatility of a comparable company; and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and the Company uses different assumptions, the Company’s stock-based compensation expense could be materially different in the future.
In addition, the Company is required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. The Company cannot assess its forfeiture rate at this time due to the lack of historical data.
| As of March 31, 2023 | As of June 30, 2022 | |||||||
| Expected volatility | ||||||||
| Expected term | ||||||||
| Risk-Free interest rate | ||||||||
| Forfeiture rate | ||||||||
| Expected dividend rate | ||||||||
At March 31, 2023, the Company has unvested and vested options under
the 2016 Plan with exercise prices that range from a low of $
| Employees/Consultants | Options | Wtd. Avg. Exercise Price | Wtd. Avg. Remaining Term | Aggregate Intrinsic Value | ||||||||||
| Outstanding at June 30, 2021 | $ | $ | ||||||||||||
| Granted | $ | |||||||||||||
| Expired | ( | ) | $ | |||||||||||
| Exercised | $ | |||||||||||||
| Cancelled | $ | |||||||||||||
| Outstanding at June 30, 2022 | $ | $ | ||||||||||||
| Granted | $ | |||||||||||||
| Expired | ( | ) | $ | |||||||||||
| Exercised | $ | |||||||||||||
| Cancelled | $ | |||||||||||||
| Outstanding at March 31, 2023 | $ | $ | ||||||||||||
17
IMAGING DIAGNOSTIC SYSTEMS, INC
Notes to Unaudited Financial Statements
March 31, 2023
(16) STOCK OPTIONS (Continued)
The following table summarizes information about vested and unvested
options under the 2016 Plan at March 31, 2023 and June 30, 2022. The Company recognized an expense of $
Employees/Consultants | Unvested | Vested and Exercisable | Total | |||||||||
| Outstanding at June 30, 2021 | ||||||||||||
| Granted | ||||||||||||
| Vested and Exercisable | ( | ) | ||||||||||
| Cancelled | ||||||||||||
| Expired | ( | ) | ||||||||||
| Outstanding at June 30, 2022 | ||||||||||||
| Granted | ||||||||||||
| Vested and Exercisable | ( | ) | ||||||||||
| Cancelled | ||||||||||||
| Expired | ( | ) | ||||||||||
| Adjustment | ||||||||||||
| Outstanding at March 31, 2023 | ||||||||||||
Unvested options will be expensed under the
Black-Scholes options-pricing model when they vest. As of March 31, 2023 remaining options to be expensed when vested over the next
year are estimated to be $
The tables below summarize information about these five plans:
| Employees/Consultants | Options | Wtd. Avg. Exercise Price | Wtd. Avg. Remaining Term | Aggregate Intrinsic Value | ||||||||||||
| Outstanding at June 30, 2021 | $ | | $ | |||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | $ | |||||||||||||||
| Cancelled | $ | |||||||||||||||
| Outstanding at June 30, 2022 | $ | | $ | |||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | $ | |||||||||||||||
| Cancelled | ( | ) | $ | |||||||||||||
| Outstanding at March 31, 2023 | $ | $ | ||||||||||||||
| Vested & Exercisable Stock Options | March 31, 2023 | June 30, 2022 | ||||||
| Employee 2016 Equity Plan | ||||||||
| Director 2016 Equity Plan | ||||||||
| Employee Other Plans | ||||||||
| Directors and Consultants Other Plans | ||||||||
| Total | ||||||||
18
IMAGING DIAGNOSTIC SYSTEMS, INC
Notes to Unaudited Financial Statements
March 31, 2023
(16) STOCK OPTIONS (Continued)
The table below summarizes information about all stock options outstanding as of March 31, 2023:
| Outstanding Options | Vested Options | |||||||||||||||||||||||
| Range of Exercise price | Number Outstanding at March 31, 2023 | Weighted Averaged Exercise Price | Weighted Averaged Remaining Life (Years) | Number Exercisable at March 31, 2023 | Weighted Averaged Exercise Price | Weighted Averaged Remaining Life (Years) | ||||||||||||||||||
| $0.20 - $0.51 | $ | $ | ||||||||||||||||||||||
| Total Outstanding options | $ | $ | ||||||||||||||||||||||
The Company’s common stock, symbol IMDS, was quoted on OTCmarkets.com
Pink until September 25, 2014 at which time IDSI’s registration was revoked by the Securities and Exchange Commission (SEC) for
failure to timely file its Quarterly and Annual Reports. The last quoted price was $
(17) COMMITMENTS AND CONTINGENCIES
The Company previously carried $
From May 2010 to June 2012, claims were made by the IRS for payment
of the Company’s accrued payroll taxes, interest and penalties, which as of June 30, 2012 was $
During fiscal 2018, as part of new management’s restructuring
plan, the Company received funds from an accredited investor to pay off the payroll tax portion of the amount owed to the IRS. The Company
engaged tax counsel to manage the settlement and payment. On June 27, 2018, the IRS provided counsel with a payoff calculation table indicating
that the balance of taxes due was $
On October 23, 2019, the Company entered into a consulting agreement
(“the Agreement”) effective as of November 1, 2019, with Dr. Huabei Jiang to serve as IDSI’s Chief Scientific Consultant.
Pursuant to the Agreement, Dr. Jiang is focused on improving the technical performance and image quality of IDSI’s CTLM® breast
imaging device. Per the Agreement, the goal of the initial project was to complete image quality improvement by November 1, 2020. A payment
of $
(18) SUBSEQUENT EVENTS
On April 5, 2023, the Company received loan proceeds
of $
19
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
CAUTIONARY STATEMENTS REGARDING FORWARD-LOOKING STATEMENTS
This quarterly report on Form 10-Q for the period ended March 31, 2023, contains “forward-looking statements” within the meaning of the federal securities laws and use terminology such as “may,” “will,” “expects,” “plans,” “anticipates,” “estimates,” “projects”, “potential,” or “continue,” or the negative or other comparable terminology regarding beliefs, plans, expectations, or intentions regarding the future. These forward-looking statements involve substantial risks and uncertainties, and actual results could differ materially from those discussed and anticipated in such statements. These forward-looking statements include, among others, statements relating to our business strategy, which is based upon our interpretation and analysis of trends in the healthcare treatment industry, especially those related to the diagnosis and treatment of breast cancer, and upon management’s ability to successfully develop and commercialize its principal product, the CTLM®. This strategy assumes that the CTLM® will provide benefits, from both a medical and an economic perspective, to current alternative techniques for diagnosing and managing breast cancer. Factors that could cause actual results to materially differ include, without limitation, the ongoing global COVID-19 pandemic/economic crisis, the timely and successful completion of our clinical trials required by the U.S. Food and Drug Administration (“FDA”) and compliance with the regulations of the FDA and the China Food and Drug Administration (“CFDA”); the timely and successful submission of our FDA application for pre-market approval and our ability to obtain U.S. marketing clearance; manufacturing risks relating to the CTLM®, including our reliance on a single or limited source or sources of supply for some key components of our products as well as the need to comply with especially high standards for those components and in the manufacture of optical imaging products in general; uncertainties inherent in the development of new products and the enhancement of our existing CTLM® product, including technical and regulatory risks, cost overruns and delays; our ability to accurately predict the demand for our CTLM® product as well as future products and to develop strategies to address our markets successfully; the early stage of market development for medical optical imaging products and our ability to gain market acceptance of our CTLM® product by the medical community; our ability to expand our international distributor network for both the near and longer-term to effectively implement our globalization strategy; our dependence on senior management and key personnel and our ability to attract and retain additional qualified personnel; risks relating to financing through private placements or other working capital financing arrangements; technical innovations that could render the CTLM® or other products marketed or under development by us obsolete; competition; risks and uncertainties relating to intellectual property, including claims of infringement and patent litigation; risks relating to future acquisitions and strategic investments and alliances; and reimbursement policies for the use of our CTLM® product and any products we may introduce in the future. There are also many known and unknown risks, uncertainties and other factors, including, but not limited to, technological changes and competition from new diagnostic equipment and techniques, changes in general economic conditions, healthcare reform initiatives, legal claims, regulatory changes and risk factors detailed from time to time in our Securities and Exchange Commission filings that may cause these assumptions to prove incorrect and may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to, those described above and in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, filed on October 4, 2022. All forward-looking statements and risk factors included in this Form 10-Q report and in the Form 10-K report are made as of the date of the relevant disclosure document based on information available to us as of the date thereof, and we assume no obligation to update any forward-looking statements or risk factors. The occurrence of any of the events described as risk factors or other future events could have a material adverse effect on our business, results of operations and financial position. Since our common stock is considered a “penny stock,” we are ineligible to rely on the safe harbor for forward-looking statements provided in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities and Exchange Act of 1934, as amended (the “Exchange Act”). You are cautioned not to place undue reliance on these forward-looking statements.
20
OVERVIEW
Our business address is 618 E South St, Suite 500, Orlando, FL 32801. Our Internet website address is www.imds.com. The information contained in, or that can be accessed through, our website is not part of this Form 10-Q quarterly report.
Imaging Diagnostic Systems, Inc. (“IDSI” or the “Company”) is a late development stage medical technology company that has developed a new, non-invasive CT scanner (“CTLM®”) that uses a laser beam in place of ionizing X-ray for breast imaging. This technology is called Diffuse Optical Tomography. The CTLM® will provide an adjunctive imaging modality to other methods of imaging the breast such as X-ray mammography, MRI and ultrasound.
Since inception in December 1993 as a Florida corporation and subsequently its reverse merger with Alkan Corp., a New Jersey Corporation on April 14, 1994, we continued operations and changed our state of incorporation from New Jersey to Florida, effective July 1, 1995. On July 14, 1995, we filed with the United States Securities and Exchange Commission (“SEC”) a Form 10 SB for registration of our securities as a small business issuer. The Form 10 SB was declared effective in September 1995 and our stock began trading on the OTC Bulletin Board (OTC:BB) on September 20, 1995 under the symbol IMDS. We became a fully reporting company under Commission File Number 0-26028 and traded on the OTC:BB and then on the OTC:QB and ultimately on the OTC PINK until September 25, 2014, at which time our registration was revoked by the SEC for failure to timely file our required periodic reports. Our latest quarterly report on Form 10-Q that was filed prior to our filing of our Form 10 registration statement on August 28, 2018, was filed on May 15, 2013, for the quarter ended March 31, 2013. Our latest annual report on Form 10-K that was filed prior to the filing of our Form 10 registration statement on August 28, 2018, was filed on October 15, 2012, for the year ended June 30, 2012. Copies of our SEC reports through the date of revocation (the “Prior Reports”) are available at www.sec.gov.
On August 28, 2018, we filed a Form 10 registration statement to register issued and outstanding shares held by our shareholders and to become a fully reporting company under the Securities Exchange Act of 1934 (the “Exchange Act”). The Form 10 was amended in response to SEC comments on October 5, 2018 and November 14, 2018. On February 7, 2019, the SEC confirmed that it had no further comments on the Form 10. Under the Exchange Act, our registration became effective on October 29, 2018, i.e. 60 days after filing the Form 10. The Form 10 was further amended on September 26, 2019 to correct the classification of the Series L Convertible Preferred Stock from a current liability to temporary equity.
As of the date of this quarterly report on Form 10-Q for the nine months ended March 31, 2023, we have had no revenues from our operations and have incurred net losses applicable to common shareholders since inception through March 31, 2023 of $135,784,184 after discounts and dividends on preferred stock. We incurred net losses applicable to common shareholders of $301,188 for the nine months ended March 31, 2023 and $483,179 for the nine months ended March 31, 2022.
The Company received marking clearance for the CTLM® from the Chinese FDA (“CFDA”) effective November 16, 2018 to November 15, 2023 as disclosed in the Company’s 8-K report filed December 11, 2018; however, we anticipate that substantial losses from operations will continue until we begin to generate revenues through the sales of CTLM® systems in China. We believe that we face substantial delays before receiving marketing clearance through the U.S. Food and Drug Administration (“FDA”). These losses will be primarily due to an anticipated increase in marketing, manufacturing and operational expenses associated with the international commercialization of the CTLM®, expenses associated with international commercialization of the CTLM®, expenses associated with FDA approval processes, and the costs associated with advanced product development activities. We have implemented a new business strategy which includes a licensing agreement on June 20, 2017 with Xi’an IDI Laser Imaging Co. Ltd (Xi’an IDI), a related party, to shift manufacturing of the CTLM® for the China and Asian markets to China.
21
The Company’s next regulatory focus, after having obtained CFDA approval in China, is on obtaining marketing clearance of its CTLM® Breast Imaging System through the FDA. The premarket approval (“PMA”) process for U.S. marketing clearance is expected to take longer than the Chinese process, and we intend to resume this effort after successful marketing and sales of CTLM® systems in China. Our sales and marketing efforts in China have been significantly hindered by the ongoing COVID-19 pandemic, and therefore we do not expect revenue from China in the foreseeable future. No sales in other countries are expected in the near future, as we do not intend to pursue sales in other countries until after obtaining FDA marketing clearance.
In analyzing the regulatory path forward, timeline, and costs associated with the level of effort required to upgrade the Company’s Quality Management System (QMS), we have decided not to renew our CE mark (required for sales in the European Union) for this year and to consider reapplying in 2 to 3 years to avoid these regulatory fees. Similarly, we will maintain our Quality Management System to be compliant to ISO 13485:2016 but not certify to ISO 13485:2016 by Underwriters Laboratories (UL) which will allow us to avoid fees associated with certification, travel, and hosting audits. Maintaining our QMS to be ISO 13485:2016 compliant will allow us to quickly schedule an audit with UL and become ISO 13485 certified when necessary.
On October 23, 2019, we entered into a consulting agreement effective as of November 1, 2019, with Dr. Huabei Jiang to serve as IDSI’s Chief Scientific Consultant (the “Consulting Agreement”). Pursuant to the Consulting Agreement, Dr. Jiang is focused on improving the technical performance and image quality of IDSI’s Computed Tomography Laser Mammography (CTLM®) breast imaging device. The details of this Agreement were disclosed on our Form 8-K report filed with the SEC on October 29, 2019. As of the date of this report, Dr. Jiang has completed the first phase of image quality improvement and is currently collecting image data for evaluation and further technical improvement.
Xi’an IDI has been working with Yiling Hospital Management Group based in Beijing, China (“Yiling”) to evaluate CTLM’s potential use and application. As of the date of this report, Xi’an IDI has loaned three CTLM® systems to Yiling and Yiling is at the stage of testing and data validation.
It is important that the effectiveness of the image quality improvements be established before Xi’an IDI can resume their sales and marketing efforts in China. Once IDSI has substantial revenues and cash flow, we believe we will be able to raise from operations and/or private investors the necessary funding to allow us to move forward with our CTLM® 3.0 project, as discussed in detail in the “CTLM®” section below. The CTLM® 3.0 project and some regulatory initiatives have been put on hold due to the COVID-19 pandemic and its consequences.
CRITICAL ACCOUNTING POLICIES
The financial statements are prepared in accordance with Generally Accepted Accounting Principles in the United States of America (“U.S. GAAP”). The preparation of financial statements in conformity with U.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Such estimates and assumptions also include the valuations of certain financial instruments, stock-based compensation, deferred tax assets, the outcome of litigation and tax matters, and other matters that affect the statements of financial condition and related disclosures. Actual results could differ materially from these estimates.
We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements:
22
Stock-Based Compensation
We rely on the guidance provided by ASC 718, (“Share Based Payments”). ASC 718 requires companies to expense the value of employee stock options and similar awards and applies to all outstanding and vested stock-based awards.
In computing the impact, the fair value of each option is estimated on the date of grant based on the Black-Scholes options-pricing model utilizing certain assumptions for a risk-free interest rate; volatility; and expected remaining lives of the awards. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, the Company’s stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. In estimating the Company’s forfeiture rate, we analyzed its historical forfeiture rate, the remaining lives of unvested options, and the amount of vested options as a percentage of total options outstanding. If our actual forfeiture rate is materially different from its estimate, or if the Company reevaluates the forfeiture rate in the future, the stock-based compensation expense could be significantly different from what we have recorded in the current period. During the nine months ended March 31, 2023 and 2022, no stock options were granted to employees or consultants. Those options are being expensed pursuant to ASC 718.
The fair value concepts were not changed significantly in ASC 718; however, in adopting this Standard, companies were given the option to choose among alternative valuation models and amortization assumptions. We elected to continue to use the Black-Scholes option pricing model and expense the options as compensation over the requisite service period of the grant. We will reconsider use of the Black-Scholes model if additional information becomes available in the future that indicates another model would be more appropriate, or if grants issued in future periods have characteristics that cannot be reasonably estimated using this model.
RESULTS OF OPERATIONS
Sales and Cost of Sales
Revenues during the three months ended March 31, 2023 and 2022 were $0.
The Cost of Sales during the three months ended March 31, 2023 and 2022 was $0.
Revenues during the nine months ended March 31, 2023 and 2022 were $0.
The Cost of Sales during the nine months ended March 31, 2023 and 2022 was $0.
Our sales and marketing efforts been significantly hindered by the ongoing COVID-19 pandemic, and therefore we do not expect revenue in the foreseeable future. We also did not receive any royalties for the three and nine months ended March 31, 2023.
GENERAL AND ADMINISTRATIVE
Our general and administrative expenses include travel/subsistence related to general and administrative activities, property and casualty insurance, professional fees associated with our corporate and securities attorneys and independent auditors, corporate governance expenses, stockholder expenses, utilities, maintenance, telephones, office supplies and sales and property taxes.
23
General and administrative expenses during the three months ended March 31, 2023, were $15,223 representing an increase of $1,350 or 10% from $13,873 during the three months ended March 31, 2022.
The general and administrative increase of $1,350 is due primarily to higher filing fees during the three months ended March 31, 2023.
General and administrative expenses during the nine months ended March 31, 2023, were $76,983 representing an increase of $3,436 or 5% from $73,547 during the nine months ended March 31, 2022.
The general and administrative increase of $3,436 is minor and is related to differences in the timing and payment of expenses.
SALARIES AND WAGES
Our salaries and wages expenses include compensation, related benefits, payroll taxes and other payroll fees for all employees.
Salaries and wages expense during the three months ended March 31, 2023 and 2022 was $0.
Salaries and wages expense during the nine months ended March 31, 2023 and 2022 was $0.
The lack of salaries and wages is due to the Company’s decision to furlough all employees on May 1, 2020 in response to the COVID-19 crisis. Some of these individuals have worked as independent contractors on an as-needed basis. Payments made to contractors are included in consulting expenses.
RESEARCH AND DEVELOPMENT
We incur research and development expenses to develop significant enhancements to our sole product, the CTLM®. These expenses consist primarily of clinical costs, costs of materials and components to make product enhancements, new product research costs, and costs associated with servicing clinical collaboration sites.
Research and development were $0 for the three months ended March 31, 2023 and 2022.
Research and development were $0 for the nine months ended March 31, 2023 and 2022.
Research and development costs of $0 was due to the lack of business activity during the three and nine months ended March 31, 2023 and 2022.
SALES AND MARKETING
Our sales and marketing expenses consist primarily of expenses associated with advertising and promotion, representative office expense, trade shows, conferences, promotional and training costs related to marketing the CTLM®, commissions, travel/subsistence, patent maintenance fees, consulting, certification expenses, and product liability insurance.
Sales and marketing expenses during the three months ended March 31, 2023, were $124 representing a decrease of $190 or 61% from $314 during the three months ended March 31, 2023.
All sales and marketing expenses during both the three months ended March 31, 2023 and 2022 were related to fees for maintaining our website. The difference relates to variations in website related fees between the two periods.
Sales and marketing expenses during the nine months ended March 31, 2023, were $630 representing an increase of $79 or 14% from $551 during the nine months ended March 31, 2022.
All sales and marketing expenses during both the nine months ended March 31, 2023 and 2022 were related to fees for maintaining our website. The difference relates to variations in website related fees between the two periods.
24
CONSULTING EXPENSES
Our consulting expenses consists of all consulting fees paid as well as share-based compensation issued to our consultants. Our share-based compensation expense consists of vested stock options expensed under the Black-Scholes options pricing model.
Consulting expenses for the three months ended March 31, 2023, were $5,888, representing a decrease of $165,591 or 97% from $171,479 during the three months ended March 31, 2022.
Consulting expenses for the nine months ended March 31, 2023, were $148,704, representing a decrease of $185,474 or 56% from $334,178 during the nine months ended March 31, 2022.
The consulting expense decreases are primarily due to the lack of stock option expenses during the three months ended March 31, 2023 as options had become fully vested in prior periods. Another reason for the decrease is due to changes in the compensation structure for David Fong, who served as the Company’s CFO until August 10, 2022, and as a consultant on an as-needed basis thereafter. Furthermore, Erhfort, LLC who had previously been receiving $8,500 per month in consulting fees no longer receives consulting fees as of January 1, 2023.
AGGREGATE OPERATING EXPENSES
Total operating expenses (general and administrative, salaries and wages, research and development, sales and marketing, depreciation and amortization, and stock options) and cost of sales during the three months ended March 31, 2023, were $21,235, representing a decrease of $164,431 or 89% from $185,666 when compared to the operating expenses and cost of sales during the three months ended March 31, 2023. The decrease in operating expenses is primarily due to a decrease in consulting fees during the three months ended March 31, 2023.
Depreciation and amortization during the three months ended March 31, 2023 and 2022, was $0. All fixed assets are fully depreciated.
Interest expense during the three months ended March 31, 2023, was $20,155 representing a decrease of $60 or less than 1% from $20,215 during the three months ended March 31, 2022. Although the amount of outstanding debt at March 31, 2023 was higher, the more recent debt were 0% interest loans, which is why the amount of interest expense did not change significantly.
Total operating expenses (general and administrative, salaries and wages, research and development, sales and marketing, depreciation and amortization, and stock options) and cost of sales during the nine months ended March 31, 2023, were $226,317, representing a decrease of $181,959 or 45% from $408,276 when compared to the operating expenses and cost of sales during the nine months ended March 31, 2022. The decrease in operating expenses is primarily due to decreases in consulting fees during the nine months ended March 31, 2023.
Depreciation and amortization during the nine months ended March 31, 2023 and 2022, was $0. All fixed assets are fully depreciated.
Interest expense during the nine months ended March 31, 2023, was $61,359 representing a decrease of $32 or less than 1% from $61,391 during the nine months ended March 31, 2022. Although the amount of outstanding debt at March 31, 2023 was higher, the more recent debt were 0% interest loans, which is why the amount of interest expense did not change significantly.
BALANCE SHEET DATA
Our combined cash and cash equivalents totaled $123 at March 31, 2023 and $613 at June 30, 2022. We do not expect to generate a positive internal cash flow for at least the next 12 months due to our efforts to generate sales in China and obtain FDA marketing clearance, the expected costs of commercializing our initial product, the CTLM®, and the time required for homologations from certain countries.
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Our inventory, which consists of raw materials, work in process (including completed units under testing), and finished goods totaled $100,087 at March 31, 2023 and $100,087 at June 30, 2022. Raw materials used for research and development or other purposes are expensed and not included in inventory. The net inventory is $0 at March 31, 2023 and June 30, 2022 because the Company has recorded an allowance for obsolete inventory for the entire value of the inventory due to lack of demand for parts and lack of sales.
Our property and equipment, net, totaled $0 at March 31, 2023 and June 30, 2022.
Our current liabilities, which consist of accounts payable, accrued payroll taxes and penalties, short term debt, and current portion of long-term debt, totaled $2,051,823 at March 31, 2023 and $1,825,542 at June 30, 2022. Accounts payable and accrued expenses totaled $910,920 at March 31, 2023 and $767,317 at June 30, 2022. Accrued payroll taxes and penalties totaled $314,019 at March 31, 2023 and June 30, 2022. Promissory notes totaled $753,954 at March 31, 2023 and $671,276 at June 30, 2022. The current portion of long-term debt was $72,930 at March 31, 2023 and $72,930 at June 30, 2022. Current liabilities increased primarily due to accounts payable and accrued expenses increasing by $143,603 and related party promissory notes increasing by $82,678.
Our temporary equity, which consists of Convertible Preferred Series L (including accrued dividends), totaled $447,451 at March 31, 2023 and $433,939 at June 30, 2022. The increase of $9,074 is due to dividends for the nine months ended March 31, 2023 that are being included in the total redemption value.
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 Viable and its affiliates and/or outside investors. While Viable has stated its intention to provide, directly or through private investors it procures, the working capital that we need for the next 12 months, there can be no assurance that this funding will be provided. In the event that we are unable to obtain adequate 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 multiple private placements of common stock as well as short term loans from related parties. During the nine months ended March 31, 2023, we received $79,009 through short-term related party loans. We also converted $3,669 of accounts payables to a short-term related party loan during the nine months ended March 31, 2023. During the nine months ended March 31, 2022, we received $80,000 through short-term related party loans.
Net cash used in operating and product development expenses, which may 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 $79,499 for the nine months ended March 31, 2023, compared to net cash used in operating activities and product development of the CTLM® and related software development of $75,243 during the nine months ended March 31, 2022. At March 31, 2023, we had negative working capital of $2,039,917 compared to negative working capital of $1,812,940 at June 30, 2022. We do not expect to generate a positive internal cash flow for at least the next 12 months due to the time needed to ramp up our sales and marketing plan in China. Implementation of our plan has been severely impeded by the ongoing COVID-19 crisis, and abatement of the crisis is needed in order for our plan to succeed.
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If and when we receive marketing clearance from the FDA, which cannot be assured, we believe that we will need funding in excess of $5 million above and beyond normal operating expenses over the following year to fully complete all necessary stages in order for us to market the CTLM® in the United States and foreign countries other than China. In China Xi’an IDI will be responsible for all expenses relating to the manufacture, marketing and sale of the CTLM®. The $5 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 the proceeds of the sale of restricted common stock through private placements as our preferred choice to raise the additional funds required to continue operations. In the event that we are unable to raise funds through private placements, of common or preferred stock, or debt securities, or combinations thereof; we will be materially adversely affected and may have to cease operations. If additional funds are raised by issuing equity securities, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders.
Through the date of this report, IDSI has been taking drastic measures as a response to the global COVID-19 crisis to preserve working capital. These measures include the conversion of our full-time employees to contractors working on an as-needed basis, deferral of payments to vendors, and transition of our facilities to a smaller, more cost-efficient space.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
Not applicable.
Item 4. Controls and Procedures
We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in the reports that we file under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Under the supervision and participation of our Chief Executive Officer and Chief Financial Officer, our management has evaluated the effectiveness of our disclosure controls and procedures as of March 31, 2023. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer, or the persons performing similar functions, concluded that our disclosure controls and procedures were effective as of March 31, 2023.
There have been no changes in our internal controls over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during our most recent fiscal year that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
At this time, there are no material pending legal proceedings to which the Company is a party or as to which any of its property is subject, and no such proceedings are known to the Company to be threatened or contemplated against it.
Item 1A. Risk Factors.
Our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, filed on October 4, 2022, includes a detailed discussion of our risk factors. The risks described in our Form 10-K Report are not the only risks facing IDSI. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. For the nine months ended March 31, 2023, there were no material changes in risk factors as previously disclosed in our Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. (Mine Safety Disclosures)
Not Applicable
Item 5. Other Information
None
Item 6. Exhibits
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Dated: May 15, 2023 | Imaging Diagnostic Systems, Inc. | |
| By: | /s/ Rongbin Wang | |
| Rongbin Wang | ||
| Chief Financial Officer | ||
|
(PRINCIPAL ACCOUNTING OFFICER)
| ||
| /s/ Lun Li | ||
| Lun Li | ||
|
Chief Executive Officer (PRINCIPAL EXECUTIVE OFFICER) |
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