10-Q 1 a10-q093005.txt QUARTERLY REPORT SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [Mark One] [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the quarterly period ended: September 30, 2005 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 for the transition period from _____to______ Commission file number: 0-26028 IMAGING DIAGNOSTIC SYSTEMS, INC. (Name of small business issuer in its charter) Florida 22-2671269 ------- ---------- (State of incorporation) (IRS employer Ident. No.) 6531 N.W. 18th Court, Plantation, FL 33313 ------------------------------------ ----- (address of principal office) (Zip Code) Registrant's telephone number: (954) 581-9800 Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes _X__ No_____ The number of shares outstanding of each of the issuer's classes of equity as of September 30, 2005: 205,994,394 shares of common stock, no par value. As of September 30, 2005, the issuer had no shares of preferred stock outstanding. IMAGING DIAGNOSTIC SYSTEMS, INC. (A Development Stage Company) PART I - FINANCIAL INFORMATION ------------------------------ Item 1. Financial Statements Page ---- Condensed Balance Sheet (Unaudited) - September 30, 2005 and June 30, 2005 3 Condensed Statement of Operations (Unaudited) - Three months ended September 30, 2005 and 2004, and December 10, 1993 (date of inception) to September 30, 2005 4 Condensed Statement of Cash Flows (Unaudited) - Three months ended September 30, 2005 and 2004, and December 10, 1993 (date of inception) to September 30, 2005 5 Notes to Condensed Financial Statements 6 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition and Results 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 13 Item 4. Controls and Procedures 13 PART II - OTHER INFORMATION --------------------------- Item 1. Legal Proceedings 15 Item 2. Changes in Securities 15 Item 3. Defaults Upon Senior Securities 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 5. Other Information 15 Item 6. Exhibits and Reports on Form 8-K 22 Signatures 23 2 IMAGING DIAGNOSTIC SYSTEMS, INC. (A Development Stage Company) Condensed Balance Sheet Assets
Sept. 30, 2005 Jun. 30, 2005 -------------- ------------- Current Assets: Unaudited * Cash $ 348,565 $ 765,523 Accounts receivable 754,270 264,535 Loans receivable 19,001 14,576 Inventory 2,018,593 2,020,498 Prepaid expenses 84,877 34,187 ------------ ----------- Total Current Assets 3,225,306 3,099,319 ------------ ----------- Property and equipment, net 2,142,211 2,166,920 Intangible assets, net 333,221 341,765 ------------ ----------- $ 5,700,738 $ 5,608,004 ============ =========== Liabilities and Stockholders' Equity Current Liabilities: Accounts payable and accrued expenses $ 790,216 $ 783,966 Customer deposits 30,000 30,000 Short term debt 21,500 21,500 ------------ ----------- Total Current Liabilities 841,716 835,466 ------------ ----------- Stockholders Equity: Common Stock 88,384,619 87,150,773 Additional paid-in capital 1,861,083 1,597,780 Deficit accumulated during development stage (85,386,680) (83,976,015) ------------ ----------- Total stockholders' equity 4,859,022 4,772,538 ------------ ----------- $ 5,700,738 $ 5,608,004 ============ ===========
* Condensed from audited financial statements. The accompanying notes are an integral part of these condensed financial statements. 3 IMAGING DIAGNOSTIC SYSTEMS, INC. A Development Stage Company (Unaudited) Condensed Statements of Operations
Three Months Ended Since Inception September 30, (12/10/93) to 2005 2004 Sept. 30, 2005 ------------ ------------- --------------- Net Sales $ 671,750 $ - $ 1,963,998 Cost of Sales 277,264 - 807,820 ------------ ------------ ------------- Gross Profit 394,486 - 1,156,178 ------------ ------------ ------------- Operating Expenses: General and administrative $ 717,528 $ 710,519 $ 44,304,272 Research and development 417,606 533,091 14,668,453 Sales and marketing 242,466 248,127 4,769,746 Inventory valuation adjustments 34,740 122,236 3,768,935 Stock option expense - 123(R) 263,304 - 263,304 Depreciation and amortization 41,402 47,832 2,462,510 Amortization of deferred compensation - - 4,064,250 ------------ ------------ ------------- 1,717,046 1,661,805 74,301,470 ------------ ------------ ------------- Operating Loss (1,322,560) (1,661,805) (73,145,292) Gain on sale of fixed assets - - 5,585 Interest income 1,531 1,021 276,048 Other income - - 409,962 Interest expense (89,636) (176,559) (6,085,223) ------------ ------------ ------------- Net Loss (1,410,665) (1,837,343) (78,538,920) Dividends on cumulative Pfd. stock: From discount at issuance - - (5,402,713) Earned - - (1,445,047) ------------ ------------ ------------- Net loss applicable to common shareholders $ (1,410,665) $ (1,837,343) $(85,386,680) ============= ============= ============= Net Loss per common share: Basic and Diluted: Net loss per common share $ (0.01) $ (0.01) $ (1.00) ============= ============= ============= Weighted avg. no. of common shares 201,835,198 176,855,811 85,035,492 ============= ============= =============
The accompanying notes are an integral part of these condensed financial statements. 4 IMAGING DIAGNOSTIC SYSTEMS, INC. (A Development Stage Company) Condensed Statement of Cash Flows
Three Months Since Inception Ended September 30, (12/10/93) to 2005 2004 Sept. 30, 2005 ------------- ------------- --------------- Cash flows from operations: Net loss $ (1,410,665) $ (1,837,343) $ (78,538,920) Changes in assets and liabilities (137,937) 103,568 25,296,936 ------------- ------------- -------------- Net cash used in operations (1,548,602) (1,733,775) (53,241,984) ------------- ------------- -------------- Cash flows from investing activities: Proceeds from sale of property & equipment - - 29,857 Capital expenditures (12,526) (4,473) (7,241,698) ------------ ------------ ------------ Net cash used in investing activities (12,526) (4,473) (7,211,841) ------------ ------------ ------------ Cash flows from financing activities: Repayment of capital lease obligation - - (50,289) Other financing activities - NET - - 5,835,029 Proceeds from issuance of preferred stock - - 18,039,500 Net proceeds from issuance of common stock 1,144,171 1,950,508 36,978,150 ----------- ----------- ----------- Net cash provided by financing activities 1,144,171 1,950,508 60,802,390 ----------- ----------- ----------- Net increase (decrease) in cash (416,958) 212,260 348,565 Cash, beginning of period 765,523 554,354 - ---------- ---------- ----------- Cash, end of period $ 348,565 $ 766,614 $ 348,565 ============ ============ ===========
The accompanying notes are an intergral part of these condensed financial statements. 5 IMAGING DIAGNOSTIC SYSTEMS, INC. NOTES TO CONDENSED FINANCIAL STATEMENTS (Unaudited) NOTE 1 - BASIS OF PRESENTATION We have prepared the accompanying unaudited condensed financial statements of Imaging Diagnostic Systems, Inc. in accordance with generally accepted accounting principles for interim financial information and pursuant to the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In our opinion, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. Operating results for the three month period ended September 30, 2005 are not necessarily indicative of the results that may be expected for any other interim period or for the year ending June 30, 2006. These condensed financial statements have been prepared in accordance with Financial Accounting Standards No. 7 (FAS 7), Development Stage Enterprises, and should be read in conjunction with our condensed financial statements and related notes included in our Annual Report on Form 10-K filed on September 13, 2005. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires that management make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of expenses incurred during the reporting period. Actual results could differ from those estimates. NOTE 2 - GOING CONCERN Imaging Diagnostic Systems, Inc. (IDSI) is currently a development stage enterprise and our continued existence is dependent upon our ability to resolve our liquidity problems, principally by obtaining additional debt and/or equity financing. IDSI has yet to generate a positive internal cash flow, and until significant sales of our product occur, we are mostly dependent upon debt and equity funding. See Item 2 "Management's Discussion and Analysis of Financial Condition and Results of Operations". In the event that we are unable to obtain debt or equity financing or we are unable to obtain such financing on terms and conditions acceptable to us, we may have to cease or severely curtail our operations. This would materially impact our ability to continue as a going concern. In the event that we are unable to draw on our private equity line, alternative financing would be required to continue operations. Management has been able to raise the capital necessary to reach this stage of product development and has been able to obtain funding for capital requirements to date. There is no assurance that, if and when Food and Drug Administration ("FDA") marketing clearance is obtained, the CTLM(R) will achieve market acceptance or that we will achieve a profitable level of operations. We have commenced our planned principal operations of the manufacture and sale of our sole product, the CTLM(R), CT Laser Mammography System. We are continuing to appoint distributors and are installing systems under our clinical collaboration program as part of our global commercialization program. We have sold 13 systems as of September 30, 2005; however, we continue to operate as a development stage enterprise because we have yet to produce significant revenues, we rely on raising capital through our Fourth Private Equity Credit Agreement and we have to create product awareness as a foundation for developing markets through an international distributor network. We would be able to exit FAS 7 Development Stage Enterprise reporting upon having sufficient revenues for two successive quarters such that we would not have to utilize other funding to meet our quarterly operating expenses. 6 NOTE 3 - INVENTORY Inventories included in the accompanying condensed balance sheet are stated at the lower of cost or market as summarized below: Sept. 30, 2005 June 30, 2005 -------------- ------------- Raw materials consisting of purchased parts, components and supplies $ 641,453 $ 577,211 Work-in-process including units undergoing final inspection and testing $ 232,338 $ 105,902 Finished goods $ 1,144,802 $ 1,337,385 Total Inventory $ 2,018,593 $ 2,020,498 NOTE 4 - REVENUE RECOGNITION We recognize revenue in accordance with the guidance presented in the SEC's Staff Accounting Bulletin No. 104. We sell our medical imaging products, parts, and services to independent distributors and in certain unrepresented territories directly to end-users. Revenue is recognized when persuasive evidence of a sales arrangement exists, delivery has occurred such that title and risk of loss have passed to the buyer or services have been rendered, the selling price is fixed or determinable, and collectibility is reasonable assured. Unless agreed otherwise, our terms with international distributors provide that title and risk of loss passes F.O.B. origin. NOTE 5 -RECENT ACCOUNTING PRONOUNCEMENTS On December 16, 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), Share-Based Payment ("SFAS No. 123(R)"), which is a revision of SFAS No. 123, and supersedes APB Opinion No. 25. SFAS No. 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values, beginning with the next fiscal year that begins after June 15, 2005. In addition, SFAS No. 123(R) will cause unrecognized expense related to previously issued options vesting after the date of initial adoption to be recognized as a charge to results of operations over the remaining vesting period. We are required to adopt SFAS No. 123(R) in our first quarter of fiscal year 2006. The FASB has concluded that companies may adopt the new standard in one of two ways: the modified prospective transition method and the modified retrospective transition method. Under the modified retrospective transition method, prior periods may be retroactively adjusted either as of the beginning of the year of adoption or for all periods presented. The modified prospective transition method requires that compensation expense be recorded for all unvested stock options and share awards at the beginning of the fiscal period of adoption of SFAS No. 123(R), while the retrospective method would record compensation expense for all unvested stock options and share awards beginning with the fiscal period retroactively adjusted. The Company adopted SFAS 123(R) on July 1, 2005 and elected to use the modified prospective transition method. In November 2004, the FASB issued SFAS No. 151, "Inventory Costs" ("SFAS 151"), an amendment of ARB No. 43, Chapter 4. SFAS 151 clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs and wasted material. SFAS 151 is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. The Company does not believe adoption of SFAS will have a material effect on its financial position, results of operations or cash flows. 7 NOTE 6 - STOCK BASED COMPENSATION We previously accounted for stock-based compensation issued to our employees using the intrinsic value method. Accordingly, compensation cost for stock options issued was measured as the excess, if any, of the fair value of our common stock at the date of grant over the exercise price of the options. The pro forma net earnings per share amounts as if the fair value method had been used are presented below for the quarter ended September 30, 2004 and the actual net earnings per share are presented below for the quarter ended September 30, 2005 in accordance with the Company's adoption of SFAS 123(R) effective July 1, 2005. For purposes of the following disclosures during the transition period of adoption of SFAS 123(R), the weighted-average fair value of options has been estimated on the date of grant using the Black-Scholes options-pricing model with the following weighted-average assumptions used for grants for the three months ended September 30, 2005, and 2004: no dividend yield; expected volatility of 119%; risk-free interest rate of 4%; and an expected ten-year term for options granted. Had the compensation cost for the quarter ended September 30, 2004 been determined based on the fair value at the grant, our net income (loss) and basic and diluted earnings (loss) per share would have been reduced to the pro forma amount for that period indicated below. For the quarter ending September 30, 2005, the net income and earnings per share reflect the actual deduction for option expense as compensation.
Three Months Ended September 30 ------------------------------- 2005 2004 ---- ---- Net income (loss) - as reported $(1,147,361) $(1,837,343) Less: stock-based employee compensation determined under the Fair value method, net of income tax effect (263,304) (158,511) ------------- -------------- Net income (loss) - Actual $(1,410,665) Proforma $(1,995,854) ============ ============ Basic and Diluted earnings (loss) per share-as reported $ (0.01) $ (0.01) Basic and Diluted earnings (loss) per share-pro forma $ (0.01) $ (0.01)
8 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion of the financial condition and results of operations of Imaging Diagnostic Systems, Inc. should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations; the Condensed Financial Statements; the Notes to the Financial Statements; and the Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2005. This quarterly report on Form 10-Q contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements using terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "potential," or "continue," or the negative or other comparable terminology regarding beliefs, plans, expectations, or intentions regarding the future. Forward-looking statements include disclosures made in Results of Operations, Regulatory Matters, Clinical Collaboration Sites Update and Other Recent Events. These forward-looking statements involve risks and uncertainties and actual results could differ materially from those discussed in the forward-looking statements. These risks and uncertainties include, but are not limited to, those described under the headings below and in Item 5, Other Information. All forward-looking statements and risk factors included in this document or incorporated by reference from our Annual Report on Form 10-K for the fiscal year ended June 30, 2005 are made as of the date of this report based on information available to us as of the date of this report, and we assume no obligation to update any forward-looking statement or risk factors. OVERVIEW Imaging Diagnostic Systems, Inc. ("IDSI") is a development stage medical technology company. Since its inception in December 1993, we have been engaged in the development and testing of a Computed Tomography Laser Breast Imaging System for detecting breast cancer (CT Laser Mammography or, "CTLM(R)"). We are currently in the process of commercializing the CTLM(R) in certain international markets. Although the CTLM(R) system is a CT-like scanner, its energy source for imaging is a laser beam and not ionizing radiation such as is found in conventional x-ray mammography or CT scanners. The advantage of imaging without ionizing radiation may be significant in our markets. X-ray mammography is a well-established method of imaging the structures within the breast. Ultrasound is often used as an adjunct to mammography to help differentiate tumors and cysts. The CTLM(R) is being marketed as an adjunct to mammography and will not compete directly with X-ray mammography. CTLM(R) is, however, an emerging new modality offering the potential of molecular functional imaging, which can visualize the process of angiogenesis which may be used to distinguish between benign and malignant tissue. We believe that the adjunctive use of CT laser breast imaging will improve early diagnosis, reduce diagnostic uncertainty, and decrease the number of biopsies performed on benign lesions. The CTLM technology is unique and patented. IDSI intends to develop our technologies into a family of related products. We believe these technologies and clinical benefits constitute substantial markets for our products well into the future. As of the date of this report we have had no substantial revenues from our operations and have incurred net losses applicable to common shareholders since inception through September 30, 2005 of approximately $85,386,680 after discounts and dividends on preferred stock. We anticipate that losses from operations will continue for at least the next 12 months, primarily due to an anticipated increase in marketing and manufacturing expenses associated with the international commercialization of the CTLM(R), expenses associated with our FDA Pre-Market Approval ("PMA") process, and the costs associated with advanced product development activities. There can be no assurances that we will obtain the PMA, that the CTLM(R) will achieve market acceptance or that sufficient revenues will be generated from sales of the CTLM(R) to allow us to operate profitably. 9 RESULTS OF OPERATIONS SALES AND COST OF SALES ----------------------- On October 12th we reported that we sold a record five CTLM(R) systems in the quarter ending September 30, 2005. We believe that these sales reflect the increasing effectiveness of our global commercialization program and growing market acceptance of the CTLM(R) system. We are also pleased to report that two of our clinical partnership sites have purchased their CTLM(R) systems after gaining experience with our new technology. These two sales were part of the total of five sold for the quarter. We will continue to pursue clinical partners and attempt to grow our distributor network worldwide. Revenues for the three months ended September 30, 2005, were $671,750 representing an increase of $671,750 from the corresponding period for 2004. The increase in revenues was a direct result of selling five CTLM(R) systems compared to no sales being recorded in the three months ended September 30, 2004. Cost of Sales for the three months ended September 30, 2005, were $277,264 representing an increase of $277,264 from the corresponding period for 2004. The increase in Cost of Sales was a direct result of no sales recorded in the three months ended September 30, 2004. REPORTING FORMAT FOR EXPENSES ----------------------------- We are in the process of commercializing our operations and as part of our transition plan to exit from FAS 7 reporting as a development stage enterprise, we have changed the format of our management discussion and analysis of financial condition and results of operations (MD&A) to better disclose and discuss the three most significant categories of expenses, i.e., general and administrative (G&A), research and development (R&D), and sales and marketing (S&M). In our previous filings, the discussion of compensation and related benefits only included salaries, payroll taxes and bonuses for two categories: 1) administrative and engineering and 2) research and development. We expanded the research and development category and are now combining engineering with research and development under our new R&D discussion. We have renamed the administrative and engineering category as general and administrative. We have created an additional category, sales and marketing. Also in our previous discussions, the costs of salaries, payroll taxes and bonuses for sales and marketing were included in administrative and engineering. In addition, we are expanding our discussion of health insurance and worker's compensation insurance so that they fall into one of the three expense categories, where we previously included them under insurance costs. GENERAL AND ADMINISTRATIVE (G&A) -------------------------------- General and administrative expenses during the three months ended September 30, 2005, were $717,528 representing an increase of $7,009 or 1% from the corresponding period in 2004. Of the $717,528 compensation and related benefits comprised $419,294 (58%) compared to $461,901 (65%) during the three months ended September 30, 2004. The three-month increase of $7,009 is a net result which is primarily due to a decrease of $42,607 G&A compensation and related benefits and an increase in consulting of $42,889. We do not expect a material increase in our general and administrative expenses until we realize a significant increase in revenue from the sale of our product. RESEARCH AND DEVELOPMENT (R&D) ------------------------------ Research and development expenses during the three months ended September 30, 2005, were $417,606 representing a decrease of $115,485 or 22% from the corresponding period in 2004. Of the $417,606 compensation and related benefits 10 comprised $314,203 (75%) compared to $357,519 (67%) during the three months ended September 30, 2004. The three-month decrease of $115,485 was due primarily to a decrease in R&D compensation and related benefits of $43,316, and decreases of $27,400 in Legal patent expenses, $18,039 in clinical expenses and $19,588 in R&D expenses. We expect a significant increase in our R&D expenses because of the costs associated with conducting clinical trials in the United States required for our PMA application. We also expect our consulting expenses and professional fees to increase due to the costs associated with the preparation and submission of our PMA application to the FDA at the conclusion of the U.S. clinical trials. See Item 5. Other Information - "Recent developments, Regulatory Matters" SALES AND MARKETING (S&M) ------------------------- Sales and marketing expenses during the three months ended September 30, 2005, were $242,466 representing a decrease of $5,661 or 2% from the corresponding period in 2004. Of the $242,466 compensation and related benefits comprised $120,462 (50%) compared to $62,346 (25%) during the three months ended September 30, 2004. The three-month decrease of $5,661 is a net result which is primarily due to an increase in S&M compensation and related benefits of $58,116, and decreases of $26,864 in certification expenses, $25,810 in travel expenses and $14,965 in S&M consulting. We expect commissions, advertising and promotion and travel and subsistence costs to increase as we continue to implement our global commercialization program. AGGREGATED OPERATING EXPENSES ----------------------------- In comparing our total operating expenses (G&A, R&D, and S&M) in the three months ended September 30, 2005 to expenses in the comparable periods in 2004, we had a decrease of $114,137 or 8%. The decrease in the three-month comparative period was due primarily to R&D expenses decreasing by $115,485. We continue to rely on outside consultants and attorneys for our regulatory affairs. We expect to incur an increase in consulting expenses and professional fees in the preparation and submission of our PMA application to the FDA. Inventory Valuation Adjustments during the three months ended September 30, 2005, were $34,740 representing a decrease of $87,496 or 72% from the comparable period in 2004. The decrease is due to the reduction in write-downs of obsolete components that are no longer used in the manufacturing of the CTLM(R). With the adoption of SFAS 123(R) effective July 1, 2005 we have recorded compensation for the expense of options granted during the first quarter ending September 30, 2005 of $4,597. We have also recorded compensation for the options which remain unvested as of July 1, 2005 of $258,707 for the quarter ended September 30, 2005. Interest expense during the three months ended September 30, 2005, was $89,636 representing a decrease of $86,923 or 49% from the corresponding period in 2004. The decrease is due primarily to having fewer draws on our equity credit line as interest with Charlton Avenue, LLC ("Charlton"). See Item 5. Other Information - "Financing/Equity Line of Credit" 11 BALANCE SHEET DATA Our combined cash and cash equivalents totaled $348,565 as of September 30, 2005. This is a decrease of $416,958 from $765,523 as of June 30, 2005. During the quarter ending September 30, 2005, we received a net of $1,144,171 from the sale of common stock through our private equity agreement with Charlton. See - "Financing/Equity Line of Credit" We do not expect to generate a positive internal cash flow for at least the next 12 months due to limited expected sales and an anticipated increase in marketing and manufacturing expenses associated with the international commercialization of the CTLM(R), expenses associated with our FDA PMA process and the costs associated with product development activities. Property and Equipment was valued at $2,142,211 net as of September 30, 2005. The overall decrease of $24,709 from June 30, 2005 to September 30, 2005 is due primarily to the recorded depreciation. LIQUIDITY AND CAPITAL RESOURCES We are currently a development stage company and our continued existence is dependent upon our ability to resolve our liquidity problems, principally by obtaining additional debt and/or equity financing. We have yet to generate a positive internal cash flow, and until significant sales of our product occur, we are mostly dependent upon debt and equity funding from outside investors. In the event that we are unable to obtain debt or equity financing or are unable to obtain such financing on terms and conditions acceptable to us, we may have to cease or severely curtail our operations. This would materially impact our ability to continue as a going concern. Since inception, we have financed our operating and research and product development activities through several Regulation S and Regulation D private placement transactions and with loans from unaffiliated third parties. Net cash used for operating and product development expenses during the three months ending September 30, 2005, was $1,548,602 primarily due to the costs of wages and related benefits, legal and consulting expenses, research and development expenses, clinical expenses, and travel expenses associated with clinical and sales and marketing activities, compared to $1,733,775 in the same period ending September 30, 2004. At September 30, 2005, we had working capital of $2,383,590 compared to working capital of $1,493,359 at September 30, 2004, and $2,263,853 at June 30, 2005. During the first quarter ending September 30, 2005, we raised a total of $1,144,171 after expenses through the sale of common stock to Charlton. We do not expect to generate a positive internal cash flow for at least the next 12 months due to limited expected sales and the expected costs of commercializing our initial product, the CTLM(R), in the international market and the expense of continuing our ongoing product development program. We will require additional funds for operating expenses, FDA regulatory processes, manufacturing and marketing programs and to continue our product development program. Accordingly, we plan to utilize the Fourth Private Equity Credit Agreement and any subsequent financing agreements to raise the funds required prior to the end of fiscal year 2006 and thereafter in order to continue operations. In the event that we are unable to utilize the Fourth Private Equity Credit Agreement we would have to raise the additional funds required by either equity or debt financing, including entering into a transaction(s) to privately place equity, either common or preferred stock, or debt securities, or combinations of both; or by placing equity into the public market through an underwritten secondary offering. If additional funds are raised by issuing equity securities, dilution to existing stockholders will result, and future investors may be granted rights superior to those of existing stockholders. As of the date of this report, we have $4,301,459 remaining to be drawn from the Fourth Private Equity Credit Agreement and we have 7,779,589 shares remaining on our current S-2 registration statement. Based on our estimated cash requirements necessary to complete the FDA process and continue our international globalization programs we plan to file another registration statement to utilize the remaining balance available on the Fourth Private Equity Credit Agreement. We are currently negotiating a new Private Equity Credit Agreement with Charlton to become effective upon the completion of the Fourth Private Equity Credit Agreement. 12 Capital expenditures for the three months ending September 30, 2005, were $12,526 as compared to approximately $4,473 for the three months ending September 30, 2004. These expenditures were a direct result of purchases of computer and miscellaneous equipment. We anticipate that the balance of our capital needs for the fiscal year ending June 30, 2006, will be approximately $65,000. There were no other changes in our existing debt agreements other than extensions, and we had no outstanding bank loans as of September 30, 2005. Our fixed commitments, including salaries and fees for current employees and consultants, rent, payments under license agreements and other contractual commitments are substantial and are likely to increase as additional agreements are entered into and additional personnel are retained. We will require substantial additional funds for our product development programs, operating expenses, regulatory processes, and manufacturing and marketing programs. Our future capital requirements will depend on many factors, including the following: 1) The progress of our ongoing product development projects; 2) The time and cost involved in obtaining regulatory approvals; 3) The cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights; 4) Competing technological and market developments; 5) Changes and developments in our existing collaborative, licensing and other relationships and the terms of any new collaborative, licensing and other arrangements that we may establish; 6) The development of commercialization activities and arrangements; and 7) The costs associated with compliance to SEC regulations. We do not expect to generate a positive internal cash flow for at least 12 months as sales remain limited and substantial costs and expenses continue due principally to the international commercialization of the CTLM(R), activities related to our FDA PMA process, and advanced product development activities. We intend to use the Fourth Private Equity Credit Agreement as our principal source of additional capital. There can be no assurance that this financing will continue to be available on acceptable terms. We plan to continue our policy of investing excess funds, if any, in a High Performance Money Market account at Wachovia Bank N.A. ISSUANCE OF STOCK FOR SERVICES/DILUTIVE IMPACT TO SHAREHOLDERS We have issued and may continue to issue stock for services performed and to be performed by consultants. Since we have generated no substantial revenues to date, our ability to obtain and retain consultants may be dependent on our ability to issue stock for services. From July 1, 1996, to the filing date of this report, we have issued an aggregate of 2,306,500 shares of common stock to consultants, which have been registered on Registration Statements on Form S-8. The aggregate fair market value of the shares was $2,437,151. The issuance of large amounts of common stock for services rendered or to be rendered and the subsequent sale of such shares may depress the price of the common stock. In addition, since each new issuance of common stock dilutes existing shareholders, the issuance of substantial additional shares may effectuate a change in our control. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK ---------------------------------------------------------- As of the date of this report, we believe that we do not have any material quantitative and qualitative market risks. ITEM 4. CONTROLS AND PROCEDURES ----------------------- We maintain disclosure controls and procedures that are designed to ensure that the information required to be disclosed in the reports that we file under the Securities Exchange Act of 1934 (the "Exchange Act") is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission's rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and our Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can only provide reasonable assurance of 13 achieving the desired control objectives, and in reaching a reasonable level of assurance, management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures. As required by SEC Rule 13a-15(b), we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and the Company's Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the quarter covered by this report. Based on the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level. There has been no change in our internal controls over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. 14 PART II OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None ITEM 2. CHANGES IN SECURITIES See Item 5. "Other Information" - FINANCING/EQUITY LINE OF CREDIT. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS On October 26, 2005 we held our annual meeting of stockholders at our corporate offices at 6531 NW 18th Court, Plantation, Florida for the following purposes: 1. To elect six directors; 2. To ratify the appointment by the Board of Directors of Sherb and Co., LLP as independent auditors of the Company for the fiscal year ending June 30, 2006. For proposal no. 1, the stockholders elected six incumbent directors with the voting as follows: Timothy B, Hansen FOR 184,718,445 WITHHELD 10,188,566 Allan L. Schwartz FOR 190,917,465 WITHHELD 3,989,546 Sherman Lazrus FOR 191,370,991 WITHHELD 3,536,020 Patrick J. Gorman FOR 191,527,466 WITHHELD 3,379,545 Edward Rolquin FOR 191,404,532 WITHHELD 3,502,479 Jay S. Bendis FOR 191,499,207 WITHHELD 3,407,804 For proposal no. 2, the stockholders voted to ratify the Board of Directors' action of its appointment of Sherb & Co., LLP as independent auditors of the Company for the fiscal year ending June 30, 2006 with the following votes: FOR 185,495,885 AGAINST 8,708,376 ABSTAIN 702,750 ITEM 5. OTHER INFORMATION Letter to Shareholders We enclosed our annual report with our proxy statement sent to all shareholders for the annual meeting held on October 26, 2005. The annual report featured a letter to shareholders written by Tim Hansen, Chief Executive Officer which is included below: Fellow Shareholders, Since I joined the Company in July 2004, we have strengthened our clinical position and begun an aggressive commercialization effort. Bringing a revolutionary new medical imaging technology to market is always challenging, but we are especially encouraged by the growing trend toward a multidisciplinary approach to handling breast disease. We believe the molecular imaging capabilities of the CTLM system being demonstrated at clinical sites, industry meetings, and in ongoing research have positioned IDSI for success in this new environment. 15 Achieving US marketing approval for the CTLM system is our number one priority. In FY05, we altered our FDA course to take full advantage of numerous CTLM technical advances and user training improvements. We are currently aligning a number of clinical sites to use these new systems and methods to collect data for the PMA submission. Meanwhile, our program to develop international markets by establishing luminary referral and research sites has created clinical and market interest and will be expanded in FY06. Our new clinical partners are helping CTLM gain needed recognition; one site published IDSI's first peer-reviewed clinical publication in the June issue of Investigative Radiology. Our China initiative, although off to a slow start, remains very promising. Overall, CTLM clinical exam volume has risen above 6,000 and is growing rapidly. This clinical momentum and our expanding geographic coverage should translate into commercial growth in FY06 and beyond. Throughout FY05 we strategically increased the strength of the IDSI team. In addition to my experience, IDSI now includes the talents of an accomplished international sales executive; a second MD radiologist, who is also a bio-med PhD; another credentialed PhD in our algorithm development team; a PhD with deep optical physics experience; a veteran imaging industry service manager; a QA director with medical device experience; and a strong technical marketing specialist. I am very proud of our team and our commitment to bring the full value of CT Laser Mammography to women and medical professionals throughout the world. On behalf of our employees, customers, distributors, and clinical partners, I would like to thank you, our shareholders, for your ongoing support. I look forward to fulfilling our vision of "Scanning for Life" together. Recent Developments Regulatory Matters In order to sell the CTLM(R) commercially in the United States, we must obtain marketing clearance from the Food and Drug Administration. A Pre Market Approval (PMA) application must be supported by extensive data, including pre-clinical and clinical trial data, as well as extensive literature to prove the safety and effectiveness of the device. Under the Food, Drug, and Cosmetic Act, the FDA has 180 days to review a PMA application, although in certain cases the FDA may increase that time period through requests for additional information or clarification of existing information. In our initial PMA application we followed the guidelines of the "Standardized Shell for Modular Submission" for the FDA approval process. We filed four modules from September 2000 to May 2001, which were accepted, and then filed our PMA application in April 2003. In June 2003 we received notification from FDA that an initial review of our PMA had been conducted and was sufficiently complete to permit a substantive review and was, therefore, suitable for filing. An in-depth evaluation of the safety and effectiveness of the device would be conducted to determine the final approval of the PMA application. We filed a new application with Health Canada in June 2003 because of new clinical data. On June 18, 2003 we received notification from the Medical Device Bureau of Health Canada that our application had been accepted for review. On November 14, 2003 we announced that we received notification from the Medical Device Bureau of Health Canada that our application for a "New Medical Device" license was approved. The license was issued in accordance with the Medical Device Regulations, Section 36. Furthermore, we possess the CAN/CSA ISO 13485-1998 certification, which is an additional regulatory requirement that is evidence of compliance to the quality system of the medical device. In August 2003, we received a letter from the FDA stating that it had completed its review of our PMA. The FDA, in its letter, outlined deficiencies in the PMA application, which must be resolved before the FDA's review could be completed. 16 The FDA stated that until these deficiencies are resolved, the PMA application was not approvable in its current form. The FDA identified measures to make the PMA approvable, and we worked with our FDA counsel and consultants to prepare an amendment to our PMA application to address the deficiencies noted in the letter. In February 2004, we received a warning letter from the FDA specifically regarding the biomonitoring section of an inspection conducted August 13th through August 18th, 2003 at our facility. We submitted our response to this letter to the FDA on February 9, 2004. On March 29, 2004, we announced in an 8-K filing that our responses to the FDA's warning letter regarding the bio-monitoring inspection addressed each of the issues and no further response to the FDA was required at that time. In March 2004, we received an extension of time to respond to the FDA's August 22, 2003 letter regarding our pre-market approval application. In September 2004, we announced that our CT Laser Mammography System, CTLM(R), had received Chinese State Food and Drug Administration (SFDA) marketing approval. The People's Republic of China SFDA issued the registration "Certificate for Medical Device". The medical device registration number is 20043241646. In October 2004, we issued a press release of a shareholder letter written by our new CEO, Tim Hansen, detailing the steps he had taken in FDA and other corporate development matters during his first three months as CEO of the Company. In the letter he stated among other things, the following: "the PMA involves a process which has, unfortunately, taken far longer than expected. We have been working on amending the PMA application at the request of the FDA. Our team recommended rephrasing the Computed Tomography Laser Mammography System (CTLM(R)) intended use statement and modifying the patient study protocols. They also recommended adding more clinical cases. Meanwhile the PMA clock was ticking and these well advised changes would have taken more time to complete. Also, as we earlier reported, our PMA amendment and processes were briefly interrupted by a bio monitoring inspection audit of our clinical trials and subsequent warning letter and, although that matter was resolved, the sum of these influences caused serious delays in our filings. These are complex matters, but after conferring with the FDA and our outside consultants, I recently made the decision to simply withdraw our current PMA application and resubmit the entire package in a simpler and more clinically and technically robust filing. Consequently, IDSI will submit a new PMA application with a rephrased intended use statement better supported by our data, the inclusion of new clinical cases to improve the biometrics, and with a new clinical protocol to fully support the adjunctive use of CTLM(R) in clinical mammography settings. The key factor in my decision was the belief that re-filing should not additionally delay our previous schedule. The schedule should remain unchanged because the FDA indicated that Modules 1 through 4 would be `grandfathered' so to speak, and because our clinical case read program will continue in its current form. We are not starting over in any sense of the word. We will, however, submit a fresh and concise PMA application without amendments or extensions. Of course, this approach requires another filing fee but we believe it yields a higher confidence scenario. So, to be very clear, we will submit a new PMA application and there should be no additional delays in our overall schedule. You have all waited patiently for CTLM(R) to become a US market reality, and I would appreciate your continuing support through this next important phase. I am very satisfied with this new approach." In November 2004, we received a letter from the FDA stating that it has determined that the CTLM(R) proposed clinical investigation is a non-significant risk (NSR) device study because it does not meet the definition of a significant risk (SR) device under section 812.3(m) of the investigational device exemptions (IDE) regulation 21 CFR 812. In January 2005 we issued a press release of a shareholder letter entitled, "Imaging Diagnostic Systems, Inc. Releases Letter to Shareholders" written by Tim Hansen, CEO. The letter contained a brief status update of the three top priorities stated in Mr. Hansen's initial letter to shareholders released in October 2004. Specific to our PMA activities, the letter stated, "...we are altering course. The clinical study we had analyzed and which we intended to submit to the FDA did not, in our opinion, adequately reflect the capabilities of CTLM(R) as an adjunctive mammography tool. Our clinical cases were collected 17 on CTLM(R) systems dating back to 2001. Since that time IDSI has developed significant improvements in the scanning subsystems, image reconstruction and image display software. We have also improved quality assurance routines to ensure better operator and physician training, and improved image quality control. These enhancements were routinely implemented as they became validated on our international CTLM(R) shipments, but the same changes were not made to the 2001 units in order to maintain our PMA modules in their original forms. We now intend to collect data using our latest systems because we believe the results will yield a stronger study to support our PMA application. Consequently, we will install updated CTLM(R) systems in the U.S. to collect data under a new protocol. Our plan will extend the time to actual PMA submission from what we were anticipating in October 2004, but we believe this approach will better support the application." Clinical Collaboration Sites Update CTLM(R) Systems have been installed and patients are being scanned under clinical collaboration agreements as follows: 1. Schering AG (Three Units) o Robert-Rossle Clinic, Berlin, Germany o University of Muenster, Muenster, Germany o Humboldt University of Berlin, Charite Hospital, Berlin, Germany 2. The University of Vienna, Allgemeines Hospital, Vienna, Austria 3. Humboldt University of Berlin, Charite Hospital, Berlin, Germany 4. The Comprehensive Cancer Centre, Gliwice, Poland (Two Systems) 5. Catholic University Hospital, Rome, Italy 6. Charles University Hospital, Prague, Czech Republic 7. Gazi University Hospital, Ankara, Turkey 8. Friendship Hospital, Beijing, Peoples Republic of China In September 2004, we announced that we have installed a third CTLM(R) as part of Schering AG's Phase 1 clinical study of the fluorescent imaging compound SF64. The third system was installed in the prestigious Charite Hospital in Berlin. We had previously announced that CTLM(R) Systems were installed at the Robert-Rossle Clinic and at the University of Muenster. In November 2004, we announced that the Comprehensive Cancer Centre in Gliwice, Poland signed a clinical collaborative agreement to gather data to expand diagnostic and therapeutic applications of the CTLM(R) system. The system was shipped to Poland in December 2004 and installed in January 2005. In December 2004, we announced that the Catholic University in Rome, Italy signed a clinical collaboration agreement and that a CTLM(R) system had been shipped to their Department of Radiology and installed in January 2005. This agreement marked the sixth out of eight targeted European sites for our clinical collaboration program. In February 2005, we announced that Charles University Hospital in Prague, Czech Republic had signed a clinical collaborative agreement to gather data and expand the proprietary applications of the CTLM(R). The system was shipped to the Czech Republic in March. This agreement marked the seventh out of eight targeted European sites for our clinical collaboration program. In April 2005, we announced that we would fulfill a request by the Institute of Oncology, Center of Oncology, of the Maria Sklodowska-Curie Memorial Institute in Poland for a second CTLM(R) system. This institute is part of the Comprehensive Cancer Centre in Gliwice, Poland. The first system was installed in January 2005 under a clinical collaborative agreement to gather data to expand diagnostic and therapeutic applications of the CTLM(R) system. 18 In May 2005, we announced the installation of a CTLM(R) system at Gazi University Hospital in Ankara, Turkey, where researchers have already begun breast scanning procedures. This system was shipped to the hospital in March 2005. We have been commercializing the CTLM(R) in many global markets and we previously announced our plans to set up this network to foster research and to promote the technology in local markets. We will continue to support similar programs in China and in other regions. These investments may accelerate CTLM(R) market acceptance while providing valuable clinical experiences. Other Recent Events In July 2005, we announced that a study demonstrating the potential of CTLM(R) to characterize benign and malignant tumors was featured in the June issue of Investigative Radiology. In August 2005, we announced that our Polish distributor, EDO Med Sp. Z.o.o. purchased the two CTLM(R) systems installed for use in research projects at Institute of Oncology at the Comprehensive Cancer Centre in Gliwice, Poland. In August 2005, we announced the appointment of Leomedics Co., Ltd. as the exclusive distributor of the CTLM(R) in South Korea. In September 2005, we participated in the 51st Argentinean Congress of Radiology and Diagnostic Imaging in Buenos Aires, Argentina. Jose A. Cisneros, M.D. Ph.D., our Associate Director of Clinical Research presented two medical sessions: "Angiogenesis and Its Role in the Early Detection of Breast Cancer" and "Physics and Instrumentation in Computed Tomography Laser Mammography (CTLM)." In October 2005, Jose Cisneros, M.D., Ph.D., our Associate Director of Clinical Research presented two lectures at the Tenth Venezuelan Congress of Radiology and Diagnostic Imaging in Maracaibo, Venezuela. In October 2005, we announced that a CT Laser Mammography (CTLM(R)) system would be installed at the prestigious European Institute of Oncology (EIO) in Milan, Italy. Studies will be performed under the auspices of Professor Umberto Veronesi, Scientific Director. On November 3, 2005, we filed an 8-K to report the voluntary resignation of Ed Horton as Chief Operating Officer of the Company. On November 7, 2005, we announced that Steve Ponder, PhD., our Director of Advanced Development has been invited to join the Florida International University (FIU) Biomedical Engineering Partnership Program (BMEPP) Advisory Board. On November 8, 2005, we announced that we will display our new clinical results and feature the CTLM(R) System at RSNA 2005 from November 27th to December 2nd in Chicago, IL. Tim Hansen, CEO stated, "We have made impressive clinical progress since last year's RSNA. Our results underscore our extensive experience and leadership in laser optical breast imaging." 19 FINANCING/EQUITY LINE OF CREDIT ------------------------------- We will require substantial additional funds for working capital, including operating expenses, clinical testing, regulatory processes and manufacturing and marketing programs and our continuing product development programs. Our capital requirements will depend on numerous factors, including the progress of our product development programs, results of pre-clinical and clinical testing, the time and cost involved in obtaining regulatory approvals, the cost of filing, prosecuting, defending and enforcing any patent claims and other intellectual property rights, competing technological and market developments and changes in our existing research, licensing and other relationships and the terms of any new collaborative, licensing and other arrangements that we may establish. Moreover, our fixed commitments, including salaries and fees for current employees and consultants, and other contractual agreements are likely to increase as additional agreements are entered into and additional personnel are retained. Since July 17, 2000, Charlton Avenue LLC ("Charlton") has provided all of our necessary funding through the private placement sale of convertible preferred stock with a 9% dividend and common stock through various private equity credit agreements. We initially sold Charlton 400 shares of our Series K convertible preferred stock for $4 million and subsequently issued an additional 95 Series K shares to Charlton for $950,000 on November 7, 2000. We paid Spinneret Financial Systems Ltd. ("Spinneret"), an independent financial consulting firm unaffiliated with the Company and, according to Spinneret and Charlton, unaffiliated with Charlton, $200,000 as a consulting fee for the first tranche of Series K shares and five Series K shares as a consulting fee for the second tranche. The total of $4,950,000 was designed to serve as bridge financing pending draws on the Charlton private equity line provided through the various private equity credit agreements described in the following paragraphs. From November 2000 to April 2001, Charlton converted 445 shares of Series K convertible preferred stock into 5,600,071 common shares and we redeemed 50 Series K shares for $550,000 using proceeds from the Charlton private equity line. Spinneret converted 5 Series K shares for $63,996. All Series K convertible preferred stock has been converted or redeemed and there are no convertible preferred shares outstanding. Prior Equity Agreements ----------------------- From August 2000 to February 2004, we obtained funding through three Private Equity Agreements with Charlton. Each equity agreement provided that the timing and amounts of the purchase by the investor were at our sole discretion. The purchase price of the shares of common stock was set at 91% of the market price. The market price, as defined in each agreement, was the average of the three lowest closing bid prices of the common stock over the ten day trading period beginning on the put date and ending on the trading day prior to the relevant closing date of the particular tranche. The only fee associated with the private equity financing was a 5% consulting fee payable to Spinneret. In September 2001 Spinneret proposed to lower the consulting fee to 4% provided that we pay their consulting fees in advance. We reached an agreement to pay Spinneret in advance as requested and paid them $250,000 out of proceeds from a put. From the date of our first put notice, January 25, 2001 to our last put notice, February 11, 2004, under our Third Private Equity Credit Agreement, we drew a total of $20,506,00 and issued 49,311,898 shares to Charlton. As each of the obligations under these prior agreements was satisfied, the agreements were terminated. The Third Private Equity Agreement was terminated on March 4, 2004 upon the effectiveness of our first Registration Statement for the Fourth Private Equity Credit Agreement. The Fourth Private Equity Credit Agreement ------------------------------------------ On January 9, 2004, we, and Charlton entered into a new "Fourth Private Equity Credit Agreement" which replaced our prior private equity agreements. The terms of the Fourth Private Equity Credit Agreement are more favorable to us than the terms of the prior Third Private Equity Credit Agreement. The new, more favorable terms are: (i) The put option price is 93% of the three lowest closing bid prices in the ten day trading period beginning on the put date and ending on 20 the trading day prior to the relevant closing date of the particular tranche, while the prior Third Private Equity Credit Agreement provided for 91%, ii) the commitment period is two years from the effective date of a registration statement covering the Fourth Private Equity Credit Agreement shares, while the prior Third Private Equity Credit Agreement was for three years, (iii) the maximum commitment is $15,000,000, (iv) the minimum amount we must draw through the end of the commitment period is $1,000,000, while the prior Third Private Equity Credit Agreement minimum amount was $2,500,000, (v) the minimum stock price requirement is now controlled by us as we have the option of setting a floor price for each put transaction (the previous minimum stock price in the Third Private Equity Credit Agreement was fixed at $.10), (vi) there are no fees associated with the Fourth Private Equity Credit Agreement; the prior private equity agreements required the payment of a 5% consulting fee to Spinneret, which was subsequently lowered to 4% by mutual agreement in September 2001, and (vii) the elimination of the requirement of a minimum average daily trading volume in dollars. The previous requirement in the Third Private Equity Credit Agreement was $20,000. The conditions to our ability to draw under this private equity line, as described above, may materially limit the draws available to us. We intend to make sales under the Fourth Private Equity Credit Agreement from time to time in order to raise working capital on an "as needed" basis. Based on our current assessment of our financing needs, we expect to draw the full $15,000,000 available under the Fourth Private Equity Credit Agreement. As of the date of this report, under the Fourth Private Equity Credit Agreement we have drawn down $10,698,541 and issued 40,220,411 shares of common stock. We are currently negotiating a new Private Equity Credit Agreement with Charlton to become effective upon the completion of the Fourth Private Equity Credit Agreement. As of the date of this report, since January 2001, we have drawn an aggregate of $31,204,541 in gross proceeds from our equity credit lines with Charlton and have issued 89,532,309 shares as a result of those draws. There can be no assurance that adequate financing will be available when needed, or if available, will be available on acceptable terms. Insufficient funds may prevent us from implementing our business plan or may require us to delay, scale back, or eliminate certain of our research and product development programs or to license to third parties rights to commercialize products or technologies that we would otherwise seek to develop ourselves. To the extent that we utilize our Private Equity Credit Agreements; or additional funds are raised by issuing equity securities, especially convertible preferred stock and convertible debentures, dilution to existing shareholders will result and future investors may be granted rights superior to those of existing shareholders. Moreover, substantial dilution may result in a change in our control. 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K. (a) Exhibits 31.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (b) Reports on Form 8-K A Form 8-K was filed on September 22, 2005 to report the dismissal of Margolies, Fink and Wichrowski as the Company's independent registered public accounting firm. The decision to change auditors was made by the Audit Committee. The committee selected Sherb & Co., LLP and the Company's Board of Directors approved their appointment. A Form 8-K was filed on October 3, 2005 to report the engagement of Sherb & Co., LLP ("Sherb") to serve as the Company's independent registered public accounting firm, effective October 3, 2005. The selection of Sherb, with offices in New York and Florida, was made by the Audit Committee and their appointment was approved by the Company's Board of Directors. A Form 8-K was filed on October 12, 2005 reporting the issuance of a press release entitled, "Imaging Diagnostic Systems reports strong first quarter revenue". A Form 8-K was filed on November 3, 2005 to report the voluntary resignation of Ed Horton as Chief Operating Officer of the Company and to report the results of the Annual Meeting of Shareholders held at the Company's corporate offices on October 26, 2005. 22 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned thereunto duly authorized. Dated: November 9, 2005 Imaging Diagnostic Systems, Inc. By: /s/ Timothy B. Hansen --------------------- Timothy B. Hansen Chief Executive Officer By: /s/ Allan L. Schwartz --------------------- Allan L. Schwartz, Executive Vice-President and Chief Financial Officer (PRINCIPAL ACCOUNTING OFFICER) 23