UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[Mark One]

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

 

or

 

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____ to _____

 

Commission file number: 000-26028

 

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC.

(Exact name of registrant as specified in its charter)

 

Florida		22-2671269
(State of Incorporation)		(IRS Employer Ident. No.)
618 E South St, Suite 500, Orlando, FL		32801
(Address of Principal Executive Offices)		(Zip Code)

 

Registrant’s telephone number: (954) 581-9800

 

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.

Yes ☒     No ☐

 

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).

Yes ☒     No ☐

 

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	☒
Non-accelerated filer	☐			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 November 20, 2020: 122,876,549 shares of common stock, no par value.

 

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC.

  

		Page
	Part I - Financial Information
Item 1.	Financial Statements
	Balance Sheets – September 30, 2020 (Unaudited) and June 30, 2020	1
	Statements of Operations – (Unaudited) Three months ended September 30, 2020 and 2019	2
	Statements of Changes in Stockholders’ Deficit – (Unaudited) Three months ended September 30, 2020 and 2019	3
	Statements of Cash Flows - (Unaudited) Three months ended September 30, 2020 and 2019	4
	Notes to (Unaudited) Financial Statements	5
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Financial Condition and Results	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	29
Item 4.	Controls and Procedures	29
Part II - Other Information
Item 1.	Legal Proceedings	30
Item 1A.	Risk Factors	30
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
Item 3.	Defaults Upon Senior Securities	30
Item 4.	(Removed and Reserved)	30
Item 5.	Other Information	30
Item 6.	Exhibits	30
Signatures		31

 

 

Item 1. Financial Statements

 

IMAGING DIAGNOSTIC SYSTEMS, INC.

 

Balance Sheets

		September 30, 2020				June 30, 2020
		(unaudited)
Assets
Current assets:
Cash		$	-			$	45,960
Royalty receivable			-				10,875
Consultant advances			5,000				5,000
Prepaid expenses			19,110				9,479
Total current assets			24,110				71,314
Property and equipment, net			1,280				1,902
Operating lease right-of-use assets			38,763				62,266
Total assets		$	64,153			$	135,482
Liabilities and Stockholders’ Deficit
Current liabilities:
Accounts payable and accrued expenses		$	411,245			$	300,936
Accrued payroll taxes and penalties			314,019				314,019
Promissory notes, related party			520,000				520,000
Current portion of PPP loan payable			16,376				-
Current portion of operating lease liabilities			34,202				54,461
Total current liabilities			1,295,842				1,189,416
Long-term liabilities
PPP Loan Payable, less current portion			63,224				79,600
Operating lease liabilities, less current portion			4,669				8,021
Total long-term liabilities			67,893				87,621
Total liabilities			1,363,735				1,277,037
Commitment and Contingencies (Note 17)
Temporary equity
Convertible Preferred Series L			402,464				397,939
Total temporary equity			402,464				397,939
Stockholders’ Deficit:
Preferred stock, no par, 2,000,000 authorized Convertible preferred stock, Series M, 600 designated 0 shares issued and outstanding at September 30, 2020 and June 30, 2020			-				-
Common stock, no par value, 500,000,000 authorized, 122,876,549 and 122,876,549 shares issued and outstanding September 30, 2020 and June 30, 2020, respectively			132,570,255				132,570,255
Accumulated Deficit			(134,272,301	)			(134,109,749	)
Total stockholders’ deficit			(1,702,046	)			(1,539,494	)
Total liabilities and stockholders’ deficit		$	64,153			$	135,482

  

See accompanying notes to the unaudited financial statements

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC.

 

Statements of Operations

(unaudited)

		Three Months Ended September 30, 2020				Three Months Ended September 30, 2019
Total Revenue		$	-			$	-
Cost of Sales			-				-
Gross Profit			-				-
Operating Expenses:
General and administrative			78,899				96,457
Salaries and wages			-				69,183
Research and development			8,308				17,144
Sales and marketing			338				178
Depreciation and amortization			622				1,947
Consulting expenses (including share-based compensation)			51,000				59,500
Total Operating Expenses			139,167				244,409
Operating Loss			(139,167	)			(244,409	)
Other Income (expense)
Interest income			1				6
Other Income			1,000				-
Interest expense			(19,861	)			(10,636	)
Total Other Expense			(18,860	)			(10,630	)
Net Loss			(158,027	)			(255,039	)
Preferred Stock Dividends			(4,525	)			(4,537	)
Net Loss Available to Common Stockholders		$	(162,552	)		$	(259,576	)
Net Loss per common share:
Basic and diluted		$	-			$	-
Weighted average number of common shares outstanding:
Basic and diluted			122,876,549				122,621,646

 

See accompanying notes to the unaudited financial statements

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC.

 

Statements of Changes in Stockholders’ Deficit

For the three months ended September 30, 2020 and 2019

(unaudited)

 

		Common Stock
		Number of								Accumulated
		Shares				Amount				Deficit				Total
Balance at June 30, 2020			122,876,549			$	132,570,255			$	(134,109,749	)		$	(1,539,494	)
Cummulative Dividend on Series L CV Preferred			-				-				(4,525	)			(4,525	)
Net loss			-				-				(158,027	)			(158,027	)
Balance at September 30, 2020			122,876,549			$	132,570,255			$	(134,272,301	)		$	(1,702,046	)
Balance at June 30, 2019			122,621,646			$	132,228,967			$	(133,062,606	)		$	(833,639	)
Cummulative Dividend on Series L CV Preferred			-				-				(4,537	)			(4,537	)
Net loss			-				-				(255,039	)			(255,039	)
Balance at September 30, 2019			122,621,646			$	132,228,967			$	(133,322,182	)		$	(1,093,215	)

 

See accommpanying notes to the unaudited financial statements

  

 

IMAGING DIAGNOSTIC SYSTEMS, INC.

 

Statements of Cash Flows

(unaudited)

		Three months ended September 30, 2020				Three months ended September 30, 2019
Net loss		$	(158,027	)		$	(255,039	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			622				1,947
Changes in assets and liabilities:
(Increase) decrease in royalty receivable			10,875				-
(Increase) decrease in prepaid expenses			(9,631	)			3,083
Increase (decrease) in accounts payable and accrued expenses			110,309				104,961
Change in right of use asset/lease obligation, net			(108	)			20,442
Total adjustments			112,067				130,433
Net cash used in operating activities			(45,960	)			(124,606	)
Cash flows from financing activities:
Proceeds from promissory notes, related party			-				120,000
Net cash provided by financing activities			-				120,000
Net increase (decrease) in cash and cash equivalents			(45,960	)			(4,606	)
Cash and cash equivalents at beginning of period			45,960				44,615
Cash and cash equivalents at end of period		$	-			$	40,009
Supplemental Disclosure of cash flow information:
Cash paid for interest		$	-			$	10,027
Cash paid for taxes		$	-			$	-
Non-cash investing and financing activities:
ROU assets and liabilities at inception		$	-			$	147,291

 

See accompanying notes to the unaudited financial statements

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(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. 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.

 

(2) GOING CONCERN AND MANAGEMENT’S PLANS

 

The accompanying financial statements are prepared assuming the Company will continue as a going concern. As of September 30, 2020, the Company had an accumulated deficit of $134,272,301, a stockholders’ deficit of $1,702,046 and a working capital deficiency of $1,271,732. For the three months ended September 30, 2020, net loss totaled $158,027. The net cash used in operating activities for the three months ended September 30, 2020 totaled $45,960. These matters raise substantial doubt about the Company’s ability to continue as a going concern for a period of twelve months from the date these financial statements are issued. The ability of the Company to continue as a going concern is dependent upon increasing sales and obtaining additional capital and financing. While the Company believes in the viability of its strategy to increase sales volume and in its ability to raise additional funds, there can be no assurances to that effect. The Company received from the Chinese FDA (“CFDA”) marketing clearance for the CTLM® effective November 16, 2018 to November 15, 2023. However, there can be no assurance that we will obtain U.S. Food and Drug Administration (“FDA”) marketing or other new international marketing clearances, that the CTLM® will achieve market acceptance or that sufficient revenues will be generated from sales of the CTLM® in China or elsewhere to allow us to operate profitably. If our majority shareholder Viable International Investments, LLC (“Viable”) fails to continue funding, the Company would be materially adversely affected and may have to cease operations due to a lack of funding. These matters affect the Company’s liquidity profile, and management’s plans in those regards are discussed in the paragraphs that follow.

 

During fiscal year 2021, 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.

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(2) GOING CONCERN AND MANAGEMENT’S PLANS (Continued)

 

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 until the third or fourth quarter of fiscal 2021. 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, as to which there can be no assurance.

 

In analyzing the regulatory path forward, timeline, and costs associated with the level of effort required to upgrade the Company’s Quality Management System, 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. We will maintain our ISO 13485:2016 certification which will allow us to pursue FDA marketing clearance and the CE Mark in the future.

 

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. The Company believes that Dr. Huabei Jiang has made substantial progress on the image quality, and once effectiveness of the improvements has been established, then Xi’an IDI will resume their sales and marketing efforts in China. The improvement of the image quality is a critical milestone as it will allow the Company to begin generating revenues from the sale of CTLM® systems 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 has applied for and received funding of $79,600 from the Paycheck Protection Program (“PPP”). The Company also applied for the Economic Injury Disaster Loan (“EIDL”) and was denied the loan, but received a grant of $4,000. Both the PPP and EIDL were both made available under the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The Company’s ability to meet its cash flow requirements through fiscal 2021 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.

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(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 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.

 

These unaudited financial statements should be read in conjunction with the Company’s audited financial statements for the year ended June 30, 2020, contained in our General Form for Registration of Securities of Form 10-K as filed with the Securities and Exchange Commission (the “Commission”) on September 28, 2020. The results of operations for the three months ended September 30, 2020, are not necessarily indicative of results to be expected for any other interim period or the fiscal year ending June 30, 2021.

 

(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.

 

(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 $0 as of September 30, 2020 and June 30, 2020.

 

(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 September 30, 2020 and June 30, 2020.

 

(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 $250,000. At September 30, 2020 and June 30, 2020, the Company had $0 in excess of the federally insured limit.

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

The Company did not have any revenue for the three months ended September 30, 2020 and 2019.

 

(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 slow moving or obsolete inventory. The Company maintains a reserve for obsolete inventory and generally makes inventory value adjustments against the reserve.

 

(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 10,972,661 and 10,972,662 options vested as of September 30, 2020 and June 30, 2020, respectively and 4,280,286 and 4,123,184 options not yet vested as of September 30, 2020 and June 30, 2020, respectively.

 

(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.

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(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. During the three months ended September 30, 2020, the Board granted options to purchase 157,102 shares with an exercise price of $.51 per share to an employee. No stock options were granted during the three months ended September 30, 2019. 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 three months ended September 30, 2020 and 2019.

 

(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.

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. The Company believes its tax positions are all highly certain of being upheld upon examination. As such, the Company has not recorded a liability for uncertain tax positions.

 

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, 2017 to 2020 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 was/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 September 30, 2020 or June 30, 2020.

 

(n) Impact of recently issued accounting pronouncements

 

In June 2016, the FASB issued ASU No. 2016-13 and updated in Nov 2018 ASU 2018-19, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”), which requires the immediate recognition of management’s estimates of current and expected credit losses. ASU 2016-13 is effective for fiscal years and interim reporting periods within those years beginning after December 15, 2019. The Company adopted this ASU on July 1, 2020 and the adoption had no material impact on the Company’s financial position or result of operations.

 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurements (Topic 820): Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in this update modify the disclosure requirements on fair value measurements in Topic 820. The ASU is effective for the Registrants for fiscal years beginning after December 15, 2019, and interim periods therein. The Company adopted this ASU on July 1, 2020 and the adoption had no material impact on the Company’s financial position or result of operations.

 

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.

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(3) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)

 

(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 September 30, 2020 and June 30, 2020, 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

 

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 comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

 

The Company had no sales during the three months ended September 30, 2020 and 2019.

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(5) RELATED PARTY TRANSACTIONS

 

Due from related parties

 

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 20 years, stipulates that Xi’an will pay IDSI a know how transfer fee of 25% of revenue for CTLM product sales in their territory. The Company also sells inventory parts or acquires parts from third parties on behalf of Xi’an. During the three months ended September 30, 2020 and 2019, there were no such sales. As of September 30, 2020 and June 30, 2020, the Company has receivables from related parties, net of allowance, of $0 as a result of sales of inventory parts or acquisition of parts from third parties on behalf of Xi’an. Xi’an and Viable have common ownership hence these transactions are considered related party transactions. The original balance of the receivables was $7,700, but the Company decided to reserve the full amount in fiscal 2020 due to its age as well as the ongoing COVID-19 crisis.

 

Additionally, as of September 30, 2020 and June 30, 2020, the Company has amounts due from related parties, net of allowance, of $0. The original balance due from related parties was $11,965. Most of this balance was due to product that was purchased by Xi’an that was paid for by IDSI. Xi’an intends to reimburse IDSI for the amounts paid on their behalf. During fiscal 2020, the Company decided to reserve the full amount of $11,965 due from related parties due to its age as well as the ongoing COVID-19 crisis.

 

Related party fees

 

Erhfort, LLC was paid a consulting fee of $25,500 and $30,000 for the three months ended September 30, 2020 and 2019, respectively. Erhfort, LLC regularly reviews the Company’s operations and reports to IDSI’s CEO, Chunming Zhang, who lives in China. Erhfort, LLC is a related party because it owns Company common stock directly and indirectly.

 

David Fong, serving as the Company’s CFO, was paid consulting fees of $25,500 for each of the three months ended September 30, 2020 and 2019. These fees were paid to his affiliated business, Fong & Associates, LLC.

 

(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 three months ended September 30, 2020 and 2019, there was no royalty income. As of September 30, 2020 and June 30, 2020, the Company had royalty receivable balances of $0.

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(7) INVENTORIES

 

Inventories consisted of the following:

 

		September 30, 2020				June 30, 2020
Raw materials consisting of purchased parts, components and supplies		$	369,452			$	369,452
Work-in process including units undergoing final inspection and testing			52,500				52,500
Finished goods			15,000				15,000
Total Inventory		$	436,952			$	436,952
Inventory Reserve			(436,952	)			(436,952	)
Net Inventory		$	-			$	-

 

Due to the age of the inventory, lack of demand for parts and lack of sales the Company wrote off all inventory during the year ended June 30, 2017 and has booked a reserve for the entire value of its inventory as of September 30, 2020 and June 30, 2020. For the three months ended September 30, 2020, there were no changes to the inventory amounts or the amount of the reserve.

 

(8) PROPERTY AND EQUIPMENT

 

The following is a summary of property and equipment, less accumulated depreciation:

 

		September 30, 2020				June 30, 2020				Useful life
Furniture and Fixtures		$	261,011			$	261,011			5 years
Computers and Equipment			370,704				370,704			5 years
Third Party Software			10,291				10,291			5 years
Clinical Equipment			15,000				15,000			5 years
Total Property & Equipment		$	657,006			$	657,006
Less: accumulated depreciation			(655,726	)			(655,104	)
Total Property & Equipment - Net		$	1,280			$	1,902

 

Depreciation expense for the three months ended September 30, 2020 and 2019 was $622 and $1,947 respectively.

 

(9) ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

As of September 30, 2020 and June 30, 2020, accounts payable and accrued expenses totaled $411,245 and $300,936, respectively, which consists of accounts payable of $401,972 and $296,917 and other accrued expenses of $9,273 and $4,019, respectively.

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(10) ACCRUED PAYROLL TAXES AND PENALTIES

 

As of September 30, 2020 and June 30, 2020, the Company owed the IRS $314,019 and $314,019, respectively. Accrued payroll taxes represent outstanding interest and penalties based on prior management’s failure to pay payroll taxes commencing with the quarter ending March 31, 2010. As part of new management’s restructuring plan, the Company received funds from an accredited investor to be able to make a payment 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 $381,224. On June 29, 2018, Viable International Investments LLC provided a bank check in that amount to counsel and they sent the check to the IRS with a letter requesting penalty and interest abatement. The amount due at September 30, 2020 of $314,019 represents the interest and penalties. The Company has formally asked the IRS to abate all remaining interest and penalties of $314,019. The Company had a telephone conference on April 18, 2019 with the office of appeals and is waiting for further communications from the appeals officer. There has been no significant updates from or discussion with IRS on this matter during the three months ended September 30, 2020.

 

(11) PROMISSORY NOTES – RELATED PARTY

 

The following table is a summary of the outstanding note balances as of September 30, 2020 and June 30, 2020.

 

Noteholder		Interest Rate		Maturity Date		September 30, 2020				June 30, 2020
Related Party Notes:
Erhfort, LLC		15%		6/30/21		$	100,000			$	100,000
Erhfort, LLC		15%		6/30/21			100,000				100,000
JM One Holdings, LLC		15%		6/30/21			20,000				20,000
Erhfort, LLC		15%		6/30/21			100,000				100,000
Erhfort, LLC		15%		6/30/21			100,000				100,000
Erhfort, LLC		15%		6/30/21			100,000				100,000
Total Related Party Notes						$	520,000			$	520,000

 

Erhfort, LLC owns Company common stock directly and indirectly. JM One Holdings, LLC is an entity affiliated with the Company’s CFO. Hence, these debts are considered related party debt.

 

During the three months ended September 30, 2019, the Company received loan proceeds of $100,000 from Erhfort, LLC and $20,000 from JM One Holdings, LLC, both of which are related parties. The loan from Erhfort have an annual interest rate of 15% and interest is being accrued and paid monthly. The loan from JM One Holdings, LLC will accrue interest monthly at an annual rate of 15%, but interest will not be paid until maturity. The maturity dates for all related party loans were extended to June 30, 2021 on August 24, 2020.

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(12) LONG-TERM DEBT

 

The following table is a summary of the outstanding loan balances as of September 30, 2020 and June 30, 2020.

 

Noteholder		Interest Rate		Maturity Date		September 30, 2020				June 30, 2020
Truist Bank		1%		5/9/22		$	79,600			$	79,600
Total Debt							79,600				79,600
Current Portion of Debt							(16,376	)			-
Total Long-term Debt						$	63,224			$	79,600

 

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 $79,600. The loan, in the form of a promissory note, matures on May 9, 2022. No additional collateral or guarantees were provided by the Company for the loan. The PPP loan provides for customary events of default. Under the CARES Act, loan forgiveness is available for the sum of documented payroll costs, rent payments, mortgage interest and covered utilities during the 24-week period beginning on the date of loan disbursement. The Company may be required to repay any portion of the outstanding principal that is not forgiven, along with accrued interest, and it cannot provide any assurance that it will be eligible for loan forgiveness, or that any amount of the PPP Loan will ultimately be forgiven by the SBA. All aspects of the PPP loan are subject to review by the SBA, including without limitation, the Company’s eligibility for and the size of the loan. The review procedures have not been made public. The Company cannot predict the outcome of that review nor be assured that all or any part of the loan will be forgiven. To the extent that all or part of the PPP loan is not forgiven, the Company will be required to make payments, beginning August 2021, including interest accruing at an annual interest rate of 1.0% beginning on the date of disbursement. As of September 30, 2020 and June 30, 2020, the Company reported an accrued interest balance related to the PPP Loan of $316 and $116, respectively. The accrued interest is included in accounts payable and accrued expenses on our balance sheets.

 

(13) LEASES

 

In February 2016, the FASB issued Accounting Standards Update 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires lessees to recognize a right-of-use (ROU) asset and lease liability in the balance sheet for all leases, including operating leases, with terms of more than twelve months. Recognition, measurement, and presentation of expenses and cash flows from a lease by a lessee have not significantly changed from previous guidance. The amendments also require qualitative disclosures along with specific quantitative disclosures. We adopted this guidance using the cumulative-effect adjustment method on July 1, 2019, meaning we did not restate prior periods. Current year financial information is presented under the guidance in topic 842, while prior year information will continue to be presented under Topic 840. Adoption of the standard resulted in the recognition of an operating ROU asset and lease liability of approximately $147,000.

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(13) LEASES (Continued) 

 

We determine if an arrangement is a lease at inception. Operating leases are included in operating lease right-of-use (“ROU”) assets, other current liabilities, and operating lease liabilities in our balance sheets. Finance leases are included in property and equipment, other current liabilities, and other long-term liabilities in our balance sheets.

 

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of our leases do not provide an implicit rate, we use our incremental borrowing rate based on the information available at commencement date in determining the present value of lease payments. We use the implicit rate when readily determinable. The operating lease ROU asset also includes any lease payments made and excludes lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise that option. Lease expense for lease payments is recognized on a straight-line basis over the lease term.

 

We have lease agreements with lease and non-lease components, which are generally accounted for separately. For certain equipment leases, such as vehicles, we account for the lease and non-lease components as a single lease component. Additionally, for certain equipment leases, we apply a portfolio approach to effectively account for the operating lease ROU assets and liabilities.

 

Our leases have remaining lease terms of 3 to 16 months as of September 30, 2020.

 

The components of lease expense were as follows:

 

		Three Months Ended
		September 30, 2020
Operating lease expense		$	25,554
Total lease expense		$	25,554

 

Supplemental cash flow information related to leases was as follows:

 

		Three Months Ended
		September 30, 2020
Cash paid for amounts included in measurement of lease liabilities
Operating cash flows from operating leases		$	25,662
Right-of-use assets obtained in exchange for new lease obligation
Operating leases		$	-

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(13) LEASES (Continued)

 

Supplemental balance sheet information related to leases was as follows:

 

		September 30, 2020
Operating leases
Operating lease right-of-use assets		$	38,763
Current portion of operating lease liability			34,202
Operating lease liability, net of current portion			4,669
Total operating lease liability		$	38,871
Weighted Average Remaining Lease Term
Operating leases			.73 Years
Weighted Average Discount Rate
Operating leases			15	%

 

As of September 30, 2020, maturities of lease liabilities were as follows:

 

		Operating
		Leases
Years Ended June 30,
2021			32,885
2022			8,427
Total minimum lease payments			41,312
Less: amounts representing interest			(2,441	)
Present value of capital lease liabilities		$	38,871

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(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 September 30, 2020:

 

Security		Date Issued		No. of Shares		Amount			Date of Conversion		No. of Shares Converted		Amount Converted			Balance 9/30/2020
Total Series M Cv Pfd		Various		600		$	6,000,000		Various		600		$	6,000,000		$	-0-
Dividends																	-0-
Total redemption value																$	-0-
Series L Cv Pfd		2/10/2010		35		$	350,000		1/6/2011		15		$	150,000		$	200,000
Dividends																	202,464
Total redemption value																$	402,464

 

Series L Convertible Preferred Stock

 

On March 31, 2010, a private investor converted a $350,000 short-term promissory note into 35 shares of Series L Convertible Preferred Stock. The original purchase price/stated value is $10,000 per share and dividends accrue at an annual rate of 9%. The preferred stock is convertible into 474 shares of common stock for each share of preferred stock. On January 6, 2011, the private investor converted 15 shares of Series L Convertible Preferred Stock representing a principal value of $150,000. After the conversion, the private investor held 20 shares representing a principal value of $200,000. The remaining principal value of $200,000 is presented on the balance sheet as temporary equity, as the holder has the option to redeem for cash at any time. At September 30, 2020 and June 30, 2020, the balance of cumulative dividends owed to the investor which is included in redemption value was $202,464 and $197,939, respectively. The total presented on the balance sheet as temporary equity is $402,464 as of September 30, 2020 and $397,939 as of June 30, 2020.

 

Series M Convertible Preferred Stock

 

The Company had previously sold 600 Series M Convertible Preferred Stock to Viable International Investments, LLC, a Florida limited liability company, (“Viable”). Each share of the Series M Preferred Stock was convertible into 147,283 shares of Common Stock. In the event of a liquidation, the holders of the Series M Preferred Stock would have been entitled to receive, prior to any distribution of assets to holders of Common Stock or other class of capital stock or other equity securities of the Corporation, $10,000 per share of Series M Preferred Stock held plus accrued but unpaid dividends. The holders of the Series M Preferred Stock would have had identical voting rights as any holder of Common Stock and would have voted together, not as separate classes. The original purchase price/stated value of each share of Series M Preferred Stock was $10,000 and Viable was be entitled to receive cumulative dividends at the fixed rate of 9% of the stated value per share per annum. As of September 30, 2020 and June 30, 2020, the balance of Series M Preferred stock was $0.

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(15) COMMON STOCK

 

The Company has 500,000,000 of common shares no par value authorized and 2,000,000 of no par preferred shares authorized.

 

The Company did not issue any shares of common or preferred stock during the three months ended September 30, 2020 and 2019.

 

(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.

 

On November 1, 2019, the Board granted an option to purchase 2,000,000 shares with an exercise price of $.51 and fair value of $.51 per share to a consultant. These options will vest over a three-year period. The options will be expensed as they vest. On March 1, 2020, the Board granted an option to purchase 98,188 shares with an exercise price of $.51 and fair value of $.51 to an employee. These options will vest when CTLM® 3.0 is ready for Alpha testing and will be expensed at that time. On August 1, 2020, the Board granted an option to purchase 157,102 shares with an exercise price of $.51 and a fair value of $.51 to an employee. These options will vest when CTLM® 3.0 is ready for Alpha testing and will be expensed at that time.

 

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.

 

		As of September 30, 2020			As of June 30, 2020
Expected volatility			23% to 44%			20% to 24%
Expected term			.41 to 3.59 Years			.67 to 4.3 Years
Risk-Free interest rate			.13% to 2.49%			.89% to 2.49%
Forfeiture rate			0.00%			0.00%
Expected dividend rate			0.00%			0.00%

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(16) STOCK OPTIONS (Continued)

 

As of September 30, 2020, the Company has unvested and vested options under the 2016 Plan with exercise prices that range from a low of $.20 per share to a high of $.51 per share. The following table summarizes information about all of the stock options granted, exercised and cancelled under the 2016 Plan at September 30, 2020 and June 30, 2020:

 

Employees/Consultants		Options				Wtd. Avg. Exercise Price				Wtd. Avg. Remaining Term				Aggregate Intrinsic Value
Outstanding at June 30, 2019			13,447,645			$	0.20			3.29 Years				$	-
Granted			2,098,188			$	0.51
Exercised			-			$	-
Cancelled			(450,000	)		$	0.20
Outstanding at June 30, 2020			15,095,833			$	0.24			2.43 Years				$	-
Granted			157,102			$	0.51
Exercised			-			$	-
Cancelled			-			$	-
Outstanding at September 30, 2020			15,252,935			$	0.25			2.21 Years				$	-

 

The following table summarizes information about vested and unvested options under the 2016 Plan at September 30, 2020 and June 30, 2020:

 

Employees/Consultants		Unvested				Vested and Exercisable				Total
Outstanding at June 30, 2019			5,730,522				7,717,123				13,447,645
Granted			1,598,188				500,000				2,400,000
Vested and Exercisable			(2,755,526	)			2,755,526				-
Cancelled			(450,000	)			-				(450,000	)
Outstanding at June 30, 2020			4,123,184				10,972,649				15,095,833
Granted			157,102				-				157,102
Vested and Exercisable			-				-				-
Cancelled			-				-				-
Outstanding at September 30, 2020			4,280,286				10,972,649				15,252,935

 

Unvested options will be expensed under the Black-Scholes options-pricing model when they vest. As of September 30, 2020, remaining options to be expensed when vested are estimated to be $501,318.

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(16) STOCK OPTIONS (Continued)

 

At September 30, 2020, the Company has issued options pursuant to six different stock option plans, the most recent being the 2016 Plan. The previous five plans through and including the 2012 Non-Statutory Plan have a remaining total of options vested and exercisable to purchase 12 shares at exercise price of $350 per share. 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, 2019			13			$	976			3.02 Years				$	-
Granted			-			$	-
Exercised			-			$	-
Cancelled			-			$	-
Outstanding at June 30, 2020			13			$	976			2.01 Years				$	-
Granted			-			$	-
Exercised			-			$	-
Cancelled			(1	)		$	13,500
Outstanding at September 30, 2020			12			$	350			1.86 Years				$	-

 

Vested & Exercisable Stock Options		September 30, 2020				June 30, 2020
Employee 2016 Equity Plan			-				-
Director 2016 Equity Plan			-				-
Employee Other Plans			12				13
Directors and Consultants Other Plans			-				-
Total			12				13

 

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 $0.1. Because the Company was de-registered and OTC markets did not provide a quote for IMDS, there is no public market for the Company’s shares. Given the exercise prices adjusted for the reverse split, it is highly unlikely that any employee holding pre-2016 Plan options will exercise them. The Company has sufficient authorized shares available for all outstanding option; however, if exercised, the shares will be issued with a restrictive legend because the Company was not an SEC reporting company until October 2018. Further, given its recent return to SEC reporting status, the Company is unable to file an S-8 Registration Statement to register shares issued because of option exercise pursuant to various stock option agreements.

 

(17) COMMITMENTS AND CONTINGENCIES

 

The Company previously carried $3,000,000 in product liability insurance to cover both clinical sites and sales. As part of its cost savings initiatives, the Company cancelled the policy as it had not had any adverse experiences after conducting more than 25,000 patient scans worldwide. The Company is now self-insuring the risk of product liability.

 

 

IMAGING DIAGNOSTIC SYSTEMS, INC

 

Notes to Unaudited Financial Statements

September 30, 2020

 

(17) COMMITMENTS AND CONTINGENCIES (Continued)

 

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 $1,489,640. The Company engaged tax counsel to handle this matter and intends to fully satisfy its payroll tax obligations. On August 4, 2014, Viable purchased 250 shares of convertible preferred stock for $2,500,000, which gave them a 78.9% voting and economic interest in the Company’s capital stock representing a change in control of the Company. New management’s tax counsel negotiated a new Installment Agreement which stipulated a lump sum payment of $250,000, which was paid on September 4, 2014 and monthly installment payments of $20,000 beginning in September 2014 due on the 18^th of each month until the balance of payroll taxes, interest and penalties are paid in full (Note 10).

 

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 $381,224. On June 29, 2018, Viable International Investments LLC provided a bank check in that amount to counsel and they sent the check to the IRS with a letter requesting abatement of penalties and interest totaling $314,019. The IRS is considering the request.

 

The Company leases a commercial building from Isco Properties, LLC for its offices and warehouse in Fort Lauderdale, FL. The term of the lease is five years beginning February 2014 with a monthly base rent beginning at $6,360 and increasing at a rate of 3% per year. The total rent commitment for the five years is $405,031, which has been fully satisfied as of the date of this report. On October 31, 2018, the Company extended the lease for two years from February 1, 2019 to January 31, 2021. The monthly base rent is $7,150 for the 1^st year and $7,350 for the 2^nd year. The lease agreement was amended on August 1, 2019 which changed the total base rent for year 1 to $76,102 and year 2 to $98,452. This was the result of an agreement to reduce the base rent from August through October of 2019 by $6,650 per month and increasing the base rent from November 2019 through April 2020 by $3,417.38 (which includes imputed interest of $92.38 per month) to make up the deficit. The rent commitment before sales tax for the two years is $174,554.

 

On January 8, 2019, the Company entered into an auto lease agreement. The term of the lease is 3 years beginning January 8, 2019 with a monthly lease payment of $1,204 due on the 7th day of each month. The total lease commitment including sales tax for the 3 years is $43,338.

 

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 is to complete image quality improvement by November 1, 2020. A payment of $500,000 will be due upon satisfactory completion of the project. As of September 30, 2020, we believe that Dr. Huabei Jiang has made substantial progress on the image quality, but we have yet to establish the effectiveness of the improvements.

 

(18) SUBSEQUENT EVENTS

 

On October 8, 2020, the company received proceeds of $10,000 from Erhfort, LLC pursuant to a promissory note. Interest is 15% per annum and is due monthly.

 

On October 27, 2020, the company received proceeds of $10,000 from Erhfort, LLC pursuant to a promissory note. Interest is 15% per annum and is due monthly.

 

As of the date of this report, the Company has vacated its current facilities in response to a thirty-day notice that was received on October 1, 2020. The thirty-day notice was issued because of the Company’s delinquent rent obligations. We are currently working with our landlord to settle the remaining obligations on the lease. As of the date of this report, the Company has established a corporate address at 618 E South St, Suite 500, Orlando, FL 32801. Physical space is not included in this lease agreement, but is available, if needed, for additional fees. The lease agreement for this facility is effective November 1, 2020 for a term of twelve months. The monthly rent is $53.10. The Company also established a physical location (250 sq ft) at 5901 Miami Gardens Drive, Suite 325, Miami FL, 33015 to be used for R&D. The lease agreement is effective November 1, 2020 for a term of six months. The monthly rent is $850.

 

 

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 September 30, 2020, 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, 2020, filed on September 28, 2020. 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.

 

 

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”) 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 three months ended September 30, 2020, we have had no substantial revenues from our operations and have incurred net losses applicable to common shareholders since inception through September 30, 2020 of $134,272,301 after discounts and dividends on preferred stock. We incurred net losses applicable to common shareholders of $162,552 for the three months ended September 30, 2020 and $259,576 for the three months ended September 30, 2019.

 

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.

 

 

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 until the third or fourth quarter of fiscal 2021. 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 our Quality Management System, 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 substantial regulatory fees. We will maintain our ISO 13485:2016 certification which will allow us to pursue FDA marketing clearance and the CE Mark in the future.

 

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. As of the date of this report, we believe that Dr. Jiang has made substantial progress on the image quality, and once effectiveness of the improvements has been established, then Xi’an IDI will resume their sales and marketing efforts in China. The improvement of the image quality is a critical milestone as we believe that it will allow us to begin generating revenues from the sale of CTLM® systems 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. 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:

 

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. We periodically review the value of items in inventory and record write-downs or write-offs based on its assessment of slow moving or obsolete inventory. We maintain a reserve for obsolete inventory and generally makes inventory value adjustments against the reserve.

 

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 three months ended September 30, 2020, the Board granted options to purchase 157,102 shares with an exercise price of $.51 per share to an employee. During the three months ended September 30, 2019, 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 September 30, 2020 and 2019 were $0.

 

The Cost of Sales during the three months ended September 30, 2020 and 2019 were $0.

 

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.

 

General and administrative expenses during the three months ended September 30, 2020, were $78,899 representing a decrease of $17,558 or 18% from $96,457 during the three months ended September 30, 2019.

 

The general and administrative decrease of $17,558 is due primarily to a decrease in legal and filing fees during fiscal 2021. There were also reductions in other expenses due to the reduction in business activity during the three months ended September 30, 2020 because of the COVID-19 crisis.

 

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 September 30, 2020, were $0 representing a decrease of $69,183 or 100% from $69,183 during the three months ended September 30, 2019.

 

The decrease of $69,183 is due to the furloughing of all employees on May 1, 2020 in response to the COVID-19 crisis.

 

 

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 expenses during the three months ended September 30, 2020 were $8,308 representing a decrease of $8,836 or 52% from $17,144 during the three months ended September 30, 2019.

 

The research and development decrease of $8,836 is due primarily to the lack of clinical expenses during the three months ended September 30, 2020.

 

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 September 30, 2020, were $338 representing an increase of $160 or 90% from $178 during the three months ended September 30, 2019.

 

All sales and marketing expense during both the three months ended September 30, 2020 and 2019 were related to fees for maintaining our website. The difference relates to difference between the website related services provided during the two quarters.

 

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 September 30, 2020, were $51,000 representing a decrease of $8,500 or 14% from $59,500 during the three months ended September 30, 2019.

 

The decrease of $8,500 is due to consulting fees to a related party being higher by $4,500 during the three months ended September 30, 2019. There was also an additional consulting fee of $4,000 related to the QMS audit during the three months ended September 30, 2019.

 

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 September 30, 2020, were $139,167, representing a decrease of $105,242 or 43% from $244,409 when compared to the operating expenses and cost of sales during the three months ended September 30, 2019. The overall decrease in expenses is due to the Company having less business activity in fiscal 2021, continuing efforts to streamline operations and reduce costs, as well as the COVID-19 pandemic.

 

Depreciation and amortization during the three months ended September 30, 2020, was $622 representing a decrease of $1,325 or 68% from $1,947 during the three months ended September 30, 2019.

 

 

Interest expense during the three months ended September 30, 2020, was $19,861 representing an increase of $9,225 or 87% from $10,636 during the three months ended September 30, 2020, 2019. The increase is due to more outstanding debt during the three months ended September 30, 2020.

 

BALANCE SHEET DATA

 

Our combined cash and cash equivalents totaled $0 at September 30, 2020 and $45,960 at June 30, 2020. 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.

 

Our inventory, which consists of raw materials, work in process (including completed units under testing), and finished goods totaled $436,952 at September 30, 2020 and $436,952 at June 30, 2020. Raw materials used for research and development or other purposes are expensed and not included in inventory. The net inventory is $0 at September 30, 2020 and June 30, 2020 because the Company has recorded an allowance for slow moving and 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 $1,280 at September 30, 2020 and $1,902 at June 30, 2020. The overall decrease of $622 is due entirely to depreciation during three months ended September 30, 2020.

 

Our operating lease right-of-use assets totaled $38,763 at September 30, 2020 and $62,266 at June 30, 2020. The decrease in operating lease right-of-use assets is due to the amortization of the asset under ASC 842.

 

Our current liabilities, which consist of accounts payable, accrued payroll taxes and penalties, short term debt, current portion of lease liabilities, and current portion of long-term debt, totaled $1,295,842 at September 30, 2020 and $1,189,416 at June 30, 2020. Accounts payable and accrued expenses totaled $411,245 at September 30, 2020 and $300,936 at June 30, 2020. Accrued payroll taxes and penalties totaled $314,019 at September 30, 2020 and $314,019 at June 30, 2020. Promissory notes totaled $520,000 at September 30, 2020 and $520,000 at June 30, 2020. The current portion of lease liabilities totaled $34,202 at September 30, 2020 and $54,461 at June 30, 2020. The current portion of long-term debt was $16,376 at September 30, 2020 and $0 at June 30, 2020. Current liabilities increased primarily due to accounts payable increasing by $110,309 during the three months ended September 30, 2020.

 

Our long-term liabilities, which consists of the noncurrent operating lease liabilities as well as long-term loans payable totaled $67,893 at September 30, 2020 and $87,621 at June 30, 2020. The decrease in long-term liabilities was due to a portion of the loans payable becoming a current liability during the three months ended September 30, 2020.

 

Our temporary equity, which consists of Convertible Preferred Series L (including accrued dividends), totaled $402,464 at September 30, 2020 and $397,939 at June 30, 2020. The increase of $4,525 is due to dividends for the three months ended September 30, 2020 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 three months ended September 30, 2020, we did not raise any capital through private placements of common stock or received proceeds from short term loans. During the three months ended September 30, 2019, we received proceeds of $120,000 through short-term related party loans.

 

Net cash used for 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 $45,960 for the three months ended September 30, 2020, compared to net cash used by operating activities and product development of the CTLM® and related software development of $124,606 during the three months ended September 30, 2019. At September 30, 2020, we had negative working capital of $1,271,732 compared to negative working capital of $1,118,102 at June 30, 2020. 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.

 

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 September 30, 2020. 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 September 30, 2020.

 

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.

 

 

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, 2020, filed on September 28, 2020, 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 three months ended September 30, 2020, 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

 

31.1	Certification by 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 by 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 by 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 by Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

 

 

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: November 20, 2020	Imaging Diagnostic Systems, Inc.
	By:	/s/ David Fong
		David Fong
		Chief Financial Officer
		(PRINCIPAL ACCOUNTING OFFICER)