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IMDS > SEC Filings for IMDS > Form 10-Q on 19-Nov-2012All Recent SEC Filings

Show all filings for IMAGING DIAGNOSTIC SYSTEMS INC /FL/

Form 10-Q for IMAGING DIAGNOSTIC SYSTEMS INC /FL/


19-Nov-2012

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

The following discussion of the financial condition and results of operations of Imaging Diagnostic Systems, Inc. should be read in conjunction with the Management's Discussion and Analysis of Financial Condition and Results of Operations; the Condensed Financial Statements; the Notes to the Financial Statements; the Risk Factors included in our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, which are incorporated herein by reference; and all our other filings, including Current Reports on Form 8-K, filed with the SEC through the date of this report. This quarterly report on Form 10-Q contains forward looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, including statements using terminology such as "may," "will," "expects," "plans," "anticipates," "estimates," "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 alternative techniques for diagnosing and managing breast cancer. Factors that could cause actual results to materially differ include, without limitation, the timely and successful submission of our U.S. Food and Drug Administration ("FDA") application to obtain 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 utilizing our Private Equity Credit Agreement 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 or elsewhere in this quarterly report. All forward-looking statements and risk factors included in this document or incorporated by reference from our Annual Report on Form 10-K for the fiscal year ended June 30, 2012, are made as of the date of this report based on information available to us as of the date of this report, and we assume no obligation to update any forward-looking statements or risk factors. You are cautioned not to place undue reliance on these forward-looking statements.


10-Q Table of Contents

OVERVIEW

Imaging Diagnostic Systems, Inc. ("IDSI") is a development stage medical technology company. Since inception in December 1993, we have been engaged in the development and testing of a laser breast imaging system that uses computed tomography and laser techniques designed to detect breast abnormalities. The CT Laser Mammography system ("CTLM®") is currently being commercialized in certain international markets where regulatory approvals have been obtained. However, it is not yet approved for sale in the U.S. market. The CTLM® system must obtain marketing clearance through the U.S. Food and Drug Administration ("FDA") before commercialization can begin in the U.S. market.

Our financial statements have been prepared assuming that we will continue as a going concern. Our auditors, in their report for the fiscal year ended June 30, 2012, stated that we have incurred recurring operating losses and will have to obtain additional capital to sustain operations. These conditions raise substantial doubt about our ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2 "Going Concern", in the Notes to the Financial Statements. The accompanying financial statements to this Annual Report do not include any adjustments to reflect the possible effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

Originally, the FDA determined the CTLM® to be a "new medical device" for which there was no predicate device and designated it as a Class III medical device.
Consequently; the CTLM® was required to go through the FDA Premarket approval ("PMA") application process. In May 2003 we filed a PMA application for the CTLM® with the FDA. In August 2003, we received a letter from the FDA citing deficiencies in our PMA application requiring a response to the deficiencies.
We initially planned on submitting an amendment to the PMA application to resolve the deficiencies and requested an extension. In March 2004 we received an extension to respond with the amendment; however, in October 2004, we made a decision to voluntarily withdraw the original PMA application and resubmit a modified PMA in a simpler and more clinically and technically robust filing.

In November 2004, we received a letter from the FDA stating that the CTLM® study has been declared a Non-Significant Risk ("NSR") study when used for our intended use.

In 2005, we initiated the PMA process by designing a new clinical study protocol and a modified intended use, which limited the participants in the study to patients with dense breast tissue. The inclusion criteria was modified because we believed that we would be more successful in proving our hypothesis of the CTLM® system's intended use and have the most success at obtaining marketing clearance from the FDA. Concurrently, we identified qualified clinical sites and retained them to proceed with our clinical study.

In 2006, we made changes to bring the CTLM® system to its most current design level. We believe these changes improved the CTLM®'s image quality and reliability. Upgraded CTLM® systems were installed at our U.S. clinical sites and data collection proceeded in accordance with our clinical protocol. The data collection continued from 2006 to 2010, progressing slowly due to low patient volume pursuant to the inclusion criteria of our clinical protocol.

We announced in March 2009 that our research and development team achieved a technical breakthrough with a new reconstruction algorithm that improved the visualization of angiogenesis in the CTLM® images. Angiogenesis is the process in which new blood vessels are formed in response to a chemical signal sent out by cancerous tumors. The CTLM visualizes the blood distribution in the breast, to detect the new blood vessels (angiogenesis) required for cancerous lesions to grow. The improved algorithm enhances the images by reducing the number of artifacts occasionally produced during an examination, thereby making diagnosis easier. We also incorporated streamlined numerical methods into the software so that the new algorithm does not require additional computing resources, allowing us to provide the improved functionality to existing customers as a software upgrade.

As of May 2009, 10 clinical sites had participated in the clinical trials and at the time we believed we had sufficient clinical data to support our PMA application. However, we did not have sufficient financing to support the clinical sites, initiate the reading phase, the statistical analysis study and the submission of the PMA application to the FDA.


10-Q Table of Contents

Through the years, new MRI and other dedicated breast imaging systems gained FDA marketing clearance pursuant to applications under the FDA's Section 510(k) premarket notification of intent to market (a "Section 510(k) premarket notification"). In the last several years, the De Novo 510(k) process became an alternate pathway for new technologies with low to moderate risk an opportunity to seek FDA marketing clearance through this simpler process. In addition, laser safety data and clinical safety and efficacy data were obtained through previous clinical trials to support an FDA application through the traditional 510(k) process. We believe our CTLM® system is of low to moderate risk due to the series of technical studies conducted as well as the series of clinical studies we were engaged in which led the FDA to determine in 2004 that our clinical studies were a Non Significant Risk (NSR) device study.

A Section 510(k) premarket notification is a premarket submission made to the FDA to demonstrate that the device to be marketed is at least as safe and effective as, that is, substantially equivalent to, a legally marketed device that is not subject to PMA. Submitters must compare their device to one or more similar legally marketed devices and make and support their substantial equivalency claims. A legally marketed device is a device that was legally marketed prior to May 28, 1976 for which a PMA is not required, or a device which has been reclassified from Class III to Class II or I, or a device which has been found to be substantially equivalent through the 510(k) process. The legally marketed device(s) to which equivalence is drawn is commonly known as the "predicate" device.

To submit a Section 510(k) premarket notification application, a company must meet the following guidelines:

To demonstrate substantial equivalence to another legally U.S. marketed device, the 510(k) applicant must demonstrate that the new device, in comparison to the predicate:

? has the same intended use as the predicate; and

? has the same technological characteristics as the predicate; or

? has the same intended use as the predicate; and

? has different technological characteristics when compared to the predicate, and

? does not raise new questions of safety and effectiveness; and

? demonstrates that the device is at least as safe and effective as the legally marketed device.

One possible outcome resulting from applying for a Section 510(k) premarket notification of intent to market that we believed would have been an option, was the evaluation of automatic class III designation, commonly referred to "De Novo process". The De Novo process is an alternate pathway provided by the FDA to classify certain new devices that had automatically been placed in Class III due to lack of a predicate. The De Novo classification process was created to provide a mechanism for the classification of certain lower-risk devices for which there is no predicate, but would otherwise fall into Class III. The De Novo process is most applicable when the risks of a device are well-understood and appropriate special controls can be established to mitigate those risks.

The de novo process cannot be requested until a Section 510(k) premarket notification has been submitted and the FDA responds with a determination that the device is "not substantially equivalent" (NSE) to the predicate device. The FDA then classifies the applicant devices into Class III designation. Applicants who receive a class III determination from the FDA may request an evaluation for reclassification into Class I or II.

In March 2010, we decided to focus on the possibility of obtaining FDA marketing clearance through a Section 510(k) premarket notification for our CTLM® system instead of a PMA application based on our own research of other medical imaging devices that received a Section 510(k) premarket notification, such as the Aurora MRI Breast Imaging System (the "breast MRI"). Other sources of our research were obtained through reading medical imaging industry publications, the FDA's website, and discussions with attendees at medical imaging trade shows; specifically the Radiological Society of North America in Chicago, IL in November 2009; Arab Health Show in Dubai, UAE in January 2010, and European Congress of Radiology in Vienna, Austria in March 2010. We began


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the process of examining the various potential predicate devices that could be credible to support our Section 510(k) premarket notification application.

In July 2010, we made our decision to select as our predicate device the breast MRI. This decision was made as a result of our examination of comparative clinical images between CTLM® and breast MRI, which are both functional molecular imaging devices having the ability to visualize angiogenesis in the breast. We began preparing the Section 510(k) premarket notification submission and engaged the services of a FDA regulatory consultant to review our preliminary draft and then re-engaged the services of our FDA regulatory counsel to complete the Section 510(k) premarket notification application and to submit it to the FDA.

On November 22, 2010, we submitted a Section 510(k) premarket notification application to the FDA for its review. We believed that the Section 510(k) premarket notification submission was the best process to obtain U.S. marketing clearance in the least burdensome and most timely manner. FDA marketing clearance would enable us to market and sell the CTLM® system throughout the United States. Also, we believed that receipt of U.S. marketing clearance will substantially enhance our ability to sell the CTLM® in the international market.

On January 21, 2011, we received a request for additional information from the FDA regarding our Section 510(k) premarket notification application. A request for additional information is quite common during the FDA review process. Due to the extensive amount of additional information requested, we filed the response to the FDA request on July 8, 2011. Upon receipt of our response at the FDA offices, the FDA 90-day response time clock was re-activated. Consequently, we expected to get either an FDA determination on our Section 510(k) application or another request for additional information within the next 90-day time frame.

On August 2, 2011, we received official notification from the FDA that the review of our Section 510(k) premarket notification application had been completed and that the FDA determined that the device, (CTLM®), is not substantially equivalent to devices marketed in interstate commerce prior to May 28, 1976, the enactment date of the Medical Device Amendments, or to any device which has been reclassified into Class I (General Controls) or Class II (Special Controls), or to another device found to be substantially equivalent through the
Section 510(k) process. This decision was based on the fact that the FDA was not aware of a legally marketed preamendments device labeled or promoted for using "Diffuse Optical Tomography" (DOT) to image the optical attenuation properties of breast tissue in order to aid the diagnosis of cancer, other conditions, diseases, or abnormalities. Therefore, this device was classified by statute into class III (Premarket Approval), under Section 513(t) of the Federal Food, Drug, and Cosmetic Act (the "Act"). All FDA determined Class III devices must fall under Section 515(a)(2) of the Act (which) requires a class III device to have an approved application (PMA) before it can be legally marketed.

The determination by the FDA that our CTLM® imaging technology will now be recognized as a DOT device and that there are no other DOT devices known to the FDA, presents us with a unique technological opportunity. Essentially, IDSI could be the first medical imaging company to file a PMA application for a Diffuse Optical Tomography breast imaging device. Since the FDA has identified CTLM® as a class III device, a formal clinical study will be required to obtain PMA approval. We have begun the PMA process and plan to use clinical studies previously collected, if permitted to do so by the FDA, in addition to new studies we plan to collect over the next several months.

In previous filings, management had disclosed the potential to have our CTLM® device approved through the FDA "De Novo" process. This process would only become an option to us if the FDA did not approve our 510(k) premarket notification of intent to market the device. While waiting for a ruling from the FDA on our 510(k) premarket notification of intent to market the CTLM®, management continued to research the advantages and disadvantages regarding the potential option to initiate a De Novo application if the FDA determined our traditional 510(k) application to be "Not Substantially Equivalent". Our research identified several articles illustrating the potential pitfalls of going down the De Novo pathway. One such article from Medical Device Consultants (MDCI), a full service contract research organization and consulting firm that helps emerging and established firms


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commercialize novel and innovative medical devices, dated March 21, 2011(included below) best summarizes the issues that we would face if we choose the De Novo pathway.

"The De Novo process has been around since the implementation of the FDA Modernization Act of 1997 (FDAMA). The FDAMA was intended to help improve the efficiency of bringing low-risk medical devices to market, allowing for simpler reclassification of devices that were classified as Class III due to the lack of a suitable predicate. The section of the FDAMA that handled this aspect of medical device classification (Section 513(f)(2)) became known as the De Novo process.

De Novo is a two-step process that requires a company to submit a 510(k) and complete a standard review, including an analysis of the risk to the patient and operator associate with the use of the device and the substantial equivalence rationale. Once that has been accomplished, and the medical device in question has been determined to be Not Substantially Equivalent (NSE) by the FDA, the product is automatically classified as a Class III device. The manufacturer can then submit a request for evaluation of Automatic Class III designation to have the product reclassified from Class III into Class I or Class II. The FDA will review the device classification proposal and either recommend special controls to create a new Class I or II device classification or determine that the product is a Class III device. If FDA determines that the level of risk associated with the use of the device is appropriate for a Class II or Class I designation, then the product can be cleared as a 510(k) and FDA will issue a new classification regulation and product code. This also adds the device in question to the predicate pool, which in turn broadens the market for other medical device companies considering products in a similar therapeutic area. If the device is not approved through De Novo, then it must go through the standard premarket approval (PMA) process for Class III devices.

The number of FDA NSE determinations due to the lack of a suitable predicate is very low for those low risk medical devices that have the potential for reaching the market via the De Novo process. Medical device manufacturers are attracted to the cost efficiencies associated with the De Novo process when compared against the investment and post-market FDA oversight associated with a PMA. Unfortunately, the time to market for devices eligible for the De Novo process can be very long.

FDAMA calls for the FDA to review and return a decision on a De Novo reclassification submission within 60 days of receipt (the initial submission must be sent by the manufacturer within 30 days of receiving NSE notification). In practice, however, the amount of time taken to review De Novo requests by the FDA and issue the special controls guidance has risen from 62 days in 2006 to 241 days since 2007. Tacked on to the 510(k) review times, devices traveling the De Novo pathway average 482 days of review time from beginning to end.

Further compounding the delays associated with De Novo is the fact that the entire process resembles a procedural "black hole." The FDA is not required to provide any updates concerning the status of a De Novo application, nor is there any simple way for medical device manufacturers to track a De Novo submission on their own.

De Novo is rare in the realm of low-risk medical devices - a mere 54 products took this particular route between 1998 and 2009. Given the extensive delays associated with the process, MDCI advises medical device companies to consider all other market approval pathways before deciding on to pursue a De Novo reclassification."

Prepared by Benjamin Hunting, Cindy Nolte, and Helen Mayfield MDCI Blogging Team"

Understanding that the above statements were a fair representation of the regulatory industry's general feelings towards the FDA De Novo process, management decided to accept and heed the FDA's letter (received on August 2, 2011) detailing their decision of CTLM® being "not substantially equivalent" and furthermore, accepting their


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recommendation that CTLM® is a class III device that would require a PMA submission. Other considerations such as comparing time frames between De Novo and the PMA process were taken into account. The average De Novo application took 482 days to be reviewed compared to the average PMA review of 284 days. In addition, upon further review, both the De Novo and PMA process require virtually identical clinical safety and efficacy data; therefore, the PMA path was chosen. Management has identified potential FDA regulatory consultants who can guide us through the complete PMA application process and is presently in contract negotiations with several prospective consulting firms.

Progress toward re-submitting a PMA application during Fiscal Year 2012 and the beginning months of Fiscal Year 2013 was significantly delayed and then eventually halted simply due to lack of funding to hire the necessary FDA consultants required to assist in the process. Our employees have reached their level of FDA expertise related to preparing the "ground work" for a PMA application submission and can proceed no further without the expert assistance of FDA consultants.

During the fiscal year ended June 30, 2012, there was a significant reduction in key Company staff due to employee resignations, retirement and layoffs, which reduced operating overhead until additional external funding could be secured.
We will not hire replacement staff until such time as we have secured sufficient funding to complete the PMA filing with the FDA. Prior to the reduction in key staff members, an internal PMA application strategy that might allow inclusion of previously collected patient data was developed. This approach (generally referred to as a PMA Protocol) will need to be qualified by our FDA consultants prior to presenting our approach to the FDA Reviewers/Examiners. The forum for this process is generally referred to as an FDA "Pre- IDE" meeting (essentially a pre-clinical meeting) between the Company, its FDA Consultants and the FDA/PMA Examiners. During the "Pre-IDE" meeting, the Company (and its FDA Consultants) would present their approach for both data collection, patient selection and data analysis. The FDA Reviewers would provide input (critique and suggestions) to us as to what they believe an acceptable PMA protocol would require. Once agreement is reached by all parties the next logical step is to implement the protocol. .

During fiscal 2012, a significant reduction in operating overhead/expenses occurred due to the reduction in key staff. This reduction in staff halted any progress towards getting the PMA application started as a result of our financial and funding limitations. We will not be able to proceed with the PMA application process until funding has been secured and the FDA consultants engaged to continue the process. There can be no assurance that we will obtain this funding.

In summary, our management team now believes that the more structured and proven PMA application approach with its semi-rigid timetable for mandatory responses would provide us with the best route to achieve marketing clearance for our innovative new imaging modality that in the future will be classified as Diffuse Optical Tomography.

The CTLM® system is a Diffuse Optical Tomography (DOT) CT-like scanner. Its energy source is a laser beam and not ionizing radiation such as is used in conventional x-ray mammography or CT scanners. The advantages of imaging without ionizing radiation may be significant in our markets. CTLM® is an emerging new imaging modality offering the potential of functional molecular imaging, which can visualize the process of angiogenesis which may be used by the radiologist to distinguish between benign and malignant tissue. X-ray mammography is a well-established method of imaging the breast but has limitations especially in dense breast cases. While x-ray mammography and ultrasound produce two dimensional images (2D) of the breast, the CTLM® produces 3D images. Ultrasound is often used as an adjunct to mammography to help differentiate tumors from cysts or to localize a biopsy site. We believe the CTLM® will be used to provide the radiologist with additional information to manage the clinical case; help diagnose breast cancer earlier; reduce diagnostic uncertainty especially in mammographically dense breast cases; and may help decrease the number of biopsies performed on benign lesions. Because breast cancers nearly always develop in the dense tissue of the breast (not in the fatty tissue), older women who have mostly dense tissue on a mammogram are at an increased risk of breast cancer. Abnormalities in dense breasts can be more difficult to detect on a mammogram. The CTLM® technology is unique and . . .

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