Notes
to Financial Statements
December
31, 2012, and 2011
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
Imaging3,
Inc. (the “Company”) is a California corporation incorporated on October 29, 1993 as Imaging Services, Inc. The Company
filed a certificate of amendment of articles of incorporation to change its name to Imaging3, Inc. on August 20, 2002.
The
Company’s primary business is production and sale of medical equipment, parts and services to hospitals, surgery centers,
research labs, physician offices and veterinarians. Equipment sales include new c-arms, c-arms tables, remanufactured c-arms,
used c-arm and surgical tables. Part sales comprise of new or renewed replacement parts for c-arms.
The
Company has developed a proprietary medical technology designed to produce 3D medical diagnostic images in real time. We believe
Imaging3 technology has the potential to contribute to the improvement of healthcare. Our technology is designed to cause 3D images
to be instantly constructed using high-resolution fluoroscopy. These images can be used as real time references for any current
or new medical procedures in which multiple frames of reference are required to perform medical procedures on or in the human
body. This technology is still in development and the Company intends to seek approval from the Food and Drug Administration (“FDA”),
which will allow us to offer our product to healthcare providers.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A
summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying financial
statements follows:
Use
of Estimates
In
preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates
and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities
at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from
those estimates.
Cash
and Cash Equivalents
The
Company considers all liquid investments with a maturity of three months or less from the date of purchase that are readily convertible
into cash to be cash equivalents. The Company maintains its cash in bank deposit accounts that may exceed federally insured limits.
The Company has not experienced any losses in such accounts. The Company had no cash equivalents at December 31, 2011 or 2012.
Accounts
Receivable
The
Company’s customer base is geographically dispersed. The Company maintains reserves for potential credit losses on accounts
receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations,
customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these
reserves. Reserves are recorded primarily on a specific identification basis.
Inventories
Inventories,
comprising of finished goods and parts are stated at the lower of cost (first-in, first-out method) or market. Management compares
the cost of inventories with the market value and allowance is made for writing down the inventories to their market value, if
lower. For the year ended December 21, 2011, impairment totaled $0 and $149,628 in 2012.
Due
to Officer
At
December 31, 2012 and 2011, the Company had balances due to the Chief Executive Officer of the Company of $350,000 and $344,938,
respectively, for amounts owed during those years. The amount is due on demand, interest free and is secured by the assets of
the Company. Interest is not imputed since a portion of this amount represents unpaid salaries.
IMAGING3,
INC.
DEBTOR
IN POSSESSION
Notes
to Financial Statements
December
31, 2012, and 2011
Property
& Equipment
Property
and equipment are stated at cost. Expenditures for maintenance and repairs are charged to expenses as incurred and additions,
renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and
accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation
of property and equipment is provided using the straight-line method for substantially all assets with estimated lives of three
to eight years.
Impairment
of Long-Lived Assets
Current
accounting literature requires that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from
the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for
the amount by which the carrying value exceeds the fair value.
The
Company tests long-lived assets, including property, plant and equipment and intangible assets subject to periodic amortization,
for recoverability at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the
net carrying amount is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable
cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance
and future estimated results in its evaluation of potential impairment and then compares the carrying amount of the asset to the
future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated
expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the
asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows at the rate
the Company utilizes to evaluate potential investments. The Company estimates fair value based on the information available in
making whatever estimates, judgments and projections are considered necessary. There was no impairment of long-lived assets in
the years ended December 31, 2011 and 2012.
Equipment
Deposits
Equipment
deposits represent amounts received from customers against future sales of goods since the Company recognizes revenue upon shipment
of goods. These deposits are applied to the invoices when the equipment is shipped to the customers. The balances at December
31, 2012 and 2011 were $-0- and $89,250, respectively.
Derivative
Financial Instruments
The
Company generally does not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may
be affect the fair values of its financial instruments. The Company utilizes various types of financing to fund our business needs,
including common stock with warrants attached and other instruments not indexed to our stock. The Company is required to record
its derivative instruments at their fair value. Changes in the fair value of derivatives are recognized in earnings in accordance
with ASC 815. Derivative financial instruments should be recorded as liabilities in the consolidated balance sheet and measured
at fair value. For purposes of the valuation, the consultant utilized fair value as the basis for formulating its opinion which
has been defined by the Financial Accounting Standards Board (“FASB”) as “the amount for which an asset (or
liability) could be exchanged in a current transaction between knowledgeable, unrelated willing parties when neither party is
acting under compulsion.” The FASB has provided guidance that its definition of fair value is consistent with the definition
of fair market value in IRS Rev. Rule 59-60. In determining the fair value of the derivatives the consultant assumed that the
Company’s business would be conducted as a going concern. These derivative liabilities will need to be marked-to-market
each quarter with the change in fair value recorded in the income statement. The FASB and IRS have provided guidance that its
definition of fair value is consistent with the definition of fair market value in IRS Rev. Rule 59-60. The opinion of Fair Value
relied on a “value in use” or “going concern” premise. To properly apply this fair value standard, the
consultant gave consideration to the holder’s intentions regarding whether or not the securities purchases were to be held,
sold or abandoned. Its analysis also reflects assumptions that would be made by market participants if these market participants
were to buy or sell each identified asset on an individual basis.
On
October 15, 2010, the Company issued 13,761,471 warrants to purchase 13,761,471 shares of common stock, (a) 4,587,157 of which
are exercisable at a price of $0.2725 per share for a period of five (5) years from the date of issuance (Series A), (b) 4,587,157
of which are exercisable at a price of $0.218 per share for a period of 18 months from the date of issuance (Series B), (c) 4,587,157
of which are exercisable at a price of $0.2725 per share for a period of five (5) years from the date of issuance. The number
of shares issuable upon the exercise of the warrants described in (a), (b), and (c) of this paragraph and the exercise prices
of the warrants described in (a), (b), and (c) of this paragraph may be adjusted pursuant to the full-ratchet anti dilution provisions
contained in those warrants.
On
October 5, 2011, the Company issued secured convertible promissory notes to Gemini Master Fund, Ltd., Alpha Capital Anstalt, Brio
Capital, L.P. and Context Partners Fund, L.P. in the total principal amount of $1,200,000 from which the Company received $1,000,000
of cash. The convertible promissory note is convertible into shares of the Company’s common stock at a rate the lesser of
(a) $0.10 per share, or (b) 80% of the average of the three (3) lowest daily VWAP’s (volume weighted average prices) during
the 22 consecutive trading days immediately preceding the applicable conversion date, but not less than $0.05 per share, subject
to full ratchet anti-dilution provisions. The notes included a total of 12,000,000 warrants that also have full ratchet anti-dilution
provisions and other potential adjustments. On their face, they are exercisable at $0.10 per share for a period of five years
from the date of issue. If these provisions are triggered, the exercise price of all their warrants and convertible notes will
be reduced. Accordingly, the warrants and convertible notes are not considered to be solely indexed to the Company’s own
stock and are not afforded equity treatment.
In
connection with previous financing transactions, the Company issued warrants to purchase common stock and convertible promissory
notes. These instruments included provisions that could result in a variable exercise price or a variable number of shares to
be issued based on specified full-ratchet anti-dilution provisions. The “reset” provisions were triggered in the event
the Company subsequently issued common stock, stock warrants, stock options or convertible debt with a stock price, exercise price
or conversion price lower than contractually specified amounts. Upon triggering the “reset” provisions, the exercise
/ conversion price of the instrument would be reduce and/or the number of shares issuable upon exercise / conversion of the instrument
would increase. In addition, the Company’s convertible notes were convertible at a price based on a discount of 80% of the
volume weighted average price (VWAP) for a specified period prior to conversion. Accordingly, pursuant to ASC 815, these instruments
were not considered to be solely indexed to the Company’s own stock and were not afforded equity treatment.
The
following table summarizes activity in the Company’s derivative liability for the years ended December 31, 2011 through
December 31, 2012:
Balance
at December 31, 2010
|
|
|
2,243,466
|
|
Increase in derivative
value due to security issuances
|
|
|
2,075,090
|
|
Decrease in derivative
value due to exercise of warrants
|
|
|
(985,044
|
)
|
Derivative loss
|
|
|
14,222,300
|
|
Balance, December
31, 2011
|
|
$
|
17,555,812
|
|
Creation of Derivative
Liability
|
|
|
71,545
|
|
Settlements to Equity
|
|
|
(12,484,594
|
)
|
Change
in Value
|
|
|
(5,142,763
|
)
|
Balance, December
31, 2012
|
|
$
|
-
|
|
The
Company classifies the fair value of these derivative liabilities under level 3 of the fair value hierarchy of financial instruments.
The fair value of the derivative liability was calculated using a Monte Carlo simulation model that values the embedded derivatives
based on several inputs, assumptions and probabilities. This model is based on future projections of the various potential outcomes.
The embedded derivatives that were analyzed and incorporated into the model included the exercise feature with the full ratchet
reset and the conversion feature of the convertible promissory notes.
The
Company utilized a third party valuation expert in determining the fair value of its derivative liabilities. The assumptions used
in the model include the following:
●
The warrant term ranged from 9 months to 60 months.
●
The estimated volatility was 120% - 122%
●
The risk free rate was 0.83% to 0.87%
IMAGING3,
INC.
DEBTOR
IN POSSESSION
Notes
to Financial Statements
December
31, 2012, and 2011
Fair
Value of Financial Instruments
On
January 1, 2008, the Company adopted a new standard related to the accounting for financial assets and financial liabilities and
items that are recognized or disclosed at fair value in the financial statements on a recurring basis, at least annually. This
standard provides a single definition of fair value and a common framework for measuring fair value as well as new disclosure
requirements for fair value measurements used in financial statements. Fair value measurements are based upon the exit price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants exclusive
of any transaction costs, and are determined by either the principal market or the most advantageous market. The principal market
is the market with the greatest level of activity and volume for the asset or liability. Absent a principal market to measure
fair value, the Company would use the most advantageous market, which is the market that the Company would receive the highest
selling price for the asset or pay the lowest price to settle the liability, after considering transaction costs. However, when
using the most advantageous market, transaction costs are only considered to determine which market is the most advantageous and
these costs are then excluded when applying a fair value measurement. The adoption of this standard did not have a material effect
on the Company’s financial position, results of operations or cash flows.
On
January 1, 2009, the Company adopted an accounting standard for applying fair value measurements to certain assets, liabilities
and transactions that are periodically measured at fair value. The adoption did not have a material effect on the Company’s
financial position, results of operations or cash flows.
In
August 2009, the FASB issued an amendment to the accounting standards related to the measurement of liabilities that are routinely
recognized or disclosed at fair value. This standard clarifies how a company should measure the fair value of liabilities, and
that restrictions preventing the transfer of a liability should not be considered as a factor in the measurement of liabilities
within the scope of this standard. This standard became effective for the Company on October 1, 2009. The adoption of this standard
did not have a material impact on the Company’s financial statements.
The
fair value accounting standard creates a three-level hierarchy to prioritize the inputs used in the valuation techniques to derive
fair values. The basis for fair value measurements for each level within the hierarchy is described below with Level 1 having
the highest priority and Level 3 having the lowest.
Level
1: Quoted prices in active markets for identical assets or liabilities.
Level
2: Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets
that are not active; and model-derived valuations in which all significant inputs are observable in active markets.
Level
3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable.
The
following table presents assets and liabilities that are measured and recognized at fair value as of December 31, 2012 and 2011
on a recurring basis:
December
31, 2012
Description
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
Gains and (Losses)
|
|
Derivative
Liability
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
5,142,763
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,142,763
|
|
December
31, 2011
Description
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
Gains and (Losses)
|
|
Derivative
Liability
|
|
|
-
|
|
|
|
-
|
|
|
|
17,555,812
|
|
|
|
(15,297,390
|
)
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
17,555,812
|
|
|
$
|
(15,297,390
|
)
|
IMAGING3,
INC.
DEBTOR
IN POSSESSION
Notes
to Financial Statements
December
31, 2012, and 2011
Revenue
Recognition
The
Company recognizes its revenue in accordance with the Securities and Exchange Commission (“SEC”) Staff Accounting
Bulletin No. 104, “Revenue Recognition in Financial Statements” (“SAB 104”). SAB 104 revises or rescinds
portions of the interpretative guidance included in Topic 13 of the codification of staff accounting bulletins in order to make
this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations.
Revenue is recognized upon shipment, provided that evidence of an arrangement exists, title and risk of loss have passed to the
customer, fees are fixed or determinable and collection of the related receivable is reasonably assured. Revenue is recorded net
of estimated product returns, which is based upon the Company’s return policy, sales agreements, management estimates of
potential future product returns related to current period revenue, current economic trends, changes in customer composition and
historical experience. The Company accrues for warranty costs, sales returns, and other allowances based on its experience. Generally,
the Company extends credit to its customers and does not require collateral. The Company performs ongoing credit evaluations of
its customers and historic credit losses have been within management’s expectations and has a revenue receivables policy
for service and warranty contracts. Equipment sales usually have a one year warranty of parts and service. After a one year period,
the Company contacts the buyer to initiate the sale of a new warranty contract for one year. Warranty revenues are deferred and
recognized on a straight-line basis over the term of the contract or as services are performed.
Rental
income is recognized when earned and expenses are recognized when incurred. The rental periods vary based on customer’s
needs ranging from five days to six months. An operating lease agreement is utilized. The rental revenues were insignificant in
the twelve month periods ended December 31, 2012, and 2011. Written rental agreements are used in all instances.
Deferred
Revenue
Deferred
revenue consists substantially of amounts received from customers in advance of the Company’s performance service period.
Deferred revenue is recognized as revenue on a systematic basis that is proportionate to the period that the underlying services
are rendered, which in certain arrangements is straight-line over the remaining contractual term or estimated customer life of
an agreement.
Stock-Based
Compensation
The
Company records stock-based compensation as a charge to earnings net of the estimated impact of forfeited awards. As such, the
Company recognizes stock-based compensation cost only for those stock-based awards that are estimated to ultimately vest over
their requisite service period, based on the vesting provisions of the individual grants. The cumulative effect on current and
prior periods of a change in the estimated forfeiture rate is recognized as compensation cost in earnings in the period of the
revision. The terms of the Company’s performance share unit grants allow the recipients of such awards to earn a variable
number of shares based on the achievement of the performance goals specified in the awards. For performance share unit awards
granted prior to 2008, the actual amount of any stock award earned is based on the Company’s earnings per share growth as
measured in accordance with its Amended and Restated Employee Long-Term Incentive Plan (“ELTIP”) for the performance
period compared to that of a peer group of companies. Beginning with performance share unit awards granted in 2008, the performance
measure for these awards will be based on the compound annual growth rate of the Company’s earnings per share from continuing
operations over a three year period. Stock-based compensation expense associated with performance share units is recognized based
on management’s best estimates of the achievement of the performance goals specified in such awards and the resulting number
of shares that will be earned. The compensation expected to be earned is recognized as compensation cost in earnings in the period
of the revision.
Income
Taxes
The
Company accounts for income taxes using the liability method. Deferred tax assets are recognized for deductible temporary differences
and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between
the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when,
in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
Basic
and Diluted Net Loss Per Share
Basic
net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based
on the assumption that all dilutive convertible notes, shares and stock options were converted or exercised. Dilution is computed
by applying the treasury stock method. Under this method, options, warrants and convertible notes are assumed to be exercised
at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase
common stock at the average market price during the period. The effect of the Company’s common stock warrants and convertible
promissory notes were not anti-dilutive at December 31, 2011.
The
components of basic and diluted earnings per share for the year ended December 31, 2012 is as follows:
|
|
2012
|
|
Numerator
|
|
|
|
Net
income attributable to common shareholders
|
|
$
|
2,636,484
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
Weighted-average
shares outstanding - basic
|
|
|
499,946,416
|
|
Dilutive
effect of warrants and convertible notes
|
|
|
250,053,584
|
|
Weighted
average shares outstanding – diluted
|
|
|
750,000,000
|
|
Research
and Development
Costs
and expenses that can be clearly identified as research and development are charged to expense as incurred in accordance with
FASB ASC 730-10. Included in research and development costs are operating costs, facilities, supplies, external services, clinical
trial and manufacturing costs, and overhead directly related to the Company’s research and development operations, as well
as costs to acquire technology licenses.
IMAGING3,
INC.
DEBTOR
IN POSSESSION
Notes
to Financial Statements
December
31, 2012 and 2011
Recent
Pronouncements
In
July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating
Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, (“ASU 2013-02”), which eliminates diversity
in practice for the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or
a tax credit carryforward is available to reduce the taxable income or tax payable that would result from disallowance of a tax
position. ASU 2013-11 affects only the presentation of such amounts in an entity’s balance sheet and is effective for fiscal
years beginning after December 15, 2013 and interim periods within those years. Early adoption is permitted. The adoption of ASU
2013-11 is not expected to have a material effect on our consolidated financial position or results of operations.
In
February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update which adds
new disclosure requirements for items reclassified out of accumulated other comprehensive income. The update requires entities
to disclose additional information about reclassification adjustments, including changes in accumulated other comprehensive income
balances by component and significant items reclassified out of accumulated other comprehensive income. The update will be effective
for us in the first quarter of 2013, but early adoption is permitted. The update will primarily impact our disclosures, but otherwise
is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.
In
July 2012, the FASB issued an accounting standards update which provides, subject to certain conditions, the option to perform
a qualitative, rather than quantitative, assessment to determine whether it is more likely than not that the fair value of an
indefinite-lived intangible asset is less than its carrying amount. The update will be effective for us in the first quarter of
2013, but early adoption is permitted. The update may, under certain circumstances, reduce the complexity and costs of testing
indefinite-lived intangible assets for impairment, but otherwise is not expected to have a material impact on the Company’s
consolidated financial position, results of operations or cash flows.
In
September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles
– Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The guidance in ASU 2011-08 is intended to reduce complexity
and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine
whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon
the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether
it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Also, the amendments improve
the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should
consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test.
The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning
after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as
of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have
not yet been issued. The adoption of this guidance is not expected to have a material impact on the Company’s financial
position or results of operations.
In
June 2011, the FASB issued ASU 2011-05, “Comprehensive Income (Topic 220): Presentation of Comprehensive Income”,
which is effective for annual reporting periods beginning after December 15, 2011. ASU 2011-05 will become effective for the Company
on April 1, 2012. This guidance eliminates the option to present the components of other comprehensive income as part of the statement
of changes in stockholders’ equity. In addition, items of other comprehensive income that are reclassified to profit or
loss are required to be presented separately on the face of the financial statements. This guidance is intended to increase the
prominence of other comprehensive income in financial statements by requiring that such amounts be presented either in a single
continuous statement of income and comprehensive income or separately in consecutive statements of income and comprehensive income.
The adoption of ASU 2011-05 is not expected to have a material impact on our financial position or results of operations.
In
May 2011, the FASB issued ASU 2011-04, “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement
and Disclosure Requirements in U.S. GAAP and IFRSs” (ASU 2011-04), which is effective for annual reporting periods beginning
after December 15, 2011. This guidance amends certain accounting and disclosure requirements related to fair value measurements.
Additional disclosure requirements in the update include: (1) for Level 3 fair value measurements, quantitative information about
unobservable inputs used, a description of the valuation processes used by the entity, and a qualitative discussion about the
sensitivity of the measurements to changes in the unobservable inputs; (2) for an entity’s use of a nonfinancial asset that
is different from the asset’s highest and best use, the reason for the difference; (3) for financial instruments not measured
at fair value but for which disclosure of fair value is required, the fair value hierarchy level in which the fair value measurements
were determined; and (4) the disclosure of all transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2011-04
will become effective for the Company on January 1, 2012. We are currently evaluating ASU 2011-04 and have not yet determined
the impact that adoption will have on our financial statements.
IMAGING3,
INC.
DEBTOR
IN POSSESSION
Notes
to Financial Statements
December
31, 2012 and 2011
3.
ACCOUNTS RECEIVABLE
All
accounts receivable are trade related. These receivables are current and management believes are collectible except for which
a reserve has been provided. The balance of accounts receivable as of December 31, 2012 and 2011 were $36,761 and $49,772 respectively.
The reserve amount for uncollectible accounts was $17,243 and $4,909 as of December 31, 2012 and 2011, respectively.
4.
INVENTORIES
Inventory
was comprised of the following:
|
|
December
31, 2011
|
|
|
December
31, 2012
|
|
Parts
inventory
|
|
$
|
29,782
|
|
|
$
|
-
|
|
Finished
goods
|
|
|
119,132
|
|
|
|
-
|
|
Total
|
|
$
|
148,914
|
|
|
$
|
-
|
|
For
the periods ending December 31, 2011 and 2012, the Company experienced an impairment of $0 and $149,628 in inventory, respectively.
At December 31, 2012, the value of the inventory on hand was deemed to be worthless and therefore was written off.
5.
PETITION FOR RELIEF UNDER CHAPTER 11 OF THE BANKRUPTCY CODE
On
September 13, 2012, the Company filed a voluntary petition with the federal bankruptcy court in Los Angeles, California, to enter
bankruptcy under Chapter 11 of the United States Bankruptcy Code. On or about July 15, 2013, our Plan of Reorganization was approved
by the United States Bankruptcy Court. On July 30, 2013, we emerged from bankruptcy and continued operations under the terms and
conditions of our Bankruptcy Reorganization Plan as it applies to post bankruptcy operations. The Chapter 11 Plan (the “Plan”)
adopted by Imaging3, Inc. is a reorganizing plan. Payments under the Plan were made by utilizing existing cash on hand, borrowings
on a secured and unsecured basis, future cash flow, if any, capital raised through the sale of our common stock in private placements,
and by conversion of debt to equity. The effective date of the Plan was July 30, 2013 (the “Effective Date”). For
accounting purposes and convenience, the Effective Date was deemed to be July 1, 2013. There was very little activity between
July 1, 2013 and July 30, 2013.
IMAGING3,
INC.
DEBTOR
IN POSSESSION
Notes
to Financial Statements
December
31, 2012, and 2011
6.
PROPERTIES AND EQUIPMENT
Net
property and equipment were as follows:
|
|
December
31, 2011
|
|
|
December
31, 2012
|
|
Furniture
and office equipment
|
|
$
|
78,695
|
|
|
$
|
78,695
|
|
Tools and Shop equipment
|
|
|
54,183
|
|
|
|
57,682
|
|
Vehicles
|
|
|
105,871
|
|
|
|
105,871
|
|
|
|
|
238,749
|
|
|
|
242,249
|
|
Less accumulated
depreciation
|
|
|
(226,736
|
)
|
|
|
(237,807
|
)
|
Total
|
|
$
|
12,013
|
|
|
$
|
4,442
|
|
Depreciation
expenses were $10,516 and 7,571 for the years ended December 31, 2011 and 2012, respectively.
7.
ACCRUED EXPENSES
Accrued
expenses consisted of the following:
|
|
December
31, 2011
|
|
|
December
31, 2012
|
|
Accrued
wages
|
|
$
|
128,077
|
|
|
$
|
-0
|
|
Accrued legal fees
|
|
|
-0-
|
|
|
|
-0-
|
|
Accrued prior litigation
|
|
|
1,637,106
|
|
|
|
1,366,203
|
|
Other accrued expenses
|
|
|
39,953
|
|
|
|
151,833
|
|
Total
|
|
$
|
1,805,136
|
|
|
$
|
1,518,036
|
|
During
2003, the Company paid payroll net of taxes and accrued said taxes without payment due to cash flow limitations resulting from
a 2002 warehouse fire that incinerated our inventory. The Company subsequently received a tax lien in 2005 related to 2003 payroll
taxes from the Internal Revenue Service and continued to accrue interest and penalty charges. The original amount was $104,052.
In 2008, payments were made and the Internal Revenue Service issued a tax lien release for this amount and the liability carried
on the Company’s books was relieved. In 2009, the Company was notified by the Internal Revenue Service that additional payroll
taxes, interest, and penalty charges were still owed. After researching, it is believed that the Internal Revenue Service double
booked the original payments made and released the lien in error. Settlement was reached and the Company is currently paying $2,000
per month on a total liability as of December 31, 2011 of $125,354, and as of December 31, 2012 of $104,035, including interest
and penalties, with a potential balloon payment in one year subject to re-negotiation after one year with the IRS.
8.
INCOME TAXES
The
Company’s book losses and other timing differences result in a net deferred income tax benefit which is offset by a valuation
allowance for a net deferred asset of zero. The Company has concluded, in accordance with the applicable accounting standards,
that it is more likely than not that the Company may not realize the benefit of all of its deferred tax assets. Accordingly, management
has provided a 100% valuation allowance against its deferred tax assets until such time as management believes that its projections
of future profits as well as expected future tax rates make the realization of these deferred tax assets more-likely-than-not.
Significant judgment is required in the evaluation of deferred tax benefits and differences in future results from our estimates
could result in material differences in the realization of these assets. The Company has recorded a full valuation allowance related
to all of its deferred tax assets. The Company has performed an assessment of positive and negative evidence regarding the realization
of the net deferred tax asset in accordance with FASB ASC 740-10, “Accounting for Income Taxes.” This assessment included
the evaluation of scheduled reversals of deferred tax liabilities, the availability of carry forwards and estimates of projected
future taxable income. The availability of the Company’s net operating loss carry forwards is subject to limitation if there
is a 50% or more change in the ownership of the Company’s stock. The provision for income taxes consists of the state minimum
tax imposed on corporations of $800. The Company has adopted guidance issued by the FASB that clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold of more likely
than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to
be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position
will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position
will be examined by taxing authorities. The Company’s policy is to include interest and penalties related to unrecognized
tax benefits in income tax expense. The Company has not recognized any unrecognized tax benefits and does not have any interest
or penalties related to uncertain tax positions as of December 31, 2012.
As
of December 31, 2012, the Company is in process of determining the amount of Federal and State net operating loss carry forwards
(“NOL”) available to offset future taxable income. The Company’s NOLs expire through 2032. These NOLs may be
used to offset future taxable income, to the extent the Company generates any taxable income, and thereby reduce or eliminate
future federal income taxes otherwise payable. Section 382 of the Internal Revenue Code imposes limitations on a corporation’s
ability to utilize NOLs if it experiences an ownership change as defined in Section 382. In general terms, an ownership change
may result from transactions increasing the ownership of certain stockholders in the stock of a corporation by more than 50% over
a three-year period. In the event that an ownership change has occurred, or were to occur, utilization of the Company’s
NOLs would be subject to an annual limitation under Section 382. Any unused annual limitation may be carried over to later years.
The Company could experience an ownership change under Section 382 as a result of events in the past in combination with events
in the future. If so, the use of the Company’s NOLs, or a portion thereof, against future taxable income may be subject
to an annual limitation under Section 382, which may result in expiration of a portion of the NOLs before utilization. As of December
31, 2012, the Company estimated it had available gross net operating loss (NOL) carry forwards of $42 million, which expire at
various dates through 2032.
IMAGING3,
INC.
DEBTOR
IN POSSESSION
Notes
to Financial Statements
December
31, 2012, and 2011
The
components of the net deferred tax asset are summarized below:
|
|
December
31, 2012
|
|
|
December
31, 2011
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net
operating losses
|
|
$
|
16,783,000
|
|
|
$
|
12,063,754
|
|
Less: valuation
allowance
|
|
|
(16,783,000
|
)
|
|
|
(12,063,754
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
The
following is a reconciliation of the provision for income taxes at the U.S. federal income tax rate to the income taxes reflected
in the Statement of Operations:
|
|
December
31, 2012
|
|
|
December
31, 2011
|
|
Tax
expense (credit) at statutory rate-federal
|
|
|
(34
|
)%
|
|
|
(34
|
)%
|
State tax expense
net of federal tax
|
|
|
(6
|
)
|
|
|
(6
|
)
|
Changes in valuation
allowance
|
|
|
40
|
|
|
|
40
|
|
Tax expense at actual
rate
|
|
$
|
-
|
|
|
$
|
-
|
|
Income
tax expense consisted of the following:
|
|
2012
|
|
|
2011
|
|
Current tax expense:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
800
|
|
|
|
800
|
|
Total Current
|
|
$
|
800
|
|
|
$
|
800
|
|
|
|
|
|
|
|
|
|
|
Deferred tax credit:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
0
|
|
|
$
|
4,996,773
|
|
State
|
|
|
0
|
|
|
|
881,783
|
|
Total deferred
|
|
$
|
0
|
|
|
$
|
5,878,556
|
|
Less: valuation
allowance
|
|
|
(0
|
)
|
|
|
(5,878,556
|
)
|
Net Deferred tax
credit
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Tax expense
|
|
$
|
800
|
|
|
$
|
800
|
|
IMAGING3,
INC.
DEBTOR
IN POSSESSION
Notes
to Financial Statements
December
31, 2012, and 2011
9.
CONVERTIBLE NOTES
During
the year ended December 31, 2011, the Company issued secured convertible promissory notes in the total principal amount of $1,200,000
from which the Company received $1,000,000 of cash. The notes have no stated rate of interest. The convertible promissory note
is convertible into shares of the Company’s common stock at a rate the lesser of (a) $0.10 per share, or (b) 80% of the
average of the three (3) lowest daily VWAP’s (volume weighted average prices) during the 22 consecutive trading days immediately
preceding the applicable conversion date, but not less than $0.05 per share, subject to full ratchet anti-dilution provisions.
The notes included a total of 12,000,000 warrants that also have full ratchet anti-dilution provisions and other potential adjustments.
On their face, they are exercisable at $0.10 per share for a period of five years from the date of issue. The notes are secured
by all personal property of the company, including inventory, equipment, contract rights including all intangible assets, etc.
The Company incurred financing costs of $15,250 related to the issuance of the convertible note and warrants. These financing
costs have been deferred and are being amortized on a straight line basis over the life of convertible promissory note. It was
determined that the convertible notes and warrants included embedded derivatives.
A
discount on the convertible promissory notes totaled $1,200,000 was amortized by $907,397. This discount is amortized using the
effective interest method over the term of the note. The debt discount amortization during the period ended December 31, 2012
was $909,016 and $292,603 for 2011. The other convertible notes payable totaling $342,950 at December 31, 2012 and taken on at
various dates between July 2012 and the end of the year had a discount of $71,545 booked of which $1,618 was amortized. The other
convertible notes all had five year terms and bore simple interest at the rate of 7% per annum, and were convertible at any time
principal and interest into common stock at a conversion price of $0.001 per share of common stock. The conversion from notes
to stock was completed as directed.
10.
STOCKHOLDERS’ EQUITY
Preferred
Stock
On
November 17, 2011, the Company authorized the issuance of up to 1,000,000 shares of preferred stock. On March 20, 2012, the Company
issued 3,000 shares of Series A Preferred Stock to the Company’s Chief Executive Officer. These shares were valued at $532,391
and recognized as an expense between 2011 and 2012.
Series
A Preferred Stock
These
shares have the right to receive dividends, when declared, on a ratable basis with the holders of the Company’s common stock
based on the number of shares of Series A Preferred Stock then outstanding in relation to the total number of shares of Series
A Preferred Stock and common stock then outstanding. These shares have voting rights that permit the holders to vote 350,000 votes
for each share of Series A Preferred Stock. The holders of Series A Preferred Stock will vote with the holders of common stock
as one class. In the event of liquidation, dissolution, or winding up of the Company, the Series A Preferred Stock then outstanding
will be entitled to be paid a preference of $0.001 per share of the then outstanding Series A Preferred Stock.
The
Company estimated the 3,000 shares of Series A Preferred Stock granted on November 17, 2011 to an officer of the Company at the
fair market value of $288,014. These shares were issued subsequent to December 31, 2011, and as such have been recorded in Preferred
Stock Payable. The holder of this preferred stock along with other common share holdings, represent a controlling voting interest
in the Company. As a result, a determination of the control premium was determined to estimate the value of the shares. The control
premium is based on publicly traded companies or comparable entities which have been recently acquired in arm’s length transactions.
This control premium was determined to be 10% of the market value of the common shares required for control on the date the shares
were granted. The market value of the common shares required to control the Company was $2,880,140 on the date of grant. The number
of common shares required for control is based on the number required to be held by the holder of the preferred stock in order
for the preferred stock to give that holder control of the Company. The Company performed the valuation with the assistance of
a valuation specialist.
IMAGING3,
INC.
DEBTOR
IN POSSESSION
Notes
to Financial Statements
December
31, 2012, and 2011
Common
Stock
During
the year ended December 31, 2011, the Company issued 20,811,084 shares of common stock for cash amounting to $1,040,554.
During
the year ended December 31, 2011, the Company issued 1,685,135 shares of common stock for consulting services. The expenses amounted
to $140,500 based on the Company’s closing stock price on the date of the issuance.
During
the year ended December 31, 2011, the Company paid $5,500 in stock offering costs.
During
the year ended December 31, 2011, the Company issued 2,427,590 shares of common stock to settle an amount expensed in a prior
period and recorded in accrued expenses. The total amount of $523,014 in accrued expenses was settled for stock in the amount
of $194,207 and cash to be paid of $156,616, generating a gain on the settlement of debt of $172,190. These shares were valued
at the fair market value on the day the transaction occurred.
During
the year ended December 31, 2011, the Company issued 12,000,000 warrants to purchase 12,000,000 shares of common stock in connection
with the issuance of a secured convertible promissory note in the principal amount of $1,200,000 from which the Company received
$1,000,000 of cash. The convertible promissory note is convertible into shares of the Company’s common stock at a rate the
lesser of (a) $0.10 per share, or (b) 80% of the average of the three (3) lowest daily VWAP’s (volume weighted average prices)
during the 22 consecutive trading days immediately preceding the applicable conversion date, but not less than $0.05 per share,
subject to full ratchet anti-dilution provisions. The 12,000,000 warrants also have full ratchet anti-dilution provisions and
other potential adjustments. On their face, they are exercisable at $0.10 per share for a period of five years from the date of
issue. The Company incurred financing costs of $15,250 related to the issuance of the convertible note and warrants. These financing
costs have been deferred and are being amortized on a straight line basis over the life of convertible promissory note.
During
the year ended December 31, 2011, the Company issued 9,043,619 shares of common stock for cashless warrants exercised during this
period. No gain or loss was recorded on the exercise of these warrants.
During
the year ended December 31, 2011, the Company was involved in litigation with warrant holders and settled such litigation subsequent
to December 31, 2011. The Company recorded an accrual for an issuance of shares pursuant to this settlement in which a number
of shares equal to $275,000 divided by 80% of the closing sale price of the Company’s common stock on the trading day immediately
preceding the entry of the date of the court order seeking approval of the settlement.
The
following is a summary of select transactions involving common stock during the year ended December 31, 2012.
●
|
The Company issued
2,000,000 shares of common stock for net cash proceeds of $89,150.
|
●
|
The Company issued
50,668,446 shares of common stock for the cashless exercise of warrants.
|
●
|
The Company issued
8,403,362 shares of common stock for net cash proceeds of $100,000 relating to the exercise of warrants.
|
●
|
The Company issued
73,655,130 shares of common stock for the conversion of convertible notes and accrued interest totaling $407,133.
|
11.
WARRANTS
During
the year ended December 31, 2011, the Company issued 12,000,000 warrants to purchase 12,000,000 shares of common stock in connection
with the issuance of a secured convertible promissory note in the principal amount of $1,200,000 from which the Company received
$1,000,000 of cash. The 12,000,000 warrants also have full ratchet anti-dilution provisions and other potential adjustments. On
their face, they are exercisable at $0.10 per share for a period of five years from the date of issue. Also during the 2012 year,
a total of 8,403,362 warrants were converted on March 24, 2012, 6,273,859 warrants converted on April 17, 2012, 47,115,751 warrants
converted on April 5, 2012, and 16,100,000 warrants converted on May 2, 2012.
IMAGING3,
INC.
DEBTOR
IN POSSESSION
Notes
to Financial Statements
December
31, 2012, and 2011
Warrant
Activity
|
|
|
|
|
|
|
12/31/2010
|
|
Balance
|
|
|
13,990,829
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued
|
|
|
12,000,000
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercised
|
|
|
(20,000,005
|
)
|
|
|
|
|
|
|
|
|
|
Warrants
expired
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Adjustments
due to reset provisions
|
|
|
216,322,618
|
|
|
|
|
|
|
|
|
12/31/2011
|
|
Balance
|
|
|
222,313,442
|
|
|
|
|
|
|
|
|
|
|
Warrants
issued
|
|
|
229,358
|
|
|
|
|
|
|
|
|
|
|
Warrants
exercised
|
|
|
(77,892,972
|
)
|
|
|
|
|
|
|
|
|
|
Warrants
issued due to reset provisions
|
|
|
88,840,336
|
|
|
|
|
|
|
|
|
12/31/2012
|
|
Balance
|
|
|
233,490,164
|
|
12.
DERIVATIVE LIABILITY
The
Company’s only asset or liability measured at fair value on a recurring basis was its derivative liability associated with
warrants to purchase common stock and the conversion feature embedded in convertible promissory notes, all of which were cancelled
or settled with successor company shares and/or warrants on the effective date of the Company’s Chapter 11 Reorganization
Plan.
In
connection with previous financing transactions, the Company issued warrants to purchase common stock and convertible promissory
notes. These instruments included provisions that could result in a variable exercise price or a variable number of shares to
be issued based on specified full-ratchet anti-dilution provisions. The “reset” provisions were triggered in the event
the Company subsequently issued common stock, stock warrants, stock options or convertible debt with a stock price, exercise price
or conversion price lower than contractually specified amounts. Upon triggering the “reset” provisions, the exercise
/ conversion price of the instrument would be reduce and/or the number of shares issuable upon exercise / conversion of the instrument
would increase. In addition, the Company’s convertible notes were convertible at a price based on a discount of 80% of the
volume weighted average price (VWAP) for a specified period prior to conversion. Accordingly, pursuant to ASC 815, these instruments
were not considered to be solely indexed to the Company’s own stock and were not afforded equity treatment.
The
following table summarizes activity in the Company’s derivative liability for the years ended December 31, 2010 through
December 31, 2012:
Balance
at December 31, 2010
|
|
|
2,243,466
|
|
Increase
in derivative value due to security issuances
|
|
|
2,075,090
|
|
Decrease
in derivative value due to exercise of warrants
|
|
|
(985,044
|
)
|
Derivative
loss
|
|
|
14,222,300
|
|
Balance,
December 31, 2011
|
|
$
|
17,555,812
|
|
Creation
of Derivative Liability
|
|
|
71,545
|
|
Settlements
to Equity
|
|
|
(12,484,594
|
)
|
Change
in Value
|
|
|
(5,142,763
|
)
|
Balance,
December 31, 2012
|
|
$
|
-
|
|
IMAGING3,
INC.
DEBTOR
IN POSSESSION
Notes
to Financial Statements
December
31, 2012, and 2011
The
Company classifies the fair value of these derivative liabilities under level 3 of the fair value hierarchy of financial instruments.
The fair value of the derivative liability was calculated using a Monte Carlo simulation model that values the embedded derivatives
based on several inputs, assumptions and probabilities. This model is based on future projections of the various potential outcomes.
The embedded derivatives that were analyzed and incorporated into the model included the exercise feature with the full ratchet
reset and the conversion feature of the convertible promissory notes.
The
Company utilized a third party valuation expert in determining the fair value of its derivative liabilities. The assumptions used
in the model include the following:
● The
warrant term ranged from 9 months to 60 months.
● The
estimated volatility was 120% - 122%
● The
risk free rate was 0.83% to 0.87%
IMAGING3,
INC.
DEBTOR
IN POSSESSION
Notes
to Financial Statements
December
31, 2012, and 2011
13.
SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The
Company prepares its statements of cash flows using the indirect method.
The
Company paid income taxes of $800 and interest of $16,140 during the year 2011. The Company paid income taxes of $800 and interest
of $975,988 during the year ending December 31, 2012.
14.
GOING CONCERN
The
Company’s financial statements are prepared using the generally accepted accounting principles applicable to a going concern,
which contemplates the realization of assets and liquidation of liabilities in the normal course of business. In the year ended
December 31, 2012 the Company had net income of $2,636,484 and incurred a net loss of $17,926,713 in December 31, 2011. The Company
has an accumulated deficit of $32,090,020 as of December 31, 2012. In addition, the Company had negative cash flow from operating
activities amounting to $845,696 as of December 31, 2012. The continuing losses have adversely affected the liquidity of the Company.
In
view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown
in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s
ability to raise additional capital, obtain financing and to succeed in its future operations. The financial statements do not
include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification
of liabilities that might be necessary should the Company be unable to continue as a going concern.
Management
has taken the following steps to revise its operating and financial requirements, which it believes are sufficient to provide
the Company with the ability to continue as a going concern. Management devoted considerable effort during the years ended December
31, 2011 and 2012, toward (i) obtaining additional equity capital (ii) controlling salaries and general and administrative expenses,
(iii) management of accounts payable, (iv) evaluation of its distribution and marketing methods, and (v) increasing marketing
and sales. In order to control general and administrative expenses, the Company has established internal financial controls in
all areas, specifically in hiring and overhead cost. The Company has also established a hiring policy under which the Company
will refrain from hiring additional employees unless approved by the Chief Executive Officer and Chief Financial Officer. Accounts
payable are reviewed and approved or challenged on a daily basis and the sales staff is questioned as to the validity of any expense
on a monthly basis. Senior management reviews the annual budget to ascertain and question any variance from plan, on a quarterly
basis, and to anticipate and make adjustments as may be feasible.
The
Company anticipates that further equity/debt financings will be necessary to continue to fund operations in the future and there
is no guarantee that such financings will be available or, if available, on acceptable terms.
15.
COMMITMENTS
The
Company has a facility lease agreement effective October 1, 2004 for five years with an option to extend for a 60 month period,
which the Company exercised effective October 1, 2009.
IMAGING3,
INC.
DEBTOR
IN POSSESSION
Notes
to Financial Statements
December
31, 2012, and 2011
Future
annual minimum lease commitments, excluding property taxes and insurance, payable at December 31, 2012 are approximately as follows:
2013
|
|
|
|
132,840
|
|
2014
|
|
|
|
132,840
|
|
|
|
|
$
|
265,680
|
|
Rent
expenses for the leased facility were $132,840 for the years ended December 31, 2012, and 2011. The Company exercised its options
under the renewal lease agreement during the third quarter of 2009.
16.
CONTINGENCIES & LITIGATION
Partly
in connection with a fire at the Company’s facility on or about February 19, 2002, in which the Company’s manufacturing,
warehouse, and office facilities were substantially destroyed, the Company became engaged in litigation in several courts, all
of which have reached judgment or been settled or dismissed.
On
November 29, 2011, we were served with a Motion to Compel Arbitration by Cranshire Capital, LLC and Freestone Advantage Partners,
LLC (collectively, the “Plaintiffs”), two warrant holders with whom we completed a private placement for the sale
of common stock and warrants for $1,000,000 in October 2010. The Plaintiffs allege that they are the holders of Series A Warrants,
Series B Warrants, and Series C Warrants (collectively, the “Warrants”) and that our entry into a transaction in October
2011 had the effect of triggering the anti-dilution provision in the Warrants. They allege that the effect of the application
of the anti-dilution provisions was to substantially lower the exercise price of the Warrants and increase the number of them.
On March 28, 2012, the Company settled this litigation and currently awaits court approval of the terms of the settlement. The
settlement includes the adjustment to the exercise price of the Series A and Series C warrants that results in an increase in
the number of shares issuable under these warrants. The parties agreed that under the Series A and Series C warrants, a number
of common shares of 105,042,042 and 105,042,042, respectively, remain issuable. The remaining Series B warrants were agreed by
both parties to be cancelled as of the date of the settlement and are no longer outstanding. The number of shares issuable under
this settlement agreement was included in the derivative valuation as of December 31, 2011. The parties agreed to exercise a portion
of the Series A warrants in exchange for 8,403,362 shares of common stock with a price to be paid of $100,000 in consideration
to the Company for such exercise. In addition, the warrant holders have promised to mandatorily exercise Series A and Series C
warrants for cash, subject to the satisfaction of certain conditions on a monthly basis, such that the Company would receive cash
proceeds from the exercises thereof of $80,000 per month if the conditions for mandatory exercise for that month are satisfied.
The mandatory exercise provisions include minimum monthly common stock price requirements of at least $0.025 per share for 15
or more trading days in the calendar month, an average daily trading volume for that month of at least 250,000 shares, and certain
registration rights pertaining to the filing and effectiveness of registration statements.
On
or about November 23, 2011, Cranshire Capital, LP, an Illinois limited partnership, filed an Application to Compel Arbitration
Under the Illinois Uniform Arbitration Act (case number 11 CH 40508 in the Circuit Court of Cook County, Illinois), regarding
a dispute concerning the issuance and pricing of warrants and shares issued by the Company. During March 2012, the Company issued
6,365,741 shares of common stock to settle this matter.
On
or about October 27, 2011, Exhibit Source, Inc. filed an action (Civil Action No. 11-cv-7652) in the United States District Court
for the Northern District of Illinois. The plaintiff claims that a display used by the Company at an Illinois trade show violated
its copyright. The Company disputed the plaintiff’s claims of copyright infringement. It is believed that this matter was
resolved in the Company’s bankruptcy proceeding.
On
May 16, 2012, the Company and its directors were named in a Complaint purporting to be a shareholder’s derivative action
by John M. Vuksich, Plaintiff. The action was filed in the Glendale Superior Court (North Central District) as case number EC058516.
This action was stayed by the Company’s bankruptcy filing, and is believed to have been disposed of in that bankruptcy case
subject to appeals.
On
September 13, 2012, the Company filed
In re Imaging3, Inc.
, Case No. 2:12-bk-41206-NB (Bankr. C.D. Ca.) (the “Bankruptcy
Case”), a voluntary petition under Chapter 11 of Title 11 of the United States Code. The Company’s plan of reorganization
thereunder (the “Plan”) was confirmed on July 9, 2013 pursuant to the court’s Order Confirming Debtor’s
First Amended Chapter 11 Plan of Reorganization Dated March 5, 2013, as Modified (the “Order”). Pursuant to the Order,
the Plan became effective on July 30, 2013 (“Effective Date”). The Plan requires that the Company pay certain obligations
on the Effective Date of the Plan. Of the Company’s obligations under the Plan, the Company is delinquent with regard to
the obligations described in the chart below:
Class
of Claim(s)
|
|
Payment
Recipient
|
|
Amount
of Each Periodic Payment
&
Amount
of Total Claim
|
|
Payment
Due Date
|
|
Status
of Payment
|
|
|
|
|
|
|
|
|
|
Administrative
Expense
Claim
|
|
Greenberg
Glusker Fields Claman & Machtinger LLP
|
|
$50,000.00
(monthly)
Total
Claim:
Approximately
$900,000.00
|
|
*Greenberg
Glusker agreed to be paid as follows:
$50,000.00
on September 1, 2013 and thereafter no less than $50,000.00 per month on or before the 15th of each month, commencing
on October 2013. Interest will be charged on the outstanding balance at the rate of 10% per annum from July 30, 2013
|
|
Not
paid
|
|
|
|
|
|
|
|
|
|
Administrative
Expense Claim
|
|
Mentor
Group
|
|
Approx.
$18,000
|
|
Effective
Date
|
|
Not
paid
|
|
|
|
|
|
|
|
|
|
Priority
Tax Claims
|
|
IRS
|
|
$1,484.00
(monthly)
Total
Claim:
$53,240.24
|
|
Monthly
payment of $1,484 until 9/12/2017
|
|
Not
Paid
|
|
|
|
|
|
|
|
|
|
Priority
Tax Claims
|
|
State
Board of Equalization
|
|
$341.00
(monthly)
Total
Claim:
$14,917.94
|
|
Monthly
payment of $341 until 9/12/2017
Modified
by Stipulation Dated June 23, 2015 as follows:
1.
Pay the balance of the Administrative Claim in the amount of $196.01
2.
Pay all of the arrearages
for
Priority Tax Claims by payment of $6,240.70
3.
Cure post-Stipulation Effective Date taxes in the aggregate amount of $31,367.12 together with monthly interest accruing
after July 1, 2015 (“Post Stipulation Effective Date Taxes”), by payment of four installments, as follows:
a.
$8,000 on the Stipulation Effective Date;
b.
$8,000 sixty days from the Stipulation Effective Date;
c.
$8,000 ninety days from the Stipulation Effective Date;
d.
the balance of the Post Stipulation Effective Date Taxes one hundred twenty days from the Stipulation Effective Date.
|
|
Paid
in accordance with the terms of the Stipulation with the State Board of Equalization
|
|
|
|
|
|
|
|
|
|
Class
1
|
|
North
Surgery Center, L.P.
|
|
$1,673.00
(monthly)
Total
Claim:
$53,792.83
|
|
Pay
monthly with first payment due on first business day of the first calendar month following the Effective Date
|
|
Paid
as scheduled until December 2013; Not Paid in and after January 2014.
|
|
|
|
|
|
|
|
|
|
Class
2
|
|
Precision
Forging Dies
|
|
Total
Claim:
$45,278.06
|
|
Pay
in full by the first business day of the thirteenth calendar month following the Effective Date (September 1, 2014)
|
|
Not
Paid
|
|
|
|
|
|
|
|
|
|
Class
9
|
|
IRS
(unsecured portion of tax claims)
|
|
Total
Claim:
$62,736.92
|
|
Cash
equal to the value of
pro rata
shares of New Common Stock outstanding on the Effective Date
|
|
Not
Paid
|
Table
of Contents
Section
IV, F of the Plan provides “A creditor or party in interest may bring a motion to convert or dismiss the case under §
1112(b), after the Plan is confirmed, if there is a default in performing the Plan. If the Court orders the case converted to
Chapter 7 after the Plan is confirmed, then all property that had been property of the Chapter 11 estate, and that has not been
disbursed pursuant to the Plan, will revest in the Chapter 7 estate, and the automatic stay will be reimposed upon the revested
property only to the extent that relief from stay was not previously granted by the Court during this case.”
In
addition, appeals of four of the Court’s orders in the Bankruptcy Case remain outstanding, specifically:
● Order
Denying Motion to Dismiss Chapter 11 Case, Case No.: 13-56695 (9th Cir.), appeal filed September 30, 2013, appealing the District
Court’s dismissal of the initial appeal of the order.
● Order
Disallowing Claims Nos. 23 and 24, Case No.: 14-55499 (9th Cir.), appeal filed March 31, 2014, appealing the District Court’s
order affirming the order of the Bankruptcy Court.
● Order
Denying Motion for Abandonment of Potential Claims Against Officers and Directors, Case No.: 14-55521 (9th Cir.), appeal filed
April 2, 2014, appealing the District Court’s order affirming the order of the Bankruptcy Court.
● Order
Confirming Debtor’s First Amended Plan, Case No.: 14-55466 (9th Cir.), appeal filed March 24, 2014, appealing the District
Court’s order affirming in part and reversing in part the order of the Bankruptcy Court.
The
above appeals are scheduled for hearing at the Ninth Circuit Court of Appeals on December 9, 2015.
The
Company was involved in the following additional litigation:
Securities and Exchange Commission v. Imaging3 & Dean Janes
,
Civil Action No. CV13-04616 GAF (AJWx) (U.S. Dist. Ct., C.D. Ca.), for which Fulbright & Jaworski LLP is counsel of record.
The Company settled this action by entering into a Deferred Prosecution Agreement with the SEC in which the Company covenanted
to comply with federal and state securities laws through December 31, 2017, among other covenants.
In
2009, the Company was notified by the Internal Revenue Service that additional payroll taxes, interest, and penalty charges were
still owed. After researching, it is believed that the Internal Revenue Service double booked the original payments made and released
the lien in error. Settlement was reached and the Company is currently paying $2,000 per month on a total liability of $49,881
as of May 17, 2016, including interest and penalties, with a potential balloon payment in one year subject to re-negotiation after
one year with the IRS. The Company has hired tax counsel to re-negotiate the current tax debt with the IRS.
17.
RELATED PARTY TRANSACTION
The
Company has a consulting agreement with the Chief Executive Officer of the Company under which he receives compensation of $12,000
per month. The Chief Executive Officer provides management, administrative, marketing, and financial services to the Company pursuant
to the consulting agreement which is terminable on 30 days notice by either party. The consulting agreement commenced on January
1, 2002 and continued until the adoption of the Company’s Chapter 11 Reorganization Plan, when it was terminated. As of
December 31,2012, the Company owed the former CEO $350,000 pursuant to this consulting agreement and advances, all of which were
settled by the issuance of common shares pursuant to the Company’s Chapter 11 Reorganization Plan.
18.
CONCENTRATIONS
Three
customers represent 33%, 12%, and 11%, respectively, of accounts receivable as of December 31, 2012. These balances were collected
subsequent to December 31, 2012. There were no revenue concentrations to disclose for the period ended December 31, 2012.
Three
customers represented 19%, and 18%, respectively, of the Company’s accounts receivable as of December 31, 2011. These balances
were collected subsequent to December 31, 2011. There were no revenue concentrations to disclose for the period ended December
31, 2011.