Notes
to Condensed Financial Statements
(Unaudited)
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
Imaging3,
Inc. (the “Company”, “us”, “we”, “Imaging3”) 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 refurbishment 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 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. Management believes that Imaging3 technology has extraordinary market potential in an almost unlimited number of medical
applications. 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.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
On
September 13, 2012 (the “Petition Date”), 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.
For accounting purposes, management deemed the effective date of the Chapter 11 Plan (the “Plan”) to be June 30, 2013.
The Company’s operations between July 1, 2013 and July 30, 2013 were not significant. 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.
Upon
emergence from bankruptcy, Imaging3 adopted fresh-start accounting which resulted in Imaging3 becoming a new entity for financial
reporting purposes. Imaging3 applied fresh start accounting as of July 1, 2013. As a result of the application of fresh start
accounting and the effects of the implementation of the plan of reorganization, the financial statements on or after July 1, 2013
are not comparable with the financial statements prior to that date.
Subsequent
to the Petition Date, all expenses, gains and losses directly associated with the reorganization proceedings are reported as Reorganization
items, net in the accompanying Consolidated Statement of Operations. In addition, Liabilities subject to compromise during the
Chapter 11 proceedings were distinguished from liabilities that were not expected to be compromised and from post-petition liabilities
in the accompanying Balance Sheets. The Company is in default on certain of its covenants under the Plan.
The
accompanying unaudited interim financial statements have been prepared in accordance with the rules and regulations of the Securities
and Exchange Commission for the presentation of interim financial information, but do not include all the information and footnotes
required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments,
consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. It is suggested that
these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s
annual report on Form 10-K for the fiscal year ended December 31, 2015. The Company follows the same accounting policies in preparation
of interim reports. Results of operations for the interim periods are not indicative of annual results.
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 satisfaction of liabilities in the normal course of business. The Company has
historically incurred net losses. 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 as a result of the Company’s going concern uncertainty.
Management’s
plan regarding this matter is to, amongst other things, seek additional equity financing by selling our equity securities, increase
our sales volume, and continue seeking approval from the FDA to bring to market our smart scan technology imaging platform. We
cannot assure you that funds from these sources will be available when needed or, if available, will be on terms favorable to
us or to our stockholders. If we raise additional funds or settle liabilities by issuing equity securities, the percentage ownership
of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities may provide for
rights, preferences or privileges senior to those of the holders of our common stock. Our ability to execute our business plan
and continue as a going concern may be adversely affected if we are unable to raise additional capital or operate profitably.
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.
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 accounting principles generally accepted in the United States of America, 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 September 30, 2016.
Revenue
Recognition
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.
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.
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.
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 all assets with estimated lives of three to eight years.
Impairment
of Long-Lived Assets
Long-lived
assets are 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, 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.
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 shares and stock options were converted or exercised. Dilution is computed by
applying the treasury stock method. Under this method, options and warrants 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. During 2015 and 2016, potentially dilutive securities were excluded from the computation of weighted
average shares outstanding-diluted because their effect was anti-dilutive.
Derivative
Financial Instruments
The
Company generally does not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may
affect the fair values of its financial instruments. The Company utilizes various types of financing to fund its business needs,
including convertible notes and warrants 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. The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability
associated with warrants to purchase common stock and convertible notes.
Fair
Value of Financial Instruments
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: Observable prices in active markets for identical assets or liabilities.
|
|
|
|
Level
2: Observable 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 the market.
|
|
|
|
Level
3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable. These unobservable
assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation
techniques include use of option pricing models, discounted cash flow models, and similar techniques.
|
The
Company had the following assets or liabilities measured at fair value on a recurring basis at September 30, 2016.
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Derivative
Liabilities
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
5,490,254
|
|
|
$
|
5,490,254
|
|
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740-10, “Income Taxes” which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial
statements or tax returns.
Under
this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases
of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates
applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents
the tax payable for the period and the change during the period in deferred tax assets and liabilities.
Inventory
Inventory
is stated at the lower of cost or market with cost determined using the first-in, first-out method.
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.
Recent
Accounting Pronouncements
In
May 2014, FASB issued Accounting Standards Update (ASU) No. 2014-09,
Revenue from Contracts with Customers
. The standard
will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with
a principle-based approach for determining revenue recognition. ASU 2014-09 is effective for annual and interim periods beginning
after December 15, 2017. Early adoption is not permitted. The revenue recognition standard is required to be applied retrospectively,
including any combination of practical expedients as allowed in the standard. We are evaluating the impact, if any, of the adoption
of ASU 2014-09 to our financial statements and related disclosures. The Company has not yet selected a transition method nor has
it determined the effect of the standard on its ongoing financial reporting.
In
August 2014, the FASB issued ASU 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure
of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. ASU 2014-15 changes to the disclosure of
uncertainties about an entity’s ability to continue as a going concern. These changes require an entity’s management
to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s
ability to continue as a going concern within one year after the date that financial statements are issued. Substantial doubt
is defined as an indication that it is probable that an entity will be unable to meet its obligations as they become due within
one year after the date that financial statements are issued. If management has concluded that substantial doubt exists, then
the following disclosures should be made in the financial statements: (i) principal conditions or events that raised the substantial
doubt, (ii) management’s evaluation of the significance of those conditions or events in relation to the entity’s
ability to meet its obligations, (iii) management’s plans that alleviated the initial substantial doubt or, if substantial
doubt was not alleviated, management’s plans that are intended to at least mitigate the conditions or events that raise
substantial doubt, and (iv) if the latter in (iii) is disclosed, an explicit statement that there is substantial doubt about the
entity’s ability to continue as a going concern. These changes become effective for the Company for the 2017 annual period.
Management is evaluating the impact of the adoption of these changes will have on the consolidated financial statements. Subsequent
to adoption, this guidance will need to be applied by management at the end of each annual period and interim period therein to
determine what, if any, impact there will be on the consolidated financial statements in a given reporting period.
In
April 2015, the FASB issued ASU No 2015-3,
Simplifying the Presentation of Debt Issuance Costs.
This update changes the
presentation of debt issuance costs in the balance sheet. ASU 2015-03 requires debt issuance costs related to a recognized debt
obligation to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability rather
than being presented as an asset. Amortization of debt issuance costs will continue to be reported as interest expense. In August
2015, the FASB issued ASU 2015-15, “Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit
Arrangements”. This ASU clarified guidance in ASC 2015-03 stating that the SEC staff would not object to a company presenting
debt issuance costs related to a line-of-credit arrangement on the balance sheet as a deferred asset, regardless of whether there
were any outstanding borrowings at period-end. This update is effective for annual and interim periods beginning after December
15, 2015, which will require us to adopt these provisions in the first quarter of 2016. We do not expect this guidance to have
a material impact to our financial position or results of operations.
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which supersedes existing guidance on accounting for leases
in “Leases (Topic 840)” and generally requires all leases to be recognized in the consolidated balance sheet. ASU
2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018; early adoption is permitted.
The provisions of ASU 2016-02 are to be applied using a modified retrospective approach. The Company is currently evaluating the
impact of the adoption of this standard on its consolidated financial statements.
In
March 2016, the FASB issued ASU 2016-09,
Improvements to Employee Share-Based Payment Accounting
. This ASU affects entities
that issue share-based payment awards to their employees. The ASU is designed to simplify several aspects of accounting for share-based
payment award transactions which include – the income tax consequences, classification of awards as either equity or liabilities,
classification on the statement of cash flows and forfeiture rate calculations. ASU 2016-09 will become effective for the Company
in the first quarter of fiscal 2018. Early adoption is permitted in any interim or annual period. The Company is currently evaluating
the impact of this guidance on its consolidated financial statements.
In
April 2016, the FASB issued AS 2016-10, Revenue from Contracts with Customers (Topic 606), which amends certain aspects of the
Board’s new revenue standard, ASU 2014-09, Revenue from Contracts with Customers. The standard should be adopted concurrently
with adoption of ASU 2014-09 which is effective for annual and interim periods beginning after December 15, 2017. The Company
has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.
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 reserve amount for uncollectible accounts was $-0- and $-0- as of September 30, 2016 and December
31, 2015, respectively.
4.
ACCRUED EXPENSES
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 $2,078
per month on a total liability of $38,019 as of September 30, 2016, including interest. The Company recognized a reduction of
accrued liability of approximately $200,000 relating to the settlement with the Internal Revenue Service, which was recorded as
other income. This agreement will cure any default of the Company’s plan payments. The final payment is due on April 16,
2018.
5.
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 September 30, 2016.
6.
NOTES PAYABLE
During
2013, the Company issued promissory notes in the aggregate amount of $42,500. These notes bear interest at 7% per annum and were
due on June 30, 2014. The notes are secured by substantially all assets of the Company. As of September 30, 2016 the notes are
past due.
During
2015, the Company issued promissory notes in the aggregate amount of $455,000. These notes bear interest at 10% per annum and
are past due as of September 30, 2016. These notes are secured by substantially all assets of the Company. The convertible promissory
note is convertible into shares of the Company’s common stock at a rate equal to $0.01 per share, subject to downward adjustments
for future equity issuances. In connection with these convertible promissory notes, the Company issued warrants to purchase 27,000,000
shares of common stock at an exercise price of $0.01 per share, subject to downward adjustments for future equity issuances. The
warrants have a term of 7 years from the date of issuance. The Company is in default under the terms of these notes.
During
2016, the Company issued promissory notes in the aggregate amount of $310,000. These notes bear interest at 10% per annum and
$165,000 is due on October 26, 2016, $65,000 is due on February 26, 2017, $40,000 is due on December 12, 2016, and $40,000 is
due on March 29, 2017. These notes are secured by substantially all assets of the Company. The convertible promissory notes are
convertible into shares of the Company’s common stock at a rate equal to $0.01-$0.05 per share, subject to downward adjustments
for future equity issuances. In connection with these convertible promissory notes, the Company issued warrants to purchase 36,500,000
shares of common stock at an exercise price of $0.01 per share, subject to downward adjustments for future equity issuances. The
warrants have a term of 7 years from the date of issuance.
The
conversion features and warrants are considered derivative liabilities pursuant to ASC 815 and were measured at their grant-date
fair value and recorded as a liability and note discount on the date of issuance. Subsequent changes to the value of the derivative
liabilities are recorded in earnings. As a result, during the year ended December 31, 2015, the Company recorded an initial note
discount of $455,000, with an additional immediate charge to interest expense of $749,809 relating to the excess value of the
derivative liabilities over the promissory notes. During the nine months ended September 30, 2016, the Company recorded an additional
note discount of $276,757, with an immediate charge to interest expense of $2,403,706 relating to the excess value of the derivative
liabilities over the promissory notes. Amortization of the note discount amounted to $272,090 during the nine months ended September
30, 2016 and $225,167 for the nine months ended September 30, 2015.
7.
STOCKHOLDERS’ EQUITY
Preferred
Stock
Upon
confirmation of the Company’s Chapter 11 Reorganization Plan, the Company was authorized to issue 2,000 shares of preferred
stock, no par value. The rights, privileges, and preferences of the preferred stock are to be determined by the Company’s
board of directors and may be issued in series. As of December 31, 2015, there were no shares of preferred stock outstanding.
As of January 18, 2016, Imaging3 issued 2,000 preferred voting shares to Dane Medley, CEO/Chairman. Each share constitutes 350,000
voting shares. The estimated value of these shares was not significant. As of September 30, 2016, there were 2,000 shares of preferred
stock outstanding.
Common
Stock
The
Company is authorized to issue 1,000,000,000 shares of no par value common stock.
During
the nine months ended September 30, 2015, the Company issued a total of 10,335,000 shares of common stock for cash proceeds of
$149,125 and 6,325,000 shares of common stock for services, valued at $70,750.
During
the nine months ended September 30, 2016 the Company issued a total of 4,364,000 shares of common stock for cash in the amount
of $159,900, and 32,000,000 shares of common stock were issued for services, valued at $1,612,500.
Stock
Option Plan
During
2014, the Board of Directors adopted, and the shareholders approved, the 2014 Stock Option Plan under which a total of 27,000,000
shares of common stock had been reserved for issuance. The 2014 Stock Option Plan will terminate in September 2024.
Stock
Options
As
of September 30, 2016, employees of the Company hold options to purchase 13,000,000 shares of common stock at an exercise price
of $0.025.
Transactions
in FY 2016
|
|
Quantity
|
|
|
Weighted-
Average
Exercise Price
Per
Share
|
|
|
Weighted-
Average
Remaining
Contractual
Life
|
|
Outstanding, December 31, 2015
|
|
|
8,000,000
|
|
|
$
|
0.025
|
|
|
|
9.25
|
|
Granted
|
|
|
5,000,000
|
|
|
|
0.025
|
|
|
|
8.88
|
|
Exercised
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2016
|
|
|
13,000,000
|
|
|
$
|
0.025
|
|
|
|
9.10
|
|
Exercisable, September 30, 2016
|
|
|
13,000,000
|
|
|
$
|
0.025
|
|
|
|
9.10
|
|
The
weighted average remaining contractual life of options outstanding issued under the Plan was 9.10 years at September 30, 2016.
8.
WARRANTS
Following
is a summary of warrants outstanding at September 30, 2016:
Warrant
Activity
|
12-31-2015 Balance
|
|
|
45,148,696
|
|
Granted
|
|
|
36,500,000
|
|
09-30-2016 Balance
|
|
|
81,648,696
|
|
Number
of Warrants
|
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
18,148,696
|
|
|
$
|
0.000001
|
|
|
July 2023
|
|
2,000,000
|
|
|
$
|
0.01
|
|
|
April 2022
|
|
25,000,000
|
|
|
$
|
0.01
|
|
|
August 2022
|
|
30,000,000
|
|
|
$
|
0.01
|
|
|
April 2023
|
|
6,500,000
|
|
|
$
|
0.01
|
|
|
August 2023
|
9.
DERIVATIVE LIABILITIES
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.
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 reduced exercise price 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 will be reduced.
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 during the nine months ended September 30, 2016:
12-31-2015
Balance
|
|
|
$
|
1,197,951
|
|
Creation
|
|
|
|
2,665,464
|
|
Change
in Value
|
|
|
|
1,626,839
|
|
09-30-2016
Balance
|
|
|
$
|
5,490,254
|
|
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 Black-Scholes model. The Company’s stock price and estimates
of volatility are the most sensitive inputs in validation of assets and liabilities at fair value. The liabilities were measured
using the following assumptions:
Term
|
|
|
0.5
years - 7.0 years
|
|
Dividend Yield
|
|
|
0
|
%
|
Risk-free rate
|
|
|
0.55%
- 1.44
|
%
|
Volatility
|
|
|
60
|
%
|
10.
COMMITMENTS AND CONTINGENCIES
Vuksich
Litigation
In
May of 2012, John M. Vuksich (“Vuksich”), a shareholder who alleges to hold shares or proxies totaling more than 30,000,000
shares in the Company (approximately 5.95% of the outstanding stock in the Company at the time of the filing prior to the Company’s
bankruptcy filing), filed a shareholder derivative action in the Los Angeles County Superior Court against the Company or (the
“Vuksich Litigation”). In that litigation, Vuksich challenged certain corporate actions taken by the Company beginning
in 2010, including the Company’s amendments to its articles of incorporation authorizing the Company to increase the authorized
number of shares of common stock and to authorize the issuance of preferred stock. Among other things, Vuksich sought an order
voiding certain other financing agreements and sought an order compelling the Company to fill vacancies on its Board of Directors.
The Vuksich Litigation, which sought to alter the equity structure and management of the Company, required the Company to expend
its already-limited resources both in terms of management time and attorney’s fees. Although the Company believed that the
Vuksich Litigation could and would be defeated, it decided that the resources of the Company were better directed towards its
business objectives in an effort to create value for the Company’s stakeholders.
There
were four appeals pending in the “Vuksich Litigation.” The following appeals were heard by the Ninth Circuit Court
of Appeals on December 9, 2015:
●
|
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
court ruled in favor of the Company on December 18, 2015.
On
December 17, 2015 the United States Court of Appeals for the Ninth Circuit affirmed the rulings of the United States Bankruptcy
Court and the United States District Court related to four appeals that John M. Vuksich had filed, asserting that:
1.
|
That
the Bankruptcy Court and the District Court should not have confirmed Imaging3’s
Chapter 11 plan of reorganization;
|
2.
|
That
the claim that Vuksich filed in the Imaging3 bankruptcy case was improperly disallowed
by the Bankruptcy Court and the District Court;
|
3.
|
That
the Bankruptcy Court and the District Court should have abandoned the Vuksich litigation;
|
4.
|
That
the Bankruptcy Court and the District Court should have dismissed the Imaging3 Chapter
11 bankruptcy case because the court had no jurisdiction over the case.
|
On
February 2, 2016, the Ninth District Judges Tashima, Callahan, and Hurwitz have voted to deny the petition for panel rehearing.
Judges Callahan and Hurwitz have voted to deny the petition for rehearing en banc, and Judge Tashima so recommends. The full court
has been advised of the petition, and no judge of the court has requested a vote on the petition for rehearing en banc. Fed. R.
App. P. 35.The petitions for rehearing and rehearing en banc are denied.
During
April 2016 John M. Vuksich appealed to Supreme Court on the most recent rulings dismissing his charges. On October 3, 2016 the
Supreme Court entered the following order: The petition for a writ of certiorari is denied.
Litigation
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.
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
$1,101,213
|
|
*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
|
|
$2,078(monthly)
Total
Claim:
$49,001
|
|
Monthly
payment of $2,078 until 4/16/2018
|
|
Current
|
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
|
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. Please refer to Basis of Presentation section
on page 4.
11.
SUBSEQUENT EVENTS
Mr.
Vuksich appealed the decision of the Ninth Circuit Court of Appeal in the matter of Vuksich v Imaging 3, Inc., to the United States
Supreme Court. The petition for a writ of certiorari was denied on October 3, 2016.