UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K/A

Amendment No: 1 

 

 

 

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2016

 

Commission file number 000-50099

 

IMAGING3, INC.

(Exact name of registrant as specified in its charter)

 

California 95-4451059
(State of Incorporation) (I.R.S. Employer Identification No.)

 

3022 North Hollywood Way, Burbank, California 91505

(Address of principal executive offices) (Zip Code)

 

(818) 260-0930

Registrant’s telephone number, including area code

 

Securities registered pursuant to Section 12(g) of the Act:

 

 

Title of Each Class

Name of Each Exchange On

Which Registered

   
COMMON STOCK OTC

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [  ] No [X]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]   Accelerated filer [  ]

Non-accelerated filer

(Do not check if a smaller reporting company)

[  ]   Smaller reporting company [X]

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $0 as of December 31, 2016 (computed by reference to the fact that no last sale price of a share of the registrant’s Common Stock on that date was reported by any securities exchange or public securities trading market.)

 

There were 259,621,593 shares outstanding of the registrant’s Common Stock as of March 31, 2017.

 

 

 

 

 

EXPLANATORY NOTE

 

The sole purpose of this Amendment to the Annual Report of Form 10-K for the year ended December 31, 2016 of Imaging3, Inc. (the “Company”) filed with the Securities and Exchange Commission on April 17, 2017 (the “Form-10K”) is to correct the checking of the third and fourth boxes above from “no” to “yes”, thereby indicating that the Company has, in fact, met the standards elucidated in said third and fourth items above.  

 

 

 

TABLE OF CONTENTS

 

PART I  
ITEM 1 Business 3
ITEM 1A Risk Factors 12
ITEM 2 Properties 12
ITEM 3 Legal Proceedings 12
ITEM 4 Mine Safety Disclosures 13
PART II  
ITEM 5 Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities 14
ITEM 6 Selected Financial Data 16
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 16
ITEM 8 Financial Statements and Supplementary Data 19
ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 35
ITEM 9A Controls and Procedures 35
ITEM 9B Other Information 35
PART III  
ITEM 10 Directors, Executive Officers, and Corporate Governance 36
ITEM 11 Executive Compensation 40
ITEM 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 42
ITEM 13 Certain Relationships and Related Transactions, and Director Independence 43
ITEM 14 Principal Accounting Fees and Services 43
PART IV  
ITEM 15 Exhibits, Financial Statement Schedules 45
SIGNATURES 47

 

2

 

PART I

 

ITEM 1. BUSINESS

 

General

 

Imaging3, Inc. has developed a proprietary medical technology designed to produce 3D medical diagnostic images in real time. In the future, healthcare workers using Imaging3 devices will potentially be able to instantly view 3D, high-resolution images of virtually any part of the human body. The company has also entered into a Dealership Agreement with Envisiontec to promote and distribute 3-D Printers. The company feels these units can and will eventually tie into their current 3-D technology.

 

Business Operations

 

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, including:

 

Multi-function Device

 

A diagnostic medical imaging device built with Imaging3 technology can perform several functions and can potentially replace or supplement a number of existing devices, resulting in considerable cost savings for hospitals and healthcare centers. These functions include:

 

Perform real-time, 3D medical imaging;
   
Emulate a computerized tomography scanner (at a fraction of the capital cost); and
   
Perform standard fluoroscopy.

 

Our management believes that this multi-function capability will be especially attractive in foreign markets, where the cost of a computed tomography (“CT”) scanner is beyond the means of most hospitals and healthcare centers.

 

Existing Base of Business to Launch a Proprietary Product

 

Imaging3 is an established company with revenues and an industry reputation. While we began as a service provider, we quickly expanded to include equipment and parts sales, both new and renewed. Management believes that Imaging3 was one of the largest remanufacturer of C-arms in the world, prior to its bankruptcy in September 2012. We offered new, demonstration, remanufactured, refurbished, and pre-owned systems in all price ranges from every major manufacturer including OEC, General Electric, Philips, Siemens, FluoroScan, XiScan and Ziehm. We currently supply full-size, compact and mini C-arms.

 

Business and Revenue Models

 

Our business strategy is straight-forward: (1) maintain our base of C-arm remanufacturing and service business, and, assuming we achieve the FDA approval we are seeking: (2) develop medical diagnostic imaging devices based on our breakthrough Imaging3 technology for the $5 billion medical imaging market, (3) sell our new medical diagnostic imaging devices directly to healthcare providers, as well as through channel partners and distributors, and (4) license our breakthrough Imaging3 technology to other medical diagnostic imaging device manufacturers.

 

Our management believes that most of our future revenues will come from the sale of medical imaging devices, based on our Imaging3 technology. Other revenues are expected to be derived from the licensing of our proprietary technology to other medical diagnostic imaging device manufacturers. The smallest portion of our future revenue is projected to come from the sale and service of C-arms and tables.

 

Proprietary Technology

 

Patent

 

On June 23, 2004, U.S. Patent No. 6,754,297 was granted in the name of Dean Janes, entitled Apparatus and Method for Three-Dimensional Real-Time Imaging System. The rights to this patent have been assigned to Imaging3, Inc. As of December 31, 2015 Imaging3 Inc. had one UCC filing against assets that were obtained by Gemini Capital in conjunction with secured notes.

 

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Abstract of the Patent Disclosure

 

A computing device in a three-dimensional imaging system utilizes a plurality of distance readings and reference readings from at least one subject sensor to determine a subject location and a subject volume and establish a base three-dimensional map of a subject. A plurality of two-dimensional image exposures along with a plurality of associated reference locations are created by rotating an image source and an image receptor around an inner circumference of an imaging gantry. The plurality of two-dimensional image exposures is digitized to create a plurality of digital two-dimensional image exposures. The computing device receives the plurality of digital two-dimensional image exposures and the plurality of associated reference locations. The overlaying, interpolating and pasting of the plurality of digital two-dimensional image exposures on the base three-dimensional map creates a base three-dimensional image exposure, which is displayed on a display device.

 

General Description

 

Real-time 3D medical diagnostic imaging will be accomplished by scanning the patient, either partially or completely in a 360-degree circumference under fluoroscopy (or other type of image exposure), utilizing a single or multiple x-ray source and image receptor. The information acquired under fluoroscopy (or other type of image exposure) will be digitized at a frame rate of between 30 to 60 frames per second. This information will be sent to a computer system to be incorporated into a three-dimensional image to be displayed on a computer monitor. The image created can then be manipulated and/or rotated to view the scanned image of the patient’s anatomy in any direction or orientation desired by the user. The user could then choose a specific area of the image to update. Once an area is selected, the computer displaying the image would then “gang” or align the x-ray source(s) and image receptor(s) to begin updating scans of new images to be overlaid upon the existing three-dimensional model. This process would then be updated and/or repeated as many times as necessary for the specific procedure to be completed. At any time, a new reference area or scan could be selected or initiated.

 

The “O” Device

 

Part of our invention is based on an “O” device to create a circular gantry similar to that used with CT to scan a patient a full 360 degrees with fluoroscopic radiation. This approach is expected to allow imaging of the patient from any frame of reference or angulation (current medical imaging devices are limited to 150 degrees to 360 degrees with mechanical orientation or manipulation). 3D imaging requires an “O” device to scan the patient in increments of 360 degrees to allow construction of a three-dimensional image. By scanning the patient in 360 degrees and acquiring images at 30 to 60 frames per second, management believes a three-dimensional image can be constructed.

 

Imaging3 Technology Differs from Other Approaches

 

The “O” device approach is similar to that used in a CT scan. The difference is CT is used to image a “slice” of the anatomy and not intended for real-time fluoroscopic imaging. The slice is obtained by using a fulcrum reference point and rotating the X-ray source and image receptor in reference to that point. This basic geometry creates a 2D image in any depth desired, in any region of the body. The “O” device would use a similar fulcrum point to reference depth, but the scan would not create a slice but instead a real-time image captured at 30 to 60 frames per second in 360 degrees. Further, management believes that the “O” device would be used for conventional fluoroscopic imaging with the advantage of positioning the X-ray source and receptor at any angulation desired.

 

4

 

Currently, 3D imaging is used only for reconstructive post processing reference images. Magnetic resonance imaging (“MRI”), CT and ultrasound currently have this capability. The 3D images are created by multiple scans of 2D images that require a long period of time to process into a three-dimensional image. The image created is then used only for reference, not real-time manipulation in the body. We anticipate that our 3D images will be constructed almost instantly and will be available to be used as real-time references whenever multiple frames of reference are required to perform medical procedures on or in the human body.

 

The Market

 

We compete in the medical diagnostic imaging market and this market has never been healthier than it is today. This vitality is due primarily to continual technological improvements that lead to faster and better resolution imaging, greater patient safety, and the provision of these capabilities to a growing and aging population. The result has been a vigorous competition to create the most cost-effective diagnostic imaging systems.

 

Diagnostic imaging is an evolving part of modern medicine and is now entering a new era of digital imaging. The field has evolved from the early X-rays by Roentgen over 100 years ago to imaging of organs by CT and MRI that are 20 years old. Medical imaging is used for diagnosis in the leading causes of death, heart attacks, strokes, and cancer. What was once called the radiology department is now called the diagnostic imaging department because of the wealth of new technologies available beyond x-rays. A trauma victim’s internal injuries are imaged with a CT scanner. Breast cancer, a leading cause of death in women, is detected with mammography and ultrasound.

 

According to a Freedonia Group study, the medical imaging equipment market in the U.S. will register gains faster than the projected growth in national health expenditures. Growth is stimulated by an increasing incidence of patient procedures involving diagnostic imaging, partly the result of an aging population and partly reflecting advances in noninvasive imaging technology.

 

Our management believes that opportunities exist not only for new companies in imaging products but also for software companies for image processing and Picture Archiving and Communication Systems networks. Technological developments continue, which consistently result in new products.

 

Diagnostic imaging is an important part of medical diagnosis. It ranges from a dentist’s X-ray to find tooth decay to angiograms done to aid a cardiologist in performing an angioplasty. The aging baby boomer population will need the new imaging capabilities for cancer and heart disease detection. The revolution in medical imaging is being fueled not only by new medical imaging technology, but also by advances in computer hardware and software. New systems such as spiral CT or multi-slice CT would not be possible without today’s faster processors. Better software algorithms for image analysis and compression make the process more accurate and efficient. The growth of diagnostic imaging could be an important source of revenue for computer manufacturers and software companies specializing in diagnostic imaging.

 

Industry Overview

 

Diagnostic imaging services are noninvasive procedures that generate representations of the internal anatomy and convert them to film or digital media. Diagnostic imaging systems facilitate the early diagnosis of diseases and disorders, often minimizing the cost and amount of care required and reducing the need for costly and invasive diagnostic procedures.

 

Computed Tomography

 

In CT imaging, a computer analyzes the information received from an x-ray beam to produce multiple cross-sectional images of a particular organ or area of the body. CT imaging is used to detect tumors and other conditions affecting bones and internal organs.

 

Other Services

 

Other diagnostic imaging technologies include x-ray, single photon emission computed tomography, and ultrasound.

 

Digital Imaging Technologies

 

New techniques for the digital capture, display, storage, and transmission of x-ray images are poised to revolutionize the diagnostic imaging market. Although digital technologies and techniques have been in use in other diagnostic imaging areas (such as CT scans, MRI scans, and ultrasound), technical problems have kept x-ray technologies in the era of film. However, new methods of digitally capturing x-ray images are under development and promise to revolutionize x-ray imaging.

 

The need to cut costs and improve services in healthcare delivery is driving the move to digital systems. The requirement for hospitals to implement electronic access to medical images and other types of information is now widely accepted and regarded as inevitable. The trend toward storing, distributing and viewing medical images in digital form is being fueled by both changes in the economic structure of the healthcare system and by rapidly evolving technologies. In particular, the new economics of health

 

care will mandate a shift from film-based radiology to the electronic delivery of digital images, while new technology promises the additional benefit of vastly improved diagnostic power.

 

Users of Diagnostic Imaging

 

MRI and other imaging services are typically provided in one of the following settings:

 

Hospitals and Clinics

 

Imaging systems are located in and owned and operated by a hospital or clinic. These systems are primarily used for the patients of the hospital or clinic, and the hospital or clinic bills third-party payers, such as health insurers, Medicare or Medicaid.

 

Independent Imaging Centers

 

Imaging systems are located in permanent facilities not generally owned by hospitals or clinics. These centers depend upon physician referrals for their patients and generally do not maintain dedicated, contractual relationships with hospitals or clinics. In fact, these centers may compete with hospitals or clinics that have their own systems to provide Imaging3 to these patients. Like hospitals and clinics, these centers bill third-party payers for their services.

 

5

 

Outsourced

 

Imaging systems, largely located in mobile trailers but also provided in fixed facilities, provide services to a hospital or clinic on a shared-service or full-time basis. Generally, the hospital or clinic contracts with the imaging service provider to perform scans of its patients, and the imaging service provider is paid directly by that hospital or clinic instead of by a third-party payor.

 

Industry Challenges

 

In a recent report, U.S. Medical Imaging Industry Outlook , Frost & Sullivan identified several challenges facing the diagnostic imaging industry. Low reimbursement rates have become a major challenge, not only for end users, but for manufacturers as well. Imaging reimbursements for many procedures may be inadequate given the expense of the equipment and the expertise required to create and interpret results.

 

Lack of adequate compensation is a concern for all industry participants, as many healthcare centers are delaying or canceling purchases of high-priced items. Until the financial rewards for imaging are increased substantially, and definitively, low reimbursement will be the foremost hurdle for manufacturers.

 

Competition

 

Competitive Landscape

 

The healthcare industry in general and the market for imaging products in particular is highly competitive. We compete with a number of companies, many of which have substantially greater financial, marketing, and other resources than we have. Our competitors include large companies such as General Electric, Philips, Siemens, Toshiba and Hitachi, which compete in most medical diagnostic imaging modalities, including x-ray imaging.

 

A study by Theta Reports, Diagnostic Imaging Equipment and Systems World Market , identifies the following 17 key players in the medical diagnostic imaging market:

 

ADAC Laboratories
   
Eastman Kodak Co.
   
Fonar Corp.
   
Fuji Medical Systems U.S.A., Inc.
   
General Electric Medical Systems
   
Hitachi Medical Systems America, Inc.
   
Hologic, Inc.
   
Imaging Diagnostic Systems, Inc.
   
Imatron, Inc.
   
Lumisys, Inc.
   
Marconi Medical Systems
   
Philips Medical Systems Nederland BV
   
PhorMax Corp.
   
Siemens Medical Engineering Group
   
Sterling Diagnostic Imaging, Inc.
   
Trex Medical Corp.
   
Varian Medical Systems, Inc.

 

Direct Competitors

 

At this time, we are not aware of any existing devices in the marketplace that provide 3D, real-time diagnostic medical imaging, with the exception of ultrasound.

 

Ultrasound is a real-time tomographic imaging modality. Not only does it produce real-time tomograms of the position of reflecting surfaces (internal organs and structures), but it can also be used to produce real-time images of tissue and blood motion. However, ultrasound is a low-resolution imaging modality that does not produce an image as precise and clear as fluoroscopy. Our devices will rely instead on the use of fluoroscopy, a high-resolution imaging modality, to produce “live” x-ray images of living patients in 3D.

 

Marketing and Sales Plan

 

Marketing Strategy

 

Our marketing strategy is to create a favorable environment to sell our medical diagnostic imaging devices. We intend to enhance, promote and support the fact that Imaging3 technology is the most complete and comprehensive medical diagnostic imaging solution available in the marketplace.

 

6

 

Product and Service Differentiation

 

According to our management, the differentiating attributes of Imaging3 technology will include:

 

The only 3D, real-time medical diagnostic imaging device in the market that will produce high resolution images;
   
Reasonably priced;
   
Easy-to-install;
   
Vast array of features; and
   
Highly reliable.

 

The Imaging3 medical device will be reasonably priced because it will cost considerably less than comparable MRI and CT Scan machines. It will be easy to install because it is lighter and will be more mobile than the MRI and CT Scan machines. It will have more features than MRI and CT Scan machines because it will provide 3D instant real time images and real time CT emulation, which the other machines currently do not provide. Management believes that the Imaging3 medical device will be more reliable than competing MRI and CT Scan machines because it needs less radiation to provide its 3D images, and its assembled components are simpler, more efficient, and standard (i.e. “off-the-shelf”), rather than customized.

 

Value Proposition

 

Our value proposition is simple: diagnostic imaging devices with Imaging3 technology allow healthcare providers to easily produce 3D, real-time, high resolution images at a reasonable cost.

 

Positioning

 

Management believes that Imaging3 can be positioned as offering the superior solution for producing medical diagnostic images. Management believes that our unique advantage is that we can offer a diagnostic imaging solution that will allow healthcare providers to view real-time references for virtually any procedure. We plan to reposition our competitors by demonstrating that their offerings are inadequate compared to our device because they:

 

Do not provide 3D images;
   
Do not provide images in real-time;
   
Do not provide comparable high resolution images; and
   
Are too costly.

 

Sales Strategy

 

After undertaking a marketing campaign, we intend to aggressively sell our medical diagnostic imaging devices in the United States. International sales efforts will follow after achieving market penetration in the domestic marketplace.

 

Sales Margin Structure

 

Our management believes that the majority of our sales will be derived from direct sales to customers, with the balance of sales derived from dealers and manufacturer’s representatives. As a result, the sales margin structure must be attractive to these independent organizations.

 

Direct Sales - Full suggested list price;
   
Dealers - 30% off suggested list price; and
   
Manufacturer’s Representatives - 10% commission.
   

 

Target Market Segment

 

Our management has identified general medical and surgical hospitals in the United States as our primary target market segment for Imaging3 technology. According to D&B/ iMarket, there are 12,041 general medical and surgical hospitals in the United States.

 

Distribution Channels

 

We plan to sell our Imaging3 medical diagnostic imaging devices through several channels of distribution, including:

 

7

 

Direct Sales to End Users

 

Our policy is to sell directly to end-users whenever possible. Our management expects that direct sales will occur most often with larger customers.

 

Dealers and Manufacturers’ Representatives

 

We plan to supplement our own field sales force by entering into agreements with dealers and manufacturers’ representatives. Because dealers and manufacturers’ representatives carry several product/service lines that are compatible with our products and services, Imaging3 plans to select dealers and manufacturers’ representatives carrying complementary and compatible products and services, as well as dealers and manufacturers’ representatives that sell dissimilar products and services yet are appropriate for their customers’ customer.

 

We have working relationships with a number of independent organizations that help distribute our current product line. We expect to work with these independent organizations to help distribute diagnostic medical imaging devices built with Imaging3 technology. These organizations have well-established relationships with mid-size to large size customers. Many also provide specific vertical market applications.

 

Executive Sales

 

Because many of Imaging3’s large customers will tend to be top healthcare managers, it is important that our president and senior managers present our products to our large customers.

 

Field Sales Force

 

Management anticipates that the majority of our selling efforts to large accounts will be handled internally through our field sales force. We have chosen to use a direct sales force because our large accounts require considerable customer education and post-sales support directly from us. Management believes that our price points, pricing structure and profits are such that our cost of sales warrants a “person-to-person” selling strategy.

 

Employees

 

We currently employ 2 full-time individuals, all of whom are working at our leased offices at 3022 North Hollywood Way, Burbank, California 91505. Both 2 full-time employees are executive officers and directors of the Company.

 

To support our need for technical staffing, we have established relationships with technical staffing organizations that continuously offer highly qualified personnel to meet our needs, both locally and from out of the area.

 

Intellectual Property Matters

 

Our policy is to have all of our employees execute agreements that impose nondisclosure obligations on the employee and in which the employee has assigned to us (to the extent permitted by California law) all copyrights and other inventions created by the employee during employment with us. The rights underlying the application for the patent of the Imaging3 technology have been assigned to us. We have in place a trade secret protection policy that our management believes to be adequate to protect our intellectual property and trade secrets.

 

Government Regulatory Approval Process

 

All of our products are classified as Class II (Medium Risk) devices by the FDA and clinical studies with our products will be considered to be Non-Significant Risk Studies, except that our 510(k) application with the FDA for our proprietary medical imaging device has not yet been approved as a Class II device. Imaging3’s business is governed by the FDA and all products typically require 510(k) market clearance before they can be put in commercial distribution. We are also regulated by the FDA’s Quality Systems Regulation, which is similar to the ISO9000 and the European EN46000 quality control regulations. All of our products currently in production or manufactured by other vendors are approved for marketing in the United States under the FDA’s 510(k) regulations.

 

8

 

A 510(k) is a pre-marketing submission made to the FDA to demonstrate that the device to be marketed is as safe and effective, that is, substantially equivalent, to a legally marketed device that is not subject to pre-market approval. Applicants must compare their 510(k) device to one or more similar devices currently on the U.S. market and make and support their substantial equivalency claims. A legally marketed device is a device that was legally marketed prior to May 28, 1976 (pre-amendments device), or a device which has been reclassified from Class III to Class II or I, a device which has been found to be substantially equivalent to such a device through the 510(k) process, or one established through Evaluation of Automatic Class III Definition. The legally marketed device(s) to which equivalence is drawn is known as the “predicate” device(s).

 

Applicants must submit descriptive data and when necessary, performance data to establish that their device is substantially equivalent to a predicate device. The data in a 510(k) is to show comparability, that is, substantially equivalent of a new device to a predicate device.

 

The FDA does not offer an opinion or determination of what submission is required. The FDA does provide a database of devices, classifications and Regulation numbers. In our research of this database we determined several Class II devices meet our criteria for submission. These devices are listed in the table below.

 

Product Code   Class   Description   Regulation  
IZG   II   System, X-ray, Photofluorographic     892.1730  
JAB   II   System, X-ray, Fluoroscopic, Non-Image-I     892.1660  
JAK   II   System, X-ray, Tomography, Computed     892.175  

 

This is a broad range of devices with which to compare our device functionality. The FDA requires the manufacturer to submit an application, whether it is a 510(k) or pre-market approval submission. Upon receipt of the submission, the FDA will respond within 30 to 45 days with their determination of acceptance of the submission, questions and/or comments to the submission or requests for more information.

 

All of our current used rebuilt products are Class II devices, FDA approved through OEM for marketing. Once approved, the FDA will not require the manufacturer to resubmit an application or change the classification. They may, however, request further information about the product(s), manufacturer and GMP requirements. The devices currently sold by us are not manufactured by us. OEC Medical Systems is the original device manufacturer and responsible for the FDA submission of their original device(s). Imaging3 remanufactures OEC Medical Systems devices, thus we are not required to submit any FDA submission for these devices. In some instances, we have performed modifications to these devices to improve the devices functionality, and in these instances Imaging3 has submitted 510(k) applications. These modifications are to existing devices with existing classifications listed in the FDA database and cannot be reclassified. The FDA database listing for current products is listed below:

 

Product Code   Class   Description   Regulation  
IZL   II   System, X-ray, Mobile     892.1720  

 

As to our new product and its potential for classification, the FDA requires us, as the manufacturer, to submit an application in whichever classification we choose in the submission form we choose, meaning 510(k) or pre-market approval application. The FDA reviews the submission and determines whether the application is appropriately filed and in the correct submission format. The criteria they use for determination on a 510(k) is substantially equivalent, which is a comparative analysis of the manufacturer’s device in the submission with existing devices already approved by the FDA. This is the purpose of the FDA’s Device Classification Database, giving manufacturer’s products with approved submissions and categories of devices to compare new device submissions. A new type of device may not be found in the product classification database. If the device is a high risk device (supports or sustains human life, is of substantial importance in preventing impairment of human health, or presents a potential, unreasonable risk of illness or injury) and has been found to be not substantially equivalent to a Class I, II, or III (Class III requiring 510(k)), then a pre-market approval application will be required.

 

Our new product, the “Real-time 3D Imaging Device” is expected to be submitted as Product Code “IZG,” Device Class II, “System, X-ray, Photo fluorography,” Regulation Number 892.1730, since this is the closest device description.

 

9

 

The pre-market approval applicant is usually the person who owns the rights, or otherwise has authorized access, to the data and other information to be submitted in support of FDA approval. This person may be an individual, partnership, corporation, association, scientific or academic establishment, government agency or organizational unit, or other legal entity. The applicant is often the inventor/developer and ultimately the manufacturer.

 

FDA regulations provide 180 days to review the pre-market approval application and make a determination. In reality, the review time is normally longer. Before approving or denying a pre-market approval application, the appropriate FDA advisory committee may review the pre-market approval application at a public meeting and provide the FDA with the committee’s recommendation on whether or not the FDA should approve the submission. After the FDA notifies the applicant that the pre-market approval application has been approved or denied, a notice is published on the Internet (1) announcing the data on which the decision is based, and (2) providing interested persons an opportunity to petition the FDA within 30 days for reconsideration of the decision.

 

A pre-market approval application is a scientific, regulatory documentation to the FDA to demonstrate the safety and effectiveness of the Class II device. There are administrative elements of a pre-market approval application, but good science and scientific writing is a key to the approval of a pre-market approval application. If a pre-market approval application lacks elements listed in the administrative checklist, the FDA will refuse to accept a pre-market approval application and will not proceed with the in-depth review of scientific and clinical data. If a pre-market approval application lacks valid clinical information and scientific analysis based on sound scientific reasoning, it will delay the FDA’s review and approval. Pre-market approval applications that are incomplete, inaccurate, inconsistent, omit critical information, and are poorly organized have resulted in delays in consideration.

 

Three categories of the pre-market approval application are very important:

 

Technical Sections. The technical sections containing data and information should allow the FDA to determine whether to approve or disapprove the application. These sections are usually divided into non-clinical laboratory studies and clinical investigations.

 

Non-clinical Laboratory Studies’ Section. The non-clinical laboratory studies’ section includes information on microbiology, toxicology, immunology, biocompatibility, stress, wear, shelf life, and other laboratory or animal tests. Non-clinical studies for safety evaluation must be conducted in compliance with 21CFR Part 58 (Good Laboratory Practice for Nonclinical Laboratory Studies).

 

Clinical Investigations Section. The clinical investigations section includes study protocols, safety and effectiveness data, adverse reactions and complications, device failures and replacements, patient information, patient complaints, tabulations of data from all individual subjects, results of statistical analyses, and any other information from the clinical investigations. Any investigation conducted under an Investigational Device Exemption must be identified as such.

 

We are listed with the FDA as a new device manufacturer, our Registration Number is 20300565, and our Owner Operator Number is 9023393. Though we do not currently manufacture new devices, the FDA requires our registration as a remanufacturer. Imaging3 is subject to the FDA’s Radiological Health Program, under the Center for Devices Radiological Health division of the FDA.

 

We must be in compliance with Good Manufactures Practices (“GMP”), Quality Control, and Medical Device Reporting (“MDR”). The FDA may from time to time, usually every two to three years, audit us for compliance. In these audits the FDA reviews documents, interviews management and reviews all procedures.

 

The current GMP requirements set forth in the Quality System (“QS”) regulation are promulgated under Section 520 of the Federal Food, Drug and Cosmetic (“FFD&C”) Act. They require that domestic or foreign manufacturers have a quality system for the design, manufacture, packaging, labeling, storage, installation, and servicing of finished medical devices intended for commercial distribution in the United States. The regulation requires that various specifications and controls be established for devices; that devices be designed under a quality system to meet these specifications; that devices be manufactured under a quality system; that finished devices meet these specifications; that devices be correctly installed, checked and serviced; that quality data be analyzed to identify and correct quality problems; and that complaints be processed. Thus, the QS regulation helps assure that medical devices are safe and effective for their intended use. The FDA monitors device problem data and inspects the operations and records of device developers and manufacturers to determine compliance with the GMP requirements in the QS regulation.

 

10

 

The MDR regulation provides a mechanism for the FDA and manufacturers to identify and monitor significant adverse events involving medical devices. The goals of the regulation are to detect and correct problems in a timely manner. Although the requirements of the regulation can be enforced through legal sanctions authorized by the FFD&C Act, the FDA relies on the goodwill and cooperation of all affected groups to accomplish the objectives of the regulation.

 

The statutory authority for the MDR regulation is Section 519(a) of the FFD&C Act as amended by the Safe Medical Devices Act of 1990. The Safe Medical Devices Act of 1990 requires user facilities to report:

 

 

    Device-related deaths to the FDA and the device manufacturer;
     
  Device-related serious injuries to the manufacturer, or to the FDA if the manufacturer is not known; and
     
  Submit to the FDA on an annual basis a summary of all reports submitted during that period.

 

When a problem arises with a product regulated by the FDA, the agency can take a number of actions to protect the public health. Initially, the agency works with the manufacturer to correct the problem voluntarily. If that fails, legal remedies include asking the manufacturer to recall a product, having federal marshals seize products if a voluntary recall is not done, and detaining imports at the port of entry until problems are corrected. If warranted, the FDA can ask the courts to issue injunctions or prosecute those that deliberately violate the law. When warranted, criminal penalties including prison sentences are sought.

 

Once on the market, there are post-market surveillance controls with which a manufacturer must comply. These requirements include the Quality Systems (also known as Good Manufacturing Practices), and Medical Device Reporting regulations. The QS regulation is a quality assurance requirement that covers the design, packaging, labeling and manufacturing of a medical device. The MDR regulation is an adverse event reporting program.

 

We are also required to report under the MDR requirements, which are for injuries and deaths, of which we have had none since our registration.

 

For all devices manufactured or remanufactured by us, the FDA may request updated information regarding any device with a previously approved 510(k) or pre-market approval submission. If any substantial changes are made to existing approved devices, the FDA may require a 510(k) supplement submission, which, in most cases, does not require the manufacturer to delay production or marketing of the modified device. As with all applications, this determination lies entirely with the FDA.

 

Our last audit with the FDA was in 2010 and we expect a new audit to take place shortly after our new device is resubmitted to the FDA in a 510(k) application.

 

In an audit performed by the FDA, our records for service and repair, quality control, device labeling and serial number tracking are reviewed. If the FDA finds issues of non-compliance they issue a letter requesting correction, giving us 30 days to correct the non-compliance. Extensions can be requested to reply, but most issues, if any, can be handled in a 30-day period.

 

Since our registration with the FDA in 1995, we have had two audits. We did not receive any notice or correspondence of non-compliance due to those audits. We received only one suggestion regarding our record keeping process, which addressed preventive maintenance forms being included in all customer files for which we provide service.

 

We have had no instances of non-compliance with either the FDA or the State of California. The consequences of non-compliance range from a letter stating non-compliance and a period to cure, suspension of manufacturing and distribution, to fines and suspension of operations.

 

We intend to seek to obtain FDA approval of our proprietary medical imaging device in 2017, although we cannot assure that this approval will be granted when expected. All of our marketing efforts for the new device must start from the date the FDA approves the device to be marketed. Since we are already registered with the FDA as a new device manufacturer and have been through an audit performed by the FDA, the FDA is already familiar with us and our processes. The FDA may wish to obtain updated information about us and may require more time to process our planned 510(k) resubmission than estimated.

 

To enter the European market, our products as well as our quality assurance systems will have to be approved and certified by an authorized certifying body such as Technischer Uberwachungsverein; English translation: Technical Inspection Association (“TUV”), Underwriters Laboratories (“UL”) or British Standards Institute (“BSI”). In the future, we may plan to go through this process as a part of our overall enhancement of the quality systems.

 

11

 

TUV, UL and BSI are all standards testing companies assisting manufactures to comply with published standards, regulatory standards and laws necessary for marketing devices throughout the world and the United States. These three companies provide the UL and CE (the European equivalent of the UL mark in the United States) marks, demonstrating compliance with the standards and laws.

 

TUV is a Nationally Recognized Testing Laboratory and Safety Checklist Contractors certified, providing a full suite of services, including CE Marking assistance, electromagnetic compatibility, electrical & mechanical testing, and many additional global conformity assessment services that help companies gain product compliance to enter individual country markets.

 

UL is an independent, not-for-profit product-safety testing and certification organization. They have tested products for public safety for more than a century. Since their founding in 1894, they have held the undisputed reputation as a leader in product- safety testing and certification within the United States. Management believes that by building on their household name in the United States, UL is becoming one of the most recognized, reputable conformity assessment providers in the world. Today, their services extend to helping companies achieve global acceptance, whether for an electrical device, a programmable system, or an organization’s quality process.

 

BSI exists to help industry develop new and better products and to make sure that products meet current and future laws and regulations. It tests products from medical devices to fire extinguishers to lamps for football stadiums against published standards.

 

Far East, Middle East, Eastern European, and Latin American markets have different regulatory requirements. We intend to comply with applicable requirements if and when we decide to enter those markets.

 

Other Government Regulations

 

The delivery of health care services has become one of the most highly regulated of professional and business endeavors in the United States. Both the federal government and individual state governments are responsible for overseeing the activities of individuals and businesses engaged in the delivery of health care services. Federal law and regulations are based primarily upon the Medicare and Medicaid programs. Each of these programs is financed, at least in part, with federal funds. State jurisdiction is based upon the state’s interest in regulating the quality of health care in the state, regardless of the source of payment. We believe that we are materially complying with applicable laws, however, we have not received or applied for a legal opinion from counsel or from any federal or state judicial or regulatory authority. Additionally, many aspects of our business have not been the subject of state or federal regulatory interpretation. The laws applicable to us are subject to evolving interpretations. If our operations are reviewed by a government authority, we may receive a determination that could be adverse to us. Furthermore, laws that are applicable to us may be amended in a manner that could adversely affect us.

 

Only a small portion of our revenues come through a government system. Virtually all of our revenues are obtained from sales and service to vendees who pay us directly. We have not been subject to Medicare, Medicaid, or any other federally funded health care program.

 

ITEM 1A. Risk Factors

 

Not applicable.

 

ITEM 2. PROPERTIES

 

We currently maintain and lease our administrative offices and production facility at 3022 North Hollywood Way, Burbank, California 91505. This facility contains 1,800 square feet of space, and we currently pay rent at a rate of $2.00 per square foot gross.

 

ITEM 3. LEGAL PROCEEDINGS

 

Administrative Claim of Greenberg Glusker Fields Claman & Machtinger LLP

 

On January 30, 2017 the Company entered into a new Agreement. Under the terms of the Agreement, the Company has agreed to pay Greenberg $1,117,574 plus any interest that has accrued at the rate of 6.0% per annum, as follows: (i) $100,000 on or before December 31, 2017; (ii) $150,000 on or before December 31, 2018 (iii) 4.0% of the first $2.5 million of gross proceeds of any private or public offering by the company (an “Offering”); (iv) 2.0% of the next $2.5 million of gross proceeds from such Offerings; (v) 4.0% of any gross proceeds thereafter from such Offerings; and (vi) the remaining balance on or before December 31, 2019.

 

In addition, Greenberg has the option to convert up to $150,000 of the balance into a warrant that would convert on terms that are equal to (or, in certain cases, better than) the terms offered in subsequent rounds of financing.

 

12

 

Bankruptcy Closure

 

On January 31, 2017, United States Bankruptcy Judge for the Central District of California, Neil Bason, granted the Company’s unopposed motion for entry of final decree and also granted approval of the two stipulations regarding payment of court-approved fees. The Company noted that as a result, the Imaging3

 

Chapter 11 proceeding is now closed—the ompany is no longer subject to the jurisdiction of the Bankruptcy Court, and the case cannot be converted to a Chapter 7 proceeding.

 

To clarify, the Judge’s order in its final paragraph stated that “Notwithstanding the foregoing [order closing the bankruptcy case pursuant to 11United States Code Section 350(a)] the bankruptcy case may be reopened on motion as set forth in the Greenberg, Glusker Fee Agreement and/or the Mentor Fee Agreement and thus the court retains jurisdiction for those purposes and as otherwise provided by law or as contemplated by the prior orders and proceedings of this court”. Thusly, technically, the case could possibly be reopened by either of those aforementioned creditors.

 

Vuksich Litigation

 

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.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not applicable.

 

13

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Common Stock

 

After meeting all of the filing requirements of the SEC, the Company commenced trading on the OTCQB effective June 22, 2016 under the new trading symbol “IGNG”. The OTCQB is part of the quality controlled segment of the over-the-counter market, available only to SEC reporting companies which are current in their regulatory filing requirements and maintain a minimum bid price. The range of high and low bid quotations for each fiscal quarter within the last two fiscal years was as follows:

 

Year Ended December 31, 2015   High   Low
         
First Quarter ended March 31, 2015   $ 0.00     $ 0.00  
Second Quarter ended June 30, 2015   $ 0.00     $ 0.00  
Third Quarter ended September 30, 2015   $ 0.00     $ 0.00  
Fourth Quarter ended December 31, 2015   $ 0.00     $ 0.00  

 

Year Ended December 31, 2016   High     Low  
                 
First Quarter ended March 31, 2016   $ 0.00     $ 0.00  
Second Quarter ended June 30, 2016   $ 0.22     $ 0.06  
Third Quarter ended September 30, 2016   $ 0.24     $ 0.03  
Fourth Quarter ended December 31, 2016   $ 0.05     $ 0.01  

 

The above quotations reflect inter-dealer prices, without retail markup, mark-down, or commission and may not necessarily represent actual transactions.

 

As of March 17, 2017, there were approximately 8,375 record holders of our common stock, not including shares held in “street name” in brokerage accounts which is unknown. As of December 31, 2016, there were approximately 241,520,093 shares of our common stock outstanding on record.

 

Dividends

 

We have not declared or paid any cash dividends on our common stock and do not anticipate paying dividends for the foreseeable future.

 

Stock Option Plan

 

During 2014, the Board of Directors adopted, and the shareholders approved, the 2014 Stock Option Plan under which a total of 36,228,014 shares of common stock had been reserved for issuance. The 2014 Stock Option Plan will terminate in September 2024.

 

Stock Options

 

As of December 31, 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       9.00  
Exercised     0                  
Cancelled/Forfeited     0                  
Outstanding, December 31, 2016     13,000,000     $ 0.025       8.86  
Exercisable, December 31, 2016     13,000,000     $ 0.025       8.86  

 

14

 

The weighted average remaining contractual life of options outstanding issued under the Plan was 8.86 years at December 31, 2016.

 

Warrants

 

Following is a summary of warrants outstanding at December 31, 2016:

 

Warrant Activity
12-31-2015 Balance     45,148,696  
Granted     36,500,000  
12-31-2016 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

 

Preferred Stock

 

As of January 18, 2016, Imaging3 issued 2000 preferred voting shares to Dane Medley, CEO/Chairman. Each share constitutes 350,000 voting shares.

 

15

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not applicable because we are a smaller reporting company.

 

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL AND CONDITION RESULTS OF OPERATIONS

 

Cautionary Statements

 

This Form 10-K contains financial projections and other “forward-looking statements,” as that term is used in federal securities laws, about Imaging3, Inc.’s financial condition, results of operations and business. These statements include, among others, statements concerning the potential for revenues and expenses and other matters that are not historical facts. These statements may be made expressly in this Form 10-K. You can find many of these statements by looking for words such as “believes,” “expects,” “anticipates,” “estimates,” or similar expressions used in this Form 10-K. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by us in those statements. The most important facts that could prevent us from achieving our stated goals include, but are not limited to, the following:

 

  (a) volatility or decline of our stock price;
     
  (b) potential fluctuation in quarterly results;
     
  (c) our failure to earn revenues or profits;
     
  (d) inadequate capital to continue the business and barriers to raising the additional capital or to obtaining the financing needed to implement our business plans;
     
  (e) failure to commercialize our technology or to make sales;
     
  (f) changes in demand for our products and services;
     
  (g) rapid and significant changes in markets;
     
  (h) litigation with or legal claims and allegations by outside parties, causing us to incur substantial losses and expenses;
     
  (i) insufficient revenues to cover operating costs;
     
  (j) dilution in the ownership of the Company through the issuance by us of additional securities and the conversion of outstanding warrants, notes and other securities;
     
  (k) failure to obtain FDA approval for our new medical imaging device, which is still in its prototype stage; and

 

We cannot assure that we will be profitable. We may not be able to develop, manage or market our products and services successfully. We may not be able to attract or retain qualified executives and technology personnel. We may not be able to obtain customers for our products or services. Our products and services may become obsolete. Government regulation may hinder our business. Additional dilution in outstanding stock ownership will be incurred due to the issuance or exercise of more shares, warrants and other convertible securities.

 

Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. We caution you not to place undue reliance on the statements, which speak only as of the date of this Form 10-K. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may make. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events.

 

The following discussion should be read in conjunction with our financial statements and notes to those statements. In addition to historical information, the following discussion and other parts of this annual report contain forward-looking information that involves risks and uncertainties.

 

16

 

Current Overview

 

Our current focus is (a) on complying with our Chapter 11 Reorganization Plan by continuing to improve our 3D medical imaging technology, and to prepare to re-file our application with the FDA for approval of our 3D medical imaging device.

 

On October 28, 2010, we received a letter from the United States Food and Drug Administration (“FDA”) responding to our application for clearance by the FDA of our 3D medical imaging technology and device. In our application to the FDA under Section 510(k) of the applicable federal legislation, we stated that our medical device is substantially equivalent to devices marketed in interstate commerce prior to May 28, 1976 and therefore should be approved for commercial sale and use as a Class II device, without the necessity for clinical trials. The FDA responded by rejecting our position that our medical device is substantially equivalent to such prior devices. We disagree with the FDA’s position and plan to re-file our application with additional information supporting our application for clearance.

 

In the absence of FDA approval for our medical device, we currently do not and cannot rely upon it as a future source of sales and revenue. We are subject to the uncertainty of not knowing whether or when our proprietary medical device will be approved and can be sold. Under those circumstances, management believes that we will continue our current trend of incurring operating losses, possibly requiring us to raise additional capital or financing from outside sources. We cannot assure that we will be able to raise sufficient capital or financing to maintain our business while we are incurring operating losses, and we cannot assure that we will become profitable if our proprietary medical device is approved by the FDA.

 

Critical Accounting Policies

 

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We monitor our estimates on an on-going basis for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.

 

We have identified the policies below as critical to our business operations and the understanding of our results of operations.

 

17

 

Stock-based Compensation

 

We measure and recognize compensation expense for all share-based payment awards made to employees and directors based on the grant date fair values of the awards. For stock option awards to employees with service and/or performance based vesting conditions, the fair value is estimated using the Black-Scholes option pricing model. The value of an award that is ultimately expected to vest is recognized as expense over the requisite service periods in our statements of operations. Our stock-based awards are comprised principally of shares issued for services and stock options.

 

We account for stock options issued to non-employees in accordance with the guidance for equity-based payments to non-employees. Stock option awards to non-employees are accounted for at fair value using the Black-Scholes option pricing model. Management believes that the fair value of stock options is more reliably measured than the fair value of the services received. The fair value of the unvested portion of the options granted to non-employees is re-measured each period. The resulting increase in value, if any, is recognized as expense during the period the related services are rendered.

 

The Black-Scholes option pricing model requires management to make assumptions and to apply judgment in determining the fair value of our awards. The most significant assumptions and judgments include estimating the fair value of our underlying stock, the expected volatility and the expected term of the award. In addition, the recognition of stock-based compensation expense is impacted by estimated forfeiture rates.

 

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.

 

Other Accounting Factors

 

The effects of inflation have not had a material impact on our operation, nor are they expected to in the immediate future.

 

Although we are unaware of any major seasonal aspect that would have a material effect on the financial condition or results of operation, the first quarter of each fiscal year is always a financial concern due to slow collections after the holidays.

 

The following sets forth selected items from our statements of operations for the years ended December 31, 2016 and 2015.

 

   

Year Ended

December 31, 2016

   

Year Ended

December 31, 2015

 
Net revenues   $ 33,083     $ 220,809  
Cost of goods sold     10,247       169,120  
Gross Profit     22,836       51,689  
General and administrative expenses     2,697,527       1,503,088  
Income (loss) from operations     (2,674,691 )     (1,451,399 )
Total other income (expenses)     (4,085,979 )     (1,180,233 )
Provision for income taxes     (800 )     (800 )
Net income (loss)   $ (6,761,470 )   $ (2,632,432 )

 

Results of Operations for the Year Ended December 31, 2016 as compared to the Year Ended December 31, 2015.

 

We had revenues for the year ended December 31, 2016 of $33,083 as compared to $220,809 for the year ended December 31, 2015, which represented a 85% decrease. The decrease in sales was attributed directly to a decrease in warranty sales and equipment sales for this period. Due to our lack of working capital caused by the reorganization process, the company did not have the ability to maintain requisite technical and sales personnel to continue operating as a cash–generating sales and service business. Therefore, management decided to concentrate its post – reorganization business on obtaining FDA 510k approval of its Smart-Scan technology. As a result, the Company concentrated on generating cash through financing activities. Cash raised through financing activities was expended on day to day business operations in connection with preparation for our 510K submittal, managing the post-bankruptcy emergence administration of our obligations under the approved bankruptcy plan, legal and audit fees, and actual payments to creditors required by the court-approved reorganization plan.

 

18

 

Our cost of revenue was $10,247 for the year ended December 31, 2016 as compared to $169,120 for the year ended December 31, 2015. This decrease was related to a decrease in sales volume. Our gross profit margin for the year ended December 31, 2016 was $22,836 as compared to $51,689 for the year ended December 31, 2015. Our total operating expenses increased in 2016 to $2,697,527 from $1,503,088 for the year ended December 31, 2015, an increase of 79% due primarily to increased Research & Development and stock based compensation expenses. Other expenses increased due to increased interest associated with convertible notes issued during 2016 and the change in value of derivative liabilities. Our net loss for the fiscal year ending December 31, 2016 was $6,761,470 as compared to a net loss of $2,632,432 for the fiscal year ending December 31, 2015.

 

Under current accounting guidance, deferred income taxes are reported using the liability method. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. We have recorded insignificant liabilities of $800 per year for income taxes for the state minimum tax of $800 imposed on corporations.

 

We expect the trend of operating losses by us to continue into the future at the current or greater rate as we spend money on product development and marketing. We cannot assure that we can achieve profitability. We do not expect litigation against us to expand and believe litigation is on a decreasing trend, although we can give no assurances in relation to future litigation.

 

Liquidity and Capital Resources

 

Our total current assets decreased to $22,638 as of December 31, 2016, from $61,013 as of December 31, 2015. The cash account as of December 31, 2016 was $22,638 compared to $9,508 as of December 31, 2015.

 

Our total current liabilities increased to $8,170,835 as of December 31, 2016 from $3,911,966 as of December 31, 2015. This increase is due in large part to an increase in derivative liability for this reporting period.

 

The cash account as of December 31, 2016 was $22,638 compared to $9,508 as of December 31, 2015. Due to our lack of working capital caused by the reorganization process, the Company did not have the ability to maintain requisite technical and sales personnel to continue operating as a cash-generating sales and service business. Therefore, management decided to concentrate its post-reorganization business on obtaining FDA 510K approval of its Smart Scan TM technology and on generating cash through financing activities, to fund the approval process. Cash raised through financing activities was expended primarily on: (i) day-to-day business operations in connection with preparation for our 510K submittal, (ii) administration of the bankruptcy process, (iii) legal and audit fees, and (iv ) payments to creditors required by the court-approved reorganization plan

 

During the year ended December 31, 2016, we used $603,770 of net cash for operating activities, as compared to $609,831 used during the year ended December 31, 2015. Net cash provided by financing activities during the year ended December 31, 2016 was $616,900, as compared to $606,975 during the year ended December 31, 2015.

 

We expect our working capital requirements in the next twelve months to be met primarily by the proceeds of private placements of common stock, convertible instruments and other securities to our existing shareholders and other investors. We expect to need additional working capital from outside sources to cover our anticipated operating deficits and to finance the re-filing of our application to the FDA for our proprietary 3D medical imaging device. There is no assurance that the Company will be able to raise sufficient additional capital or financing to continue in business or to effectively execute its business plan.

 

Going Concern Qualification

 

We have incurred significant losses from operations, and such losses are expected to continue. In their report on our financial statements as of and for the period ended December 31, 2016, our auditors have expressed substantial doubt about our ability to continue as a going concern. In addition, we have limited working capital. The foregoing raises substantial doubt about our ability to continue as a going concern. Management’s plans include seeking additional capital and/or debt financing. We cannot guarantee that additional capital and/or debt financing will be available when and to the extent required, or that if available it will be on terms acceptable to us. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The “Going Concern Qualification” may make it substantially more difficult for us to raise capital.

 

Off-Balance Sheet Arrangements

 

None.

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

19

 

IMAGING3, INC.

 

FINANCIAL STATEMENTS

 

FOR THE YEARS ENDED DECEMBER 31, 2016 and 2015

 

CONTENTS

 

Report of Independent Registered Public Accounting Firm 21
   
Balance Sheets as of December 31, 2016 and 2015 22
   
Statements of Operations for the years ended December 31, 2016 and December 31, 2015 23
   
Statements of Cash Flows for the years ended December 31, 2016 and December 31, 2015 24
   
Statement of Stockholders’ Deficit for the years ended December 31, 2016 and 2015 25
   
Notes to Financial Statements 26

 

20

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Imaging3, Inc.

 

We have audited the accompanying balance sheets of Imaging3, Inc. (the “Company”) as of December 31, 2016 and 2015, and the related statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2016. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Imaging3, Inc. as of December 31, 2016 and 2015, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2016, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 10 to the financial statements, the Company has incurred significant operating losses and negative cash flows from operations during the years ended December 31, 2016 and 2015. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 10. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Rose, Snyder & Jacobs LLP

 

Encino, California

 

April 14, 2017

 

21

 

IMAGING3, INC.

BALANCE SHEETS

 

    December 31, 2016     December 31, 2015  
             
ASSETS                
                 
CURRENT ASSETS:                
Cash and cash equivalents   $ 22,638     $ 9,508  
Accounts receivable, net     -       51,505  
                 
Total current assets     22,638       61,013  
                 
PROPERTY AND EQUIPMENT, net     -       -  
Total assets   $ 22,638     $ 61,013  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
CURRENT LIABILITIES:                
Accounts payable   $ 1,692,652     $ 1,942,641  
Accrued expenses     132,428       277,962  
Derivative liability     5,532,898       1,197,951  
Deferred revenue     41,829       72,912  
Convertible notes payable, net of discount     771,028       420,500  
Total current liabilities     8,170,835       3,911,966  
                 
STOCKHOLDERS’ DEFICIT:                
Preferred stock, no par value; authorized shares 1,000,000, 2000 and -0 shares issued and outstanding as of December 31, 2016 and 2015 respectively.     -       -  
Common stock, no par value; authorized shares 1,000,000,000 and 243,844,093 and 190,756,393 issued outstanding as of December 31, 2016, and December 31, 2015, respectively     7,829,273       5,365,047  
Accumulated deficit     (15,977,470 )     (9,216,000 )
Total stockholders’ deficit     (8,148,197 )     (3,850,953 )
Total liabilities and stockholders’ deficit   $ 22,638     $ 61,013  

 

The accompanying notes form an integral part of these financial statements.

 

22

 

IMAGING3, INC.

STATEMENTS OF OPERATIONS

 

    Year Ended December 31, 2016     Year Ended December 31, 2015  
             
Net revenues   $ 33,083     $ 220,809  
                 
Cost of goods sold     10,247       169,120  
Gross profit     22,836       51,689  
                 
Operating expenses                
General and administrative expenses     2,697,527       1,503,088  
Total operating expense     2,697,527       1,503,088  
                 
Loss from operations     (2,674,691 )     (1,451,399 )
                 
Other income (expense):                
Interest expense     (2,894,263 )     (1,191,290 )
Change in value     (1,633,732 )     6,857  
Loss on extinguishment of debt     (29,489 )     -  
Other income     471,504       4,200  
Total other income (expense)     (4,085,979 )     (1,180,233 )
                 
Income (Loss) before income tax     (6,760,670 )     (2,631,632 )
                 
Provision for income taxes     800       800  
                 
Net loss   $ (6,761,470 )   $ (2,632,432 )
                 
Basic and diluted net loss per share   $ (0.03 )   $ (0.01 )
                 
Basic and diluted weighted average common shares outstanding     212,835,271       184,098,899  

 

The accompanying notes form an integral part of these financial statements.

 

23

 

IMAGING3, INC.

STATEMENTS OF CASH FLOWS

 

   

Year Ended

December 31, 2016

   

Year Ended

December 31, 2015

 
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net loss   $ (6,761,470 )   $ (2,632,432 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Stock-based compensation     139,535       168,000  
Change in value of derivatives     1,633,732       (6,857 )
Non cash interest     2,789,771       1,172,809  
Loss on extinguishment of debt     29,489       -  
Shares issued for services     1,903,050       134,500  
(Increase) / decrease in current assets:                
Accounts receivable     51,505       (47,007 )
Prepaid expenses and other assets     -       6,609  
Inventory     -       1,000  
Increase / (decrease) in current liabilities:                
Accounts payable     (240,012 )     648,072  
Accrued expenses     (130,787 )     28,215  
Deferred revenue     (31,083 )     (82,740 )
Net cash used in operating activities     (616,270 )     (609,831 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from note payable     462,500       410,000  
Proceeds from sale of common stock     166,900       196,975  
Net cash provided by financing activities     629,400       606,975  
                 
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS     13,130       (2,856 )
                 
CASH & CASH EQUIVALENTS, BEGINNING BALANCE     9,508       12,364  
                 
CASH & CASH EQUIVALENTS, ENDING BALANCE   $ 22,638     $ 9,508  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                
Interest paid in cash   $ 0     $ 0  
Income taxes paid in cash   $ 0     $ 0  
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:                
Conversion of debt and accrued interest   $ 70,747     $ 0  

 

The accompanying notes form an integral part of these financial statements.

 

24

 

IMAGING3, INC.

STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2016 AND 2015

 

    Preferred stock     Common stock           Total  
    Number of           Number of           Accumulated     stockholders’  
    shares     Amount     shares     Amount     deficit     deficit  
                                     
Balance as of December 31, 2014                     169,502,393     $ 4,865,572       (6,583,568 )     (1,717,996 )
                                                 
Shares issued for cash                     12,379,000       196,975       -       196,975  
                                                 
Shares issued for services                     8,875,000       134,500       -       134,500  
                                                 
Stock-based compensation                     -       168,000       -       168,000  
                                                 
Net Loss                     -       -       (2,632,432 )     (2,632,432 )
                                                 
Balance as of December 31, 2015                     190,756,393       5,365,047       (9,216,000 )     (3,850,953 )
                                                 
Preferred stock issued to officer     2,000       -       -       -       -       -  
                                                 
Shares issued for cash                     4,504,000       166,900       -       166,900  
                                                 
Shares issued for services                     41,685,000       1,903,050       -       1,903,050  
Note payable converted to stock                     7,074,700       254,741       -       254,741  
 Stock-based compensation                             139,535       -       139,535  
                                                 
Net loss                     -       -       (6,761,470 )     (6,761,470 )
                                                 
Balance as of December 31, 2016                     244,020,093     $ 7,829,273     $ (15,977,470 )   $ (8,148,197 )

 

The accompanying notes form an integral part of these financial statements.

 

25

 

IMAGING3, INC.

Notes to Financial Statements

 

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 has been refurbishment and sale of medical equipment, parts and services to hospitals, surgery centers, research labs, physician offices and veterinarians. Equipment sales have included new and used c-arms, c-arms tables, and surgical tables. Part sales are comprised of 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 on or in the human body. This technology is still in the development stage, and the Company intends to seek approval from the Food and Drug Administration (“FDA”), which, if approved, will allow us to offer products utilizing the technology to healthcare providers.

 

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

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.

 

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 December 31, 2016 or 2015.

 

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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 the years ended December 31, 2016 and 2015, potentially dilutive securities were excluded from the computation of weighted average shares outstanding-diluted because their effect was anti-dilutive.

 

The Company’s policy for Equity – Based compensation is predicated on Employment Agreements for both Dane Medley CEO and

 

Xavier Aguilera, CFO.

 

27

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 December 31, 2016 and 2015 respectively.

 

    Level 1     Level 2     Level 3     Total  
Derivative Liabilities 2016   $ -     $ -     $ 5,532,898     $ 5,532,898  
Derivative Liabilities 2015   $ -     $ -     $ 1,197,951     $ 1,197,951  

 

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.

 

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, 2016. 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. 

 

28

 

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 required us to adopt these provisions in the first quarter of 2016. This guidance did not 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 balance of accounts receivable as of December 31, 2015 and 2016 were $51,505 and $-, respectively. The reserve amount for uncollectible accounts was $-0- and $ -0- as of December 31, 2015 and 2016, 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 $2,578 per month on a total liability of $48,627 as of December 31, 2016, including interest and penalties.

 

29

 

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 December 31, 2015 or December 31, 2016.

 

As of December 31, 2016, the Company estimated it had available gross net operating loss (NOL) carry forwards of approximately $18.665 million, which expire at various dates through 2037.

 

The components of the net deferred income taxes at December 31, 2015 and 2016 are summarized below:

 

    December 31, 2015     December 31, 2016  
Deferred income tax assets                
Net operating loss carry forwards   $ 18,400,000     $ 18,665,000  
Less: valuation allowance     (18,400,000 )     (18,665,000 )
Deferred income tax assets, net   $ -     $ -  

 

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, 2015     December 31, 2016  
Tax expense (benefit) at federal statutory rate     (34 )%     (34 )%
State tax expense, net of federal tax     (6 )     (6 )
Changes in valuation allowance     40       40  
Effective income tax rate   $ -     $ -  

 

Income tax expense for the period ended December 31, 2015 and the year ended December 31, 2016 is summarized below.

 

    2015     2016  
Current tax expense:                
Federal   $ -     $ -  
State     800       800  
Total current tax expense   $ 800     $ 800  
                 
Deferred tax expense:                
Federal   $ -     $ -  
State     -       -  
Total deferred tax expense, net   $ -     $ -  
                 
Tax expense   $ 800     $ 800  

 

30

 

6. NOTES PAYABLE

 

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 December 31, 2016. The 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 27,000,000 warrants to purchase 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 $487,850 for cash proceeds of $465,000. These notes bear interest at 5%-10% per annum and are due on various dates through June 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 Company is in default under the terms of these notes.

 

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 ended 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 year ended December 31, 2016, the Company recorded an additional note discount of $388,000, with an immediate charge to interest expense of $2,440,000 relating to the excess value of the derivative liabilities over the promissory notes. Amortization of the note discount amounted to $349,000 during the year ended December 31, 2016 and $378,000 for the year ended December 31, 2015.

 

7. STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

Upon confirmation of the Company’s Chapter 11 Reorganization Plan, the Company is authorized to issue 1,000,000 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. On January 18, 2016, Imaging3 issued 2000 preferred voting shares to Dane Medley, CEO/Chairman. Each share constitutes 350,000 voting shares.

Common Stock

 

The Company is authorized to issue 1,000,000,000 shares of no par value common stock.

 

During the year ended December 31, 2015, the Company issued a total of 21,254,000 shares of common stock, 12,379,000 of such shares were issued for cash proceeds of $196,975. The remaining 8,875,000 shares were issued for services rendered, valued at $134,500.

 

During the year ended December 31, 2016, the Company issued 53,263,700 shares of common stock, 41,685,000 shares related to services valued at $1,903,050, 4,504,000 shares were issued for cash proceeds of $166,900, and 7,074,700 shares related to a conversion of notes payable at $0.01 per share.

 

Stock Option Plan

 

During 2014, the Board of Directors adopted, and the shareholders approved, the 2014 Stock Option Plan under which a total of 36,276,614 shares of common stock had been reserved for issuance. The Stock Option Plan will terminate in September 2024.

 

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Stock Options

 

Transactions in FY2016   Quantity     Weighted-
Average
Exercise Price
Per 
Share
    Weighted-
Average
Remaining 
Contractual
Life
 
Outstanding, December 31, 2015     8,000,000     $ 0.025       9.00  
Granted     5,000,000     $ 0.025       8.63  
Exercised     0                  
Cancelled/Forfeited     0                  
Outstanding, December 31, 2016     13,000,000     $ 0.025       8.86  
Exercisable, December 31, 2016     13,000,000     $ 0.025       8.86  

 

Transactions in FY2015

 

Outstanding, December 31, 2014                  
Granted     8,000,000     $ 0.025       9.00  
Exercised     0                  
Cancelled/Forfeited     0                  
Outstanding, December 31, 2015     8,000,000     $ 0.025       9.00  
Exercisable, December 31, 2015     8,000,000     $ 0.025       9.00  

 

The fair value of the options granted during the year ended December 31, 2016 is estimated at approximately $139,535 which was expensed upon grant as the options vested immediately. The fair value of these options was estimated at the date of grant using the Black Scholes option pricing model with the following assumptions for the fiscal year ended December 31, 2016: no dividends, expected volatility of 60%, risk free interest rate of 1.91%, and expected life of 9 years.

 

The weighted average remaining contractual life of options outstanding issued under the Plan was 8.86 years at December 31, 2016. 

 

8. WARRANTS

 

Pursuant to the Chapter 11 Reorganization Plan, the Company issued 7,861,472 and 10,287,224 warrants to purchase common stock to Gemini Master Fund, Ltd and Alpha Capital, respectively. These warrants are exercisable at an exercise price of $0.000001 per share and expire July 30, 2023.

 

 

During the years ended December 31, 2016 and 2015, the Company issued warrants to purchase common stock in connection with convertible promissory notes. The warrants are exercisable at $0.01 per share, subject to downward adjustments for future equity issuances, and have a term of 7 years.

 

Warrant Activity  
12-31-2014 Balance     18,148,696  
Granted     27,000,000  
12-31-2015 Balance     45,148,696  
Granted     36,500,000  
12-31-2016 Balance     81,648,696  

 

Following is a summary of warrants outstanding at December 31, 2016

 

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 features embedded in convertible promissory notes.

 

In connection with 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.

 

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The following table summarizes activity in the Company’s derivative liability during the years ended December 31, 2016 and 2015:

 

12-31-2014 Balance   $ -0-  
Creation   $ 1,204,809  
Change in Value   $ (6,857 )
12-31-2015 Balance   $ 1,197,952  

 

12-31-2015 Balance   $ 1,197,952  
Creation   $ 2,813,219  
Settlement     (112,005 )
Change in Value   $ 1,633,732  
12-31-2016 Balance   $ 5,532,898  

 

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       0.23% - 1.69 %
Volatility     60 %

 

10. 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 and as of December 31, 2016 had an accumulated deficit totaling $16.0 M. During the years ended December 31, 2016 and 2015, the Company utilized an aggregate of $1.226 Million of cash in operating activities and incurred an aggregate net loss of $9,393,902. 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, obtaining funds through the issuance of debt, and continue seeking approval from the FDA to bring to market our real-time 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.

 

11. COMMITMENTS AND CONTINGENCIES

 

Leases

 

During 2014 through May 2015, the Company leased its facilities on a month-to-month lease, which was cancellable by the parties with 30-days written notice. The Company entered into a facility lease agreement effective June 1, 2015 for three years with an option to extend for a 24 month period effective on June 1, 2018.

 

Future annual minimum lease commitments, excluding property taxes and insurance, on this lease are as follows:

 

2017   $ 35,366  
2018     14,915  
    $ 50,281  

 

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Litigation

 

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 $2,578 per month on a total liability of $48,627 as of December 31, 2016, including interest and penalties, with a potential balloon payment in one year subject to re-negotiation after one year with the IRS.

 

12. SUBSEQUENT EVENTS

 

Notes Payable

 

On January 5, 2017, the Company closed a financing arrangement with five key shareholders, whereby fourteen separate 10% original-issue-discount secured convertible notes held by these shareholders (twelve of which were in default) with an aggregate balance due of about $770,000 have been amended such that (i) the maturity date of all notes is now August 31, 2017 and (ii) the notes are now convertible into subsequent rounds of financing rather than being convertible at $0.01 per share. Should there be an event of default under these amended notes, the conversion price will revert back to $0.01 per share.

 

As part of the financing arrangement, fifteen separate warrants held by these same shareholders were also amended such that the number of shares exercisable pursuant to each warrant has been reduced by 75%. The exercise price of these warrants remains at $0.01. In consideration for this reduction, Imaging3 has issued to the five holders new convertible promissory notes in the total principal amount of $124,688 in the same form as the notes described above, as amended. The resulting reduction in the number of warrant-shares outstanding is 49,875,000.

 

Furthermore, these shareholders agreed, as part of the arrangement, to lend Imaging3 up to an additional $200,000, in increments of $50,000, at the Company’s discretion, as long as the original notes are not in default. These loans will: (i) be evidenced by notes in the form of the notes described above, as amended; (ii) be due on August 31, 2017; (iii) bear interest at 10% per annum; and (iv) have a face value of 118.75% of the funds actually advanced. In addition, Imaging3 shall issue warrants granting the noteholder the right to purchase, at $0.01 per share, that number of common shares of the company equal to 25 times the number of dollars loaned.

 

Administrative Claim of Greenberg Glusker Fields Claman & Machtinger LLP

 

On January 30, 2017 the Company entered into a new Agreement. Under the terms of the Agreement, the Company has agreed to pay Greenberg $1,117,574 plus any interest that has accrued at the rate of 6.0% per annum, as follows: (i) $100,000 on or before December 31, 2017; (ii) $150,000 on or before December 31, 2018 (iii) 4.0% of the first $2.5 million of gross proceeds of any private or public offering by the company (an “Offering”); (iv) 2.0% of the next $2.5 million of gross proceeds from such Offerings; (v) 4.0% of any gross proceeds thereafter from such Offerings; and (vi) the remaining balance on or before December 31, 2019.

 

In addition, Greenberg has the option to convert up to $150,000 of the balance into a warrant that would convert on terms that are equal to (or, in certain cases, better than) the terms offered in subsequent rounds of financing.

 

Bankruptcy Closure 

 

On January 31, 2017, United States Bankruptcy Judge for the Central District of California, Neil Bason, granted the Company’s unopposed motion for entry of final decree and also granted approval of the two stipulations regarding payment of court-approved fees. The Company noted that as a result, the Imaging3

 

Chapter 11 proceeding is now closed—the Company is no longer subject to the jurisdiction of the Bankruptcy Court, and the case cannot be converted to a Chapter 7 proceeding.

 

To clarify, the Judge’s order in its final paragraph stated that “Notwithstanding the foregoing [order closing the bankruptcy case pursuant to 11United States Code Section 350(a)] the bankruptcy case may be reopened on motion as set forth in the Greenberg, Glusker Fee Agreement and/or the Mentor Fee Agreement and thus the court retains jurisdiction for those purposes and as otherwise provided by law or as contemplated by the prior orders and proceedings of this court”. Thusly, technically, the case could possibly be reopened by either of those aforementioned creditors.

 

Stock

 

As of April 2017, the Company cancelled 11 million shares of common stock issued in 2016. Furthermore, the company intends to cancel an additional 18 million shares pending negotiations relating to officer employment agreements.

 

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.

 

ITEM 9A. CONTROL AND PROCEDURES

 

Evaluation of Disclosure Controls and Procedures

 

We carried out an evaluation, under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, of the effectiveness of our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based upon that evaluation, our principal executive officer and principal financial officer concluded that, as of the end of the period covered in this report, our disclosure controls and procedures were not effective to ensure that information required to be disclosed in reports filed under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the required time periods and is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

 

Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all error or fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints and the benefits of controls must be considered relative to their costs. Due to the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. To address the material weaknesses, we performed additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this annual report have been prepared in accordance with generally accepted accounting principles. Accordingly, management believes that the financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented.

 

Management’s Report on Internal Control Over Financial Reporting

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended. Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2016. In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated (2013Framework). A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. We have identified the following material weaknesses:

 

1. As of December 31, 2016, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.

 

2. As of December 31, 2016 we did not maintain adequate segregation of duties. Accordingly, management has determined that this control deficiently constitutes a material weakness.

 

Because of these material weaknesses, management has concluded that we did not maintain effective internal control over financial reporting as of December 31, 2016, based on the criteria established in “Internal Control-Integrated Framework” issued by the COSO.

 

Independent Registered Accountant’s Internal Control Attestation

 

This annual report does not include an attestation report of our public accounting firm regarding our internal control over financial reporting.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting through the date of this report or during the quarter ended December 31, 2016, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

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PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

The following table lists our executive officers and directors as of December 31, 2016:

 

Name   Age   Position
         
Dane Medley   58   Chairman of the Board of Directors and Chief Executive Officer
         
Xavier Aguilera   67   Executive Vice President, Chief Financial Officer, Corporate Secretary and Director
         
Dr. Art Lu   69   Director
         
Richard Klug   61   Director

 

Dane Medley has been the Chairman and Chief Executive Officer of the Company since October 2012. Prior to joining us, Mr. Medley was the Senior Vice President of Service and Operations at Xerox Corporation (2008-2012), the Regional Operations Specialist at Sharp Electronics Corporation (2002-2007), a Service Manager at Lewan & Associates, Inc. (1986 to 2001), and served in the United States Air Force from 1981 to 1985 as an Antenna and Radio Maintenance Specialist. His leadership responsibilities and experience at Xerox Corp. included the following:

 

Accountable for $75 million + of revenue, managing profit and loss.
     
Directed operational manpower needs, budget, and operating expenses.
     
Retained relationships with 60 + sales personnel, upper level management, and a customer base in excess of 40,000, generating $75 million in revenue.
     
Developed helpdesk dispatching procedures resulting in reduced response time and deliveries to customers, and increased field productivity of field engineers.
     
Budgeted staffing, recruiting, performance reviews, accounting, and facility management.
     
Extensive experience in operations, branch management, and administrative management with over 20 years’ experience.
     
Introduced and implemented internship program specifically for technicians, creating career paths and keeping turnover to under 3% over a 5-year period.
     
Employed philosophy of long-term customer satisfaction.

 

At Sharp Electronics Corporation, his experience and accomplishments included the following:

 

Maintained an 8 state region of 42 dealers, specializing in dealer operations.
     
Provided training for inventory control, technical solutions, service meetings, and overall health of the dealer.
     
Worked closely with senior management on budget analysis and benchmarking.
     
Principal point of contact for dealer with manufacturer for problem resolution.
     
Taught bi-monthly corporate courses to technicians and operations specialists.
     
Conveyed customer service and operational procedures.
     
Developed train the trainer program now instituted as training protocol at SHARP.

 

At Lewan & Associates, Inc., Mr. Medley was responsible for the following:

 

Responsible for $30 million of revenue, managing profit and loss.
     
Managed hiring and firing, inventory, budget, training, and customer satisfaction.
     
Managed over 50,000 service calls yearly with 74 technicians.
     
Developed technician benchmarking creating Presidents Club and bonus structure.
     
Developed leadership skills, using Lewan management and development courses.
     
Support services, sales satisfaction, territory management, customer equipment repair.

 

36

 

In the United States Air Force, Mr. Medley gained the following experience:

 

Trained in antenna maintenance and radio communications.
     
Responsible for coordinating projects with 1836 EIG operations.
     
Based in Wiesbaden, Germany, Rome and New York. Assistant Team Chief 1984-1985. Honorable Discharge-E3.

 

Education

 

University of Maryland USAF, 1982-1984.
     
Arapahoe Community College, 1979-1980.
     
Casper College, 1978.
     
Global leadership training, 2007.
     
Global SMART training, 2007.
     
Xerox Leadership training, 2007.
     
Sharp Electronics leadership development certification.
     
Microsoft Certified Professional. COMPTIA certification, 2006.
     
Security + certified. Comptia certification, 2005.
     
Net + certified. Comptia certification, 2004.
     
A+ certified. Comptia certification, 2004.
     
Controller certified. Sharp Electronics, 2003.
     
Windows business suite, printer, 45 copier certifications. Sharp Electronics, 2003.
     
Train the Trainer certified. University of Wisconsin, 2003.
     
CPR certified

 

Mr. Medley’s biographical history and experience with us indicates his leadership qualifications, finance qualifications, industry experience and education.

 

Xavier Aguilera has been our Executive Vice President, Chief Financial Officer, and Corporate Secretary since June 1999 and a director since 2005. Mr. Aguilera’s responsibilities include managing our finances, accounting, taxes, credit facilities and interfacing and developing new relationships with banks and other financial institutions. Prior to working for Imaging3, Mr. Aguilera was self-employed as a consultant for Xavier Aguilera & Associates from 1997 to 1999. His responsibilities were to manage and open primary healthcare facilities throughout Southern California. He provided property management, estate planning, credit facility and Import/Export consulting for several businesses in Southern California. From 1995 to 1997, Mr. Aguilera was the chief administrative officer for East Los Angeles Doctors Hospital, where his responsibilities were to manage administrative personnel within the hospital, manage public relations, business development and JCAHO compliance. From 1992 to 1995, Mr. Aguilera was the chief executive officer for El Centro Human Services Corporation, where his responsibilities were to develop and implement a community based mental health facility consisting of eight satellite centers. He managed a $9.4 million budget and a full time staff of 240 employees. From 1990 to 1992, Mr. Aguilera was a deputy director/administrator for Northeast Community Clinic, where his responsibilities were to implement and administer the clinics health programs and oversee operations. From 1988 to 1990, Mr. Aguilera was self-employed as a consultant for finance, management and international finance. He provided these services to banks as well as businesses throughout Southern California. From 1987 to 1988, Mr. Aguilera was vice president of international banking marketing for California Commerce Bank, where his responsibilities were to manage and administer a $14 million portfolio, develop new business in the Southern California with Hispanic businesses and develop business relationships with Northern Mexico businesses and banks. From 1981 to 1987, Mr. Aguilera was an assistant general manager/deputy director for Banco Nacional de Mexico (BANAMEX). He was responsible for $60 million in new deposits as well as new business development and management of commercial and personal lending departments. He holds a bachelor degree in business from California State University at Northridge (1983) and a certificate of medical management from the University of California at Los Angeles (1995).

 

Mr. Aguilera’s qualifications:

 

Leadership experience – Executive vice president, chief financial officer and corporate secretary of Imaging3 since June 1999 and chairman of the audit committee since 2003.
     
Finance experience – Mr. Aguilera is currently our chief financial officer and had extensive experience in financial management with other companies prior to joining us in June 1999.
     
Industry experience - Mr. Aguilera has over 25 years of financial and management experience in the medical and banking industries.
     
Technology and education experience - Mr. Aguilera has a bachelor degree in business from California State University at Northridge and a certificate of medical management from the University of California at Los Angeles.

 

37

 

Dr. Arthur Lu Dr. Arthur Lu, age 61, has been a director of the Company since December 1, 2015. Since 1987, Dr. Lu has worked in private practice as an ophthalmologist. He worked as an ophthalmologist at Magnolia Eye Care, Medical Center, Inc. from 1987 to 2005. Dr. Lu was an assistant clinical professor at the University of California, San Diego from 1987 to 1997. He is a member of the American Academy of Ophthalmology, California Medical Association, and Orange County Medical Association. Dr. Lu became a fellow of the American Board of Ophthalmology in 1989, a diplomat of the American Board of Ophthalmology in 1988, a licensed physician and surgeon in California in 1985, and a diplomat of the National Board of Medical Examiners in 1984. Dr. Lu received his Doctor of Medicine from the University of California, Irvine in 1983, his Master of Science degree in electrical engineering from the University of Southern California in 1978, his Bachelor of Science degree in electrical engineering from California State University at Los Angeles in 1976, and his Bachelor of Science degree in biochemistry from California State University at Los Angeles in 1974.

 

Richard J. Klug has been a director of the Company since October 2014. Since 1997, Mr. Klug has served as a Manager and Senior Regional Manager for Sharp Electronics Corp. in Mahwah, New Jersey, currently responsible for technical and organizational support of all Sharp products in a six state region. His skills and experience include budget and productivity responsibility, technical operations management, and general management and administration of dealer networks for manufacturers and resellers. Mr. Klug served as the Director of Retail Services for Gestetner Corporation in Greenwich, Connecticut (1996-1997), an independent management consultant from 1994 to 1995, and a National Manager, Product Support for Sharp Electronics Corp. in Mahwah, New Jersey (1979 to 1994). Mr. Klug’s education and training include the following:

 

Education

 

Sharp Management Institute (Conducted by New York University staff), New York, 1989-1990.
     
Technical Training classes for copiers, thermal and laser facsimile, and laser printers, 1979-1994.
     
U.S. Air Force electronics and weapons and electronics systems training, 1968-1971.
     
Management level training, 1968-1971.
     
Queens College, New York, 1967-1968.

 

Mr. Klug’s extensive management experience and accomplishments in the wholesale and retail products markets, his computer and related technical skills, his responsibility for budgeting and productivity, and his technical education and training, evidence his qualities of leadership, financial experience, technology acumen, and industry knowledge.

 

Limitation of Liability and Indemnification of Officers and Directors

 

Under the California Corporation Code, our directors will have no personal liability to us or our stockholders for monetary damages incurred as the result of the breach or alleged breach by a director of his “duty of care.” This provision does not apply to the directors’ (i) acts or omissions that involve intentional misconduct or a knowing and culpable violation of law, (ii) acts or omissions that a director believes to be contrary to the best interests of the corporation or its shareholders or that involve the absence of good faith on the part of the director, (iii) approval of any transaction from which a director derives an improper personal benefit, (iv) acts or omissions that show a reckless disregard for the director’s duty to the corporation or its shareholders in circumstances in which the director was aware, or should have been aware, in the ordinary course of performing a director’s duties, of a risk of serious injury to the corporation or its shareholders, (v) acts or omissions that constituted an unexcused pattern of inattention that amounts to an abdication of the director’s duty to the corporation or its shareholders, or (vi) approval of an unlawful dividend, distribution, stock repurchase or redemption. This provision would generally absolve directors of personal liability for negligence in the performance of duties, including gross negligence.

 

The California Corporations Code grants corporations the right to indemnify their directors, officers, employees and agents in accordance with applicable law. Our bylaws provide for indemnification of such persons to the full extent allowable under applicable law. These provisions will not alter the liability of the directors under federal securities laws.

 

We intend to enter into agreements to indemnify our directors and officers, in addition to the indemnification provided for in our bylaws. These agreements, among other things, indemnify our directors and officers for certain expenses (including attorneys’ fees), judgments, fines, and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of Imaging3, arising out of such person’s services as a director or officer of Imgagin3, any subsidiary of Imaging3 or any other company or enterprise to which the person provides services at our request. We believe that these provisions and agreements are necessary to attract and retain qualified directors and officers.

 

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling us pursuant to the foregoing provisions, we have been informed that in the opinion of the Securities and Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

 

38

 

Board Committees

 

Our board of directors has appointed an audit committee. The board of directors has adopted a written charter of the audit committee. The audit committee is authorized by the board of directors to review our annual financial statements prior to publication, and to review the work of, and approve non-audit services performed by, our independent accountants. The audit committee will make annual recommendations to the board for the appointment of independent public accountants for the ensuing year. The audit committee will also review the effectiveness of the financial and accounting functions and our organization, operations and management. The audit committee was formed on August 31, 2003. The audit committee held two meetings during fiscal year ended December 31, 2016.

 

Our board of directors does not have a compensation committee so all decisions with respect to management compensation are made by the whole board. Our board of directors does not have a nominating committee. Therefore, the selection of persons or election to the board of directors was neither independently made nor negotiated at arm’s length. 

 

Report of the Audit Committee

 

Our audit committee has reviewed and discussed our audited financial statements for the fiscal year ended December 31, 2016 with senior management. The audit committee has reviewed and discussed with management our audited financial statements. The audit committee has also discussed with Rose, Snyder and Jacobs LLP (“RSJ”), our independent auditors, the matters required to be discussed by the statement on Auditing Standards No. 16 (Communication with Audit Committees) and received the written disclosures and the letter from RSJ required by Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees). The audit committee has discussed with RSJ the independence of RSJ as our auditors. Finally, the audit committee has considered whether the independent auditor’s provision of non-audit services to us is compatible with the auditors’ independence. Based on the foregoing, our audit committee has recommended to the board of directors that our audited financial statements be included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016 for filing with the United States Securities and Exchange Commission. Our audit committee did not submit a formal report regarding its findings.

 

AUDIT COMMITTEE

 

Notwithstanding anything to the contrary set forth in any of our previous or future filings under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate this report in future filings with the Securities and Exchange Commission, in whole or in part, the foregoing report shall not be deemed to be incorporated by reference into any such filing.

 

Code of Conduct

 

We have adopted a code of conduct that applies to all of its directors, officers and employees. The text of the code of conduct has been posted on our Internet website and can be viewed at www.imaging3.com. Any waiver of the provisions of the code of conduct for executive officers and directors may be made only by our audit committee or the full board of directors and, in the case of a waiver for members of the audit committee, by the board of directors. Any such waivers will be promptly disclosed to our shareholders.

 

Compliance with Section 16(A) of Exchange Act

 

Our affiliates who are members of our management voluntarily comply with Section 16 of the Securities Exchange Act of 1934, as amended, even though we do not have securities registered under Section 12 of Exchange Act. Section 16(a) of the Exchange Act requires a registrant’s officers and directors, and certain persons who own more than 10% of a registered class of a registrant’s equity securities (collectively, “Reporting Persons”), to file reports of ownership and changes in ownership (“Section 16 Reports”) with the Securities and Exchange Commission. Reporting Persons are required by the SEC to furnish the registrant with copies of all Section 16 Reports they file.

 

Based solely on our review of the copies of such Section 16 Reports received by us, or written representations received from certain Reporting Persons, all Section 16(a) filing requirements that would be applicable to our Reporting Persons (as our securities are registered under Section 12 of the Exchange Act) during and with respect to the fiscal year ended December 31, 2016 have been met on a timely basis.

 

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ITEM 11. EXECUTIVE COMPENSATION

 

Compensation Discussion and Analysis

 

The following Compensation Discussion and Analysis describes the material elements of compensation for our executive officers identified in the Summary Compensation Table (“Named Executive Officers”), and executive officers that we may hire in the future. As more fully described below, our board of directors makes all decisions for the total compensation of our executive officers, including the Named Executive Officers. We do not have a compensation committee, so all decisions with respect to management compensation are made by the whole board.

 

Compensation Program Objectives and Rewards

 

Our compensation philosophy is based on the premise of attracting, retaining, and motivating exceptional leaders, setting high goals, working toward the common objectives of meeting the expectations of customers and stockholders, and rewarding outstanding performance. Following this philosophy, in determining executive compensation, we consider all relevant factors, such as the competition for talent, our desire to link pay with performance in the future, the use of equity to align executive interests with those of our stockholders, individual contributions, teamwork and performance, and each executive’s total compensation package. We strive to accomplish these objectives by compensating all executives with total compensation packages consisting of a combination of competitive base salary and, once we grow more and increase our staff, incentive compensation. Because of our small size and staff to date, we have not yet adopted a management equity incentive plan, nor have we yet used equity incentives as part of our management compensation policy.

 

While we have not hired at the executive level significantly since inception because our business has not grown sufficiently to justify increasing staff, we expect to grow and hire in the future. Our Named Executive Officers have been with us for many years and their compensation has basically been static, based primarily on levels at which we can afford to retain them, and their responsibilities and individual contributions. To date, we have not applied a formal compensation program to determine the compensation of the Named Executives. In the future, as we and our management team expand, our board of directors expects to add independent members, form a compensation committee comprised of independent directors, adopt a management equity incentive plan and apply the compensation philosophy and policies described in this section of the Form 10-K.

 

The primary purpose of the compensation and benefits described below is to attract, retain and motivate highly talented individuals when we do hire, who will engage in the behaviors necessary to enable us to succeed in our mission while upholding our values in a highly competitive marketplace. Different elements are designed to engender different behaviors, and the actual incentive amounts which may be awarded to each Named Executive Officer are subject to the annual review of the board of directors. The following is a brief description of the key elements of our planned executive compensation structure.

 

Base salary and benefits are designed to attract and retain employees over time. Incentive compensation awards are designed to focus employees on the business objectives for a particular year. Equity incentive awards, such as stock options and non-vested stock, focus executives’ efforts on the behaviors within the recipients’ control that they believe are designed to ensure our long-term success as reflected in increases to our stock prices over a period of several years, growth in our profitability and other elements. Severance and change in control plans are designed to facilitate a company’s ability to attract and retain executives as it competes for talented employees in a marketplace where such protections are commonly offered. We currently have not given separation benefits to any of our Name Executive Officers.

 

Benchmarking

 

We have not yet adopted benchmarking but may do so in the future. When making compensation decisions, our board of directors may compare each element of compensation paid to our Named Executive Officers against a report showing comparable compensation metrics from a group that includes both publicly-traded and privately-held companies. Our board believes that while such peer group benchmarks are a point of reference for measurement, they are not necessarily a determining factor in setting executive compensation as each executive officer’s compensation relative to the benchmark varies based on scope of responsibility and time in the position. We have not yet formally established our peer group for this purpose.

 

The Elements of Imaging3’s Compensation Program

 

Base Salary

 

Executive officer base salaries are based on job responsibilities and individual contribution. The board reviews the base salaries of our executive officers, including our Named Executive Officers, considering factors such as corporate progress toward achieving objectives (without reference to any specific performance-related targets) and individual performance experience and expertise. None of our Named Executive Officers have employment agreements with us. Additional factors reviewed by the board of directors in determining appropriate base salary levels and raises include subjective factors related to corporate and individual performance. For the year ended December 31, 2016, all executive officer base salary decisions were approved by the board of directors.

 

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Our board of directors determines base salaries for the Named Executive Officers at the beginning of each fiscal year, and the board proposes new base salary amounts, if appropriate, based on its evaluation of individual performance and expected future contributions. We do not have a 401(k) Plan, but if we adopt one in the future, base salary would be the only element of compensation that would be used in determining the amount of contributions permitted under the 401(k) Plan.

 

Incentive Compensation Awards

 

The Named Executives have not been paid bonuses and our board of directors has not yet established a formal compensation policy for the determination of bonuses. If our revenue grows and bonuses become affordable and justifiable, we expect to use the following parameters in justifying and quantifying bonuses for our Named Executive Officers and other officers of Imaging3: (1) the growth in our revenue, (2) the growth in our earnings before interest, taxes, depreciation and amortization, as adjusted (“EBITDA”), and (3) our stock price. The board has not adopted specific performance goals and target bonus amounts for any of its fiscal years, but may do so in the future. It is anticipated that such an incentive compensation awards program may commence during the year 2016.

 

Equity Incentive Awards

 

As stated previously, in the future we plan to adopt a formal management equity incentive plan pursuant to which we plan to grant stock options and make restricted stock awards to members of management, which would not be assignable during the executive’s life, except for certain gifts to family members or trusts that benefit family members. These equity incentive awards, we believe, would motivate our employees to work to improve our business and stock price performance, thereby further linking the interests of our senior management and our stockholders. The board will consider several factors in determining whether awards are granted to an executive officer, including those previously described, as well as the executive’s position, his or her performance and responsibilities, and the amount of options or other awards, if any, currently held by the officer and their vesting schedule. Our policy will prohibit backdating options or granting them retroactively.

 

Benefits and Prerequisites

 

At this stage of our business we have limited benefits and no prerequisites for our employees other than health insurance and vacation benefits that are generally comparable to those offered by other small private and public companies or as may be required by applicable state employment laws. We do not have a 401(k) Plan or any other retirement plan for our Named Executive Officers. We may adopt these plans and confer other fringe benefits for our executive officers in the future if our business grows sufficiently to enable us to afford them.

 

Executive Compensation

 

The following table summarizes compensation paid or accrued by us for the years ended December 31, 2016 and December 31, 2015 for services rendered in all capacities, by our chief executive officer and our other most highly compensated executive officers during the fiscal years ended December 31, 2016 and December 31, 2015.

 

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Summary Compensation Table

 

Name and Principal Position (1)   Year   Salary     Bonus     Option Awards     Non-Equity Incentive Plan Compensation     Non-Qualified Deferred Compensation Earnings     All Other Compensation     Total  
                                               
Dane Medley   2016   $ 36,000       0     $ 0       900,000       0       0     $ 936,000  
Chief Executive Officer   2015   $ 125,000       0       84,000       0       0       0     $ 209,000  
                                                             
                  0       0       0       0       0          
                  0       0       0       0       0          
                                                             
Xavier Aguilera,   2016   $ 36,000       0     $ 0       500,000       0       0     $ 536,000  
Chief Financial Officer/Treasurer, Executive Vice President, and Corporate Secretary   2015   $ 95,000       0       84,000       0       0       0     $ 179,000  
                                                             
Officers as a Group   2016   $ 72,000       0     $ 0       1,400,000       0       0     $ 1,472,000  
    2015   $ 220,000       0       168,000       0       0       0     $ 388,000  

 

Employment Agreements

 

We have entered into five-year employment agreements with our chief executive officer and our chief financial officer, which commenced in June 2013. We may enter into new employment agreements with them in the future.

 

Outstanding Equity Awards at Fiscal Year End

 

The executive officers each received 4,000,000 stock options at $0.025 per share each during the year ended December 31, 2015 with a ten year term to exercise.

 

Employee Benefit Plans

 

We have not yet, but may in the future, establish a management stock option plan pursuant to which stock options may be authorized and granted to the executive officers, directors, employees and key consultants of Imaging3. In the event we establish the stock option plan, we expect to authorize approximately 36,576,614 shares or more for future issuance.

 

Director Compensation

 

None of our directors received any compensation for their respective services rendered to us as directors during the year ended December 31, 2016.

 

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

 

The following table sets forth the names of our executive officers and directors and all persons known by us to beneficially own 5% or more of the issued and outstanding common stock of Imaging3 at December 31, 2016. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. In computing the number of shares beneficially owned by a person and the percentage of ownership of that person, shares of common stock subject to options held by that person that are currently exercisable or become exercisable within 60 days of December 31, 2015 are deemed outstanding even if they have not actually been exercised. Those shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person. The percentage ownership of each beneficial owner is based on 169,502,393 outstanding shares of common stock. Except as otherwise listed below, the address of each person is c/o Imaging3, Inc., 3022 North Hollywood Way, Burbank, California 91505. Except as indicated, each person listed below has sole voting and investment power with respect to the shares set forth opposite such person’s name.

 

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Name, Title and Address   Number of Shares Beneficially Owned (1)       Percentage Ownership    
             
Dane Medley, Chairman and Chief Executive Officer     895,000         * %  
                 
Xavier Aguilera, Director, Chief Financial Officer/Treasurer, Executive Vice President, and Secretary     200,000         *    
                 
All current Executive Officers as a Group     1,095,000         * %  

 

* Less than 1%.

 

(1) Except as pursuant to applicable community property laws, the persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned. The total number of issued and outstanding shares and the total number of shares owned by each person does not include unexercised warrants and stock options, and is calculated as of December 31, 2015.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

 

None.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

Presently and since June 20, 2015, Rose, Snyder and Jacobs LLP (“RSJ”) has been and is our principal auditing firm. The audit committee approved the engagement of RSJ before they rendered audit services to us. Prior to June 20, 2015, our principal auditing firm was M&K CPAS, PLLC.

 

Each year the retention of the independent auditor to audit our financial statements, including the associated fee, is approved by the board of directors before the filing of the previous year’s Annual Report on Form 10-K.

 

    2016     2015  
Audit Fees(1)   $ 77.000     $ 60,000  
Audit Related Fees     8,500       -0-  
All Other Fees(2)     -0-       -0-  
    $ 85,500     $ 60,000  

 

(1) Audit Fees consist of fees for the audit of our financial statements and review of the financial statements included in our quarterly reports. With respect to audit related fees, $8,500 was paid to M&K CPAS, PLLC (our prior principal auditing firm) during the year ended December 31, 2016. However, audit fees totaling $77,000 were paid to RSJ during the year ended 2016.
     
(2) Tax fees consist of fees for the preparation of original federal and state income tax returns and fees for miscellaneous tax consulting services.

 

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Pre-Approval Policies and Procedures of Audit and Non-Audit Services of Independent Registered Public Accounting Firm

 

The audit committee’s policy is to pre-approve, typically at the beginning of our fiscal year, all audit and non-audit services, other than de minimis non-audit services, to be provided by an independent registered public accounting firm. These services may include, among others, audit services, audit-related services, tax services and other services and such services are generally subject to a specific budget. The independent registered public accounting firm and management are required to periodically report to the full board of directors regarding the extent of services provided by the independent registered public accounting firm in accordance with this pre-approval, and the fees for the services performed to date. As part of the board’s review, the board will evaluate other known potential engagements of the independent auditor, including the scope of work proposed to be performed and the proposed fees, and approve or reject each service, taking into account whether the services are permissible under applicable law and the possible impact of each non-audit service on the independent auditor’s independence from management. At audit committee meetings throughout the year, the auditor and management may present subsequent services for approval. Typically, these would be services such as due diligence for an acquisition, that would not have been known at the beginning of the year.

 

The audit committee has considered the provision of non-audit services provided by our independent registered public accounting firm to be compatible with maintaining their independence. The audit committee will continue to approve all audit and permissible non-audit services provided by our independent registered public accounting firm.

 

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PART IV

 

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

 

Exhibits

 

Exhibit   Description
3.1   Articles of Incorporation (1)
3.2   Articles of Amendment dated October 25, 2001, June 24, 2002, and August 13, 2002(1)
3.3   Bylaws (1)
3.4   Certificate of Amendment dated September 30, 2003(2)
3.5   Certificate of Amendment dated October 25, 2001(3)
3.6   Certificate of Amendment June 24, 2002(3)
3.7   Certificate of Amendment August 13, 2002(3)
3.8   Certificate of Determination for Series A Preferred Stock(10)
3.9   Amendment to Certificate of Determination for Series A Preferred Stock(10)
10.1   Patent No. 6,754,297(3)
10.2   Consulting Agreement(3)
10.3   Assignment(3)
10.6   Commercial Promissory Note dated August 4, 2004(4)
10.7   Security Agreement(4)
10.8   Commercial Promissory Note dated April 24, 2005(5)
10.9   IR Commercial Real Estate Association Standard Industrial/Commercial Single-Tenant Lease - Net, dated June 21, 2004 by and between Four T’s, Bryan Tashjian, Ed Jr. Tashjan, Bruce Tashjan, Greg Tashjan and Dean Janes DBA Imaging Services, Inc.(6)
10.10   Promissory Note, dated November 1, 2008 in the amount of $140,039.35, payable by Imaging3, Inc. to Dean Janes(7).
10.11   Promissory Note, dated March 23, 2009 in the amount of $95,000, payable by Imaging3, Inc. to Dean Janes(7)
10.12   Promissory Note, dated April 2, 2009 in the amount of $375,000, payable by Imaging3, Inc. to Dean Janes(7)
10.13   Promissory Note, dated April 13, 2010 in the amount of $66,500, payable by Imaging3, Inc. to Dean Janes(7)
10.14   Promissory Note, dated June 28, 2010 in the amount of $100,000, payable by Imaging3, Inc. to Dean Janes(7)
10.15   Securities Purchase Agreement by and between Imaging3, Inc. and Cranshire Capital, L.P., dated October 4, 2010(8)
10.16   Series A Warrant, dated October 15, 2010 for Cranshire Capital, L.P.(9)
10.17   Series A Warrant dated October 15, 2010 for Freestone Advantage Partners, L.P.(9)
10.18   Series B Warrant, dated October 15, 2010 for Cranshire Capital, L.P.(9)
10.19   Series B Warrant, dated October 15, 2010 for Freestone Advantage Partners, L.P.(9)
10.20   Series C Warrant, dated October 15, 2010 for Cranshire Capital, L.P.(9)
10.21   Series C Warrant, dated October 15, 2010 for Freestone Advantage Partners, L.P.(9)
10.22   Registration Rights Agreement entered into by Imaging3, Inc., Cranshire Capital, L.P. and Freestone Advantage Partners, L.P., dated October 15, 2010(9)
10.23   Securities Purchase Agreement with Gemini Strategies, LLC, dated October 3, 2011(11)
10.24   Security Agreement with Gemini Strategies, LLC, dated October 3, 2011(11)
14.1   Code of Conduct
31.1   Section 302 Certification of Chief Executive Officer
31.2   Section 302 Certification of Chief Financial Officer
32.1   Section 906 Certification of Chief Executive Officer
32.2   Section 906 Certification of Chief Financial Officer

 

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101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

  (1) Incorporated by reference to the Form 10SB/A Registration Statement filed with the Securities and Exchange Commissioner on December 9, 2002.
     
(2) Incorporated by reference to Amendment No. 2 to Form SB-2 Registration Statement filed with the Securities and Exchange Commission on October 6, 2004.
     
(3) Incorporated by reference to Amendment No. 3 to Form SB-2 Registration Statement filed with the Securities and Exchange Commission on October 21, 2004.
     
(4) Incorporated by reference to Amendment No. 5 to Form SB-2 Registration Statement filed with the Securities and Exchange Commission on April 18, 2005.
     
(5) Incorporated by reference to Amendment No. 6 to Form SB-2 Registration Statement filed with the Securities and Exchange Commission on July 7, 2005.
     
(6) Incorporated by reference to Amendment No. 8 to Form SB-2 Registration Statement filed with the Securities and Exchange Commission on September 9, 2005.
     
(7) Incorporated by reference to the Report on Form 8-K filed with the Securities and Exchange Commission on August 30, 2010.
     
(8) Incorporated by reference to the Report on Form 8-K filed with the Securities and Exchange Commission on October 5, 2010.
     
(9) Incorporated by reference to the Report on Form 8-K filed with the Securities and Exchange Commission on October 21, 2010.
     
(10) Incorporated by reference to the Report on Form 8-K filed with the Securities and Exchange Commission, dated March 20, 2012.
     
(11) Incorporated by reference to the Report on Form 8-K filed with the Securities and Exchange Commission, dated October 4, 2011.

 

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SIGNATURES

 

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  IMAGING3, INC.
     
Dated: April 17, 2017 By: /s/ Dane Medley
    Dane Medley
    Chairman of the Board and Chief Executive Officer (Principal Executive Officer)

 

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

 

Dated: April 17, 2017  
   
  /s/ Dane Medley
  Dane Medley, Chairman of the Board and Chief
  Executive Officer (Principal Executive Officer)
   
Dated: April 17, 2017  
  /s/ Xavier Aguilera
  Xavier Aguilera, Chief Financial Officer/Treasurer,
  Executive Vice President, Corporate Secretary, and
  Director (Principal Financial/Accounting Officer)

 

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