Notes
to Financial Statements
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
Imaging3,
Inc. (the “Company”, “us”, “we”, “Imaging3”) is a corporation incorporated on
October 29, 1993 as Imaging Services, Inc. in the state of California. The Company filed a certificate of amendment of articles
of incorporation to change its name to Imaging3, Inc. on August 20, 2002. In March of 2018, the Company incorporated in Delaware.
The
Company is a development stage medical device company. The Company has developed a portable proprietary imaging technology designed
to produce 3D x-ray images in real time. The Company’s devices have the potential to use less radiation and require less
specialized power sources than many currently available x-ray imaging devices. The Company’s lead device, the Dominion Smartscan,
for which the Company plans to submit a 510K application with the FDA in 2020, will be easily transportable and works off conventional
household current. While the primary focus is applications for the healthcare industry, there are many potential non-healthcare
related uses for the Company’s technology, including agriculture and security.
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.
On
March 16, 2018, the Company completed a 1-for-20 reverse stock split. The accompanying financial statements have been retroactively
restated to reflect the 1-for-20 reverse-stock split.
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, 2018 or 2017.
Revenue
Recognition
Effective
January 1, 2018, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update
(“ASU”) 2014-09,
Revenue
from
Contracts with Customers (Topic 606).
ASU 2014-09 supersedes the revenue
recognition requirements in FASB Accounting Standards Codification (“ASC”) 605, Revenue Recognition, and is based
on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional
disclosure about the nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, including
significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The
adoption of ASU 2014-09, using the modified retrospective approach, had no significant impact on the Company’s results of
operation, cash flows or financial position.
Revenue
is measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing services.
All revenue is recognized when the Company satisfies its performance obligations under the contract. The majority of the Company’s
contracts have a single performance obligation and are short term in nature. 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. The Company 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.
Basic
and Diluted Net Income Per Share
Basic
net income per share is based upon the weighted average number of common shares outstanding. Diluted net income 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 2018, potentially dilutive securities were excluded from the computation of weighted average
shares outstanding-diluted because their effect was anti-dilutive.
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Numerator:
|
|
|
|
|
|
|
Net income attributable
to common shareholders, for the year ended December 31, 2018
|
|
$
|
(8,130,154
|
)
|
|
|
2,852,511
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Weighted-average number of common shares
outstanding during the period
|
|
|
32,116,087
|
|
|
|
13,825,914
|
|
Dilutive effect
of stock options, warrants, and convertible promissory notes
|
|
|
-
|
|
|
|
1,841,365
|
|
Common stock
and common stock equivalents used for diluted earnings per share
|
|
$
|
32,116,087
|
|
|
$
|
15,667,279
|
|
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, 2018 and 2017 respectively.
|
|
Level
1
|
|
|
Level
2
|
|
|
Level
3
|
|
|
Total
|
|
Derivative
Liabilities 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
677,990
|
|
|
$
|
677,990
|
|
Derivative
Liabilities 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
701,347
|
|
|
$
|
701,347
|
|
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
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 became effective for the Company in
the first quarter of fiscal 2018. The adoption of this standard had no material impact on the Company’s financial position
or results of operations.
In
July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and
Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception, (ASU 2017-11). Part I of this update addresses the complexity of accounting
for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments
(or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings Current
accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible
instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part
II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence
of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite
deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain
mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This
ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently
assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.
3.
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, 2017 or December 31, 2018.
As of December 31, 2018, the Company is
still determining the amount of net operating loss (NOL) available or offset future taxable income.
The
components of the net deferred income taxes at December 31, 2017 and 2018 are summarized below:
|
|
December
31, 2018
|
|
|
December
31, 2017
|
|
Deferred income tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carry
forwards
|
|
$
|
4,779,000
|
|
|
$
|
3,373,000
|
|
Less: valuation allowance
|
|
|
(4,779,000
|
)
|
|
|
(3,373,000
|
)
|
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, 2018
|
|
|
December
31, 2017
|
|
Tax expense (benefit)
at federal statutory rate
|
|
|
21
|
%
|
|
|
34
|
%
|
State tax expense, net of federal
tax
|
|
|
9
|
|
|
|
6
|
|
Change in deferred taxes due to statutory
rate change
|
|
|
-
|
|
|
|
51
|
|
Changes in valuation allowance
|
|
|
(30
|
)
|
|
|
(90
|
)
|
Effective income tax rate
|
|
$
|
-
|
|
|
$
|
-
|
|
Income
tax expense for the period ended December 31, 2017 and the year ended December 31, 2018 is summarized below.
|
|
2018
|
|
|
2017
|
|
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
|
|
4.
NOTES PAYABLE
During
2015 and 2016, the Company issued promissory notes in the aggregate amount of $942,850 for cash proceeds of $872,500. These notes
bear interest at 5%-10% per annum and several were due on various dates between 2015 and 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 $0.20-$1.00 per share, subject to downward adjustments for future equity issuances. In connection with these convertible
promissory notes, the Company issued warrants to purchase 3,325,000 shares of common stock at an exercise price of $0.20 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.
On
January 5, 2017 the Company entered into a financing arrangement with five accredited investors (the “Investors”),
whereby amendments to certain convertible note agreements totaling $662,000 were enacted. The amendments to the convertible note
agreements involved (1) extending the maturity dates of the note agreements; and (2) amending the optional conversion provisions
of the original note agreements to now describe an adjustable conversion price based on the completion of a qualified financing
offering. If the cumulative gross proceeds of such offerings exceed $2.5 million, the conversion price will be adjusted automatically
to match the offering’s conversion price and conversion to common shares will occur automatically. If the cumulative gross
proceeds of such offerings remain below $2.5 million, the conversion price adjusts to match the offering conversion price for
the Investors. Should there be an event of default under these amended notes, the Investors will have, in addition to all the
other rights described in that certain Securities Purchaser Agreement, the right, at each Investor’s option, to convert
the notes into common shares at $0.20 per share. The Company and certain Investors agreed to amend its warrant agreements to reduce
the number of warrants by 75% to 831,250. The exercise price remains at $0.20 per share. In consideration of this reduction of
the number of warrants, the Company issued to the Investors new convertible promissory notes in total principal amount of $124,688
in the same form as the original convertible notes described above as amended. These additional convertible notes accrue interest
beginning on January 9, 2017 and are due May 18, 2018.
The
amendment to the notes and warrants were accounted for as an extinguishment of debt, which resulted in a gain on extinguishment
of debt totaling $3,668,776 for the year ended December 31, 2017.
The
Investors agreed to lend the Company up to $200,000, in increments of $50,000, at the Company’s discretion (the “Additional
Loans”), as long as the Original Notes are not in default. These loans will be evidenced by note agreements in the form
of the original notes as amended, described above, with a maturity date of May 18, 2018 and bear interest at 10% per annum. These
notes have a face value of 118.75% of the funds actually advanced and contain conversion features (conversion price of $0.50 per
share) making them derivative instruments. As of December 31, 2017, $150,034 of cash proceeds have been received from this agreement,
for a total principal outstanding of $178,166. The Additional Loans are secured by a UCC filing on the Company’s assets.
In connection with these note agreements, the derivative liability created by these note agreements and warrants totaled $288,057.
The derivative liability in excess of the cash proceeds received was recorded as a charge to interest expense, which totaled $136,835.
In addition, the Company issued 187,500 warrants in the form of the original Warrants as amended granting the Investor the right
to purchase, at $0.20 per share in connection with these notes. These warrants were valued using the black-scholes valuation model
with the assumptions and inputs discussed in note 6.
The
agreement to amend the notes and warrants and to loan additional monies to the Company, as described above, was dependent on the
two officers of the Company—Chief Executive Officer Dane Medley and Chief Financial Officer Xavier Aguilera—agreeing
to restate their respective employment agreement, which they both have done.
On
January 10, 2017, certain note holders converted notes to common shares. The total principal and accrued interest balance converted
amounted to $196,797 along with $234,578 of derivative liability associated with conversion features that were settled upon conversion.
The conversion resulted in the issuance of 431,375 common shares. The fair market value of the common shares on the date of conversion
totaled $431,375.
On
May 25, 2017 the Company completed the sale of $500,000 of Convertible Promissory Notes (the “Notes”) to two accredited
investors (the “Investors”) that are due May 23, 2018 (the “Maturity Date”). After transaction costs,
the company netted $425,000 from the sale of the Notes. These Notes bear interest at the rate of 12% per annum to the Maturity
Date and may be redeemed by the Company for 125% of face value within 90 days of issuance and at 135% of face value from 91 days
after issuance and before 180 days after issuance. Any amount of principal or interest on these notes which is not paid when due
shall bear interest at the rate of 24% per annum from the due date thereof until the same is paid. If the Notes are not repaid
by the end of this period, any balance due is convertible—at the option of the note holders—into common stock at 60%
of the lowest closing price for the prior 20 trading days. In connection with the sale of the Notes, the Investors received a
commitment fee totaling 900,000 shares valued at $180,000, and the holders of a majority of the principal amount of the Company’s
notes outstanding at May 18, 2017 (the “Prior Notes”) executed, as of that date, an Omnibus Amendment that enabled
the transaction by (i) extending the maturity date of these Prior Notes to May 18, 2018 and (ii) restricting the rights of all
the holders of the Prior Notes, including their right to convert until certain conditions are met. In addition, the holders of
these Prior Notes were relieved of their obligation to provide the final note tranche of $50,000. In connection with these notes,
the Company recorded note discounts totaling $648,750 and an immediate charge to interest of $411,725 related to the excess value
of the conversion feature derivative over the carrying value of the notes.
During
2018, the Company issued promissory notes in the amount of $101,000 that bear interest at 2% per annum and were due in the fourth
quarter of 2018. The notes also provided for the issuance of 101,000 shares to the note holders. During the first quarter of 2019,
$76,000 of the above-mentioned notes have been converted to 1,534,960 shares of common stock.
During
the fourth quarter of 2018, the Company issued a promissory note in the amount of $56,750 that bears interest at 12% and was due
the fourth quarter of 2018. The Company is in default on this note.
During 2018, debt and accrued interest in
the amount of $574,524 were converted to 6,811,151 shares of common stock. As a result of these conversions, the Company
recognized approximately $100,000 as a gain on extinguishment of debt, accrued interest, and derivative liabilities.
Amortization
of note discounts amounted to $449,717 during the year ended December 31, 2018 and $449,281 for the year ended December 31, 2017.
5.
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, 2018 had an accumulated deficit totaling $21.3 million. During the years
ended December 31, 2018 and 2017, the Company utilized an aggregate of $1.5 million of cash in operating activities and incurred
an aggregate net loss of $5.28 million. 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;
or, possibly merge with another operating organization. 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.
6.
STOCKHOLDERS’ EQUITY
Preferred
Stock
The
Company has authorized 1,000,000 shares of preferred stock. During 2017, 2,000 shares of preferred shares were cancelled. As of
December 31, 2018 and 2017, there are no shares of preferred stock outstanding.
Common
Stock
The
Company is authorized to issue 1,000,000,000 shares of no par value common stock.
During
the year ended December 31, 2017 the Company issued a total of 7,500 shares of common stock for cash in the amount of $7,000 and
2,541,500 shares were issued for services rendered valued at $648,300. In addition, the Company raised $130,600 of capital related
to shares of common stock, however these shares were not issued as of December 31, 2017 and are presented as a subscription payable
on the accompanying balance sheet.
During the year ended December 31, 2018, the
Company issued 18,058,539 shares related to services valued at $5,442,076, of which 3,100,001 shares were cancelled during 2018,
2,325,146 shares were issued for cash proceeds of $377,418, 6,811,151 shares related to conversions of notes payable, and
857,694 shares related to the satisfaction of $111,500 of subscriptions payable.
As
of December 31, 2018, there were approximately 580 record holders of our common stock, not including shares held in “street
name” in brokerage accounts which is unknown. As of December 31, 2018, there were 40,426,983 shares of our common stock
outstanding on record.
Stock
Option Plan
During
2014, the Board of Directors adopted, and the shareholders approved, the 2014 Stock Option Plan under which a total of 27,000,000
shares of common stock had been reserved for issuance. The Stock Option Plan will terminate in September 2024.
Stock
Options
Transactions
in FY2018
|
|
Quantity
|
|
|
Weighted-
Average
Exercise Price
Per
Share
|
|
|
Weighted-
Average
Remaining Contractual
Life
|
|
Outstanding, December
31, 2017
|
|
|
250,000
|
|
|
$
|
1.00
|
|
|
|
7.57
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
$
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
250,000
|
|
|
$
|
1.00
|
|
|
|
6.57
|
|
Exercisable, December 31, 2018
|
|
|
250,000
|
|
|
$
|
1.00
|
|
|
|
6.57
|
|
Transactions
in FY2017
Outstanding, December 31, 2016
|
|
|
650,000
|
|
|
$
|
0.69
|
|
|
|
8.86
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(400,000
|
)
|
|
$
|
0.50
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2017
|
|
|
250,000
|
|
|
$
|
1.00
|
|
|
|
7.57
|
|
Exercisable, December 31, 2017
|
|
|
250,000
|
|
|
$
|
1.00
|
|
|
|
7.57
|
|
As
of December 31, 2018, former employees of the Company hold options to purchase 250,000 shares of common stock at an exercise price
of $1.00. On September 15, 2017, two officers exercised their 400,000 options at a cost of $200,000, by offsetting and reducing
their deferred salary and other amounts owed to them by the Company.
7.
WARRANTS
Following
is a summary of warrants outstanding at December 31, 2018:
Number of
|
|
|
|
|
|
|
Warrants
|
|
Exercise
Price
|
|
|
Expiration
Date
|
|
541,362
|
|
$
|
0.00002
|
|
|
|
July
2023
|
|
25,000
|
|
$
|
0.20
|
|
|
|
April
2022
|
|
312,500
|
|
$
|
0.20
|
|
|
|
August
2022
|
|
287,500
|
|
$
|
0.20
|
|
|
|
April
2023
|
|
125,000
|
|
$
|
0.20
|
|
|
|
May
2023
|
|
81,250
|
|
$
|
0.20
|
|
|
|
August
2023
|
|
2,800,000
|
|
$
|
0.40
|
|
|
|
May
2022
|
|
187,500
|
|
$
|
0.20
|
|
|
|
January
2024
|
|
Effective
May 1, 2017, the Board of Directors of the Company authorized the issuance of 2,800,000 warrants to purchase 2,800,000 shares
of the Company’s common stock at an exercise price of $0.40 per share for a period of five years from the date of issuance
to the officers of the Company. These warrants were fully-vested upon grant and as such, an expense was recognized upon grant.
The fair value of the warrants was calculated using a Black-Scholes model and was estimated to be $194,956. The significant assumptions
used in the calculations were as follows:
Term
|
|
5.0 years
|
|
Dividend Yield
|
|
|
0
|
%
|
Risk-free rate
|
|
|
1.84
|
%
|
Volatility
|
|
|
60
|
%
|
8.
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.
The
following table summarizes activity in the Company’s derivative liability during the years ended December 31, 2018 and 2017:
12-31-2016 Balance
|
|
$
|
5,532,898
|
|
Creation
|
|
|
1,188,275
|
|
Reclassification of equity
|
|
|
(163,674
|
)
|
Change in Value
|
|
|
(5,856,152
|
)
|
12-31-2017 Balance
|
|
$
|
701,347
|
|
12-31-2017 Balance
|
|
$
|
701,347
|
|
Creation
|
|
|
-
|
|
Reclassification to Equity
|
|
|
(202,996
|
)
|
Change in
Value
|
|
|
179,639
|
|
12-31-2018
Balance
|
|
$
|
677,990
|
|
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
|
|
|
1.20%
- 1.77
|
%
|
Volatility
|
|
|
60
|
%
|
9.
COMMITMENTS AND CONTINGENCIES
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.
As
of December 31, 2018, the Company has not made any of the payments required and is in default pursuant to the terms of the Agreement.
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. 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, except that the Judge’s order in its final
paragraph stated that “Notwithstanding the foregoing [order closing the bankruptcy case pursuant to 11 United 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”. Thus, technically, the case could possibly be reopened by either of
those aforementioned creditors. As of the date of filing of this report, the Company is in default of certain terms of the Greenberg,
Glusker and Mentor agreements, however, the Company maintains open and cordial relations with Greenberg, Glusker and Mentor.
Pending
Litigation
On
September 13, 2017, Alpha Capital Anstalt and Brio Capital Master Fund, LTD, two minority members of a group of investors in the
Company (the “Plaintiff”) filed a lawsuit seeking damages and injunctive relief in the United States District Court
for the Southern District of New York claiming that the Company breached certain Note and Warrant agreements among the parties
to the action. The holders of the majority of the investment involved in the above lawsuit chose not to join in the lawsuit and
have informed the Company that they believe the lawsuit to be baseless. On November 21, 2017, the Court denied the Plaintiff’s
request for injunctive relief against the Company. As a result, the case essentially became an action for money damages against
the Company, which the Company believes to be without merit and has defended. However, on July 27, 2018 United States District
Court for the Southern District of New York granted the plaintiffs motion for summary judgement, awarding them approximately $1.4
million dollars. The Company is, as of the date of this letter, in advanced negotiations to settle this judgment. The Company
has accrued this amount, in full, as of December 31, 2018, resulting in a charge to other expenses of approximately $1.034 million
during 2018.
10.
SUBSEQUENT EVENTS
On
March 11, 2019 the Company signed a non-binding letter of intent (“LOI”) to be acquired in a reverse acquisition (the
“Acquisition”) by a privately held Los Angeles based cannabis company (the “Acquirer”). The Acquirer holds
licenses issued by the State of California to manufacture and distribute cannabis products in California. The Acquirer commenced
operations in mid-2018 and has reported more than $550,000 in revenue from operations since they commenced. The Acquirer maintains
facilities in Riverside County California near Palm Springs. On Thursday, March 7, 2019 the Acquirer obtained its final permit
and clearance from the local fire department to commence operation of an ethanol extraction laboratory at such facilities and
will initiate related extraction and post processing operations as soon as practicable. The Acquirer’s laboratory will be
able to extract CBD hemp under Federal law pursuant to the recently signed 2018 Farm Act that classifies CBD hemp as an insurable
commodity.
Pursuant to the terms of the LOI, the Company
and the Acquirer have initiated negotiations intended to result in completion of a definitive Exchange Agreement (the “Agreement”)
encompassing all of the material terms of the Agreement on or before March 31, 2019. Pursuant to the terms of the LOI, the Agreement
will provide that upon conclusion of the Acquisition, the Acquirer’s designees shall own 80% of the then outstanding common
shares of the Company and the Company’s current shareholders shall own 20% of such outstanding common shares. In addition,
the Company will be required to settle certain outstanding creditor obligations on terms acceptable to both the Acquirer and the
Company. Furthermore, the Acquirer is required to obtain a commitment for a bridge loan of not less than $1,250,000.00 to be
funded upon the closing of the Acquisition and an equity infusion of at least $5,000,000.00 at a pre-money valuation of at least
$15,000,000.00 to be funded upon the closing of the Acquisition.
Simultaneous
with a successful closing of the Acquisition, the Company will assign all rights to its intellectual property and assets relating
to its Dominion imaging technology to a private closely held Company to be owned by IGNG, current IGNG management and board members,
certain other persons currently associated with the Company and the Acquirer’s designees in percentages to be negotiated
among those persons prior to the closing of the transaction. The Dominion enterprise will thereafter execute its business plan
as previously articulated in IGNG’s periodic reports to the SEC.
At
the closing, current IGNG officers and directors shall appoint the Acquirer’s designees to officer and directors positions
at post acquisition IGNG and resign there officer and director positions.
In January 2019, a former officer of the
company canceled 8,000,000 shares of common stock that were previously issued.