Notes to Condensed Financial Statements

(Unaudited)

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.

The accompanying unaudited interim financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for the presentation of interim financial information, but do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2018. The Company follows the same accounting policies in preparation of interim reports. Results of operations for the interim periods are not indicative of annual results

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 March 31, 2019 or December 31, 2018.

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 and 2019, potentially dilutive securities were excluded from the computation of weighted average shares outstanding-diluted because their effect was anti-dilutive.

Derivative Financial Instruments

The Company generally does not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of its financial instruments. The Company utilizes various types of financing to fund its business needs, including convertible notes and warrants and other instruments not indexed to our stock. The Company is required to record its derivative instruments at their fair value. Changes in the fair value of derivatives are recognized in earnings in accordance with ASC 815. The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated with warrants to purchase common stock and convertible notes.

Fair Value of Financial Instruments

The fair value accounting standard creates a three-level hierarchy to prioritize the inputs used in the valuation techniques to derive fair values. The basis for fair value measurements for each level within the hierarchy is described below with Level 1 having the highest priority and Level 3 having the lowest.

Level 1: Observable prices in active markets for identical assets or liabilities.

Level 2: Observable prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in the market.

Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.

The Company had the following assets or liabilities measured at fair value on a recurring basis at December 31, 2018 and 2017 respectively.

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 adoption of this standard had no material impact on the Company’s financial position or results of operations.

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 Form 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 adoption of this standard had no material impact on the Company’s financial position or results of operations.

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, 2018 or March 31, 2019.

4. NOTES PAYABLE

During the first quarter of 2018, the Company issued a promissory note in the amount of $10,000 that bears interest of 10%. The note matured as of April 15, 2018 and was paid back with cash.

During the first quarter of 2019, the Company issued two short-term promissory notes in the amount of $30,000 that bears interest at $6,000 per month. The notes matured within twenty days of issuance but are extendable at the Company’s option and remain outstanding as of March 31, 2019.

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.

During the first quarter ended March 31, 2019, debt and accrued interest in the amount of $54,338 were converted to 14,027,800 shares of common stock. As a result of these conversions, the Company recognized approximately $50,000 as a loss on extinguishment of debt, accrued interest, and derivative liabilities.

Amortization of note discounts amounted to $179,307 during the quarter ended March 31, 2018 and none for the quarter ended March 31, 2019.

5. 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 March 31, 2019, and December 31, 2018, 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 three months ended March 31, 2018, the Company issued a total of 1,148,921 shares of common stock for cash in the amount of $148,773 and 17,645,000 shares were issued for services rendered valued at $5,280,661.

During the first quarter ended March 31, 2019, the Company issued 3,234,985 shares for $273,283 of subscription payable received before December 31, 2018, 14,027,800 shares related to conversions of notes payable of $977,427. During the quarter ended March 31, 2019, the company recorded $240,000 of subscription payable for 4,800,000 shares and 9,600,000 warrants with a strike price of $0.10. During the quarter ended March 31, 2019, 8,000,000 shares of stock to a former officer were canceled. The Company awarded directors, officers and key consultants 5,750,000 shares for services rendered. These shares were issued subsequent to March 31, 2019. At March 31, 2019, the company is also in the process of issuing 4,950,154 shares of common stock for the balance of subscription payable at March 31, 2019.

As of March 31, 2019, there were approximately 582 record holders of our common stock, not including shares held in “street name” in brokerage accounts which is unknown. As of March 31, 2019, there were 49,689,768 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.

As of March 31, 2019, former employees of the Company hold options to purchase 250,000 shares of common stock at an exercise price of $1.00.

During the quarter ended March 31, 2019, the Company issuanced of 9,800,000 warrants to purchase 9,800,000 shares of the Company’s common stock at an exercise price of $0.10 per share for a period of two years from the date of issuance.

7. 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 first quarter ended March 31, 2019 and the year ended December 31, 2018:

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:

8. 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 March 31, 2019, 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

See note 9

9. SUBSEQUENT EVENTS

On Monday, April 15, Imaging3, Alpha Capital Anstalt (“Alpha”) and Brio Capital Master Fund (“Brio”) agreed to terms settling the outstanding judgment against the Company, issued by the United States District Court for the Southern District of New York (the “Court”) on July 27, 2018 (the “Agreement”). The Court awarded Alpha $804,770.08 and Brio $669,805.43, respectively. Under the terms of the Agreement, the Company will pay $100,000 cash to both Alpha and Brio at the time of the closing of the Acquisition. The balance of the judgments will be converted to IGNG restricted common shares at the conversion price of $0.164 per share, translating to 4,191,070 (four million, one hundred, ninety thousand, and seventy) Shares of IGNG’s common stock to Alpha and 3,514,628 (three million, five hundred fourteen thousand, six hundred and twenty) Shares to Brio. Further, Alpha and Brio, with the full and complete cooperation of IGNG, shall promptly commence an action against IGNG in the Superior Court of the State of California (the “Settlement Court”) seeking the Settlement Court’s approval of this Agreement pursuant to Section 3(a)(10) of the Securities Act of 1933 which will, essentially, allow IGNG to issue the above shares to Alpha and Brio without restriction. IGNG management believes this cooperative proceeding will be completed by mid-July 2019.

On Sunday, April 28, Imaging3 and GBI executed a definitive Share Exchange Agreement and Plan of Reorganization (the “Agreement”), at the closing of which GBI will become a wholly-owned subsidiary of IGNG and GBI’s shareholders and other persons will own approximately 81% of the post-Acquisition common shares of IGNG. The IGNG common shares representing the 81% IGNG stake will be restricted securities issued to the current GBI shareholders on a pro rata basis to their GBI ownership in exchange for their GBI shares which will thereafter be owned by IGNG. At the conclusion of the Acquisition the Company will have approximately 387,969,000 common shares issued and outstanding, subject to adjustment, of which GBI management will own approximately 230,223,000 shares or approximately 60% of the then outstanding common shares of the Company. In addition, at the closing, a newly formed corporation (“New I3”) will assume all of the current assets and most of the liabilities of IGNG. IGNG will thereafter own a yet-to-be determined percentage of the shares of New I3. Furthermore, closing of the Acquisition will be dependent upon IGNG reaching final terms with an Investor or Investors for an investment of $12,000,000.00 of debt and equity in IGNG.

The closing of the transaction will occur on or before the business day following the satisfaction or waiver of all conditions to the obligations of the parties to consummate the acquisition which both IGNG and GBI management expect to be on or before June 30, 2019 (the “Closing”). Within 75 days of the Closing the Company shall file a Form 8-K with the SEC which will include, along with all other required disclosures, audited pro forma consolidated financial statements of IGNG and GBI from GBI’s inception through the period ended April 30, 2019.

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, 2018 had an accumulated deficit totaling $21.3 million. During the quarter ended March 31, 2019 and the years ended December 31, 2018 and 2017, the Company utilized an aggregate of $1.7 million of cash in operating activities and incurred an aggregate net loss of $18.5 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.