Annual Report (10-k)

Date : 04/16/2019 @ 8:02PM
Source : Edgar (US Regulatory)
Stock : Imaging3, Inc. (QB) (IGNG)
Quote : 0.0775  0.0025 (3.33%) @ 8:59PM

Annual Report (10-k)

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

 

FORM 10-K

 

 

 

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

THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended: December 31, 2018

 

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.)

 

4919 Noeline Ave., Encino, California 91436

(Address of principal executive offices) (Zip Code)

 

(805) 908-5719

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, 2018 (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 49,689,768 shares outstanding of the registrant’s Common Stock as of April 16, 2019.

 

 

 

     
     

 

TABLE OF CONTENTS

 

PART I  
ITEM 1 Business 3
ITEM 2 Properties 13
ITEM 3 Legal Proceedings 13
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 15
ITEM 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
ITEM 8 Financial Statements and Supplementary Data 20
ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 36
ITEM 9A Controls and Procedures 36
ITEM 9B Other Information 37
PART III  
ITEM 10 Directors, Executive Officers, and Corporate Governance 37
ITEM 11 Executive Compensation 40
ITEM 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 43
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 44
SIGNATURES 46

 

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PART I

 

ITEM 1. BUSINESS

 

General

 

Imaging3, Inc. (the “Company”) (OTCQB: IGNG) is a development stage medical device company. The Company has developed a portable, proprietary, X-ray imaging technology designed to produce 3D images in real time. The Company’s devices are designed to operate flexibly to serve varying imaging applications with less radiation exposure in a lower cost, lower weight and easily transportable format that does not require specialized power sources when compared to currently available 3D 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 will operate on conventional 110V power sources. While the Company’s primary focus is on applications for the healthcare industry (human and veterinary), there are many potential non-healthcare related applications for the Company’s technology, including agricultural and industrial parts inspection and security screening.

 

Importantly and discussed in greater detail in the Recent Development and Subsequent Events sections, the Company began discussions with Grapefruit Boulevard Investments, Inc. (GBI) of Westwood, CA, on March 1, 2019, regarding the possible reverse acquisition of Company by GBI.

 

BUSINESS

 

Overview

 

Imaging3 Inc. is a medical device company that has developed a patented fluoroscopic imaging device, the Dominion Smartscan™ (“Dominion”) that can produce real-time 2D, 3D and CT-like slice-through images in one second of imaging time and without the radiation associated with other much more costly and time-consuming technologies. In 2018, the Company was focused on securing the financing necessary for efforts towards gaining FDA marketing authorization via the 510K process, further developing the final product, expanding of the existing patent estate, and building the management team necessary to execute these steps towards successful commercialization. Currently, efforts are focused exclusively on the US market. The Dominion system is not currently available for sale in any market.

 

Near-term, the Dominion is an easily transportable imaging system which allows for basic 2D X-rays (e.g., imaging of bone and soft tissue) and can do so in one second or less of imaging time using radiation levels at or below equivalent X-ray imaging devices. Unlike other current technologies, from one second of imaging time the Dominion can also produce precise 3D models and 3D CT-like slice through imaging, which we believe will offer healthcare providers unusually valuable information about their patient, in settings where this is not normally available with current technologies. In the future, the use of the Dominion to provide real-time “live” (continuous) 3D imaging offers the potential to use the device to guide minimally invasive surgery (MIS).

 

The Company believes that the Dominion has potential uses where a flexible X-ray/CT-like image is desired without the need for a special room, where real-time “live” imaging would be beneficial, and in populations where traditional higher radiation dosing modalities must be avoided. Examples of these applications could be in clinics or communities that cannot justify the multi-million dollar expense of a CT device, in clinics or environments such as pediatrics where a one-second 2D or 3D image of an injury would be beneficial, in transport-dependent military combat and disaster management applications, in developing countries, and ultimately, where minimally invasive surgery is practiced.

 

The Dominion system utilizes an O-ring design, where the X-ray image capture technology circles the target area. During 180 degrees of travel, the system typically takes 180 images. The data from these images are processed through a proprietary algorithm and software to produce a 3D model of the volume that was imaged, which can then be sliced and analyzed from any angle to provide images and information that maximize value to the healthcare provider and patient. This process is completed fast enough that the 3D image can be delivered effectively in real-time.

 

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Historical

 

In June 2010, the Company submitted a 510(k) application to the FDA for the Dominion system. In March 2012, the FDA notified the Company that the Dominion Smartscan system did not meet the required criteria for substantial equivalence based upon the live surgical guidance performance claims requested and the data and information submitted by the Company in the 510(k) submission. The founder and CEO of the Company was convicted of fraudulent misrepresentations and was completely eliminated from the management and direction of the Company, and the Company subsequently declared bankruptcy under Chapter 11 and was delisted by the SEC. Following these interactions with the FDA and an extended period of rebuilding the Company for a re-start, the Company determined that a new 510(k) application would need to be submitted with more modest initial claims in 2D and 3D fluoroscopy in order to facilitate an early FDA clearance for the Dominion Smartscan system. The Company has engaged expert regulatory consultants to facilitate an FDA clearance for the Dominion Smartscan system, to be followed by initial commercialization in the USA.

 

Pursuant to the above, in recent years the Company has reduced its workforce, abandoned certain equipment designs, canceled certain contracts, written down inventory, written off certain patents, completed financial restructuring and successfully emerged from bankruptcy, as well as completed a multi-year SEC remediation and release process. The Company believes that it is now repositioned with new leadership and a clear opportunity to achieve its goals for the development and commercialization of the Dominion SmartScan system.

 

We believe that future outcomes of minimally invasive surgeries will be enhanced through the combination of the Dominion’s more advanced tools and imaging functionality, which are designed to: (i) empower the surgical team with improved precision, surgical guidance options and visualization; (ii) improve patient satisfaction and post-operative recovery; and (iii) provide a cost-effective imaging system, compared to existing alternatives, for a wide range of clinical applications that are currently un-served or underserved with medical imaging solutions.

 

Our business strategy is to focus on the development and commercialization of the Dominion Smartscan system, through tiered levels of performance claims, regulatory approvals, and commercialization in an expanding portfolio of application areas.

 

Market Overview

 

Over the past two decades, fluoroscopic imaging (C-arm devices) has emerged as a lower radiation dosing and more operationally convenient alternative to CT scans in minimally invasive surgery applications. In C-arm imaging, two views are necessary to provide orthogonal diagnostic view perspectives. The process of repositioning the C-arm to generate the two images and their subsequent translation into a 3D image and/or slice analysis, typically requires seconds or minutes of elapsed time. This makes it impossible to create a “live” real-time 3D image and slice analysis. Additionally, working from just two orthogonal images requires significant extrapolation and consequent imprecision or error in 3D image reconstruction.

 

Beyond the particularly high-value surgical guidance applications, billions of 2D and 3D imaging procedures across a broad range of clinical applications are now performed each year worldwide. The majority of these imaging procedures continue to be traditional 2D X-rays, although the value of these procedures is now dwarfed by the value delivered and captured in 3D imaging and slice analysis, and in live 3D guidance procedures.

 

While C-arm surgical guidance imaging has decreased the invasiveness of many previously open surgical procedures, it still has many limitations. These traditional imaging techniques still require multiple x-rays and extended time delays to achieve the visualization and triangulation required to provide successful surgical guidance results. Many such traditional imaging instruments are relatively rigid instruments that lack the external articulation required to provide the equipment dexterity needed for complex imaging tasks. Most x-ray imaging is performed with two-dimensional (“2D”) visualization of the subject or operative field, making the often-important dimension of depth perception difficult.

 

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A persistent challenge associated with x-ray imaging is the utilization of tissue-damaging ionizing radiation. The introduction of lower radiation dosing solutions that achieve equivalent outcomes versus current higher radiation dosing modalities will always be a compelling additional value proposition in the comparison of imaging technologies.

 

Despite its limitations, traditional fluoroscopy remains the prevalent technique in minimally invasive surgery. We believe that the Dominion device, with its CT-like imaging with lower radiation dosing capabilities, will provide higher value to facilitate adoption by radiologists and will enhance surgical outcomes over use of traditional imaging methods.

 

Modern imaging technologies, including computer-controlled automated slice analyses, have developed as technologies that offer the potential to improve upon many aspects of the traditional 2D or C-arm 3D x-ray imaging experience. Hundreds of thousands of CT radiological procedures are now performed each year worldwide, but they remain a small fraction of the total imaging procedures performed. While initial widespread adoption of imaging was focused on 2D x-ray images, and CT scanning procedures were primarily performed in high-cost, custom-built rooms, CT scanning has been more recently applied to many other clinical applications, particularly in general surgery. Despite recent advances, we believe there remain many limitations associated with current fluoroscopic and CT imaging systems used in connection with minimally invasive surgeries.

 

Product Overview

 

With the introduction of the Dominion, the Company intends to provide a unique tool to provide access in many non-traditional settings to better visualization of a wide variety of healthcare related issues and to facilitate better-informed decision-making, ranging from basic 2D X-rays to 3D imaging and slice analyses, and ultimately, to guidance of minimally invasive surgical procedures. In addition to human medical applications, the Dominion is expected to deliver unique new value in many non-traditional settings for inspection of foods, industrial parts, and in security screenings.

 

Current Product Offering

 

Dominion Smartscan system

 

The Dominion Smartscan system is a multi-functional imaging system that allows up to 360 images to be obtained from a single 360-degree orbit of its O-ring design. The Dominion utilizes a fluoroscopic cone beam X-ray emitter such as those used in some modern fluoroscopic C-arm systems, but unlike the two images that are typically utilized from the use of the C-arm, the 3D images generated from the Dominion system are constructed in real time from approximately 180 images. The Company believes that the additional data provided allows for more complete, accurate and precise 3D image reconstruction, and does not rely as heavily on the extrapolated volume-filling of current software solutions based upon two orthogonal images. The Company also believes that the Dominion will deliver its benefits at a significant cost savings to the healthcare system.

 

Key features of the Dominion Smartscan system are:

 

  Real-time imaging: The Dominion Smartscan can provide real-time 3D images, including the ability to provide live continuous real-time 3D imaging in a surgical setting.
     
  Low radiation: The system’s fluoroscopic X-ray emitters produce 2D and 3D images, including CT-like slice analyses, from just one second of imaging time with X-ray power levels flexibly reduced to minimum requirements for each application.
     
  Multi-functional: The Dominion Smartscan is expected to weigh under 150 pounds and to utilize standard 110/120v power sources. The Dominion unit is envisioned to be mountable within or upon a vehicle or easily wheeled around an office, clinic or hospital.

 

5

 

 

  Cost savings: The Dominion system offers an extremely broad variety of potential applications, without the need for a multi-million dollar investment in a CT device and custom room installation.
     
    Improved Throughput for Doctors: Having a low cost, small footprint, easily mobile imaging solution with the ability to produce CT like images in real time, along with traditional static 2D and 3D images and slice analyses, will help doctors realize greater throughput of patients, faster turnaround of patient results, and improved outcomes and higher patient satisfaction.

 

Business Strategy

 

Our current strategy is to focus our resources on FDA clearance and commercialization of the Dominion Smartscan system, initially for performance claims focusing on 2D and 3D fluoroscopy. Following market introduction of the Dominion and establishment of appropriate clinical collaborations, an expanding portfolio of application claims will be pursued for higher value applications. After interactions with the FDA, we have prioritized our short-term operational strategy around the finalization and prosecution of an initial 510(k) application for The Dominion Smartscan system, with the assistance of an expert regulatory consultancy team.

 

We believe that:

 

  There are a vast number of urgent/emergency care, sports and other clinical specialty settings, hospitals, combat and emergency response and other settings in the U.S. and globally where trained medical staff could benefit from and would adopt an easily transportable, 110V powered, low acquisition and operating cost, rapid 3D imaging and slice analysis system such as the Dominion Smartscan system;
     
  Physicians, healthcare systems and patients will continue to seek reduced ionizing radiation alternatives for many common imaging needs, and the Dominion system’s flexibility for minimization of radiation dosing to the functional minimums required for each imaging task will be an attractive feature;
     
  These same features will prove to be similarly attractive in expanding markets for agricultural and industrial parts inspection, and security screening.

 

Marketing

 

Imaging3 competes in the medical diagnostic imaging market, and this market continues to grow vigorously in installed equipment base and numbers of procedures performed. This vitality is due primarily to continual technological improvements that lead to faster and higher-resolution imaging, greater patient safety, and the provision of these capabilities to a geographically disperse and rapidly growing global population. This has resulted in vigorous competition to create the most cost-effective diagnostic imaging systems, still preponderantly focused on high resolution imaging .

 

According to a Freedonia Group study, the medical imaging equipment market in the US is greater than $9.5 billion and has a projected growth rate greater than that for overall national healthcare expenditures. Growth will be stimulated by ever increasing utilization in patient procedures involving diagnostic imaging, driven by factors including demographics of an aging population, advances in noninvasive surgical procedures, expanding demonstrations of improved medical outcomes from utilization of medical imaging, and decreasing cost of medical imaging due to competitive intensity.

 

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Intellectual Property

 

We believe that our intellectual property and expertise is an important competitive resource. We intend to maintain an active program of intellectual property protection, both to assure that the proprietary technology developed by the Company is appropriately protected and, where necessary, to assure that there is no infringement of our proprietary technology by competitors.

 

The following summarizes our current patent and patent application portfolio.

 

Patents and Patent Applications Owned by the Company: The Company holds one United States patent, and it has more than 21 patent amendments filed in the United States. In each instance, we own all right, title and interest, and no licenses, security interests or other encumbrances have been granted on such patents and patent applications.

 

Our issued patent resulted from filings related to the Dominion Smartscan system. The patent will remain in force until 2024 and we intend to seek further patent and other intellectual property protection in the United States and internationally, where available and when appropriate, as we continue our product development efforts.

 

Competition

 

Our industry is highly competitive, subject to change and significantly affected by new product introductions and other activities of industry participants. Many of our competitors have significantly greater financial and human resources than we do and have established reputations with traditional target customers, as well as worldwide distribution channels that are well developed and established.

 

There are many competitive offerings in the field of radiology imaging. Several companies have launched devices that enable reduced radiation without real-time 3D imaging. Our imaging competitors include, but are not limited to: Fujifilm, GE, Siemens, Medtronic, Samsung, Shimadzu, Carestream, Hitachi, Hologic, Esaote, Toshiba, Striker, Phillips, Ziehm, and OEC. In addition, non-ionizing radiation imaging modalities including but not limited to ultrasound imaging continue to make important advances.

 

In addition to imaging device manufacturer competitors, there are many products and therapies that are designed to reduce the need for or attractiveness of imaging intervention. These products and therapies may impact the overall volume of imaging procedures and negatively impact our business.

 

Our ability to compete may be affected by the failure to fully educate physicians in the use of our products and products in development, or by the level of physician expertise. This may have the effect of making our products less attractive. Some medical device companies are actively engaged in research and development of imaging systems or other medical devices and tools used in minimally invasive surgery procedures. We cannot predict the basis upon which we will compete with new products marketed by others.

 

Government Regulation of our Product Development Activities

 

The U.S. government and foreign governments regulate the medical device industry through various agencies, including but not limited to, the U.S. FDA, which administers the Federal Food, Drug and Cosmetic Act (the “FDCA”). The design, testing, manufacturing, storage, labeling, distribution, advertising, and marketing of medical devices are subject to extensive regulation by federal, state and local governmental authorities in the United States, including the FDA, and by similar agencies in other countries, including the European Union. Any device product that we develop must receive all requisite regulatory approvals or clearances, as the case may be, before it may be marketed in a particular country.

 

Device Development, Marketing Clearance and Approval

 

Medical devices are subject to varying levels of pre-market regulatory requirements. The FDA classifies medical devices into one of three classes: (i) Class I devices are relatively simple and can be manufactured and distributed with general controls; (ii) Class II devices are somewhat more complex and receive greater scrutiny from the FDA and have heightened regulatory clearance requirements; and (iii) Class III devices are new, high risk devices, and frequently are permanently implantable or help sustain life and generally require a Pre-Market Approval (“PMA”) by the FDA.

 

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In the United States, a company typically can obtain permission to distribute a new medical device in one of two ways. The first applies to any device that is substantially equivalent to a device first marketed prior to May 1976, or to another device marketed after that date, but which was substantially equivalent to a pre-May 1976 device. These devices are either Class I or Class II devices. To obtain FDA clearance to distribute the medical device, a company generally must submit a Section 510(k) notification, and receive an FDA order finding substantial equivalence to a predicate device (pre-May 1976 device or post-May 1976 device that was substantially equivalent to a pre-May 1976 device) and permitting commercial distribution of that medical device for its intended use. A 510(k) notification must provide information supporting a claim of substantial equivalence to a single medical device, the predicate device. If clinical data from human experience are required to support the 510(k) notification, these data must be gathered in compliance with investigational device exemption (“IDE”) regulations for investigations performed in the United States. The 510(k) process is normally used for products of the type that the Company is developing and proposes to market and sell. The FDA review process for premarket notifications submitted pursuant to Section 510(k) takes 90 days, pursuant to statutory requirements, but it can take substantially longer if the FDA has questions regarding the regulatory submission. It is possible for Section 510(k) clearance procedures to take from six to twenty-four months, depending on the concerns raised by the FDA and the complexity of the device. There is no guarantee that the FDA will “clear” a medical device for marketing, in which case the device cannot be distributed in the United States. There is also no guarantee that the FDA will deem the applicable device subject to the 510(k) process, as opposed to the more time-consuming, resource-intensive and challenging PMA process described below. In 2011, the FDA issued a series of draft guidance documents designed to reform the 510(k) clearance process. Similarly, the Medical Device User Fee Amendments of 2012 authorized the FDA to collect user fees for the review of certain pre-market submissions received on or after October 1, 2012, including 510(k) notifications.

 

The second, more comprehensive, approval process applies to a new device that is not substantially equivalent to a pre-1976 product or that is to be used in supporting or sustaining life or preventing impairment. These devices are normally Class III devices. For example, most implantable devices are subject to the approval process as a Class III device. Two steps of FDA approval are generally required before a company can market a product in the United States that is subject to pre-market approval, as a Class III device. First, a company must comply with IDE regulations in connection with any human clinical investigation of the device. These regulations permit a company to undertake a clinical study of a “non-significant risk” device without formal FDA approval. Prior express FDA approval is required if the device is a significant risk device. Second, the FDA must approve the company’s PMA application, which contains, among other things, clinical information acquired under the IDE. Additionally, devices subject to PMA approval may be subject to a panel review to obtain marketing approval and are required to pass a factory inspection in accordance with the current “good manufacturing practices” standards in order to obtain approval. The FDA will approve the PMA application if it finds there is reasonable assurance that the device is safe and effective for its intended use. The PMA process takes substantially longer than the 510(k) process, approximately one to two years or more. However, in some instances the FDA may find that a device is new and not substantially equivalent to a predicate device but is also not a high-risk device as is generally the case with Class III PMA devices. In these instances, FDA may allow a device to be down classified from Class III to Class I or II.

 

The de novo classification option is an alternate pathway to classify novel devices of low to moderate risk that had automatically been placed in Class III after receiving a “not substantially equivalent” (“NSE”) determination in response to a 510(k) notification. The regulations have also been amended to allow a sponsor to submit a de novo classification request to the FDA for novel low to moderate risk devices without first being required to submit a 510(k) application. These types of applications are referred to as “Evaluation of Automatic Class III Designation” or “de novo.” In instances where a device is deemed not substantially equivalent to a Class II predicate device, the candidate device may be filed as a de novo application which may lead to delays in regulatory decisions by the FDA. FDA review of a de novo application may lead the FDA to identify the device as either a Class I or II device and worthy of either an exempt or 510(k) regulatory pathway.

 

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We believe that the Dominion Smartscan system should be approvable as a Class II device for 2D and 3D imaging and slice analysis applications, and we are in the process of pursuing such a Section 510(k) clearance for the Dominion Smartscan system. Later FDA submissions are expected to address expanded claims for live real-time 3D surgical guidance imaging applications, and these will seek to utilize a Class II device 510(k) clearance with suitable comparison to predicate devices. The FDA might find that a 510(k) submission does not provide the evidence required to prove that the Dominion Smartscan system is substantially equivalent to marketed Class II devices. If that were to occur, we could be required to undertake the more complex and costly PMA process or perhaps be considered for a de novo reclassification. For either the 510(k), de novo, or the PMA process, the FDA could require us to conduct clinical trials, which would take more time, cost more money and pose other risks and uncertainties.

 

Clinical studies conducted in the U.S. or used in any U.S. application on an unapproved medical device require approval from the FDA prior to initiation. Even when a clinical study has been approved by the FDA or deemed approved, the study is subject to factors beyond a manufacturer’s control, including, but not limited to, the fact that the institutional review board (IRB) at a specified clinical site might not approve the study, might decline to renew approval, or might suspend or terminate the study before its completion. There is no assurance that a clinical study at any given site will progress as anticipated. In addition, there can be no assurance that the clinical study will provide sufficient evidence to assure the FDA that the product is safe and effective, a prerequisite for FDA approval of a PMA, or substantially equivalent in terms of safety and effectiveness to a predicate device, a prerequisite for clearance under Section 510(k). Even if the FDA approves or clears a device, it may limit its intended uses in such a way that manufacturing and distribution of the device may not be commercially feasible.

 

After clearance or approval to market is given, the FDA and foreign regulatory agencies, upon the occurrence of certain serious adverse events, are authorized under various circumstances to withdraw the clearance or approval of the device, or require changes to a device, its manufacturing process or its labeling or require additional proof that regulatory requirements have been met.

 

A manufacturer of a device approved through the PMA process is not permitted to make changes to the device which affect its safety or effectiveness without first submitting a supplement application to its PMA and obtaining FDA approval for that supplement, prior to marketing the modified device. In some instances, the FDA may require clinical trials to support a supplement application. A manufacturer of a device cleared through the 510(k) process must submit an additional premarket notification if it intends to make a change or modification in the device that could significantly affect the safety or effectiveness of the device, such as a significant change or modification in design, material, chemical composition, energy source, labeling or manufacturing process. Any change in the intended uses of a PMA device or a 510(k) device requires an approval supplement or new cleared premarket notification. Exported devices are subject to the regulatory requirements of each country to which the device is exported, as well as certain FDA export requirements.

 

Continuing FDA Regulation

 

After a device is placed on the market, numerous FDA and other regulatory requirements continue to apply. These include:

 

  establishment of registration and device listing with the FDA;
     
  quality system regulations, which require manufacturers to follow stringent design, testing, process control, documentation and other quality assurance procedures;
     
  labeling regulations, which prohibit the promotion of products for unapproved, i.e. “off label,” uses and impose other restrictions on labeling;
     
  medical device reporting regulations, which require that manufacturers report to the FDA if their device may have caused or contributed to a death or serious injury or malfunctioned in a way that would likely cause or contribute to a death or serious injury if it were to recur;

 

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  corrections and removal reporting regulations, which require that manufacturers report to the FDA on field corrections and product recalls or removals, if undertaken to reduce a risk to health posed by the device or to remedy a violation of the FDCA that may present a risk to health; and
     
  requirements to conduct post-marketing surveillance studies to establish continued safety data.

 

We are required to and have registered with the FDA and the International Organization for Standardization (“ISO”) as medical device manufacturers, and must obtain all necessary permits and licenses to operate our business. As manufacturers, we and our suppliers are subject to announced and unannounced inspections by the FDA to determine our compliance with the Quality System Regulation (“QSR”) and other regulations.

 

In Europe, we need to comply with the requirements of the Medical Devices Directive (“MDD”) and appropriately affix the CE Mark on our products to attest to such compliance. To achieve compliance, our products must meet the “Essential Requirements” of the MDD relating to safety and performance and we must successfully undergo verification of our regulatory compliance, or conformity assessment, by a notified body selected by us. The level of scrutiny of such assessment depends on the regulatory class of the product. We are subject to continued surveillance by our notified body and will be required to report any serious adverse incidents to the appropriate authorities. We also must comply with additional requirements of individual countries in which our products are marketed. In the European Community, we are required to maintain certain ISO certifications in order to sell products. These regulations require us or our manufacturers to manufacture products and maintain documents in a prescribed manner with respect to design, manufacturing, testing, labeling and control activities.

 

Impact of Regulation

 

Failure to comply with the applicable regulatory requirements can result in enforcement action by the FDA, which may include, among other things, any of the following sanctions:

 

  warning letters, fines, injunctions, consent decrees and civil penalties;
     
  repair, replacement, refund or seizure of our products;
     
  operating restrictions, partial suspension or total shutdown of production;
     
  refusing our request for 510(k) clearance or premarket approval of new products or modifications to existing products;
     
  withdrawing or suspending clearances or approvals that are already granted;
     
  criminal prosecution; and
     
  disgorgement of profits.

 

Further, the levels of revenues and profitability of medical device companies like the Company may be affected by the continuing efforts of government and third party payers to contain or reduce the costs of health care through various means. For example, in certain foreign markets, pricing or profitability of products is subject to governmental control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental controls.

 

Therefore, we cannot assure you that any of our products will be considered cost effective, or that, following any commercialization of our products, coverage and reimbursement will be available or sufficient to allow us to manufacture and sell them competitively and profitably.

 

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Health Care Regulation

 

Our business activities are subject to additional healthcare regulation and enforcement by the federal government and by authorities in the states and foreign jurisdictions in which we conduct our business. Such laws include, without limitation, state and federal anti-kickback, fraud and abuse, false claims, privacy and security and physician payment transparency laws. If our operations are found to be in violation of any of such laws that apply to us, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business and our financial results.

 

In the United States, there have been, and we expect there to continue to be, a number of legislative and regulatory initiatives, at both the federal and state government levels, to change the healthcare system in ways that, if approved, could affect our ability to sell our products profitably. At the current time, our products are not defined as durable medical equipment (“DME”). Non-DME devices used in imaging systems procedures are normally paid directly by the hospital or health care provider and not reimbursed separately by third-party payers. Instead, the hospital or health care provider is reimbursed based on the procedure performed and the inpatient or outpatient stay. As a result, these types of devices are subject to intense price competition that can place a small manufacturer at a competitive disadvantage as hospitals, ambulatory surgery centers and health care providers attempt to negotiate lower prices for products such as the ones we develop and sell.

 

In March 2010, President Obama signed into law both the Patient Protection and Affordable Care Act (the “Affordable Care Act”) and the reconciliation law known as Health Care and Education Reconciliation Act (the “Reconciliation Act,”) and together (the “2010 Health Care Reform Legislation”). The constitutionality of the 2010 Health Care Reform Legislation was confirmed twice by the Supreme Court of the United States. Both Congressional leaders and President Trump have announced plans to repeal or modify the 2010 Health Care Reform Legislation. At this time the Company is not certain as to the impact of federal health care legislation on its business.

 

The 2010 Health Care Reform Legislation subjects manufacturers of medical devices to an excise tax of 2.3% on certain U.S. sales of medical devices beginning in January 2013. This excise tax was suspended in December 2015 for two years, and we anticipate that this may be repealed. If eventually implemented, this excise tax will likely increase our expenses in the future.

 

Further, the 2010 Health Care Reform Legislation includes the Open Payments Act (formerly referred to as the Physician Payments Sunshine Act), which, in conjunction with its implementing regulations, requires certain manufacturers of certain drugs, biologics, and devices that are reimbursed by Medicare, Medicaid and the Children’s Health Insurance Program to report annually certain payments or “transfers of value” provided to physicians and teaching hospitals and to report annually ownership and investment interests held by physicians and their immediate family members during the preceding calendar year. We have provided reports under the Open Payments Act to the Centers for Medicare & Medicaid Services since 2014. The failure to report appropriate data accurately, timely, and completely could subject us to significant financial penalties. Other countries and several states currently have similar laws and more may enact similar legislation.

 

International Regulation and Potential Impact

 

Through marketing and acquisition of Dominion Smartscan systems, the Company intends to expand into international markets. Some of these markets maintain unique regulatory requirements outside of or in addition to those of the U.S. FDA and the European Union. The Dominion Smartscan system is not CE marked, which would allow us to offer the product for sale in a number of jurisdictions, including select countries in Europe, the Middle East, Asia and Latin America. Due to the variations in regulatory requirements within territories, the Company may be required to perform additional safety or clinical testing or fulfill additional agency requirements for specific territories. The Company may also be required to apply for registration using third parties within those territories and may be dependent upon the third parties’ successful regulatory processes to file, register and list the product applications and associated labeling, which could lead to significant investments and resource use. These additional requirements may result in delays in international registrations and commercialization of our products in certain countries.

 

11

 

 

Recent Developments

 

On March 11, 2019 the Company signed a non-binding letter of intent (“LOI”) to be acquired in a reverse acquisition (the “Acquisition”) by Grapefruit Boulevard Investments, Inc., a privately held Los Angeles area 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 received more than $550,000.00 in revenue from operations since they commenced. The Acquirer maintains facilities near Palm Springs in Riverside County, California. 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 during the second quarter of 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 (the “Dominion Enterprise”) 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 officers’ and directors’ positions at post acquisition IGNG and resign their officer and director positions.

 

Employees

 

As of December 31, 2018, we had 2 employees, including 1 full time employee. The Company considers its relationships with its employees to be good.

 

Corporate Information

 

Imaging3 is a Delaware corporation.

 

Available Information

 

The Company maintains a website at www.imaging3.com. Our Code of Business Conduct and Ethics, as reviewed and updated on October 26, 2017, is available on our website. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are available free of charge on our website as soon as practicable after electronic filing of such material with, or furnishing it to, the U.S. Securities and Exchange Commission (the SEC”). This information may be read and copied at the Public Reference Room of the SEC at 100 F Street, N.E., Washington D.C. 20549. The SEC also maintains an internet website that contains reports, proxy statements, and other information about issuers, like Imaging3, Inc., who file electronically with the SEC. The address of the site is http://www.sec.gov.

 

12

 

 

ITEM 2. PROPERTIES

 

Our administrative office is located at 4919 Noeline Ave, Encino, CA 91436.

 

ITEM 3. LEGAL PROCEEDINGS

 

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 report, in advanced negotiations to settle this judgment.

 

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 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, 2017   High   Low
         
First Quarter ended March 31, 2017   $ 1.00     $ 0.20  
Second Quarter ended June 30, 2017   $ 0.40     $ 0.20  
Third Quarter ended September 30, 2017   $ 0.20     $ 0.20  
Fourth Quarter ended December 31, 2017   $ 0.20     $ 0.17  

 

Year Ended December 31, 2018   High     Low  
                 
First Quarter ended March 31, 2018   $ 0.32     $ 0.14  
Second Quarter ended June 30, 2018   $ 0.45     $ 0.18  
Third Quarter ended September 30, 2018   $ 0.20     $ 0.05  
Fourth Quarter ended December 31, 2018   $ 0.07     $ 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 April 15, 2019, 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 approximately 40,426,983 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 1,811,401 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, 2018, employees of the Company hold options to purchase 250,000 shares of common stock at an exercise price of $0.50.

 

Transactions in FY 2018   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  

 

14

 

 

The weighted average remaining contractual life of options outstanding issued under the Plan was 6.57 years at December 31, 2018.

 

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

 

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;

 

15

 

 

  (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.

 

Current Overview

 

During 2018, we 1) completed a critical transition in leadership, recruiting a highly-experienced professional team, 2) established strategic partnering with leading regulatory, marketing and medical device R&D consulting organizations to support our objective of gaining 510(k) marketing clearance from the FDA for our lead product, the Dominion SmartScan™ system, and 3) advanced constructive debt renegotiation with existing lenders.

 

Our first additions to the leadership team were announced in January 2018, with the formation of our Scientific Advisory Board. Our first two members, Doctors Douglas P. Beal and Brooke Spencer, brought valuable and varied practice and research perspectives from the radiology community. In early March, we announced the appointment of Joe Biehl as Chief Financial Officer, who brought highly relevant experience to the Company from both smaller and larger companies, and important hands-on financial leadership experience in rapidly expanding companies. Continuing our Board evolution, in an effort to build a strong, independent board with relevant technical and commercial experience to guide and accelerate the Company through its next phase, we announced in March the addition of Jeffrey N. Peterson to the Board, and his appointment as Chairman. Mr. Peterson received BSChE and MSChE engineering degrees from MIT, and brought broad, global senior management experience from diverse businesses within GE, Abbott Laboratories, consulting roles, entrepreneurial startups, and as chairman of Pressure BioSciences (PBIO:OTCQB). The following month, we added Dr. George Zdasiuk to the Board and to the Scientific Advisory Board. Dr. Zdasiuk earned a PhD in applied physics from Stanford, and continued into a 30-year career at Varian Medical Systems, including 15 years as their Chief Technology Officer and VP of R&D. His deep scientific understanding spanning all medical imaging modalities is an invaluable resource for Imaging3 going forward.

 

Beginning our efforts to establish strong strategic partners for regulatory, marketing and medical device R&D activities, in January 2018, we engaged the highly-regarded technology, strategy and marketing consultants of Halteres Associates to help define and lead the Company through critical strategy planning. In March 2018, we announced the selection of the Experien Group, a renowned medical device regulatory consultancy, to help lead our regulatory preparation and submission activities. The Experien Group have successfully assisted hundreds of companies like Imaging3 with their FDA submissions. In November 2018, we commenced work with a highly-experienced contract consulting team with particularly relevant radiology product R&D experience, on the evaluation and further instrument development planning around the Dominion SmartScan’s uniquely distinguishing algorithmic and software capabilities.

 

16

 

 

In preparation for fund-raising and a step-wise progression towards a later uplist to a major stock exchange, the Company announced the successful completion of a 1:20 reverse split in April of 2018, which addressed the Company’s capital and debt structure as we improve our ability to attract new capital. In May 2018, three of our note holders chose to complete the conversion of their debt investments entirely over into equity.

 

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, requiring us to raise additional capital or financing from outside sources. We have raised $782,831 via equity and debt during 2018, sufficient to continue Company operations, and believe that we will be able to close on additional monies in the near future to accelerate progress on the Company’s stated plans. 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.

 

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.

 

17

 

 

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.

 

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.

 

The following sets forth selected items from our statements of operations for the years ended December 31, 2018 and 2017.

 

   

Year Ended

December 31, 2018

   

Year Ended

December 31, 2017

 
Net revenues   $ -     $ 41,829  
Cost of goods sold     -       14,263  
Gross Profit     -       27,566  
General and administrative expenses     6,321,546       1,654,541  
Income (loss) from operations     (6,321,546 )     (1,626,975 )
Total other income (expenses)     (1,807,808 )     4,480,286  
Provision for income taxes     (800 )     (800 )
Net income (loss)   $ (8,130,154 )   $ 2,852,511  

 

18

 

 

Results of Operations for the Year Ended December 31, 2018 as compared to the Year Ended December 31, 2017.

 

We are focusing on our development stage medical device efforts. The legacy C-arm activity was completely wound down in 2017. We had no revenues for the year ended December 31, 2018 as compared to $41,829 for the year ended December 31, 2017.

 

For the year ended December 31, 2018 there was no cost of revenue as compared to $14,263 of revenue for the year ended December 31, 2017. This decrease was a result of no outside labor related to C-Arm repairs. There was no gross profit margin for the year ended December 31, 2017 compared to $27,565 for the year ended December 31, 2017.

 

Our total operating expenses increased in 2018 to $6,321,546 from $1,654,541 for the year ended December 31, 2017, an increase of 282% primarily as a result of stock based compensation and outside consulting activity.

 

Other expenses increased as a result of derivative liability activity and the extinguishment of debt. Our net loss for the fiscal year ending December 31, 2018 was $8,130,155 as compared to a net income of $2,773,037 for the fiscal year ending December 31, 2017.

 

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 increased to $14,214 as of December 31, 2018, from $3,594 as of December 31, 2017. The cash account as of December 31, 2018 was $14,214 compared to $3,594 as of December 31, 2017.

 

Our total current liabilities increased to $5,324,379 as of December 31, 2018 from $2,579,582 as of December 31, 2017. This increase is due in large part to the reclassification of the administrative claims payable balance to current from long-term and a number of notes payable issued for this reporting period.

 

The cash account as of December 31, 2018 was $14,214 compared to $3,594 as of December 31, 2017. Cash raised through financing activities was expended primarily on: (i) day-to-day business operations in connection with preparation for our 510K submittal and legal and audit fees.

 

During the year ended December 31, 2018, we used $772,211 of net cash for operating activities, as compared to $731,679 used during the year ended December 31, 2017. Net cash provided by financing activities during the year ended December 31, 2018 was $669,223, as compared to $712,635 during the year ended December 31, 2017.

 

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, 2018, 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 plan includes, among other things, seeking 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 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.

 

19

 

 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

 

IMAGING3, INC.

 

FINANCIAL STATEMENTS

 

FOR THE YEARS ENDED DECEMBER 31, 2018 and 2017

 

CONTENTS

 

Report of Independent Registered Public Accounting Firm 21
   
Balance Sheets as of December 31, 2018 and 2017 22
   
Statements of Operations for the years ended December 31, 2018 and December 31, 2017 23
   
Statements of Cash Flows for the years ended December 31, 2018 and December 31, 2017 24
   
Statement of Stockholders’ Deficit for the years ended December 31, 2018 and 2017 25
   
Notes to Financial Statements 26

 

20

 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of

Imaging3, Inc.

 

Opinion on the Financial Statements

 

We have audited the accompanying balance sheets of Imaging3, Inc. (the Company) as of December 31, 2018 and 2017, and the related statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

 

Explanatory Paragraph – Going Concern

 

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 5 to the financial statements, the Company has incurred recurring losses from operations and negative cash flows from operations, resulting in an accumulated deficit of approximately $21.3 million as of December 31, 2018. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans with regard to these matters are also described in Note 5. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, 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.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

Rose, Snyder & Jacobs LLP

 

We have served as the Company’s auditor since 2015

 

Encino, CA

April 16, 2019

 

21

 

 

IMAGING3, INC.

BALANCE SHEETS

 

    December 31, 2018     December 31, 2017  
             
ASSETS                
                 
CURRENT ASSETS:                
Cash and cash equivalents   $ 14,214     $ 3,594  
                 
Total current assets     14,214       3,594  
                 
PROPERTY AND EQUIPMENT, net     -       -  
Total assets   $ 14,214     $ 3,594  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT                
                 
CURRENT LIABILITIES:                
Accounts payable   $ 703,518     $ 488,102  
Administrative claims payable     1,113,708       -  
Accrued expenses     372,773       216,031  
Subscriptions payable     289,283       130,600  
Derivative liability     677,990       701,347  
Convertible notes payable, net of discount of $- and $455,478     2,167,107       1,043,502  
Total current liabilities     5,324,379       2,579,582  
LONG TERM LIABILITIES                
Administrative claims payable     -       1,131,916  
                 
TOTAL LIABILITIES     5,324,379       3,711,498  
COMMITMENTS AND CONTINGENCIES, note 10                
                 
STOCKHOLDERS’ DEFICIT:                
      -       -  
Common stock and additional paid-in capital authorized 1,000,000,000 shares, no par value and 40,426,983 and 15,474,454 issued and outstanding as of December 31, 2018, and December 31, 2017, respectively     15,944,948       9,417,055  
Accumulated deficit     (21,255,113 )     (13,124,959 )
Total stockholders’ deficit     (5,310,165 )     (3,707,904 )
Total liabilities and stockholders’ deficit   $ 14,214     $ 3,594  

 

* The financial statements have been retroactively restated to reflect the 1-for-20 reverse-stock split that occurred on March 16, 2018.

 

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

 

22

 

 

IMAGING3, INC.

STATEMENTS OF OPERATIONS

 

   

Year Ended

December 31, 2018

   

Year Ended

December 31, 2017

 
             
Net revenues   $ -     $ 41,829  
                 
Cost of goods sold     -       14,263  
Gross profit     -       27,566  
                 
Operating expenses                
General and administrative expenses     6,321,546       1,654,541  
Total operating expenses     6,321,546       1,654,541  
                 
Loss from operations     (6,321,546 )     (1,626,975 )
                 
Other income (expense):                
Interest expense     (679,685 )     (1,171,708 )
Change in value of derivatives     (179,639 )     1,895,731  
Gain (loss) on extinguishment of debt     100,914       3,668,776  
Settlement of legal debt     (1,026,071 )     -  
Other income     (23,327 )     87,487  
Total other income (expense)     (1,807,808 )     4,480,286  
                 
Income (loss) before income tax     (8,129,354 )     2,853,311  
                 
Provision for income taxes     800       800  
                 
Net income (loss)   $ (8,130,154 )   $ 2,852,511  
                 
Net income (loss) per share - Basic   $ (0.25 )   $ 0.21  
Net income (loss) per share - Diluted   $ (0.25 )   $ 0.18  
                 
Weighted average common stock outstanding - Basic     32,116,087       13,825,914  
Weighted average common stock outstanding - Diluted     32,116,087       15,667,279  

 

* The financial statements have been retroactively restated to reflect the 1-for-20 reverse-stock split that occurred on March 16, 2018.

 

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

 

23

 

 

IMAGING3, INC.

STATEMENTS OF CASH FLOWS

 

   

Year Ended

December 31, 2018

   

Year Ended

December 31, 2017

 
CASH FLOWS FROM OPERATING ACTIVITIES:                
Net income (loss)   $ (8,130,154 )   $ 2,852,511  
Adjustments to reconcile net loss to net cash used in operating activities:                
Change in value of derivatives     179,639       (1,895,731 )
Non cash interest     453,218       964.437  
(Gain)loss on extinguishment of debt     (100,914 )     (3,668,776 )
Shares issued for services     5,442,076       648,300  
Warrants issued for services     -       194,956  
Legal settlement     1,034,197       -  
Increase / (decrease) in current liabilities:                
Accounts payable     164,878       124,778  
Accrued expenses     184,849       89,675  
Deferred revenue     -       (41,829 )
Net cash used in operating activities     (772,211 )     (731,679 )
                 
CASH FLOWS FROM FINANCING ACTIVITIES:                
Proceeds from note payable     212,750       575,035  
Proceeds from sale of common stock     377,418       137,600  
Proceeds from subscriptions payable     192,663       -  
Net cash provided by financing activities     782,831       712,635  
                 
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS     10,620       (19,044 )
                 
CASH & CASH EQUIVALENTS, BEGINNING BALANCE     3,594       22,638  
                 
CASH & CASH EQUIVALENTS, ENDING BALANCE   $ 14,214     $ 3,594  
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:                
Interest paid in cash   $ -     $ -  
Income taxes paid in cash   $ -     $ -  
SUPPLEMENTAL DISCLOSURE OF NON CASH INVESTING AND FINANCING ACTIVITIES:                
Notes and accrued interest converted to common stock   $ 574,524     $ 196,797  
Promissory notes issued for no cash consideration   $ -     $ 151,222  
Compensation paid through exercise of options   $ -     $ 200,000  

 

* The financial statements have been retroactively restated to reflect the 1-for-20 reverse-stock split that occurred on March 16, 2018.

 

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

 

24

 

 

IMAGING3, INC.

STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

 

    Preferred stock     Common stock           Total  
    Number of           Number of           Accumulated     stockholders’  
    shares     Amount     shares     Amount     deficit     deficit  
                                     
Balance as of December 31, 2016     100                        12,201,005     $ 7,829,273     $ (15,977,470 )   $ (8,148,197 )
                                                 
Shares issued for cash                     7,500       7,000       -       7,000  
                                                 
Shares issued for services                     2,541,500       648,300       -       648,300  
                                                 
Note payable converted to stock                     431,375       431,375       -       431,375  
                                                 
Warrants issued for services                     -       194,956               194,956  
                                                 
Shares from the issuance of notes                     900,000       180,000               180,000  
                                                 
Repurchase of preferred stock     (100 )                                       -  
                                                 
Aguilera shares cancelled                     (1,400,000 )       -               -  
                                                 
Cashless exercise of warrants                     393,074       -               -  
                                                 
Settlement of derivatives                             (73,849 )               (73,849 )
                                                 
Exercise of stock options                     400,000       200,000               200,000  
                                                 
Net income                     -       -       2,852,511       2,852,511  
                                                 
Balance as of December 31, 2017     -               15,474,454       9,417,055       (13,124,959 )     (3,707,904 )
                                                 
Shares issued for cash                     2,325,146       377,418       -       377,418  
                                                 
Shares issued for services                     18,058,539       5,442,076               5,442,076  
                                                 
Shares for subscriptions payable                     857,694       111,500       -       111,500  
                                                 
Shares from the conversion of notes                     6,811,151       596,899         -     596,899  
                                                 
Cancellation of shares                     (3,100,001 )                     -  
                                                 
Net income                     -       -       (8,130,154 )     (8,130,154 )  
                                                 
Balance as of December 31, 2018                     40,426,983     $ 15,944,948     $ (21,255,113 )   $ (5,310,165 )

 

* The financial statements have been retroactively restated to reflect the 1-for-20 reverse-stock split that occurred on March 16, 2018.

 

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 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.

 

26

 

 

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.

 

27

 

 

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.

 

28

 

 

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.

 

29

 

 

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.

 

30

 

 

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.

 

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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.

 

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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.

 

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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 %

 

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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.

 

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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.

 

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.

 

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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, 2018. 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, 2018, 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, 2018, 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, 2018, 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, 2018, that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

ITEM 9B. OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE

 

The following table lists our executive officers and directors as of December 31, 2018:

 

Name   Age   Position
Jeffrey N. Peterson   63   Chairman
John Hollister   58   Chief Executive Officer
George Zdasiuk   67   Director
Kenneth J. Biehl   64   Executive Vice President & Chief Financial Officer

 

Jeffrey N. Peterson joined the Company in March of 2018 as it’s Chairman.  He also serves as Chairman of Pressure Biosciences, Inc. (OTCQB: PBIO) and has filled that role since 2012.  PBIO is an innovative platform technology company utilizing extreme pressure cycling to control biomolecular interactions and optimize sample preparation for life science R&D and diagnostic applications and have also emerged as a leader in high-pressure disaggregation and refolding of proteins for optimal effectiveness, serving the biopharmaceutical industry.  Mr. Peterson is also Chairman & CEO of Veritomyx, Inc., a provider of high-performance cloud computing SaaS solutions for advanced signal processing in mass spectrometry, which is a subsidiary of Target Discovery, Inc., where he has served as co-founder and CEO since 1999. Prior to founding Target Discovery, he served as CEO of Sharpe, Peterson, Ocheltree & Associates, an international business development consulting firm assisting Fortune 500 and many smaller firms in business expansion and strategy.  Previously, Mr. Peterson held key management roles in Abbott Laboratories’ Diagnostics and International (Pharmaceuticals, Hospital Products, Nutritionals, Consumer) businesses, most recently as CEO and GM of Abbott South Africa.  Prior to Abbott, Mr. Peterson’s experience included 11 years with General Electric’s Engineered Materials.  Mr. Peterson currently serves on the Advisory Board for the California Technology Council, which innovates to advance California’s primacy in all forms of technology, application, systems and infrastructure.  Mr. Peterson completed the Entrepreneurship curriculum and holds BSChemE and MSChemE degrees from MIT.  He previously served for 12 years on the Board of BayBio and is chair emeritus of the BayBio Institute.  Mr. Peterson has also served as an active member of the Coalition for the 21st Century Medicine, BIO’s Personalized Medicine & Diagnostic Group, and on the UT MD Anderson Cancer Center for Professional Development and Entrepreneurship Center Advisory Board.

 

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John Hollister joined Imaging3 in December of 2017 to serve as the Chief Executive Officer and Chairman of the Board and continues to serve as the Chief Executive Officer upon Mr. Petersen assuming the responsibilities of Chairman in March of 2018. Mr. Hollister brings nearly 30 years of healthcare leadership to Imaging3. Prior to joining the Company, Mr. Hollister served as the CEO of NuLife Sciences, a publicly traded (OTCQB; NULF) company (2016-2017) developing a proprietary process for transplant and wound care. Prior to NULF (2014-2015), he served as the first CEO and Director of NEMUS Bioscience (OTCQB: NMUS), a publicly traded life-sciences company developing a variety of molecules for multiple indications. He helped establish the company and served in this capacity during the licensing of the core technologies, the process of going public and the first year of raising necessary capital. From 2011-2013, Mr. Hollister served as the Executive Vice President, Marketing for Tethys Bioscience, a diagnostic company in the field of personalized medicine. Between 2009 and 2011, he was an independent healthcare consultant working with a variety of private, early stage healthcare companies. From 2006 and 2009, Mr. Hollister served as the CEO and Director of EEG Spectrum, a medical device company. Mr. Hollister was promoted to Chairman after the first year working with the company. Prior to EEG Spectrum, Mr Hollister spent 5 years at AMGEN in product marketing and as the Global Commercial Leader in Oncology. Prior to AMGEN, he spent three years as the Director of Marketing at Aviron, an early stage vaccine company and he started his career spending 8 years (1988-2006) at SmithKline Beecham in a variety of sales and marketing positions. Mr. Hollister received his BA in Economics at Stanford University and his MBA at the Drucker Graduate Management Center at the Claremont Graduate University. He also serves as the Secretary of the Board of the Brain and Behavior Research Foundation, the largest donor supported charity focused on research of the brain.

 

George Zdasiuk , PhD joined the Company as a Director in April of 2018. Dr. Zdasiuk is a globally-recognized scientific leader in the medical imaging industry, with diverse experience in nurturing and commercializing innovative new technologies. Dr. Zdasiuk assists Imaging3 on all matters pertaining to product development, regulatory and commercial strategy, with the goal of maximizing the global market impact and value realization from the Company’s Dominion SmartScan™ technology. From 1980-2015, Dr. Zdasiuk was employed by Varian Medical Systems (formerly, Varian Associates), a leader in the fields of radiotherapy, radiosurgery, X-ray tube technology and digital imaging, in roles including Chief Technology Officer and Senior VP/ Director of Varian’s Ginzton Technology Center. Varian employs 6,500 people across the globe and is recognized as a pioneer in the field of radiotherapy and medical imaging. Dr. Zdasiuk was responsible for investigating new disruptive technologies, conducting feasibility studies and incubating start-up businesses within Varian. Dr. Zdasiuk earned a Ph.D. in Applied Physics from Stanford University, specializing in photonics systems and non-linear optics. Dr. Zdasiuk received his BASc, with highest honors, in Engineering Science and his MS in Physics from the University of Toronto.

 

Kenneth J. Biehl joined the company as Executive Vice President & Chief Financial Officer in March of 2018. He is a C-level, strategic, operations and finance executive with over 25 years of experience in leading private, public, and nonprofit companies through growth, mergers and acquisitions, and IPOs. Mr. Biehl is also the CEO of CxCTeams, a provider of finance and accounting services, which was founded in 2005. Mr. Biehl has served as an executive finance and operations officer of several public and private companies. From 2000 to 2005, he was the COO and CFO of Integrated Information Systems (IIS), a public IT consultancy corporation specializing in Microsoft and custom application development solutions in Tempe, Arizona. Prior to IIS, from 1997 to 2000, he served as EVP and CFO for Sunstone Hotel Investors, a public real estate investment trust, investing in and operating lodging assets, headquartered in San Clemente, California. Prior to Sunstone, Mr. Biehl served as Vice President & Corporate Controller of Starwood Lodging. Prior to Starwood, Mr. Biehl served with KPMG, PricewaterhouseCoopers, and Ernst & Young international accounting firms. He is a graduate from the Brigham Young Marriott School of Accountancy.

 

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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.

 

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, 2018.

 

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.

 

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AUDIT COMMITTEE

 

Report of the Audit Committee

 

The members of our Audit Committee are Jeffrey N. Peterson, Chair and George Zdasiuk. Our audit committee has reviewed and discussed our audited financial statements for the fiscal year ended December 31, 2018 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. 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, 2018 for filing with the United States Securities and Exchange Commission. Our audit committee did not submit a formal report regarding its findings.

 

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, 2017 have been met on a timely basis.

 

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.

 

  40  
 

 

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.

 

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 raise’s include subjective factors related to corporate and individual performance. For the year ended December 31, 2018, all executive officer base salary decisions were approved by the board of directors.

 

  41  
 

 

  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 2019.

 

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, 2018 and December 31, 2017 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, 2017 and December 31, 2016.

 

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  
                                                 
John Hollister, CEO     2018     $ 219,000       -     $ -       -       -       -     $ 219,000  
      2017     $ 19,000       -       -       -       -       -     $ 19,000  
Kenneth J. Biehl, EVP and CFO     2018     $ 49,500       -     $ -       -       -       -     $ 49,500  
      2017     $ -       -       -       -       -       -     $ -  
Dane Medley, former CEO     2018     $ 47,750       -     $ -       -       -       -     $ 47,750  
      2017     $ 36,000       -       -       -       -       -     $ 36,000  
Xavier Aguilera, former EVP and CFO     2018     $ 30,500       -     $ -       -       -       -     $ 30,500  
      2017     $ 36,000       -       -       -       -       -     $ 36,000  
Officers as a Group     2018     $ 219,000       -     $ -       -       -       -     $ 346,750  
    2017     $ 19,000       -       -       -       -       -     $ 91,000  

 

  42  
 

 

Employment Agreements

 

We have entered into an employment agreement with our chief executive officer, which commenced in November 2017. We may enter into a new employment agreement with him in the future.

 

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.

 

Director Compensation

 

During the year ended December 31, 2018, $45,000 was accrued for services provided by our chairman Jeffrey Peterson. In addition, $20,000 was accrued for George Zdasiuk as a director.

 

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, 2018. 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, 2018 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 8,475,120 outstanding shares of common stock. Except as otherwise listed below, the address of each person is c/o Imaging3, Inc., 4919 Noeline Ave., Encino, California 91436. 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.

 

Name, Title and Address     Number of
Shares
Beneficially
Owned (1)
    Percentage Ownership
             
John Hollister, Chief Executive Officer           *

 

*   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, 2018.

 

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.

 

  43  
 

 

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.

 

    2018     2017  
Audit Fees(1)   $ 58,500     $ 88,000  
Audit Related Fees             -0-  
All Other Fees(2)     -0-       -0-  
    $ 58,500     $ 88,000  

 

(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, 2017. However, audit fees totaling $79,500 were paid to RSJ during the year ended 2017.

 

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.

 

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

 

  44  
 

 

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.

 

  45  
 

 

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 16, 2019 By: /s/ John Hollister
    John Hollister
    Chief 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 16, 2019  
   
  /s/ John Hollister
  John Hollister
  Chief Executive Officer

 

Dated: April 16, 2019  
  /s/ K. J. Biehl
 

Kenneth J. Biehl

Executive Vice President & Chief Financial Officer

 

  46  
 

 

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