Notes
to Condensed Financial Statements
(Unaudited)
1.
ORGANIZATION AND DESCRIPTION OF BUSINESS
Imaging3,
Inc. (the “Company”, “us”, “we”, “Imaging3”) incorporated in the state of California
on October 29, 1993 as Imaging Services, Inc. The Company filed a certificate of amendment of articles of incorporation to change
its name to Imaging3, Inc. on August 20, 2002. 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 images in real time. The Company’s devices emit low levels of radiation and require less specialized power
sources than currently available imaging devices. The Company’s lead device, the Dominion Smartscan™, for which the
Company plans to submit a 510K application with the FDA in fourth quarter 2018, will be portable and works on 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
Basis
of Presentation
On
September 13, 2012 (the “Petition Date”), the Company filed a voluntary petition with the federal bankruptcy court
in Los Angeles, California, to enter bankruptcy under Chapter 11 of the United States Bankruptcy Code. On or about July 15, 2013,
our Plan of Reorganization was approved by the United States Bankruptcy Court. On July 30, 2013, we emerged from bankruptcy and
continued operations under the terms and conditions of our Bankruptcy Reorganization Plan as it applies to post bankruptcy operations.
For accounting purposes, management deemed the effective date of the Chapter 11 Plan (the “Plan”) to be June 30, 2013.
The Company’s operations between July 1, 2013 and July 30, 2013 were not significant. The Plan adopted by Imaging3, Inc.
is a reorganizing plan. Payments under the Plan were made by utilizing existing cash on hand, borrowings on a secured and unsecured
basis, future cash flow, if any, capital raised through the sale of our common stock in private placements, and by conversion
of debt to equity.
Upon
emergence from bankruptcy, Imaging3 adopted fresh-start accounting which resulted in Imaging3 becoming a new entity for financial
reporting purposes. Imaging3 applied fresh start accounting as of July 1, 2013. As a result of the application of fresh start
accounting and the effects of the implementation of the plan of reorganization, the financial statements on or after July 1, 2013
are not comparable with the financial statements prior to that date.
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.
The
accompanying unaudited interim financial statements have
been
prepared
in
accordance with the rules and regulations of the Securities and Exchange Commission
for
the presentation of interim financial information, but do not include all the information and notes required by generally
accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of
normal recurring adjustments, considered necessary
for
a fair presentation have been
included. It
is
suggested that these condensed financial statements be read
in
conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K
for the fiscal year ended December 31, 2017. The Company follows the same accounting policies
in
preparation of interim reports. Results of operations
for
the interim periods
are not indicative of annual results.
Going
Concern
The
Company’s financial statements are prepared using the generally accepted accounting principles applicable to a going concern,
which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has
historically incurred net losses. The continuing losses have adversely affected the liquidity of the Company.
In
view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown
in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s
ability to raise additional capital, obtain financing and to succeed in its future operations. The financial statements do not
include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification
of liabilities that might be necessary as a result of the Company’s going concern uncertainty.
Management’s
plan regarding this matter is to, amongst other things, seek additional equity financing by selling our equity securities, and
continue seeking approval from the FDA to bring
to
market our smart scan technology
imaging platform. We cannot assure you that funds from these sources will be available when needed or, if available, will be on
terms favorable
to
us or
to
our stockholders.
If
we raise additional funds or settle liabilities by issuing equity securities, the
percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities
may provide for rights, preferences or privileges senior to those of the holders of our common stock. Our ability to execute our
business plan and continue as a going concern may be adversely affected
if
we
are unable to raise additional capital or operate profitably.
The
Company anticipates that further equity and debt financings will be necessary to continue to fund operations in the future and
there is no guarantee that such financings will be available or, if available, on acceptable terms.
A
summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying financial
statements follows:
Use
of Estimates
In
preparing financial statements in conformity with accounting principles generally accepted
in
the United States of America, management is required
to
make estimates and
assumptions that affect the reported amounts of assets
and
liabilities and the disclosure
of contingent assets
and
liabilities at the date of the financial statements, and
revenues and expenses during the reporting period.
Actual
results could differ from
those estimates.
Cash
and Cash Equivalents
The
Company considers all liquid investments with a maturity of three months or less from the date of purchase that are readily convertible
into cash to be cash equivalents. The Company maintains its cash in bank deposit accounts that may exceed federally insured limits.
The Company has not experienced any losses in such accounts. The Company had no cash equivalents at June 30, 2018.
Revenue
Recognition
Effective
January 1, 2018, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update
(“ASU”) 2014-09,
Revenue
from
Contracts with Customers (Topic 606).
ASU 2014-09 supersedes the revenue
recognition requirements in FASB Accounting Standards Codification (“ASC”) 605, Revenue Recognition, and is based
on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional
disclosure about the nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, including
significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The
adoption of ASU 2014-09, using the modified retrospective approach, had no significant impact on the Company’s results of
operation, cash flows or financial position.
Revenue
is measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing services.
All revenue is recognized when the Company satisfies its performance obligations under the contract. The majority of the Company’s
contracts have a single performance obligation and are short term in nature. Generally, the Company extends credit to its customers
and does not require collateral.
The
Company performs ongoing credit evaluations of
its customers
and
historic credit losses have been within management’s expectations
and has a revenue receivables policy for service
and
warranty contracts. Equipment
sales usually have a one-year warranty of parts and service. After a one-year period, the Company contacts the buyer
to
initiate the sale of a new warranty contract
for
one year. Warranty revenues
are deferred and recognized on a straight line basis over the term of the contract or as services are performed.
Basic
and Diluted Net Loss Per Share
Basic
net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based
on
the assumption that all dilutive convertible shares and stock options were converted
or exercised. Dilution
is
computed by applying the treasury stock method. Under this
method, options and warrants are assumed to be exercised at the beginning of the period (or
at
the
time of issuance,
if
later),
and as
if
funds obtained thereby were used
to
purchase common stock at the average market price during the period. During 2018, potentially dilutive securities were
excluded from the computation of weighted average shares outstanding-diluted because their effect was anti-dilutive. Computation
of the weighted average shares outstanding-diluted for the six months ended June 30, 2018 is as follows:
Numerator:
|
|
|
|
Net income attributable to common shareholders
|
|
$
|
(7,596,109
|
)
|
|
|
|
|
|
Denominator:
|
|
|
|
|
Weighted-average number of common shares outstanding during the period
|
|
|
12,661,546
|
|
Dilutive effect of stock options, warrants, and convertible promissory
notes
|
|
|
1,930,307
|
|
Common stock and common stock equivalents used for diluted earnings per
share
|
|
|
14,591,853
|
|
Derivative
Financial Instruments
The
Company generally does not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may
affect the fair values of its financial instruments. The Company utilizes various types of financing
to
fund its business needs, including convertible notes and warrants and other instruments not indexed
to
our stock. The Company
is
required
to
record its derivative instruments at their fair value. Changes
in
the fair
value of derivatives are recognized
in
earnings in accordance with ASC 815. The Company’s
only asset or liability measured
at
fair value on a recurring basis
is
its derivative liability associated with warrants to purchase common stock and convertible notes.
Fair
Value of Financial Instruments
The
fair value accounting standard creates a three-level hierarchy to prioritize the inputs used in the valuation techniques to derive
fair values. The basis for fair value measurements for each level within the hierarchy is described below with Level 1 having
the highest priority and Level 3 having the lowest.
Level
1: Observable prices in active markets for identical assets or liabilities.
Level
2: Observable prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations in which all significant inputs are observable in the market.
Level
3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable. These unobservable assumptions
reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include
use of option pricing models, discounted cash flow models, and similar techniques.
The
Company had the following assets or liabilities measured at fair value on a recurring basis at June 30, 2018 and December 31,
2017.
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Derivative Liabilities – June 30, 2018
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
651,551
|
|
|
$
|
651,551
|
|
Derivative Liabilities – December 31, 2017
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
701,397
|
|
|
$
|
701,397
|
|
Income
Taxes
The
Company accounts for income taxes in accordance with ASC 740-10, “Income Taxes” which requires the recognition of
deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial
statements or tax returns.
Under
this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases
of assets
and
liabilities
and
their
financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which
the differences are expected
to
affect taxable income. Valuation allowances are established,
when necessary, to reduce deferred tax assets
to
the amount expected
to
be realized. The provision for income taxes represents the tax payable
for
the
period and the change during the period in deferred tax assets and liabilities.
Research
and Development
Costs
and expenses that can be clearly identified as research and development are charged to expense as incurred in accordance with
FASB ASC 730-10. Included in research and development costs are operating costs, facilities, supplies, external services, clinical
trial and manufacturing costs, and overhead directly related to the Company’s research and development operations, as well
as costs to acquire technology licenses.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which supersedes existing guidance on accounting for leases
in “Leases (Topic 840)” and generally requires all leases to be recognized in the consolidated balance sheet. ASU
2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018; early adoption is permitted.
The provisions of ASU 2016-02 are to be applied using a modified retrospective approach. The Company is currently evaluating the
impact of the adoption of this standard on its consolidated financial statements.
In
March 2016, the FASB issued
ASU
2016-09,
Improvements
to
Employee Share-Based Payment Accounting
. This
ASU
affects entities that
issue share-based payment awards to their employees. The
ASU
is designed to simplify
several aspects of accounting for share-based payment award transactions which include – the income tax consequences, classification
of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations.
ASU
2016-09 became effective for the Company
in
the first quarter of fiscal 2018.
The adoption of this standard had no material impact on the Company’s financial position or results of operations.
In
July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and
Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception, (ASU 2017-11). Part I of this update addresses the complexity of accounting
for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments
(or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings Current
accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible
instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part
II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence
of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite
deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain
mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This
ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently
assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.
3.
INCOME TAXES
The
Company’s book losses
and
other timing differences result
in
a net deferred income tax benefit which is offset by a valuation allowance for a
net
deferred asset of zero. The Company has concluded,
in
accordance with the applicable
accounting standards, that
it is
more likely than not that the Company may not realize
the benefit of all of its deferred tax assets. Accordingly, management has provided a 100% valuation allowance against its deferred
tax assets until
such
time as management believes that
its
projections of future profits as
well
as expected future tax rates make the
realization of these deferred tax assets more-likely-than-not. Significant judgment is required in the evaluation of deferred
tax benefits and differences
in
future results from our estimates could result
in
material differences
in
the realization of these assets. The Company has recorded
a full valuation allowance related to
all
of its deferred tax assets. The Company
has performed an assessment of positive and negative evidence regarding the realization of the net deferred tax asset in accordance
with FASB ASC 740-10, “Accounting for Income Taxes.” This assessment included the evaluation of scheduled reversals
of deferred tax liabilities, the availability of carry forwards
and
estimates of
projected future taxable income. The availability of the Company’s net operating loss carry forwards is subject
to
limitation
if
there
is
a 50%
or more change
in
the ownership of the Company’s stock. The provision for income
taxes consists of the state minimum tax imposed on corporations of $800. The Company has adopted guidance issued by the FASB that
clarifies the accounting
for
uncertainty in income taxes recognized in
an
enterprise’s financial statements and prescribes a recognition threshold of more likely than not and a measurement
process
for
financial statement recognition and measurement of a tax position taken
or expected to be taken
in
a tax return. In making this assessment, a company must
determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical
merits of the position and must assume that the tax position will be examined
by
taxing
authorities.
The
Company’s policy is
to
include interest
and
penalties related
to
unrecognized tax benefits in income tax expense. The Company has not recognized any unrecognized tax benefits and
does
not
have
any interest or penalties related
to
uncertain tax positions as of March 31, 2018.
On
December 22, 2017, the U.S. President signed the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act). Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification Topic 740, Income Taxes (“ASC 740”) requires
that the company recognize the effects of changes in tax laws or tax rates in the financial statements for the period in which
such changes were enacted. Among other things, changes in tax laws or tax rates can affect the amount of taxes payable for the
current period, as well as the amount and timing of deferred tax liabilities and deferred tax assets. The Company has begun the
process of analysis of the 2017 Tax Act and will recognize the effect of the changes in tax laws or rates in the period that the
process has been completed.
4.
NOTES PAYABLE
During
2015 and 2016, the Company issued promissory notes that bear interest at 5%-10% per annum and were due on various dates throughout
2015, 2016 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 per share, subject to downward adjustments
for future equity issuances. In connection with these convertible promissory notes, the Company issued warrants to purchase 3,325,000
shares of common stock at an exercise price of $0.20 per share, subject to downward adjustments for future equity issuances. The
warrants have a term of 7 years from the date of issuance. The Company is in default under the terms of these notes.
The
conversion features and warrants are considered derivative liabilities pursuant
to ASC
815
and were measured at their grant-date fair value and recorded as a liability and note discount on the date of issuance. Subsequent
changes
to
the value of the derivative liabilities are recorded in earnings.
On
January 5, 2017 the Company entered into a financing arrangement with five accredited investors (the “Investors”),
whereby amendments
to
certain convertible note agreements totaling $662,000 were
enacted. The amendments
to
the convertible note agreements involved
(1)
extending the maturity dates of the note agreements; and (2) amending the optional conversion provisions of the original
note agreements
to
now describe an adjustable conversion price based on the completion
of a qualified financing offering. If the cumulative gross proceeds of such offerings exceed $2.5 million,
the
conversion
price
will be adjusted automatically
to
match the offering’s conversion price and conversion
to
common shares
will occur automatically. If the cumulative gross proceeds of such offerings remain below $2.5 million, the conversion price adjusts
to match the offering conversion price for the Investors. Should there be an event of default under these amended notes, the Investors
will have,
in
addition
to
all the other
rights described
in
that certain Securities Purchase 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. As of June 30, 2018, $662,000 of principal remains outstanding,
which was due on May 18, 2018. The Company is in default under the terms of these notes.
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 were due
May 18, 2018. The Company is in default under the terms of these notes.
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 quarter ended March 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 August 31, 2017, which was subsequently amended to
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 $0.025 per share) making them derivative instruments. As of June 30, 2018, $150,034
of cash proceeds has 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 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. The Company
is in default under the terms of these notes.
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. As of June 30, 2018, the balance of these Notes amounted
to $497,771. The Company is in default under the terms of these notes.
Amortization
of note discounts amounted to $449,717 and $211,000 during the six months ended June 30, 2018 and 2017, respectively.
On
July 27, 2018 the United States District Court for the Southern District of New York granted Plaintiffs’ Alpha Capital Anstalt
(“Alpha”) and Brio Capital Master Fund, Ltd.(“Brio”) Motion for Summary Judgment (“MSJ”) against
the Company in the total amount of $1,274,525 plus 18% prejudgment interest from mid-2017. The Company believes the Court’s
ruling was erroneous and intends to file a notice of appeal to the United States Court of Appeal for the Second Circuit within
approximately 30 days. Management will continue its efforts begun prior to this ruling to settle with Alpha and Brio on terms
acceptable to the parties to the litigation and potential equity investors which allow for a successful pathway for the development
of the Company’s disruptive technology. Included in Other income (expense) is an accrual for $1,033,029 related to this
contingent judgment, which was recorded in notes payable and accounts payable and accrued expenses.
5.
STOCKHOLDERS’ EQUITY
Preferred Stock
Upon
confirmation of the Company’s Chapter 11 Reorganization Plan, the Company is authorized to issue 2,000 shares of preferred
stock, no par value. The rights, privileges, and preferences of the preferred stock are to be determined by the Company’s
board of directors and may be issued
in
series.
As
of January 18, 2016, Imaging3 issued 2,000 preferred voting shares
to
Dane
Medley, CEO/Chairman. Each share constitutes 350,000 voting shares. The estimated value of these shares was not significant. However,
Dane Medley relinquished these voting shares during the first quarter ending March 31, 2017 for consideration of $60,000, which
was settled in the second quarter ending June 30, 2018.
Common
Stock
The
Company is authorized to issue 1,000,000,000 shares of no par value common stock.
During
the six months ended June 30, 2018, the Company issued a total of 2,904,171 shares of common stock for cash in the amount of
$493,223 and 18,058,539 shares were issued for services rendered valued at $5,442,076. During the quarter ended June 30,
2018, 3,000,000 of these shares were cancelled.
As
of June 30, 2018, there were approximately 590 record holders of our common stock, not including shares held in “street
name” in brokerage accounts which is unknown. As of June 30, 2018, there were approximately 34,115,831 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 2014 Stock Option Plan will terminate in September 2024.
Stock
Options
As
of June 30, 2018, former employees of the Company hold options to purchase 250,000 shares of common stock at an exercise price
of $0.50. These options expire in 2025.
Transactions in FY 2018
|
|
Quantity
|
|
|
Weighted- Average Exercise
Price Per Share
|
|
|
Weighted- Average Remaining
Contractual Life
|
|
Outstanding, December 31, 2017
|
|
|
250,000
|
|
|
$
|
0.50
|
|
|
|
7.57
|
|
Granted
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Cancelled/Forfeited
|
|
|
0
|
|
|
|
|
|
|
|
|
|
Outstanding ,June 30, 2018
|
|
|
250,000
|
|
|
$
|
0.50
|
|
|
|
7.08
|
|
Exercisable, June 30, 2018
|
|
|
250,000
|
|
|
$
|
0.50
|
|
|
|
7.08
|
|
The
weighted average remaining contractual life of options outstanding issued under the Plan was 7.08 years at June 30, 2018.
6.
WARRANTS
Following
is a summary of warrants outstanding at June 30, 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
|
7.
DERIVATIVE LIABILITIES
The
Company’s only asset or liability measured at fair value on a recurring basis was its derivative liability associated with
warrants to purchase common stock and the conversion feature embedded in convertible promissory notes.
In
connection with previous financing transactions, the Company issued warrants
to
purchase
common stock and convertible promissory notes. These instruments included provisions that could result in a reduced exercise price
based on specified full-ratchet anti-dilution provisions. The “reset” provisions were triggered in the event the Company
subsequently issued common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion
price lower than contractually specified amounts. Upon triggering the “reset” provisions, the exercise / conversion
price of the instrument will be reduced. Accordingly, pursuant
to ASC
815, these
instruments were not considered
to
be solely indexed to
the
Company’s own stock and were not afforded equity treatment.
The
following table summarizes activity in the Company’s derivative liability during the six months ended June 30, 2018:
12-31-2017 Balance
|
|
$
|
701,347
|
|
Creation / Settlement
|
|
$
|
(53,403
|
)
|
Change in Value and Extinguishment of Debt
|
|
$
|
3,607
|
|
06-30-2018 Balance
|
|
$
|
651,551
|
|
As
of the June 30, 2018, there are 6,875,501 shares issuable upon conversion of the Company’s convertible debts accounted for
as derivative liabilities.
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
|
|
|
0.1 years - 7.0 years
|
|
Dividend Yield
|
|
|
0
|
%
|
Risk-free rate
|
|
|
2.06% - 2.63
|
%
|
Volatility
|
|
|
Up to 65
|
%
|
8.
COMMITMENTS AND CONTINGENCIES
Administrative
Claim of Greenberg Glusker Fields Claman & Machtinger LLP
On
January 30, 2017 the Company entered into a new Agreement. Under the terms of the Agreement, the Company has agreed to pay Greenberg
$1,117,574 plus any interest that has accrued at the rate of 6.0% per annum, as follows: (i) $100,000 on or before December 31,
2017; (ii) $150,000 on or before December 31, 2018 (iii) 4.0% of the first $2.5 million of gross proceeds of any private or public
offering by the company (an “Offering”); (iv) 2.0% of the next $2.5 million of gross proceeds from such Offerings;
(v) 4.0% of any gross proceeds thereafter from such Offerings; and (vi) the remaining balance on or before December 31, 2019.
In
addition, Greenberg has the option to convert up to $150,000 of the balance into a warrant that would convert on terms that are
equal to (or, in certain cases, better than) the terms offered in subsequent rounds of financing.
As
of June 30, 2018, the Company is in default under the terms of this 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. The Company noted that as a result, the Imaging3 Chapter 11 proceeding is now closed—the Company is no longer subject
to the jurisdiction of the Bankruptcy Court, and the case cannot be converted to a Chapter 7 proceeding.
To
clarify, the Judge’s order
in
its final paragraph stated that “Notwithstanding the foregoing [order closing
the
bankruptcy case pursuant to 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”.
Thusly, technically, the case could possibly be reopened by either of those aforementioned creditors.
9.
SUBSEQUENT EVENTS
On
July 27, 2018 the United States District Court for the Southern District of New York granted Plaintiffs’ Alpha Capital Anstalt
(“Alpha”) and Brio Capital Master Fund, Ltd. (“Brio”) Motion for Summary Judgment (“MSJ”)
against the Company in the total amount of $1,274,525 plus 18% prejudgment interest from mid-2017. The Company believes the Court’s
ruling was erroneous and intends to file a notice of appeal to the United States Court of Appeal for the Second Circuit within
approximately 30 days. Management will continue its efforts begun prior to this ruling to settle with Alpha and Brio on terms
acceptable to the parties to the litigation and potential equity investors which allow for a successful pathway for the development
of the Company’s disruptive technology. Included in Other income (expense) is an accrual for $1,033,029 related to this
contingent judgment.