Attached files
FORM 10-K
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2009
COMMISSION FILE NUMBER 0-13215
IMAGING3, INC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4451059
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(State of Incorporation) (I.R.S. Employer Identification No.)
3200 W. VALHALLA DRIVE, BURBANK, CALIFORNIA 91505
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(Address of principal executive offices) (Zip Code)
(818) 260-0930
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Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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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 filed
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 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 [___] Smaller reporting company [_X_]
(Do not check if a smaller
reporting company)
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 $194,295,690 as of March 29, 2010 (computed by
reference to the last sale price of a share of the registrant's Common Stock on
that date as reported by OTC Bulletin Board).
There were 375,709,898 shares outstanding of the registrant's Common
Stock as of March 29, 2010.
TABLE OF CONTENTS
PART 1
ITEM 1 Business 4
ITEM 2 Properties 18
ITEM 3 Legal Proceedings 18
ITEM 4 Submission of Matters to a Vote of Security Holders 18
PART II
ITEM 5 Market for Common Equity and Related Stockholder Matters 18
ITEM 6 Selected Financial Data 19
ITEM 7 Management's Discussion and Analysis or Plan of Operation 19
ITEM 8 Financial Statements and Supplementary Data 24
ITEM 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 41
ITEM 9A(T) Controls and Procedures 41
ITEM 9B Other Information 42
PART III
ITEM 10 Directors, Executive Officers, and Corporate Governance 43
ITEM 11 Executive Compensation 46
ITEM 12 Security Ownership of Certain Beneficial Owners and Management and Related 47
Stockholder Matters
ITEM 13 Certain Relationships and Related Transactions, and Director Independence 48
ITEM 14 Principal Accounting Fees and Services 48
ITEM 15 Exhibits, Financial Statement Schedules 49
SIGNATURES 50
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PART I
ITEM 1. BUSINESS
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GENERAL
Imaging3, Inc. (the "Company" or "Imaging3") has developed a
proprietary medical technology designed to produce 3D medical diagnostic images
in real time. In the future, healthcare workers using Imaging3 devices will
potentially be able to instantly view 3D, high-resolution images of virtually
any part of the human body.
HISTORY
The Company was founded as Imaging Services, Inc. ("ISI") on October
29, 1993, by Dean Janes. The Company initially served as a low cost, third party
service alternative for equipment made by Orthopedic Equipment Company Medical
Systems ("OEC"). OEC is the largest manufacturer of mobile surgical C-arms with
over a 60% market share in the United States. A C-arm is an integral component
of a fluoroscopic imaging system used for various types of surgery. Management
believes that prior to the Company's inception, no company existed solely
focused on providing third party service for OEC equipment.
In early 1994, Imaging3 began offering upgrades for OEC C-arms. The
most successful upgrade was a CCD (Charged Coupled Device) camera, which
improved the image quality of older systems to be comparable with that of brand
new products. This offering became so successful that the Company integrated
this upgrade with used OEC C-arms and built custom units for NASA, Harvard,
University of California at Irvine, University of California at Davis, Baylor
University, Baxter Healthcare and other prestigious healthcare organizations.
Later that year, Imaging3 applied for and received United States Food and Drug
Administration ("FDA") approval for this device, described as the NASA II CCD
C-arm.
In mid 1995, Imaging3 purchased the assets of ProMedCo. ProMedCo had an
exclusive agreement with OEC to remanufacture OEC C-arms for OEC Medical
Systems. Though the purchase did not transfer the agreement, it eliminated one
of the Company's competitors and provided a substantial inventory of replacement
parts. Access to these replacement parts allowed Imaging3 to increase
immediately its production levels and created the opportunity to remanufacture
OEC's complete product line, thereby increasing the models ISI could offer its
customers. Also, this purchase allowed the Company to enter the lucrative parts
sales business.
In 2000, the Company continued its expansion by purchasing a sales
company in San Diego, California. This asset purchase brought an extensive
database with the contact information for over 43,000 physicians, hospitals,
medical centers and surgery centers as well as a streamlined automated sales
force. Also, as part of this expansion, several key employees, most of whom were
former employees of OEC, were hired to increase the Company's service presence
in Arizona, Washington, Nevada, Florida and Hawaii with a national service
presence as the ultimate goal. In 2002, the Company closed the San Diego office
and consolidated operations in Burbank, California.
On February 19, 2002, a fire gutted the Company's principal operating
facility, causing an estimated $4.3 million in damage. The 10,800-square-foot
structure was subsequently rebuilt and the Company has reoccupied it. In the
interim, the Company leased temporary facilities. The damage to the building and
the loss of the Company's equipment were partially covered by liability
insurance. Nevertheless, the fire disrupted the Company's operations.
In order to better position the Company for its future direction away
from service and toward providing proprietary medical imaging products, the
Company changed its name Imaging Services, Inc. to Imaging3, Inc. on August 20,
2002.
On November 25, 2009, the Company filed with the FDA a 510(k)
application for approval of the Company's medical diagnostic imaging device for
sale in the United States. Assuming that the FDA grants approval, the Company
intends to follow up and apply to sell the product in the European and then
worldwide markets. The FDA is currently reviewing the application, and
management is not certain if or when FDA approval will be granted. The Company
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completed building its first prototype medical diagnostic imaging device in
April 2007.
BUSINESS OPERATIONS
Imaging3 technology has the potential to contribute to the improvement
of healthcare. The Company's technology is designed to cause 3D images to be
instantly constructed using high-resolution fluoroscopy. These images can be
used as real time references for any current or new medical procedures in which
multiple frames of reference are required to perform medical procedures on or in
the human body. Management believes that Imaging3 technology has extraordinary
market potential in an almost unlimited number of medical applications,
including:
o TRAUMA CENTER. Imaging3 technology would allow a surgeon to
immediately view exactly where a bullet is lodged in a gunshot
victim. At any point during the procedure, the surgeon could
continue to view 3D images in real-time.
o CARDIOLOGY. Imaging3 technology could provide a 3D view of a
heart and allow a cardiologist to record the heartbeat in
real-time. The entire heart would be visible, including veins
that are wrapped around the "back" side.
o PAIN MANAGEMENT. Imaging3 technology could provide a 3D view
of the spine, nerve endings, and injection points and help
guide the needle for spinal procedures. 3D images in real-time
could also be used to view disk compression.
o NEURO-VASCULAR. Imaging3 technology could provide a 3D view of
the skull and brain to diagnose neuro-vascular diseases. 3D
images in real-time could be used to view the rupture of
vessels or arterial blockages diminishing blood flow to the
brain.
o ORTHOPEDIC. Imaging3 technology could provide a 3D view of
bones and joints to help diagnose orthopedic conditions. An
orthopedic surgeon could view a 3D image in real-time to line
up a screw with the hole in a hip pinning.
o VASCULAR. Imaging3 technology could provide a 3D view of veins
throughout the body. After injecting dye, a 3D image in
real-time could pinpoint clots and occlusions and help
diagnose vascular diseases.
MULTI-FUNCTION DEVICE
A diagnostic medical imaging device built with Imaging3 technology can
perform several functions and can replace or supplement a number of exiting
devices, resulting in considerable cost savings for hospitals and healthcare
centers. These functions include:
o Perform real-time, 3D medical imaging;
o Emulate a computerized tomography ("CT") scanner (at a
fraction of the capital cost); and
o Perform standard fluoroscopy.
The Company's management believes that this multi-function capability
will be especially attractive in foreign markets, where the cost of a CT scanner
is beyond the means of most hospitals and healthcare centers.
EXISTING BASE OF BUSINESS TO LAUNCH A PROPRIETARY PRODUCT
Imaging3 is an established company with revenues and an industry
reputation. While the Company began as a service provider, it quickly expanded
to include equipment and parts sales, both new and renewed. Management believes
that Imaging3 is the largest remanufacturer of C-arms in the world. The Company
offers new, demonstration, remanufactured, refurbished and pre-owned systems in
all price ranges from every major manufacturer including OEC, General Electric
("GE"), ISI, Philips, Siemens, FluoroScan, XiScan and Ziehm. The Company
supplies full-size, compact and mini C-arms.
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Management believes that Imaging3 is also the largest distributor of
C-arm tables in the United States. The Company offers new, demonstration,
remanufactured, refurbished and pre-owned C-arm tables in all price ranges from
every major manufacturer. The Company also supplies pain management tables,
surgery tables, urology tables and vascular tables. Imaging3's management
intends to use the Company's base of operations and channels of distribution to
launch its new medical imaging devices business, based on its breakthrough
Imaging3 technology.
BUSINESS AND REVENUE MODELS
The Company's business strategy is straight-forward: (1) continue to
build the Company's base of C-arm remanufacturing and service business, (2)
develop medical diagnostic imaging devices, based on the Company's breakthrough
Imaging3 technology for the $5 billion medical imaging market, (3) sell the
Company's new medical diagnostic imaging devices directly to healthcare
providers, as well as through channel partners and distributors, and (4) license
the Company's breakthrough Imaging3 technology to other medical diagnostic
imaging device manufacturers.
The Company's management believes that most of the Company's future
revenues will come from the sale of medical imaging devices, based on the
Company's Imaging3 technology. Other revenues are expected to be derived from
the licensing of its proprietary technology to other medical diagnostic imaging
device manufacturers. The smallest portion of the Company's future revenue is
projected to come from the sale and service of C-arms.
PROPRIETARY TECHNOLOGY
PATENT
On June 23, 2004, U.S. Patent No. 6,754,297 was granted in the name of
Dean Janes, entitled Apparatus and Method for Three-Dimensional Real-Time
Imaging System. The rights to this patent have been assigned to the Company.
ABSTRACT OF THE PATENT DISCLOSURE
A computing device in a three-dimensional imaging system utilizes a
plurality of distance readings and reference readings from at least one subject
sensor to determine a subject location and a subject volume and establish a base
three-dimensional map of a subject. A plurality of two-dimensional image
exposures along with a plurality of associated reference locations are created
by rotating an image source and an image receptor around an inner circumference
of an imaging gantry. The plurality of two-dimensional image exposures is
digitized to create a plurality of digital two-dimensional image exposures. The
computing device receives the plurality of digital two-dimensional image
exposures and the plurality of associated reference locations. The overlaying,
interpolating and pasting of the plurality of digital two-dimensional image
exposures on the base three-dimensional map creates a base three-dimensional
image exposure, which is displayed on a display device.
GENERAL DESCRIPTION
Real-time 3D medical diagnostic imaging will be accomplished by
scanning the patient, either partially or completely in a 360-degree
circumference under fluoroscopy (or other type of image exposure), utilizing a
single or multiple x-ray source and image receptor. The information acquired
under fluoroscopy (or other type of image exposure) will be digitized at a frame
rate of between 30 to 60 frames per second. This information will be sent to a
computer system to be incorporated into a three-dimensional image to be
displayed on a computer monitor. The image created can then be manipulated
and/or rotated to view the scanned image of the patient's anatomy in any
direction or orientation desired by the user. The user could then choose a
specific area of the image to update. Once an area is selected, the computer
displaying the image would then "gang" or align the x-ray source(s) and image
receptor(s) to begin updating scans of new images to be overlaid upon the
existing three-dimensional model. This process would then be updated and/or
repeated as many times as necessary for the specific procedure to be completed.
At any time, a new reference area or scan could be selected or initiated.
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THE "O" DEVICE
Part of the Company's invention is based on an "O" device to create a
circular gantry similar to that used with CT to scan a patient a full 360
degrees with fluoroscopic radiation. This approach is expected to allow imaging
of the patient from any frame of reference or angulation (current medical
imaging devices are limited to 150 degrees to 360 degrees with mechanical
orientation or manipulation). 3D imaging requires an "O" device to scan the
patient in increments of 360 degrees to allow construction of a
three-dimensional image. By scanning the patient in 360 degrees and acquiring
images at 30 to 60 frames per second, management believes a three-dimensional
image can be constructed.
IMAGING3 TECHNOLOGY DIFFERS FROM OTHER APPROACHES
The "O" device approach is similar to that used in a CT scan. The
difference is CT is used to image a "slice" of the anatomy and not intended for
real-time fluoroscopic imaging. The slice is obtained by using a fulcrum
reference point and rotating the X-ray source and image receptor in reference to
that point. This basic geometry creates a 2D image in any depth desired, in any
region of the body. The "O" device would use a similar fulcrum point to
reference depth, but the scan would not create a slice but instead a real-time
image captured at 30 to 60 frames per second in 360 degrees. Further, management
believes that the "O" device would be used for conventional fluoroscopic imaging
with the advantage of positioning the X-ray source and receptor at any
angulation desired.
Currently, 3D imaging is used only for reconstructive post processing
reference images. Magnetic resonance imaging ("MRI"), CT and ultrasound
currently have this capability. The 3D images are created by multiple scans of
2D images that require a long period of time to process into a three-dimensional
image. The image created is then used only for reference, not real-time
manipulation in the body. The Company anticipates that it's 3D images will be
constructed almost instantly and will be available to be used as real-time
references whenever multiple frames of reference are required to perform medical
procedures on or in the human body.
THE MARKET
The Company competes in the medical diagnostic imaging market and this
market has never been healthier than it is today. This vitality is due primarily
to continual technological improvements that lead to faster and
better-resolution imaging, greater patient safety, and the provision of these
capabilities to a growing and aging population. The result has been a vigorous
competition to create the most cost-effective diagnostic imaging systems.
Diagnostic imaging is an evolving part of modern medicine and is now
entering a new era of digital imaging. The field has evolved from the early
X-rays by Roentgen over 100 years ago to imaging of organs by CT and MRI that
are 20 years old. Medical imaging is used for diagnosis in the leading causes of
death, heart attacks, strokes, and cancer. What was once called the radiology
department is now called the diagnostic imaging department because of the wealth
of new technologies available beyond x-rays. A trauma victim's internal injuries
are imaged with a CT scanner. Breast cancer, a leading cause of death in women,
is detected with mammography and ultrasound.
According to a Freedonia Group study, the medical imaging equipment
market in the U.S. will register gains of 7.6 percent per year through 2010 to
$9.5 billion, faster than projected growth in national health expenditures.
Growth will be stimulated by an increasing incidence of patient procedures
involving diagnostic imaging, partly the result of an aging population and
partly reflecting advances in noninvasive imaging technology.
The Company's management believes that opportunities exist not only for
new companies in imaging products but also software companies for image
processing and Picture Archiving and Communication Systems ("PACS") networks.
Technological developments continue, which consistently result in new products.
Diagnostic imaging is an important part of medical diagnosis. It ranges
from a dentist's X-ray to find tooth decay to angiograms done to aid a
cardiologist in performing an angioplasty. The aging baby boomer population will
need the new imaging capabilities for cancer and heart disease detection. The
revolution in medical imaging is being fueled not only by new medical imaging
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technology, but also by advances in computer hardware and software. New systems
such as spiral CT or multi-slice CT would not be possible without today's faster
processors. Better software algorithms for image analysis and compression make
the process more accurate and efficient. The growth of diagnostic imaging could
be an important source of revenue for computer manufacturers and software
companies specializing in diagnostic imaging.
INDUSTRY OVERVIEW
Diagnostic imaging services are noninvasive procedures that generate
representations of the internal anatomy and convert them to film or digital
media. Diagnostic imaging systems facilitate the early diagnosis of diseases and
disorders, often minimizing the cost and amount of care required and reducing
the need for costly and invasive diagnostic procedures.
MAGNETIC RESONANCE IMAGING ("MRI")
MRI involves the use of high-strength magnetic fields to produce
computer-processed cross-sectional images of the body. Due to its superior image
quality, MRI is the preferred imaging technology for evaluating soft tissue and
organs, including the brain, spinal cord and other internal anatomy. With
advances in MRI technology, MRI is increasingly being used for new applications
such as imaging of the heart, chest and abdomen. Conditions that can be detected
by MRI include multiple sclerosis, tumors, strokes, infections, and injuries to
the spine, joints, ligaments, and tendons. Unlike x-rays and computed
tomography, which are other diagnostic imaging technologies, MRI does not expose
patients to potentially harmful radiation.
MRI technology was first patented in 1974, and MRI systems first became
commercially available in 1983. Since then, manufacturers have offered
increasingly sophisticated MRI systems and related software to increase the
speed of each scan and improve image quality. Magnet strengths are measured in
tesla, and MRI systems typically use magnets with strengths ranging from 0.2 to
1.5 tesla. The 1.0 and 1.5 tesla strengths are generally considered optimal
because they are strong enough to produce relatively fast scans but are not so
strong as to create discomfort for most patients. Manufacturers have worked to
gradually enhance other components of the machines to make them more versatile.
Many of the hardware and software systems in recently manufactured machines are
modular and can be upgraded for much lower costs than purchasing new systems.
The MRI industry has experienced growth as a result of:
o Recognition of MRI as a cost-effective, noninvasive diagnostic
tool.
o Superior soft-tissue image quality of MRI versus that of other
diagnostic imaging technologies.
o Wider physician acceptance and availability of MRI technology.
o Growth in the number of MRI applications.
o MRI's safety when compared to other diagnostic imaging
technologies, because it does not use potentially harmful
radiation.
o Increased overall demand for healthcare services, including
diagnostic services, for the aging population.
POSITRON EMISSION TOMOGRAPHY ("PET")
PET is a nuclear medicine procedure that produces pictures of the
body's metabolic and biologic functions. PET can provide earlier detection of
certain cancers, coronary diseases or neurologic problems than other diagnostic
imaging systems. It is also useful for the monitoring of these conditions.
COMPUTED TOMOGRAPHY ("CT")
In CT imaging, a computer analyzes the information received from an
x-ray beam to produce multiple cross-sectional images of a particular organ or
area of the body. CT imaging is used to detect tumors and other conditions
affecting bones and internal organs.
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OTHER SERVICES
Other diagnostic imaging technologies include x-ray, single photon
emission computed tomography, and ultrasound.
DIGITAL IMAGING TECHNOLOGIES
New techniques for the digital capture, display, storage, and
transmission of x-ray images are poised to revolutionize the diagnostic imaging
market. Although digital technologies and techniques have been in use in other
diagnostic imaging areas (such as CT scans, MRI scans, and ultrasound),
technical problems have kept x-ray technologies in the era of film. However, new
methods of digitally capturing x-ray images are under development and promise to
revolutionize x-ray imaging.
The need to cut costs and improve services in healthcare delivery is
driving the move to digital systems. The requirement for hospitals to implement
electronic access to medical images and other types of information is now widely
accepted and regarded as inevitable. The trend toward storing, distributing and
viewing medical images in digital form is being fueled by both changes in the
economic structure of the healthcare system and by rapidly evolving
technologies. In particular, the new economics of health care will mandate a
shift from film-based radiology to the electronic delivery of digital images,
while new technology promises the additional benefit of vastly improved
diagnostic power.
USERS OF DIAGNOSTIC IMAGING
MRI and other imaging services are typically provided in one of the
following settings:
HOSPITALS AND CLINICS
Imaging systems are located in and owned and operated by a hospital or
clinic. These systems are primarily used for the patients of the hospital or
clinic, and the hospital or clinic bills third-party payors, such as health
insurers, Medicare or Medicaid.
INDEPENDENT IMAGING CENTERS
Imaging systems are located in permanent facilities not generally owned
by hospitals or clinics. These centers depend upon physician referrals for their
patients and generally do not maintain dedicated, contractual relationships with
hospitals or clinics. In fact, these centers may compete with hospitals or
clinics that have their own systems to provide Imaging3 to these patients. Like
hospitals and clinics, these centers bill third-party payors for their services.
OUTSOURCED
Imaging systems, largely located in mobile trailers but also provided
in fixed facilities, provide services to a hospital or clinic on a
shared-service or full-time basis. Generally, the hospital or clinic contracts
with the imaging service provider to perform scans of its patients, and the
imaging service provider is paid directly by that hospital or clinic instead of
by a third-party payor.
INDUSTRY CHALLENGES
In a recent report, U.S. MEDICAL IMAGING INDUSTRY OUTLOOK, Frost &
Sullivan identified several challenges facing the diagnostic imaging industry.
Low reimbursement rates have become a major challenge, not only for end users,
but for manufacturers as well. Imaging reimbursements for many procedures may be
inadequate given the expense of the equipment and the expertise required to
create and interpret results.
Lack of adequate compensation is a concern for all industry
participants, as many healthcare centers are delaying or canceling purchases of
high-priced items. Until the financial rewards for imaging are increased
substantially, and definitively, low reimbursement will be the foremost hurdle
for manufacturers.
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COMPETITION
COMPETITIVE LANDSCAPE
The healthcare industry in general and the market for imaging products
in particular is highly competitive. The Company competes with a number of
companies, many of which have substantially greater financial, marketing, and
other resources than the Company. The Company's competitors include large
companies such as GE, Philips, Siemens, Toshiba and Hitachi, which compete in
most medical diagnostic imaging modalities, including x-ray imaging.
A study by Theta Reports, DIAGNOSTIC IMAGING EQUIPMENT AND SYSTEMS
WORLD MARKET, identifies the following 17 key players in the medical diagnostic
imaging market:
o ADAC Laboratories
o Eastman Kodak Co.
o Fonar Corp.
o Fuji Medical Systems U.S.A., Inc.
o General Electric Medical Systems
o Hitachi Medical Systems America, Inc.
o Hologic, Inc.
o Imaging Diagnostic Systems, Inc.
o Imatron, Inc.
o Lumisys, Inc.
o Marconi Medical Systems
o Philips Medical Systems Nederland BV
o PhorMax Corp.
o Siemens Medical Engineering Group
o Sterling Diagnostic Imaging, Inc.
o Trex Medical Corp.
o Varian Medical Systems, Inc.
DIRECT COMPETITORS
At this time, the Company is not aware of any existing devices in the
marketplace that provide 3D, real-time diagnostic medical imaging, with the
exception of ultrasound.
Ultrasound is a real-time tomographic imaging modality. Not only does
it produce real-time tomograms of the position of reflecting surfaces (internal
organs and structures), but it can also be used to produce real-time images of
tissue and blood motion. However, ultrasound is a low-resolution imaging
modality that does not produce an image as precise and clear as fluoroscopy. The
Company's devices will rely instead on the use of fluoroscopy, a high-resolution
imaging modality, to produce "live" x-ray images of living patients in 3D.
MARKETING AND SALES PLAN
MARKETING STRATEGY
Imaging3's marketing strategy is to create a favorable environment to
sell its medical diagnostic imaging devices. The Company intends to enhance,
promote and support the fact that Imaging3 technology is the most complete and
comprehensive medical diagnostic imaging solution available in the marketplace.
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PRODUCT AND SERVICE DIFFERENTIATION
The differentiating attributes of Imaging3 technology include:
o The only 3D, real-time medical diagnostic imaging device in
the market that will produce high resolution images;
o Reasonably priced;
o Easy-to-install;
o Vast array of features; and
o Highly reliable.
VALUE PROPOSITION
The Company's value proposition is simple: diagnostic imaging devices
with Imaging3 technology allow healthcare providers to easily produce 3D,
real-time, high resolution images at a reasonable cost.
POSITIONING
Management believes that Imaging3 can be positioned as offering the
superior solution for producing medical diagnostic images. Management believes
that the Company's unique advantage is that it can offer a diagnostic imaging
solution that will allow healthcare providers to view real-time references for
virtually any procedure. The Company plans to reposition its competitors by
demonstrating that their offerings are inadequate because they:
o Do not provide 3D images;
o Do not provide images in real-time;
o Do not provide high resolution images; and
o Are too costly.
SALES STRATEGY
After undertaking a marketing campaign, the Company intends to
aggressively sell its medical diagnostic imaging devices in the United States.
International sales efforts will follow after achieving market penetration in
the domestic marketplace.
SALES MARGIN STRUCTURE
The Company's management believes that the majority of its sales will
be derived from direct sales to customers, with the balance of sales derived
from dealers and manufacturer's representatives. As a result, the sales margin
structure must be attractive to these independent organizations.
o Direct Sales - Full suggested list price;
o Dealers - 30% off suggested list price; and
o Manufacturer's Representatives - 10% commission.
TARGET MARKET SEGMENT
The Company's management has identified general medical and surgical
hospitals in the United States as its primary target market segment for Imaging3
technology. According to D&B/iMarket, there are 12,041 general medical and
surgical hospitals in the United States.
DISTRIBUTION CHANNELS
The Company plans to sell its Imaging3 medical diagnostic imaging
devices through several channels of distribution, including:
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DIRECT SALES TO END USERS
The Company's policy is to sell directly to end-users whenever
possible. The Company's management expects that direct sales will occur most
often with larger customers.
DEALERS AND MANUFACTURER'S REPRESENTATIVES
The Company has working relationships with a number of independent
organizations that help distribute the Company's current product line. The
Company expects to work with these independent organizations to help distribute
diagnostic medical imaging devices built with Imaging3 technology. These
organizations have well-established relationships with mid-size to large size
customers. Many also provide specific vertical market applications.
EXECUTIVE SALES
Because many of Imaging3's large customers will tend to be top
healthcare managers, it is important that its Company president and senior
managers present its products to its large customers.
FIELD SALES FORCE
Management anticipates that the majority of the Company's selling
efforts to large accounts will be handled internally through its field sales
force. Imaging3 has chosen to use a direct sales force because its large
accounts require considerable customer education and post-sales support directly
from the Company. Management believes that the Company's price points, pricing
structure and profits are such that its cost of sales warrants a
"person-to-person" selling strategy.
DEALERS AND MANUFACTURERS' REPRESENTATIVES
The Company plans to supplement its own field sales force by entering
into agreements with dealers and manufacturers' representatives. Because dealers
and manufacturers' representatives carry several product/service lines that are
compatible with the Company's products and services, Imaging3 plans to select
dealers and manufacturers representatives carrying complementary and compatible
products and services, as well as dealers and manufacturers' representatives
that sell dissimilar products and services yet are appropriate for their
customers' customer.
EMPLOYEES
The Company currently employs thirteen full-time individuals, all of
whom are working at the Company's offices at 3200 W. Valhalla Drive, Burbank,
California 91505. Eight of those thirteen full-time employees are employed in
administrative, marketing, and sales positions, and the remaining five are
technical employees employed in research, development and production positions.
The Company projects that during the next 12 months, the Company's workforce is
likely to increase.
To support the Company's need for technical staffing, the Company has
established relationships with technical staffing organizations that
continuously offer highly qualified personnel to meet the Company's needs, both
locally and from out of the area.
INTELLECTUAL PROPERTY MATTERS
All of the Company's employees have executed agreements that impose
nondisclosure obligations on the employee and in which the employee has assigned
to the Company (to the extent permitted by California law) all copyrights and
other inventions created by the employee during employment with the Company. The
rights underlying the application for the patent of the Imaging3 technology have
been assigned to the Company. The Company has in place a trade secret protection
policy that the Company's management believes to be adequate to protect the
Company's intellectual property and trade secrets.
-12-
GOVERNMENT REGULATORY APPROVAL PROCESS
All the Company's products are classified as Class II (Medium Risk)
devices by the FDA and clinical studies with the Company's products will be
considered to be Non-Significant Risk Studies ("NSR"). Imaging3's business is
governed by the FDA and all products typically require 510(k) market clearance
before they can be put in commercial distribution. The Company is also regulated
by the FDA's Quality Systems Regulation ("QSR"), which is similar to the ISO9000
and the European EN46000 quality control regulations. All of the Company's
products currently in production or manufactured by other vendors are approved
for marketing in the United States under the FDA's 510(k) regulations.
A 510(k) is a pre-marketing submission made to the FDA to demonstrate
that the device to be marketed is as safe and effective, that is, substantially
equivalent ("SE"), to a legally marketed device that is not subject to
pre-market approval ("PMA").
Applicants must compare their 510(k) device to one or more similar devices
currently on the U.S. market and make and support their substantial equivalency
claims. A legally marketed device is a device that was legally marketed prior to
May 28, 1976 (pre-amendments device), or a device which has been reclassified
from Class III to Class II or I, a device which has been found to be
substantially equivalent to such a device through the 510(k) process, or one
established through Evaluation of Automatic Class III Definition. The legally
marketed device(s) to which equivalence is drawn is known as the "predicate"
device(s).
Applicants must submit descriptive data and when necessary, performance
data to establish that their device is SE to a predicate device. The data in a
510(k) is to show comparability, that is, SE of a new device to a predicate
device.
Imaging3 has not sought or obtained a determination from the FDA
whether a 510(K) submission is required. The FDA does not offer an opinion or
determination of what submission is required. The FDA does provide a database of
devices, classifications and Regulation numbers. In the Company's research of
this database the Company determined several Class II devices meet the Company's
criteria for submission. These devices are listed in the table below.
PRODUCT CODE CLASS DESCRIPTION REGULATION
------------ ----- ----------- ----------
IZG II System, X-ray, Photofluorographic 892.1730
JAB II System, X-ray, Fluoroscopic, Non-Image-I 892.1660
JAK II System, X-ray, Tomography, Computed 892.175
This is a broad range of devices with which to compare the Company's
device functionality. The FDA requires the manufacturer to submit an
application, whether it is a 510(k) or PMA submission. Upon receipt of the
submission, the FDA will respond within 30 to 45 days with their determination
of acceptance of the submission, questions and/or comments to the submission or
requests for more information.
All of the Company's current used rebuilt products are Class II
devices, FDA approved through OEM for marketing. Once approved, the FDA will not
require the manufacturer to resubmit an application or change the
classification. They may, however, request further information about the
product(s), manufacturer and GMP requirements. The devices currently sold by the
Company are not manufactured by the Company. OEC Medical Systems is the original
device manufacturer and responsible for the FDA submission of their original
device(s). Imaging3 remanufactures OEC Medical Systems devices, thus the Company
is not required to submit any FDA submission for these devices. In some
instances, the Company has performed modifications to these devices to improve
the devices functionality, and in these instances Imaging3 has submitted 510(k)
applications. These modifications are to existing devices with existing
classifications listed in the FDA database and cannot be reclassified. The FDA
database listing for current products is listed below:
PRODUCT CODE CLASS DESCRIPTION REGULATION
------------ ----- ----------- ----------
IZL II System, X-ray, Mobile 892.1720
As to the Company's new product and its potential for classification,
the FDA requires the Company, as the manufacturer, to submit an application in
whichever classification the Company chooses in the submission form it chooses,
meaning 510(k) or PMA application. The FDA reviews the submission and determines
whether the application is appropriately filed and in the correct submission
-13-
format. The criteria they use for determination on a 510(k) is SE, which is a
comparative analysis of the manufacturer's device in the submission with
existing devices already approved by the FDA. This is the purpose of the FDA's
Device Classification Database, giving manufacturer's products with approved
submissions and categories of devices to compare new device submissions. A new
type of device may not be found in the product classification database. If the
device is a high risk device (supports or sustains human life, is of substantial
importance in preventing impairment of human health, or presents a potential,
unreasonable risk of illness or injury) and has been found to be not
substantially equivalent ("NSE") to a Class I, II, or III (Class III requiring
510(k)), then a PMA application will be required.
If the FDA determines the new device must be classified as a Class III
device, the FDA may still allow the device submission to be a 510(k) submission.
Class III devices, which are equivalent to devices legally marketed before May
28, 1976 may be marketed through the pre-market notification (510(k)) process
until the FDA has published a requirement for manufacturers of that generic type
of device to submit pre-market approval data.
Class III devices are usually those that support or sustain human life,
are of substantial importance in preventing impairment of human health, or which
present a potential, unreasonable risk of illness or injury. Examples of Class
III devices which require a pre-market approval include replacement heart
valves, silicone gel-filled breast implants, and implanted cerebella
stimulators.
The Company's new product, the "Real-time 3D Imaging Device" is
expected to be submitted as Product Code "IZG," Device Class II, "System, X-ray,
Photofluorographic," Regulation Number 892.1730, since this is the closest
device description. The FDA may at its own choosing and determination wish to
reclassify this device as a Class III, which the Company believes is unlikely,
since the majority of the Company's device functions are similar to existing
products currently being marketed and as classified above.
If the FDA determines to classify this device as a Class III device a
PMA application must be filed. The PMA application is the most stringent type of
device marketing application required by the FDA. The applicant must receive FDA
approval of its PMA application prior to marketing the device. PMA approval is
based on a determination by the FDA that the PMA contains sufficient valid
scientific evidence to assure that the device is safe and effective for its
intended use(s). An approved PMA application is, in effect, a private license
granting the applicant (or owner) permission to market the device. The PMA
owner, however, can authorize use of its data by another.
The PMA applicant is usually the person who owns the rights, or
otherwise has authorized access, to the data and other information to be
submitted in support of FDA approval. This person may be an individual,
partnership, corporation, association, scientific or academic establishment,
government agency or organizational unit, or other legal entity. The applicant
is often the inventor/developer and ultimately the manufacturer.
FDA regulations provide 180 days to review the PMA application and make
a determination. In reality, the review time is normally longer. Before
approving or denying a PMA application, the appropriate FDA advisory committee
may review the PMA application at a public meeting and provide the FDA with the
committee's recommendation on whether or not the FDA should approve the
submission. After the FDA notifies the applicant that the PMA application has
been approved or denied, a notice is published on the Internet (1) announcing
the data on which the decision is based, and (2) providing interested persons an
opportunity to petition the FDA within 30 days for reconsideration of the
decision.
A PMA application is a scientific, regulatory documentation to the FDA
to demonstrate the safety and effectiveness of the Class III device. There are
administrative elements of a PMA application, but good science and scientific
writing is a key to the approval of a PMA application. If a PMA application
lacks elements listed in the administrative checklist, the FDA will refuse to
accept a PMA application and will not proceed with the in-depth review of
scientific and clinical data. If a PMA application lacks valid clinical
information and scientific analysis based on sound scientific reasoning, it will
delay the FDA's review and approval. PMA applications that are incomplete,
inaccurate, inconsistent, omit critical information, and are poorly organized
have resulted in delays in consideration.
-14-
Three categories of the PMA application are very important:
TECHNICAL SECTIONS. The technical sections containing data and
information should allow the FDA to determine whether to approve or disapprove
the application. These sections are usually divided into non-clinical laboratory
studies and clinical investigations.
NON-CLINICAL LABORATORY STUDIES' SECTION. The non-clinical laboratory
studies' section includes information on microbiology, toxicology, immunology,
biocompatibility, stress, wear, shelf life, and other laboratory or animal
tests. Non-clinical studies for safety evaluation must be conducted in
compliance with 21CFR Part 58 (Good Laboratory Practice for Nonclinical
Laboratory Studies).
CLINICAL INVESTIGATIONS SECTION. The clinical investigations section
includes study protocols, safety and effectiveness data, adverse reactions and
complications, device failures and replacements, patient information, patient
complaints, tabulations of data from all individual subjects, results of
statistical analyses, and any other information from the clinical
investigations. Any investigation conducted under an Investigational Device
Exemption ("IDE") must be identified as such.
Imaging3, Inc. is listed with the FDA as a new device manufacturer, its
Registration Number is 20300565, and its Owner Operator Number is 9023393.
Though the Company does not currently manufacture new devices, the FDA requires
the Company's registration as a remanufacturer. Imaging3 is subject to the FDA's
Radiological Health Program, under the Center for Devices Radiological Health
("CDRH") division of the FDA.
The Company must be in compliance with Good Manufactures Practices
("GMP"), Quality Control ("QC") and Medical Device Reporting ("MDR"). The FDA
may from time to time, usually every 2 to 3 years, audit the Company for
compliance. In these audits the FDA reviews documents, interviews management and
reviews all procedures.
The current GMP requirements set forth in the Quality System ("QS")
regulation are promulgated under Section 520 of the Federal Food, Drug and
Cosmetic ("FFD&C") Act. They require that domestic or foreign manufacturers have
a quality system for the design, manufacture, packaging, labeling, storage,
installation, and servicing of finished medical devices intended for commercial
distribution in the United States. The regulation requires that various
specifications and controls be established for devices; that devices be designed
under a quality system to meet these specifications; that devices be
manufactured under a quality system; that finished devices meet these
specifications; that devices be correctly installed, checked and serviced; that
quality data be analyzed to identify and correct quality problems; and that
complaints be processed. Thus, the QS regulation helps assure that medical
devices are safe and effective for their intended use. The FDA monitors device
problem data and inspects the operations and records of device developers and
manufacturers to determine compliance with the GMP requirements in the QS
regulation.
The MDR regulation provides a mechanism for the FDA and manufacturers
to identify and monitor significant adverse events involving medical devices.
The goals of the regulation are to detect and correct problems in a timely
manner. Although the requirements of the regulation can be enforced through
legal sanctions authorized by the FFD&C Act, the FDA relies on the goodwill and
cooperation of all affected groups to accomplish the objectives of the
regulation.
The statutory authority for the MDR regulation is Section 519(a) of the
FFD&C Act as amended by the Safe Medical Devices Act ("SMDA") of 1990. The SMDA
requires user facilities to report:
o Device-related deaths to the FDA and the device manufacturer;
o Device-related serious injuries to the manufacturer, or to the
FDA if the manufacturer is not known; and
o Submit to the FDA on an annual basis a summary of all reports
submitted during that period.
When a problem arises with a product regulated by the FDA, the agency
can take a number of actions to protect the public health. Initially, the agency
works with the manufacturer to correct the problem voluntarily. If that fails,
legal remedies include asking the manufacturer to recall a product, having
-15-
federal marshals seize products if a voluntary recall is not done, and detaining
imports at the port of entry until problems are corrected. If warranted, the FDA
can ask the courts to issue injunctions or prosecute those that deliberately
violate the law. When warranted, criminal penalties including prison sentences
are sought.
Once on the market, there are post-market surveillance controls with
which a manufacturer must comply. These requirements include the Quality Systems
(also known as Good Manufacturing Practices), and Medical Device Reporting
regulations. The QS regulation is a quality assurance requirement that covers
the design, packaging, labeling and manufacturing of a medical device. The MDR
regulation is an adverse event reporting program.
The Company is also required to report under the MDR requirements,
which are for injuries and deaths, of which the Company has had none since its
registration.
For all devices manufactured or remanufactured by the Company, the FDA
may request updated information regarding any device with a previously approved
510(k) or PMA submission. If any substantial changes are made to existing
approved devices, the FDA may require a 510(k) supplement submission, which, in
most cases, does not require the manufacturer to delay production or marketing
of the modified device. As with all applications, this determination lies
entirely with the FDA.
Imaging3's last audit with the FDA was in 2000 and the Company expects
a new audit to take place shortly after its new device is submitted in a 510(k)
application.
In an audit performed by the FDA, the Company's records for service and
repair, quality control, device labeling and serial number tracking are
reviewed. If the FDA finds issues of non-compliance they issue a letter
requesting correction, giving the Company 30 days to correct the non-compliance.
Extensions can be requested to reply, but most issues, if any, can be handled in
a 30-day period.
Since the Company's registration with the FDA in 1995, it has had only
one audit. The Company did not receive any notice or correspondence of
non-compliance due to that audit. The Company received only one suggestion
regarding its record keeping process, which addressed preventive maintenance
forms being included in all customer files for which the Company provides
service. Imaging3, to its knowledge, has been in good standing with the FDA,
receiving no actions or correspondence.
The Company is also licensed with the State of California as a Device
Manufacturer, license number 63620. Both require annual renewal registration
updates, listing any new products being manufactured or marketed. The State of
California currently follows the FDA standards and requirements.
The Company has had no instances of non-compliance with either the FDA
or the State of California. The consequences of non-compliance range from a
letter stating non-compliance and a period to cure, suspension of manufacturing
and distribution, to fines and suspension of operations.
Imaging3 estimates it will obtain FDA approval this year, although
there is no assurance that this approval will be granted when expected. This
estimate for FDA approval is based on Mr. Janes' past experience with 510(k)
submissions. All of the Company's marketing efforts for the new device must
start from the date the FDA approves the device to be marketed. Since the
Company is already registered with the FDA as a new device manufacturer and has
been through an audit performed by the FDA, the FDA is already familiar with the
Company and its processes. The FDA may wish to obtain updated information about
the Company and may require more time to process this 510(k) submission than
estimated.
In two other 510(k) submissions by Mr. Janes, the process lasted
approximately 120 days, however, these systems were not as complex as the
Company's current submission. Management believes Mr. Janes' familiarity with
the process and experience with 510(k) submissions will help the Company.
Because of Mr. Janes experience and expertise, the Company does not have to seek
outside professional consulting services in this process as most companies must,
enabling the Company to avoid additional expense and delays. Management believes
that having a person in-house having the experience with the process,
understanding 510(k) submissions, and direct access to all engineering and
-16-
proprietary knowledge, is a distinct advantage and should allow the Company to
effectively navigate the FDA review process.
To enter the European market, the Company's products as well as its
quality assurance systems will have to be approved and certified by an
authorized certifying body such as Technischer Uberwachungsverein; English
translation: Technical Inspection Association ("TUV"), Underwriters Laboratories
("UL") or British Standards Institute ("BSI"). In the future, the Company may
plan to go through this process as a part of its overall enhancement of the
quality systems.
TUV, UL and BSI are all standards testing companies assisting
manufactures to comply with published standards, regulatory standards and laws
necessary for marketing devices throughout the world and the United States.
These three companies provide the UL and CE (the European equivalent of the UL
mark in the United States) marks, demonstrating compliance with the standards
and laws.
TUV is a Nationally Recognized Testing Laboratory ("NRTL") and Safety
Checklist Contractors ("SCC") certified, providing a full suite of services,
including CE Marking assistance, electromagnetic compatibility ("EMC"),
electrical & mechanical testing, and many additional global conformity
assessment services that help companies gain product compliance to enter
individual country markets.
UL is an independent, not-for-profit product-safety testing and
certification organization. They have tested products for public safety for more
than a century. Since their founding in 1894, they have held the undisputed
reputation as a leader in product- safety testing and certification within the
United States. Management believes that by building on their household name in
the United States, UL is becoming one of the most recognized, reputable
conformity assessment providers in the world. Today, their services extend to
helping companies achieve global acceptance, whether for an electrical device, a
programmable system, or an organization's quality process.
BSI exists to help industry develop new and better products and to make
sure that products meet current and future laws and regulations. It tests
products from medical devices to fire extinguishers to lamps for football
stadiums against published standards.
Far East, Middle East, Eastern European, and Latin American markets
have different regulatory requirements. The Company intends to comply with
applicable requirements if and when it decides to enter those markets.
OTHER GOVERNMENT REGULATIONS
The delivery of health care services has become one of the most highly
regulated of professional and business endeavors in the United States. Both the
federal government and individual state governments are responsible for
overseeing the activities of individuals and businesses engaged in the delivery
of health care services. Federal law and regulations are based primarily upon
the Medicare and Medicaid programs. Each of these programs is financed, at least
in part, with federal funds. State jurisdiction is based upon the state's
interest in regulating the quality of health care in the state, regardless of
the source of payment. The Company believes that it is materially complying with
applicable laws, however, the Company has not received or applied for a legal
opinion from counsel or from any federal or state judicial or regulatory
authority. Additionally, many aspects of the Company's business have not been
the subject of state or federal regulatory interpretation. The laws applicable
to the Company are subject to evolving interpretations. If the Company's
operations are reviewed by a government authority, it may receive a
determination that could be adverse to the Company. Furthermore, laws that are
applicable to the Company may be amended in a manner that could adversely affect
the Company.
Only a small portion of the Company's revenues come through a
government system. Virtually all of the Company's revenues are obtained from
sales and service to vendees who pay the Company directly. The Company is not
subject to Medicare, Medicaid, or any other federally funded health care
program.
-17-
ITEM 2. PROPERTIES
-------------------
The Company currently maintains its administrative offices and
production facility at 3200 W. Valhalla Drive, Burbank, California 91505. This
facility contains 10,600 square feet of space, and the Company currently pays
rent at a rate of $1.05 per square foot, gross.
ITEM 3. LEGAL PROCEEDINGS
-------------------------
The Company may be involved in legal actions and claims arising in the
ordinary course of business, from time to time, none of which at this time is
considered to be material to the Company's business or financial condition.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-----------------------------------------------------------
No matters were submitted during the fourth quarter of the fiscal year
covered by this report to a vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
----------------------------------------------------------------------------
COMMON STOCK
The Company's Common Stock trades on the OTC Bulletin Board Market
under the symbol "IMGG." 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, 2008 HIGH LOW
-------------------------------------- ------ -------
First Quarter ended March 31, 2008 $0.12 $0.12
Second Quarter ended June 30, 2008 $0.12 $0.10
Third Quarter ended September 30, 2008 $0.078 $0.078
Fourth Quarter ended December 31, 2008 $0.069 $0.055
YEAR ENDED DECEMBER 31, 2009 HIGH LOW
-------------------------------------- ------ -------
First Quarter ended March 31, 2009 $0.065 $0.055
Second Quarter ended June 30, 2009 $0.045 $0.04
Third Quarter ended September 30, 2009 $0.05799 $0.048
Fourth Quarter ended December 31, 2009 $0.76 $0.715
The above quotations reflect inter-dealer prices, without retail
markup, mark-down, or commission and may not necessarily represent actual
transactions.
As of March 29, 2010, there were approximately 790 record holders of
the Company's Common Stock, not including shares held in "street name" in
brokerage accounts which is unknown. As of March 29, 2010, there were
approximately 375,709,898 shares of Common Stock outstanding on record.
DIVIDENDS
The Company has not declared or paid any cash dividends on its Common
Stock and does not anticipate paying dividends for the foreseeable future.
EQUITY COMPENSATION PLAN INFORMATION
The Company has 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 the
-18-
Company. In the event the Company establishes the stock option plan, the Company
expects to authorize approximately 16,000,000 shares or more for future
issuance.
WARRANTS
As of December 31, 2009, the Company had no warrants outstanding.
ITEM 6. SELECTED FINANCIAL DATA.
-------------------------------
Not applicable.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION
--------------------------------------------------------------------------------
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 ("Imaging3," "we," "us," or the "Company") 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 the Company's actual results
to be materially different from any future results expressed or implied by the
Company in those statements. The most important facts that could prevent the
Company from achieving its stated goals include, but are not limited to, the
following:
(a) volatility or decline of the Company's stock price;
(b) potential fluctuation in quarterly results;
(c) failure of the Company 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 its
business plans;
(e) failure to commercialize the Company's technology or
to make sales;
(f) changes in demand for the Company's products and
services;
(g) rapid and significant changes in markets;
(h) litigation with or legal claims and allegations by
outside parties, causing the Company to incur
substantial losses and expenses;
(i) insufficient revenues to cover operating costs;
(j) failure to obtain FDA approval for the Company's new
medical scanning device, which is still in its
prototype stage.
There is no assurance 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.
-19-
Additional dilution in outstanding stock ownership may be incurred due to the
issuance of more shares, warrants, and stock options, 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. The Company cautions 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 the Company or persons acting on its behalf may make. The
Company does 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
Our efforts have been to market our refurbished equipment. The sales
and revenues from service and parts are either from extended warranty purchases
at the time of purchase of the refurbished equipment, or service contracts and
time and material revenue realized upon warranty expiration, the majority of
which is realized one year from equipment purchase as warranties expire.
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. These funds are accrued over a one year period
and revenue is recognized quarterly.
Our sales effort through direct mail, broadcast facsimile and broadcast
email to thousands of potential customers throughout the United States generates
leads of potential customers desiring to purchase equipment either immediately
or in the course of one year. This lead generation through direct mail and
broadcast facsimiles and email will continue on a quarterly basis with the goal
of increasing the total number of our leads for our sales staff. Management
expects that the marketing program will also eventually help stabilize the
amount of refurbished equipment sold on a monthly basis, since the carry-over of
leads not looking for immediate purchase will overlap with the immediate sales
leads. The greater the number of leads generated, whether immediate or long
term, the greater the opportunity to eventually create a consistent number of
sales.
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.
REVENUE RECOGNITION. We recognize revenue in accordance with the
Securities and Exchange Commission ("SEC") Staff Accounting Bulletin No. 104,
"Revenue Recognition in Financial Statements" ("SAB 104"). We recognize revenue
upon shipment, provided that evidence of an arrangement exists, title and risk
of loss have passed to the customer, fees are fixed or determinable, and
collection of the related receivable is reasonably assured. We record revenue
net of estimated product returns, which is based upon our return policy, sales
agreements, management estimates of potential future product returns related to
-20-
current period revenue, current economic trends, changes in customer composition
and historical experience. We accrue for warranty costs, sales returns, and
other allowances based on our experience. Generally, we extend credit to our
customers and do not require collateral. We perform ongoing credit evaluations
of our customers and historic credit losses have been within our expectations.
We do not ship a product until we have either a purchase agreement or rental
agreement signed by the customer with a payment arrangement. This is a critical
policy, because we want our accounting to show only sales that are "final" with
a payment arrangement. We do not make consignment sales or inventory sales
subject to a "buy back" or return arrangement from customers. 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. These funds are accrued over a one year period and revenue is
recognized quarterly.
PROVISION FOR SALES RETURNS, ALLOWANCES AND BAD DEBTS. The Company
maintains a provision for sales allowances, returns and bad debts. Sales returns
and allowances result from equipment damaged in delivery or customer
dissatisfaction, as provided by agreement. The provision is provided for by
reducing gross revenue by a portion of the amount invoiced during the relevant
period. The amount of the reduction is estimated based on historical experience.
RESERVE FOR OBSOLETE/EXCESS INVENTORY. Inventories are stated at the
lower of cost or market. We regularly review our inventories and, when required,
will record a provision for excess and obsolete inventory based on factors that
may impact the realizable value of our inventory including, but not limited to,
technological changes, market demand, regulatory requirements and significant
changes in our cost structure. If ultimate usage varies significantly from
expected usage, or other factors arise that are significantly different than
those anticipated by management, inventory write-downs or increases in reserves
may be required.
The fire in 2002 incinerated our inventory, so we have not had to deal
with significant amounts of obsolete inventory since that time. Our procedure is
now to maintain only limited inventory, based on our experience in service and
repair, necessary for current service and repair contracts or orders anticipated
within the following 60 days. We have supply relationships with long term
suppliers to provide additional parts on an as needed, prompt basis for the vast
majority of repair and service parts, so obsolescence is no longer a factor in
our business. We have not recorded any material amounts as charges to
obsolescence since the fire in 2002 destroyed our warehouse.
Rental income is recognized when earned and expenses are recognized
when incurred. The rental periods vary based on customer's needs ranging from
five days to six months. An operating lease agreement is utilized. The rental
revenues were insignificant in the twelve month periods ended December 31, 2009
and 2008. Written rental agreements are used in all instances.
OTHER ACCOUNTING FACTORS
The effects of inflation have not had a material impact on our
operation, nor are they expected to in the immediate future.
Although we are unaware of any major seasonal aspect that would have a
material effect on the financial condition or results of operation, the first
quarter of each fiscal year is always a financial concern due to slow
collections after the holidays.
The deposits that are shown in the financials are for pending sales of
existing products and not any new patented product. These are deposits received
from our customers for sales of equipment and services and are only removed as
deposits upon completion of the sale. If for any reason a customer order is
cancelled, the deposit would be returned as stated in the terms of sale, minus a
restocking fee.
No depositor is a related party of any officer or employee of Imaging3,
Inc.
Our terms of deposit typically are 50% down with the balance of the
sale price due upon delivery.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2009 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 2008.
We had revenues for the year ended December 31, 2009 of $1,364,892 as
compared to $1,755,754 for the year ended December 31, 2008, which represented a
28% decrease. The decrease in sales was attributed directly to a decrease in
equipment sales for this period. For the year ended December 31, 2009, our
-21-
remanufactured equipment sales were $767,289 as compared to $1,116,000 for the
year ended December 31, 2008, representing an decrease in equipment sales of
$348,711 or 45%. Our service and parts sales for the year ended December 31,
2008 were $153,087 as compared to $169,034 for the year ended December 31, 2009,
which is an increase of $15,947 or 10%.
Our rental revenue has been a little more than 1% of our total revenue
in the past two years and is recognized over the term of the lease agreement.
Rental revenues are only deemed earned as collected. In February 2002, a fire
destroyed our manufacturing facility and headquarters building along with our
entire inventory, all office equipment and internal infrastructure. Rebuilding
the Company's inventory and entire infrastructure continues to this day. The
amount of insurance received from this fire was approximately $2,400,000, which
was inadequate to replace inventory and rebuild the necessary assets and
infrastructure required to be rebuilt over eight years of prior business.
Several employees were let go and offices in San Diego, Arizona, Washington and
Florida were closed, which lowered administrative expenses but negatively
impacted revenue and income as well. Although the Company has made significant
strides, it continues on the path of rebuilding.
Our cost of revenue was $700,248 for the year ended December 31, 2009
as compared to $662,232 for the year ended December 31, 2008, an increase of
$38,016 or 6%. This increase resulted directly from increased costs for
equipment, parts, sales and services. The Company's gross profit margin for the
year ended December 31, 2009 was $664,644 as compared to $1,093,521 for the year
ended December 31, 2008, a 64% decrease. This is due to decreased revenue and
increased costs in 2009. The Company's total operating expenses increased in
2009 to $2,592,358 for the year as opposed to $2,278,720 for the year ended
December 31, 2008, an increase of 13% due to increased general and
administrative expenses. Outside consulting expenses decreased by $176,696.
Overall professional fees have increased by $12,621 or 30%. The increase in auto
expense was caused primarily by the increased impact of the overall gasoline
price increases for the year. Travel and entertainment expenses decreased by
$11,416. The taxes account was impacted by other taxes that decreased as
evidenced by decreased sales to clients in the State of California, which
reduced taxes owed to the State Board of Equalization and to the County of Los
Angeles. The net overall decrease in utilities to the Burbank Department of
Water and Power was a result of satisfying most of the debt owed to the City,
which mistakenly read only one meter rather than two meters. Once the City
realized its mistake, it quickly assessed the Company the difference for the
period and arranged a workout with an advance for payment of the difference. Our
net loss for the fiscal year ending December 31, 2009 was $1,912,064 as compared
to $906,928 for the fiscal year ending December 31, 2008. This increased loss is
attributed directly to decreased sales, increased cost of goods sold and higher
operating cost.
At December 31, 2009 the Company had a balance due to the Chief
Executive Officer of the Company amounting to $50,766 for the amount borrowed by
the Company. This amount is due on demand, secured and interest free.
The Company filed its tax return for 2000 as an S Corporation and
changed its status to a C Corporation effective August 1, 2001. Under current
accounting guidance, deferred income taxes are reported using the liability
method. Deferred tax assets are recognized for deductible temporary differences
and deferred tax liabilities are recognized for taxable temporary differences.
We have recorded insignificant liabilities of $800 per year for income taxes due
to adjustments as a result of the conversion from an S corporation to a
Corporation for tax purposes. The provision for income taxes was recorded for
the state minimum tax of $800 imposed on corporations. (See Note 7 in financial
statements for year ended December 31, 2009.)
We expect the trend of operating losses by the Company to continue into
the future at the current or greater rate as we spend money on product
development and marketing. There is no assurance we can achieve profitability.
We do not expect litigation against us to expand as evidenced by the significant
drop in activity in this area, and believe litigation is on a decreasing trend,
although we can give no assurances in relation to future litigation.
In 2009, the Company spent and recorded $74,693 for research and
development of its patented technology, which includes software design,
mechanical design and the manufacturing of the prototype. Costs for individuals
employed by Imaging3 are absorbed in normal operating expenses and are not
separated into different categories at this time for simplicity.
-22-
LIQUIDITY AND CAPITAL RESOURCES
Our total current assets increased from $487,484 as of December 31,
2008 to $1,134,654 as of December 31, 2009, a difference of $647,170 or 132%.
The cash account as of December 31, 2009 was $633,443, an increase of $73,447
compared to December 31, 2008. This is due in large part to the increase in the
sale of Company shares during this period.
Our total current liabilities decreased to $2,803,127 as of December
31, 2009 from $3,465,597 as of December 31, 2008. This decrease is due in large
part to the payment of accrued litigation settlements as well as the liquidation
of accounts payable and payments of money owed to the Company's Chief Executive
Officer.
During the year ended December 31, 2009, the Company used $1,890,414 of
cash for operating activities, as compared to $1,557,399 during the year ended
December 31, 2008. Cash provided by financing activities during the year ended
December 31, 2009 was $2,450,410, as compared to $1,651,544 during the year
ended December 31, 2008.
GOING CONCERN QUALIFICATION
The Company has incurred significant losses from operations, and such
losses are expected to continue. The Company's auditors have included a "Going
Concern Qualification" in their report for the year ended December 31, 2009. In
addition, the Company has limited working capital. The foregoing raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans include seeking additional capital and/or debt financing.
There is no 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 the Company. 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 the Company
to raise capital.
OFF-BALANCE SHEET ARRANGEMENTS
None.
-23-
IMAGING3, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
CONTENTS
Reports of Independent Registered Public Accounting Firms .................................................. 25
Balance Sheets as of December 31, 2009 and 2008............................................................. 27
Statements of Operations for the years ended December 31, 2009 and 2008..................................... 28
Statement of Changes in Stockholders' Deficit for the years ended December 31, 2009 and 2008................ 29
Statements of Cash Flows for the years ended December 31, 2009 and 2008 .................................... 30
Notes to Financial Statements .............................................................................. 31-40
-24-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Imaging3, Inc.
Burbank, California
We have audited the accompanying balance sheet of Imaging3, Inc. (the "Company")
as of December 31, 2009 and the related statements of operations, stockholders'
deficit and cash flows for the year then ended. The financial statements for the
year ended December 31, 2008 were audited by other auditors whose report
expressed an unqualified opinion on those statements. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal control over
financial reporting. Our audit included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles
used and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Imaging3, Inc. as of December
31, 2009 and the results of its operations and cash flows for the period
described above in conformity with accounting principles generally accepted in
the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses from operations and maintains a working capital deficit. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. These financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that may result should the Company be unable
to continue as a going concern. See note 10 to the financial statements for
further information regarding this uncertainty.
/s/ M&K CPAS, PLLC
www.mkacpas.com
Houston, Texas
March 26, 2010
-25-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Imaging3, Inc.
We have audited the accompanying balance sheet of Imaging3, Inc. as of December
31, 2008, the related statements of operations, stockholders' equity, and cash
flows for the year ended December 31, 2008. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Imaging3, Inc. as of December
31, 2008 and the results of its operations and its cash flows for the year ended
December 31, 2008, in conformity with accounting principles generally accepted
in the United States of America.
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 liquidation of liabilities in the normal course of
business. The Company has deficit accumulated at December 31, 2008 of
$10,687,106 including a net loss of $906,928 for the year ended December 31,
2008. These factors as discussed in Note 10 to the financial statements, raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 10. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Kabani & Company, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Los Angeles, California
February 24, 2009
-26-
IMAGING3, INC.
BALANCE SHEETS
AT DECEMBER 31, 2009 AND DECEMBER 31, 2008
2009 2008
---------------- ---------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 633,443 $ 73,447
Accounts receivable, net 220,938 64,149
Inventory, net 249,996 328,740
Prepaid expenses 30,277 21,148
---------------- ---------------
Total current assets 1,134,654 487,484
PROPERTY AND EQUIPMENT, NET 26,852 23,755
OTHER ASSETS 31,024 31,024
---------------- ---------------
Total assets $ 1,192,530 $ 542,263
================ ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 137,145 $ 175,329
Accounts payable-related party 16,092 -
Accrued expenses 2,253,079 2,270,638
Deferred revenue 144,408 119,052
Equipment deposits 201,637 116,368
Due to an officer 50,766 784,210
---------------- ---------------
Total current liabilities 2,803,127 3,465,597
STOCKHOLDERS' DEFICIT:
Common stock, no par value; authorized shares 500,000,000;
375,709,898 and 249,924,052 issued and outstanding
at December 31, 2009 and December 31, 2008, respectively 10,988,573 7,763,772
Accumulated deficit (12,599,170) (10,687,106)
---------------- ---------------
Total stockholders' deficit (1,610,597) (2,923,334)
---------------- ---------------
Total liabilities and stockholders' deficit $ 1,192,530 $ 542,263
================ ===============
The accompanying notes form an integral part of these financial statements
-27-
IMAGING3, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2009 2008
-------------------- -------------------
NET REVENUES $ 1,364,892 $ 1,755,754
COST OF GOODS SOLD 700,248 662,232
-------------------- -------------------
GROSS PROFIT 664,644 1,093,522
OPERATING EXPENSES
General and administrative expenses 2,509,257 2,278,720
Impairment 83,101 -
-------------------- -------------------
Total operating expense 2,592,358 2,278,720
-------------------- -------------------
LOSS FROM OPERATIONS (1,927,714) (1,185,198)
OTHER INCOME (EXPENSE):
Interest expense (52,366) (51,790)
Other income 6,816 330,860
Gain on legal settlement 62,000 -
-------------------- -------------------
Total other income (expense) 16,450 279,070
-------------------- -------------------
LOSS BEFORE INCOME TAX (1,911,264) (906,128)
PROVISION FOR INCOME TAXES 800 800
-------------------- -------------------
NET LOSS $ (1,912,064) $ (906,928)
==================== ===================
BASIC AND DILUTED NET LOSS PER SHARE $ 0.01 $ -
==================== ===================
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 294,511,622 243,552,012
==================== ===================
The accompanying notes form an integral part of these financial statements
-28-
IMAGING3, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER, 2009 AND 2008
COMMON STOCK UNAMORTIZED TOTAL
NUMBER OF SUBSCRIPTION CONSULTING ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT RECEIVABLES FEES DEFICIT DEFICIT
---------------- -------------- ------------- ----------- ---------------- ---------------
Balance on January 1, 2008 225,562,085 $ 6,381,316 $ - $ (18,750) $ (9,780,178) $ (3,417,611)
Common stock issued for cash 22,943,634 1,259,072 - - - 1,259,072
Common stock issued for services 1,418,333 123,383 - 18,750 - 142,133
Net loss for December 31, 2008 - - - - (906,928) (906,928)
---------------- -------------- -------- ---- ----------- ---------------- ---------------
Balance on December 31, 2008 249,924,052 $ 7,763,771 $ - $ - $ (10,687,106) $ (2,923,335)
================ ============== ======== ==== =========== ================ ===============
Common stock issued for cash 119,934,027 3,197,476 - - - 3,197,476
Common stock offering costs - (113,622) - - - (113,622)
Common stock issued for services 687,500 34,375 - - - 34,375
Common stock issued for debt conversion 5,164,319 106,573 - - - 106,573
Net loss for December 31, 2009 - - - - (1,912,064) (1,912,064)
---------------- -------------- -------- ---- ----------- ---------------- ---------------
Balance on December 31, 2009 375,709,898 $ 10,988,573 $ - $ - $ (12,599,170) $ (1,610,597)
================ ============== ======== ==== =========== ================ ===============
The accompanying notes form an integral part of these financial statements
-29-
IMAGING3, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2009 AND 2008
2009 2008
------------------ ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,912,064) $ (906,928)
Adjustments to reconcile net loss to net cash used for
operating activities:
Bad debt expense - 15,000
Depreciation and amortization (3,098) 17,910
Common stock issued for services 34,375 142,133
Gain on settlement of debt (62,000) -
Loss on conversion of debt 6,573 -
Impairment of inventory 83,101 -
(Increase) / decrease in current assets:
Accounts receivable (156,789) (21,769)
Inventory (4,357) (164,987)
Prepaid expenses and other assets (9,129) (524)
Increase / (decrease) in current liabilities:
Accounts payable (22,092) (38,624)
Accrued expenses 44,441 (452,425)
Deferred revenue 25,356 12,347
Equipment deposits 85,269 (159,532)
------------------ ------------------
Net cash used for operating activities (1,890,414) (1,557,399)
------------------ ------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment - (22,992)
------------------ ------------------
Net cash used for investing activities - (22,992)
------------------ ------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts from / (payments to) officer, net (633,444) 392,472
Proceeds from issuance of common stock, net 3,083,854 1,259,072
------------------ ------------------
Net cash provided by financing activities 2,450,410 1,651,544
------------------ ------------------
NET INCREASE IN CASH & CASH EQUIVALENTS 559,996 71,154
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 73,447 2,293
------------------ ------------------
CASH & CASH EQUIVALENTS, ENDING BALANCE $ 633,443 $ 73,447
================== ==================
The accompanying notes form an integral part of these financial statements
-30-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008 and 2009
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Imaging3, Inc. (the "Company") is a California corporation, incorporated on
October 29, 1993 as Imaging Services, Inc. The Company filed a certificate of
amendment of articles of incorporation to change its name to Imaging3, Inc. on
August 20, 2002.
The Company's primary business is production and sale of medical equipment,
parts and services to hospitals, surgery centers, research labs, physician
offices and veterinarians. Equipment sales include new c-arms, c-arms tables,
remanufactured c-arms, used c-arm and surgical tables. Part sales comprise of
new or renewed replacement parts for c-arms.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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 generally accepted
accounting principles, 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, 2009 or 2008.
ACCOUNTS RECEIVABLE
The Company's customer base is geographically dispersed. The Company maintains
reserves for potential credit losses on accounts receivable. Management reviews
the composition of accounts receivable and analyzes historical bad debts,
customer concentrations, customer credit worthiness, current economic trends and
changes in customer payment patterns to evaluate the adequacy of these reserves.
Reserves are recorded primarily on a specific identification basis.
INVENTORIES
Inventories, comprising of finished goods and parts are stated at the lower of
cost (first-in, first-out method) or market. Management compares the cost of
inventories with the market value and allowance is made for writing down the
inventories to their market value, if lower. For the yearend December 31, 2009,
the Company experienced an impairment of $83,101 of loaner machine inventory.
DUE TO OFFICER
At December 31, 2008 and 2009, the Company had balances due to the Chief
Executive Officer of the Company of $784,210 and $50,766, respectively, for
amounts owed during those years. The amount is due on demand, interest free and
is secured by the assets of the Company. Interest is not imputed since a portion
of this amount represents unpaid salaries.
-31-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008 and 2009
PROPERTY & EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expenses as incurred and additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method for substantially all assets with estimated lives of three to eight
years.
IMPAIRMENT OF LONG-LIVED ASSETS
Current accounting literature requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable through the estimated
undiscounted cash flows expected to result from the use and eventual disposition
of the assets. Whenever any such impairment exists, an impairment loss will be
recognized for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets, including property, plant and equipment and
intangible assets subject to periodic amortization, for recoverability at least
annually or more frequently upon the occurrence of an event or when
circumstances indicate that the net carrying amount is greater than its fair
value. Assets are grouped and evaluated at the lowest level for their
identifiable cash flows that are largely independent of the cash flows of other
groups of assets. The Company considers historical performance and future
estimated results in its evaluation of potential impairment and then compares
the carrying amount of the asset to the future estimated cash flows expected to
result from the use of the asset. If the carrying amount of the asset exceeds
estimated expected undiscounted future cash flows, the Company measures the
amount of impairment by comparing the carrying amount of the asset to its fair
value. The estimation of fair value is generally measured by discounting
expected future cash flows at the rate the Company utilizes to evaluate
potential investments. The Company estimates fair value based on the information
available in making whatever estimates, judgments and projections are considered
necessary. There was no impairment of long-lived assets in the years ended
December 31, 2009 and 2008.
EQUIPMENT DEPOSITS
Equipment deposits represent amounts received from customers against future
sales of goods since the Company recognizes revenue upon shipment of goods.
These deposits are applied to the invoices when the equipment is shipped to the
customers. The balances at December 31, 2008 and 2009 were $116,368 and
$201,637, respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS
On January 1, 2008, the Company adopted a new standard related to the accounting
for financial assets and financial liabilities and items that are recognized or
disclosed at fair value in the financial statements on a recurring basis, at
least annually. This standard provides a single definition of fair value and a
common framework for measuring fair value as well as new disclosure requirements
for fair value measurements used in financial statements. Fair value
measurements are based upon the exit price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants exclusive of any transaction costs, and are determined by either
the principal market or the most advantageous market. The principal market is
the market with the greatest level of activity and volume for the asset or
liability. Absent a principal market to measure fair value, the Company would
use the most advantageous market, which is the market that the Company would
receive the highest selling price for the asset or pay the lowest price to
settle the liability, after considering transaction costs. However, when using
the most advantageous market, transaction costs are only considered to determine
which market is the most advantageous and these costs are then excluded when
applying a fair value measurement. The adoption of this standard did not have a
material effect on the Company's financial position, results of operations or
cash flows.
On January 1, 2009, the Company adopted an accounting standard for applying fair
value measurements to certain assets, liabilities and transactions that are
periodically measured at fair value. The adoption did not have a material effect
on the Company's financial position, results of operations or cash flows.
-32-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008 and 2009
In August 2009, the FASB issued an amendment to the accounting standards related
to the measurement of liabilities that are routinely recognized or disclosed at
fair value. This standard clarifies how a company should measure the fair value
of liabilities, and that restrictions preventing the transfer of a liability
should not be considered as a factor in the measurement of liabilities within
the scope of this standard. This standard became effective for the Company on
October 1, 2009. The adoption of this standard did not have a material impact on
the Company's financial statements.
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: Quoted prices in active markets for identical assets or
liabilities.
Level 2: Quoted 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 active markets.
Level 3: Valuations derived from valuation techniques in which one or
more significant inputs are unobservable.
REVENUE RECOGNITION
The Company recognizes its revenue in accordance with the Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin No. 104, "Revenue
Recognition in Financial Statements" ("SAB 104"). SAB 104 revises or rescinds
portions of the interpretative guidance included in Topic 13 of the codification
of staff accounting bulletins in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations. Revenue is recognized upon shipment, provided that
evidence of an arrangement exists, title and risk of loss have passed to the
customer, fees are fixed or determinable and collection of the related
receivable is reasonably assured. Revenue is recorded net of estimated product
returns, which is based upon the Company's return policy, sales agreements,
management estimates of potential future product returns related to current
period revenue, current economic trends, changes in customer composition and
historical experience. The Company accrues for warranty costs, sales returns,
and other allowances based on its experience. Generally, the Company extends
credit to its customers and does not require collateral. The Company performs
ongoing credit evaluations of its customers and historic credit losses have been
within management's expectations and has a revenue receivables policy for
service and warranty contracts. Equipment sales usually have a one year warranty
of parts and service. After a one year period, the Company contacts the buyer to
initiate the sale of a new warranty contract for one year. These funds are
accrued over a one year period and revenue is recognized quarterly.
STOCK-BASED COMPENSATION
The Company records stock-based compensation as a charge to earnings net of the
estimated impact of forfeited awards. As such, the Company recognizes
stock-based compensation cost only for those stock-based awards that are
estimated to ultimately vest over their requisite service period, based on the
vesting provisions of the individual grants. The cumulative effect on current
and prior periods of a change in the estimated forfeiture rate is recognized as
compensation cost in earnings in the period of the revision. The terms of the
Company's performance share unit grants allow the recipients of such awards to
earn a variable number of shares based on the achievement of the performance
goals specified in the awards. For performance share unit awards granted prior
to 2008, the actual amount of any stock award earned is based on the Company's
earnings per share growth as measured in accordance with its Amended and
Restated Employee Long-Term Incentive Plan ("ELTIP") for the performance period
compared to that of a peer group of companies. Beginning with performance share
unit awards granted in 2008, the performance measure for these awards will be
based on the compound annual growth rate of the Company's earnings per share
from continuing operations over a three year period. Stock-based compensation
expense associated with performance share units is recognized based on
management's best estimates of the achievement of the performance goals
specified in such awards and the resulting number of shares that will be earned.
T expected to be earned is recognized as compensation cost in earnings in the
period of the revision.
-33-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008 and 2009
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
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. The
Company had no common stock equivalents or other potentially dilutive securities
at December 31, 2009 or 2008.
RECENT PRONOUNCEMENTS
On January 1, 2009, the Company adopted a new accounting standard issued by the
FASB related to accounting for business combinations using the acquisition
method of accounting (previously referred to as the purchase method). Among the
significant changes, this standard requires a redefining of the measurement date
of a business combination, expensing direct transaction costs as incurred,
capitalizing in-process research and development costs as an intangible asset
and recording a liability for contingent consideration at the measurement date
with subsequent re-measurements recorded in the results of operations. This
standard also requires costs for business restructuring and exit activities
related to the acquired company to be included in the post-combination financial
results of operations and also provides new guidance for the recognition and
measurement of contingent assets and liabilities in a business combination. In
addition, this standard requires several new disclosures, including the reasons
for the business combination, the factors that contribute to the recognition of
goodwill, the amount of acquisition related third-party expenses incurred, the
nature and amount of contingent consideration, and a discussion of pre-existing
relationships between the parties.
The application of this standard was not material for 2009, however, it is
likely to have a significant impact on how the Company allocates the purchase
price of certain future business combinations, including the recognition and
measurement of assets acquired and liabilities assumed and the expensing of
direct transaction costs and costs to integrate the acquired business.
On January 1, 2009, the Company adopted a new accounting standard issued by the
FASB related to the disclosure of derivative instruments and hedging activities.
This standard expanded the disclosure requirements about an entity's derivative
financial instruments and hedging activities, including qualitative disclosures
about objectives and strategies for using derivatives, quantitative disclosures
about fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
instruments.
Effective June 30, 2009, the Company adopted a newly issued accounting standard
related to accounting for and disclosure of subsequent events in its
consolidated financial statements. This standard provides the authoritative
guidance for subsequent events that was previously addressed only in United
States auditing standards. This standard establishes general accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued and requires the
Company to disclose the date through which it has evaluated subsequent events
and whether that was the date the financial statements were issued or available
to be issued. This standard does not apply to subsequent events or transactions
that are within the scope of other applicable GAAP that provide different
guidance on the accounting treatment for subsequent events or transactions. The
adoption of this standard did not have a material impact on the Company's
financial statements.
In June 2009, the FASB issued an amendment to the accounting standards related
to the consolidation of variable interest entities ("VIE"). This standard
provides a new approach for determining which entity should consolidate a VIE,
-34-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008 and 2009
how and when to reconsider the consolidation or deconsolidation of a VIE and
requires disclosures about an entity's significant judgments and assumptions
used in its decision to consolidate or not consolidate a VIE. Under this
standard, the new consolidation model is a more qualitative assessment of power
and economics that considers which entity has the power to direct the activities
that "most significantly impact" the VIE's economic performance and has the
obligation to absorb losses or the right to receive benefits that could be
potentially significant to the VIE. This standard is effective for the Company
as of January 1, 2010 and the Company does not expect the impact of its adoption
to be material to its financial statements.
In October 2009, the FASB issued an amendment to the accounting standards
related to the accounting for revenue in arrangements with multiple deliverables
including how the arrangement consideration is allocated among delivered and
undelivered items of the arrangement. Among the amendments, this standard
eliminates the use of the residual method for allocating arrangement
consideration and requires an entity to allocate the overall consideration to
each deliverable based on an estimated selling price of each individual
deliverable in the arrangement in the absence of having vendor-specific
objective evidence or other third party evidence of fair value of the
undelivered items. This standard also provides further guidance on how to
determine a separate unit of accounting in a multiple-deliverable revenue
arrangement and expands the disclosure requirements about the judgments made in
applying the estimated selling price method and how those judgments affect the
timing or amount of revenue recognition. This standard, for which the Company is
currently assessing the impact, will become effective for the Company on January
1, 2011.
In October 2009, the FASB issued an amendment to the accounting standards
related to certain revenue arrangements that include software elements. This
standard clarifies the existing accounting guidance such that tangible products
that contain both software and non-software components that function together to
deliver the product's essential functionality, shall be excluded from the scope
of the software revenue recognition accounting standards. Accordingly, sales of
these products may fall within the scope of other revenue recognition accounting
standards or may now be within the scope of this standard and may require an
allocation of the arrangement consideration for each element of the arrangement.
This standard, for which the Company is currently assessing the impact, will
become effective for the Company on January 1, 2011.
In January 2010, the FASB issued an amendment to the accounting standards
related to the disclosures about an entity's use of fair value measurements.
Among these amendments, entities will be required to provide enhanced
disclosures about transfers into and out of the Level 1 (fair value determined
based on quoted prices in active markets for identical assets and liabilities)
and Level 2 (fair value determined based on significant other observable inputs)
classifications, provide separate disclosures about purchases, sales, issuances
and settlements relating to the tabular reconciliation of beginning and ending
balances of the Level 3 (fair value determined based on significant unobservable
inputs) classification and provide greater disaggregation for each class of
assets and liabilities that use fair value measurements. Except for the detailed
Level 3 roll-forward disclosures, the new standard is effective for the Company
for interim and annual reporting periods beginning after December 31, 2009. The
requirement to provide detailed disclosures about the purchases, sales,
issuances and settlements in the roll-forward activity for Level 3 fair value
measurements is effective for the Company for interim and annual reporting
periods beginning after December 31, 2010. The Company does not expect that the
adoption of this new standard will have a material impact to its financial
statements.
3. ACCOUNTS RECEIVABLE
All accounts receivable are trade related. These receivables are current and
management believes are collectible except for which a reserve has been
provided. The balance of accounts receivable as of December 31, 2008 and 2009
were $64,149 and $220,938, respectively. The reserve amount for uncollectible
accounts was $1,375 as of December 31, 2008 and 2009, respectively.
-35-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008 and 2009
4. INVENTORIES
Inventory comprised of the following:
December December
31, 2008 31, 2009
------------ -------------
Parts inventory $ 22,082 $ 41,345
Finished goods 306,658 208,651
------------ -------------
Total $ 328,740 $ 249,996
============ =============
For the period ending December 31, 2009, the Company experienced an impairment
of $83,101 in loaner machine inventory.
5. PROPERTIES AND EQUIPMENT
Net property and equipment were as follows:
December December
31, 2008 31, 2009
------------ -------------
Furniture and office equipment $ 78,695 $ 78,695
Tools and Shop equipment 54,183 54,183
Vehicles 105,871 105,871
------------ -------------
238,749 238,749
Less accumulated depreciation (214,995) (211,897)
------------ -------------
Total $ 23,754 $ 26,852
============ =============
Depreciation expenses were $17,910 and ($3,098) for the years ended December 31,
2008 and 2009, respectively.
6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
December December
31, 2008 31, 2009
------------ -------------
Accrued wages $ 30,352 $ 14,557
Accrued legal fees 416,620 401,109
Accrued ongoing litigation 1,807,165 1,662,971
Other accrued expenses 16,501 174,442
------------ -------------
Total $ 2,270,638 $ 2,253,079
============ =============
During 2003, the Company paid payroll net of taxes and accrued said taxes
without payment due to cash flow limitations resulting from a 2002 warehouse
fire that incinerated our inventory. The Company subsequently received a tax
lien in 2005 related to 2003 payroll taxes from the Internal Revenue Service and
continued to accrue interest and penalty charges. The original amount was
$104,052. In 2008, payments were made and the Internal Revenue Service issued a
tax lien release for this amount and the liability carried on the Company's
books was relieved. In 2009, the Company was notified by the Internal Revenue
Service that additional payroll taxes, interest, and penalty charges were still
owed. After researching, it is believed that the Internal Revenue Service double
booked the original payments made and released the lien in error. Settlement was
reached and the Company is currently paying $2,000 per month on a total
liability of $104,052 plus interest and penalties, with a potential balloon
payment in one year subject to re-negotiation after one year with the IRS.
-36-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008 and 2009
7. INCOME TAXES
For the year ended December 31, 2009, the Company incurred net operating losses
for tax purposes of approximately $1,933,117. The total net operating loss carry
forwards of $13,641,941 may be used to reduce taxable income through the year
2028. The availability of the Company's net operating loss carry forwards are
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.
Temporary differences that give rise to deferred tax assets and liabilities at
December 31, 2008 and 2009, are comprised of depreciation and amortization,
entertainment, bad debt expense, stock based compensation, loss on debt
conversion, and gain on settlement of debt. The gross deferred tax asset balance
as of December 31, 2008 and 2009 was approximately $3,981,000 and $4,638,260,
respectively. A 100% valuation allowance has been established against the
deferred tax assets, as the utilization of the loss carry forwards cannot
reasonably be assured. The Company had no uncertain tax position as of 2009.
The components of the net deferred tax asset are summarized below:
December 31, 2008 December 31, 2009
----------------- -----------------
Deferred tax assets
Net operating losses $ 3,981,000 $ 4,638,260
Less: valuation allowance (3,981,000) (4,638,260)
----------------- -----------------
$ - $ -
----------------- -----------------
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 December
31, 2008 31, 2009
------------ -------------
Tax expense (credit) at statutory rate-federal (34)% (34)%
State tax expense net of federal tax (6) (6)
Changes in valuation allowance 40 40
----------- -------------
Tax expense at actual rate $ - $ -
=========== =============
Income tax expense consisted of the following:
2008 2009
-------------- -------------
Current tax expense:
$ - $ -
Federal
State 800 800
-------------- -------------
Total Current $ 800 $ 800
Deferred tax credit:
$ 306,000 $ 657,260
Federal
State 51,000 59,677
-------------- -------------
Total deferred $ 357,000 $ 716,937
Less: valuation allowance (357,000) (716,937)
-------------- -------------
Net Deferred tax credit - -
-------------- -------------
Tax expense $ 800 $ 800
============== =============
-37-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008 and 2009
8. STOCKHOLDERS' EQUITY
COMMON STOCK
During the year ended December 31, 2008, the Company issued 22,943,634 shares of
common stock for cash amounting to $1,376,618.
During the year ended December 31, 2008, the Company issued 1,418,333 shares of
common stock for consulting services. The expenses amounted to $123,383.
During the year ended December 31, 2009, the Company issued 119,934,027 shares
of common stock for cash amounting to $3,191,476.
During the year ended December 31, 2009, the Company issued 687,500 shares of
common stock for consulting services. The expenses amounted to $34,375, based on
the closing stock price on the date of the issue.
During the year ended December 31, 2009, the Company incurred fund raising cost
of $113,622. The fund raising cost represented the referral fees payable to
finders for introducing purchasers of the Company's common stock.
During the year ended December 31, 2009, the Company converted loans payable in
the amount of $100,000 to 5,164,319 shares of common stock. 164,319 of these
shares were in excess of the stated conversion price of the loans, resulting in
an expense of $6,573 based on the closing stock price on the date of grant.
9. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method.
The Company paid income taxes of $800 and interest of $51,790 during the year
2008. The Company paid income taxes of $800 and interest of $52,366 during the
year ending December 31, 2009.
10. GOING CONCERN
The Company's financial statements are prepared using the generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. In the years ended December 31, 2009 and 2008, the Company incurred
losses of $1,912,064 and $906,928, respectively. The Company has an accumulated
deficit of $12,599,170 as of December 31, 2009. In addition, the Company had
negative cash flow from operating activities amounting to $1,890,414 as of
December 31, 2009. 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 should the Company be unable to continue as a going concern.
Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue as a going concern. Management devoted considerable effort
during the years ended December 31, 2009 and 2008, toward (i) obtaining
additional equity capital (ii) controlling salaries and general and
administrative expenses, (iii) management of accounts payable, (iv) evaluation
of its distribution and marketing methods, and (v) increasing marketing and
sales. In order to control general and administrative expenses, the Company has
established internal financial controls in all areas, specifically in hiring and
overhead cost. The Company has also established a hiring policy under which the
Company will refrain from hiring additional employees unless approved by the
-38-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008 and 2009
Chief Executive Officer and Chief Financial Officer. Accounts payable are
reviewed and approved or challenged on a daily basis and the sales staff is
questioned as to the validity of any expense on a monthly basis. Senior
management reviews the annual budget to ascertain and question any variance from
plan, on a quarterly basis, and to anticipate and make adjustments as may be
feasible.
11. COMMITTMENTS
The Company has a facility lease agreement effective October 1, 2004 for five
years with an option to extend for a 60 month period, which the Company
exercised effective October 1, 2009.
Future annual minimum lease commitments, excluding property taxes and insurance,
payable at December 31, 2009 are approximately as follows:
2010 $ 132,840
2011 132,840
2012 132,840
2013 132,840
2014 132,840
-------
$ 664,200
Rent expenses for the leased facility were $126,840 and $120,840 for the years
ended December 31, 2009 and 2008, respectively. The Company exercised its
options under the renewal lease agreement during the third quarter of 2009.
12. CONTINGENCIES & LITIGATION
Partly in connection with a fire at the Company's facility on or about February
19, 2002, in which the Company's manufacturing, warehouse, and office facilities
were substantially destroyed, the Company became engaged in litigation in
several courts, all of which have reached judgment or been settled or dismissed.
The judgments and settlements are reflected in the liability section of the
Company's balance sheet and total $1,662,971 as of December 31, 2009.
13. OTHER INCOME
The Company recorded $62,000 as a gain on litigation settlement during the year
ended December 31, 2009. Since litigation on Tenaya Surgical and Fairfield Pain
Management took several years, both companies elected to settle their claims for
half of their original amounts. Tenaya Surgical's claim was originally $46,000
and settled for $23,000, and Fairfield Pain Management's claim was originally
$78,000 and settled for $39,000.
14. RELATED PARTY TRANSACTION
The Company has a consulting agreement with the Chief Executive Officer of the
Company under which he receives compensation of $12,000 per month. The Chief
Executive Officer provides management, administrative, marketing, and financial
services to the Company pursuant to the consulting agreement which is terminable
on 30 days notice by either party. The consulting agreement commenced on January
1, 2002 and will continue until such time as the Company terminates the
agreement or the Chief Executive Officer resigns. The accrued compensation has
been included in due to officer.
During the normal course of business, the Chief Executive Officer advanced funds
to the Company. These advances are recorded as due to officer.
-39-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008 and 2009
At December 31, 2008 and 2009, the Company had balances due to the Chief
Executive Officer of the Company of $784,210 and $50,766, respectively, for
amounts owed during those years. The amount is due on demand, interest free and
is secured by the assets of the Company. Interest is not imputed since a portion
of this amount represents unpaid consulting fees.
15. CONCENTRATIONS
Three customers represented 27%, 25%, and 11% of the Company's accounts
receivable as of December 31, 2009. These balances were collected subsequent to
December 31, 2009.
16. SUBSEQUENT EVENTS
There have been no significant subsequent events through April 5, 2010, the date
the financial statements were issued.
-40-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
--------------------------------------------------------------------------------
On or about April 13, 2009, the Company engaged M&K CPAS, PLLC ("New
Accountant") to audit and review the Company's financial statements for the
fiscal year ending December 31, 2009. The New Accountant has been engaged for
general audit and review services and not because of any particular transaction
or accounting principle, or because of any disagreement with the Company's
former accountant, Kabani & Company, Inc., Certified Public Accountants (the
"Former Accountant").
Prior to engaging the New Accountant, the Company had not consulted the
New Accountant regarding the application of accounting principles to a specified
transaction, completed or proposed, or the type of audit opinion that might be
rendered on the Company's financial statements or a reportable event, nor did
the Company consult with the New Accountant regarding any disagreements with its
prior auditor on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements, if
not resolved to the satisfaction of the prior auditor, would have caused it to
make reference to the subject matter of the disagreements in connection with its
reports.
The Former Accountant was dismissed effective April 13, 2009. The
Former Accountant's reports on the Company's financial statements during its
past two fiscal years did not contain an adverse opinion or disclaimer of
opinion, nor was it modified as to uncertainty, audit scope or accounting
principles, except for a going concern qualification contained in its audit
reports for the fiscal years ending December 31, 2007 and December 31, 2008.
The decision to change accountants was recommended by the Company's
Audit Committee Chairperson and approved by the Company's Board of Directors on
April 13, 2009. During the fiscal years ended December 31, 2007 and December 31,
2008 through the date hereof, the Company did not have any disagreements with
the Former Accountant on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure which, if not
resolved to the Former Accountant's satisfaction, would have caused it to make
reference to the subject matter of the disagreement in connection with its
report.
The New Accountant was engaged effective April 13, 2009. The New
Accountant was engaged for general audit and review services and not because of
any particular transaction or accounting principle, or because of any
disagreement with the Former Accountant. A letter from the Former Accountant
addressed to The Securities and Exchange Commission was requested by the Company
and sent to the Securities and Exchange Commission.
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
-41-
performed additional analysis and other post-closing procedures in an effort to
ensure our consolidated financial statements included in this annual report have
been prepared in accordance with generally accepted accounting principles.
Accordingly, management believes that the financial statements included in this
report fairly present in all material respects our financial condition, results
of operations and cash flows for the periods presented.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended. Our management assessed the
effectiveness of our internal control over financial reporting as of December
31, 2009. 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 Framework. 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 the
Company's 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, 2009, we did not maintain effective controls over
the control environment. Specifically, the Board of Directors does not currently
have any independent members and no director qualifies as an audit committee
financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B. Since these
entity level programs have a pervasive effect across the organization,
management has determined that these circumstances constitute a material
weakness.
2. As of December 31, 2009, 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.
Because of these material weaknesses, management has concluded that the
Company did not maintain effective internal control over financial reporting as
of December 31, 2009, based on the criteria established in "Internal
Control-Integrated Framework" issued by the COSO.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in the Company's internal control over
financial reporting through the date of this report or during the quarter ended
December 31, 2009, that materially affected, or are reasonably likely to
materially affect, the Company's internal control over financial reporting.
INDEPENDENT REGISTERED ACCOUNTANT'S INTERNAL CONTROL ATTESTATION
This annual report does not include an attestation report of the
Company's registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to attestation by the
Company's registered public accounting firm pursuant to temporary rules of the
Securities and Exchange Commission that permit the Company to provide only
management's report in this annual report.
CORRECTIVE ACTION
Management plans to make future investments in the continuing education
of our accounting and financial staff. Specifically, we plan to seek specific
public company accounting training during 2010.
ITEM 9B. OTHER INFORMATION
--------------------------
None.
-42-
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
----------------------------------------------------------------
The following table lists the executive officers and directors of the
Company as of March 31, 2010:
NAME AGE POSITION
-------------------- --- ------------------------------------------
Dean Janes 44 Chairman of the Board of Directors and
Chief Executive Officer
Xavier Aguilera (1) 61 Executive Vice President, Chief Financial
Officer, Corporate Secretary and Director
Christopher Sohn 49 President and Chief Operating Officer
------------------
(1) Member of Audit Committee.
DEAN JANES has been the Chairman and Chief Executive Officer of the
Company since its inception in October 1993. Mr. Janes founded Imaging Services,
Inc. in October of 1993 which changed its name to Imaging3, Inc. in 2002. Mr.
Janes was the President and Chief Executive Officer of Imaging Services, Inc.
from 1993 to 2001, where his responsibilities included business development and
overseeing operations, sales and marketing, operations and finance. In 2001, Mr.
Janes brought Mr. Christopher Sohn on as President and Chief Operating Officer
with Mr. Janes taking the position of Chairman and Chief Executive Officer, his
duties remaining the same with the exception of directly overseeing operations
and finance. Prior to founding the Company, Mr. Janes worked for COHR, Center
for Health Resources, from 1992 to 1993 as a Senior Field Service Engineer; his
job responsibilities included technical support for junior engineers and
business development of service contracts and revenues for all makes of medical
imaging equipment. From 1991 to 1992, Mr. Janes worked for Toshiba American
Medical Corporation; his job title was National Technical Support Engineer. His
primary responsibilities were to assist Service Engineers throughout the United
States with problems and design errors with Cath Labs and Angio Suites being a
conduit to Japan and the Service Engineers in the United States. From 1990 to
1991, Mr. Janes worked for OEC Medical Systems, Inc. as a Senior Field Service
Engineer; his responsibilities were to maintain, repair and install c-arms and
Urology systems in the Southern California area. From 1988 to 1990 Mr. Janes
worked for Kaiser Medical Physics as an in-house X-ray Service Engineer for
Kaiser Harbor City Hospital; his responsibilities were to maintain and repair
medical imaging equipment within the hospital and three outlying clinics. Mr.
Janes also served in the United States Army Reserves as a Biomedical engineer;
his service was from 1983 to 1991, with a tour in the first Gulf War from
December of 1990 to April of 1991. He majored in Bio-Medical Electronic
Engineering at the University of Colorado Technical Institute (1984-1988). Mr.
Janes is the principal inventor of Imaging3 real-time 3D medical diagnostic
imaging technology. Mr. Janes is a member of MENSA. Dean Janes and Michele Janes
are husband and wife.
XAVIER AGUILERA has been the Executive Vice President, Chief Financial
Officer and Corporate Secretary of the Company since 1999. Mr. Aguilera's
responsibilities include managing the Company's finances, accounting, taxes,
credit facilities and interfacing and developing new relationships with banks
and other financial institutions. Prior to working for the Company, Mr. Aguilera
was self-employed as a consultant for Xavier Aguilera & Associates from 1997 to
1999. His responsibilities were to manage and open primary healthcare facilities
throughout Southern California. He provided property management, estate
planning, credit facility and Import/Export consulting for several businesses in
Southern California. From 1995 to 1997, Mr. Aguilera was the Chief
Administrative Officer for East Los Angeles Doctors Hospital; his
responsibilities were to manage administrative personnel within the hospital,
manage public relations, business development and JCAHO compliance. From 1992 to
1995, Mr. Aguilera was the Chief Executive Officer for El Centro Human Services
Corporation; his responsibilities were to develop and implement a community
based mental health facility consisting of eight satellite centers. He managed a
$9.4 million budget and a full time staff of 240 employees. From 1990 to 1992,
Mr. Aguilera was a Deputy Director/Administrator for Northeast Community Clinic;
his responsibilities were to implement and administer the clinics health
programs and oversee operations. From 1988 to 1990, Mr. Aguilera was self
employed as a consultant for finance, management and international finance. He
provided these services to banks as well as businesses throughout Southern
California. From 1987 to 1988, Mr. Aguilera was Vice President of International
-43-
Banking Marketing for California Commerce Bank; his responsibilities were to
manage and administer a $14 million portfolio, develop new business in Southern
California with Hispanic Businesses and develop business relationships with
Northern Mexico businesses and banks. From 1981 to 1987, Mr. Aguilera was an
Assistant General Manager/Deputy Director for Banco Nacional de Mexico
(BANAMEX). He was responsible for $60 million in new deposits as well as new
business development and management of commercial and personal lending
departments. He holds a bachelors degree in business from California State
University at Northridge (1983) and a Certificate of Medical Management from the
University of California at Los Angeles (1995).
CHRISTOPHER SOHN has been the President and Chief Operating Officer of
the Company since 2001. As Chief Operating Officer for Imaging3, Mr. Sohn's
responsibilities include developing international sales, marketing and
resourcing network, organizing and strategizing with manufacturing companies and
researching new sources of products from developing countries for import into
the United States, overseeing of business operations and human resources. Prior
to working for the Company, Mr. Sohn was President and Chief Executive Officer
of DMI, Inc. from 1994 to 2000. As Chief Executive Officer for an international
trading company of diagnostic medical imaging systems, Mr. Sohn's main
responsibility was to develop business relationships and dealer networks in
Central and South American markets, connecting this with the needs of Asian
medical equipment manufactures as well as manufactures in the United States and
North America. Mr. Sohn has also organized and participated in more than a dozen
medical exhibitions during this period including the Hospitalar (Brazil
1995-2000) and RSNA during the same period. From 2000 to 2001, Mr. Sohn was
Chief Executive Officer of ISOL America, Inc.; his responsibilities included
starting up an overseas headquarters for the parent company ISOL Korea in the
United States as well as setting up a distribution and dealer network in the
United States, Central and South America for ISOL's products, which included,
Magnetic Resonance Imaging and Bone Desitometry Systems. Mr. Sohn also assisted
in the Company's efforts to achieve FDA and UL approval of its products as well
as researching manufacturing partners for the assembly and manufacture of ISOL
products within the United States. Mr. Sohn majored in biochemistry and computer
science at the University of California at Los Angeles (1978-1982).
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under the California Corporation Code, the Company's directors will
have no personal liability to the Company or its 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. The Company's 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.
The Company intends to enter into agreements to indemnify its directors
and officers, in addition to the indemnification provided for in the Company's
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 the Company, arising out of such
person's services as a director or officer of the Company, any subsidiary of the
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Company or any other company or enterprise to which the person provides services
at the request of the Company. The Company believes 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 the Company
pursuant to the foregoing provisions, the Company has been informed that in the
opinion of the Securities and Exchange Commission, such indemnification is
against public policy as expressed in the Act and is therefore unenforceable.
BOARD COMMITTEES
The Board of Directors has appointed an Audit Committee. As of March
29, 2010, the sole member of the Audit Committee is Xavier Aguilera, who may not
be considered to be independent as defined in Rule 4200 of the National
Association of Securities Dealers' listing standards. 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, with the Company's independent
accountants, the annual financial statements of the Company prior to
publication, and to review the work of, and approve non-audit services performed
by, such 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 the organization,
operations and management of the Company. The Audit Committee was formed on
August 31, 2003. The Audit Committee held one meeting during fiscal year ended
December 31, 2009.
The Company established a Compensation Committee on August 31, 2003,
which consists of one director, Dean Janes. The Compensation Committee is
responsible for reviewing general policy matters relating to compensation and
benefits of directors and officers, determining the total compensation of our
officers and directors. The Board of Directors does not have a nominating
committee. Therefore, the selection of persons or election to the Board of
Directors was neither independently made nor negotiated at arm's length.
REPORT OF THE AUDIT COMMITTEE
The Company's Audit Committee has reviewed and discussed the Company's
audited financial statements for the fiscal year ended December 31, 2009 with
senior management. The Audit Committee has reviewed and discussed with
management the Company's audited financial statements. The Audit Committee has
also discussed with M&K CPAS, PLLC ("M&K"), the Company's independent auditors,
the matters required to be discussed by the statement on Auditing Standards No.
61 (Communication with Audit Committees) and received the written disclosures
and the letter from M&K required by Independence Standards Board Standard No. 1
(Independence Discussion with Audit Committees). The Audit Committee has
discussed with M&K the independence of M&K as auditors of the Company. Finally,
the Audit Committee has considered whether the independent auditor's provision
of non-audit services to the Company is compatible with the auditors'
independence. Based on the foregoing, the Company's Audit Committee has
recommended to the Board of Directors that the audited financial statements of
the Company be included in the Company's Annual Report on Form 10-K for the
fiscal year ended December 31, 2009 for filing with the United States Securities
and Exchange Commission ("SEC). The Company's Audit Committee did not submit a
formal report regarding its findings.
AUDIT COMMITTEE
XAVIER AGUILERA
Notwithstanding anything to the contrary set forth in any of the
Company's previous or future filings under the Securities Act of 1933, as
amended (the "Securities Act"), or the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), 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.
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CODE OF CONDUCT
The Company has 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 the Company's 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 the 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 the Company's
shareholders.
COMPLIANCE WITH SECTION 16(A) OF EXCHANGE ACT
Section 16(a) of the Exchange Act requires the Company's officers and
directors, and certain persons who own more than 10% of a registered class of
the Company's equity securities (collectively, "Reporting Persons"), to file
reports of ownership and changes in ownership ("Section 16 Reports") with the
Securities and Exchange Commission (the "SEC"). Reporting Persons are required
by the SEC to furnish the Company with copies of all Section 16 Reports they
file.
Based solely on its review of the copies of such Section 16 Reports
received by it, or written representations received from certain Reporting
Persons, all Section 16(a) filing requirements applicable to the Company's
Reporting Persons during and with respect to the fiscal year ended December 31,
2009 have been complied with on a timely basis, except that Dean Janes may have
been late on one or more of his Form 4 filings.
ITEM 11. EXECUTIVE COMPENSATION
-------------------------------
EXECUTIVE OFFICER COMPENSATION
The following table sets forth the total compensation paid in all forms
to the executive officers and directors of the Company during the periods
indicated:
SUMMARY COMPENSATION TABLE
---------------------------------------------------------------------------------------------------------------------
NAME AND NON-EQUITY NON-QUALIFIED
PRINCIPAL INCENTIVE DEFERRED
POSITION OPTION PLAN COMPENSATION ALL OTHER
(1) YEAR SALARY BONUS AWARDS COMPENSATION EARNINGS COMPENSATION TOTAL
---------------------------------------------------------------------------------------------------------------------
Dean Janes, 2009 $149,604 0 0 0 0 0 $149,604
Chief Executive
Officer
Christopher Sohn, 2009 $125,008 0 0 0 0 0 $125,008
President and
Chief Operating
Officer
Xavier Aguilera, 2009 $95,000 0 0 0 0 0 $95,000
Chief Financial
Officer/Treasurer,
Executive Vice
President, and
Corporate
Secretary
Michele Janes, 2009 $49,998 0 0 0 0 0 $49,998
Vice President
of Administration
Officers as a Group 2009 $369,612 0 0 0 0 0 $369,612
-------------------------
(1) All officers serve at will without employment contracts except that Dean
Janes is engaged under a Consulting Agreement under which the Company pays
Mr. Janes $12,000 per month until either party terminates the Agreement on
30 days written notice.
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EMPLOYMENT AGREEMENTS
The Company has not entered into any employment agreements with its
executive officers to date. The Company may enter into employment agreements
with them in the future.
Dean Janes, the Company's Chief Executive Officer, is engaged pursuant
to a consulting agreement. See "Certain Relationships and Transactions - Item
13."
OUTSTANDING EQUITY AWARDS
None of the Company's executive officers received any equity awards
during the year ended December 31, 2009.
DIRECTOR COMPENSATION
None of the Company's directors received any compensation for their
respective services rendered to the Company during the year ended December 31,
2009.
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 March 29, 2010. 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 March 29, 2010 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
375,709,892 outstanding shares of common stock. Except as otherwise listed
below, the address of each person is c/o Imaging3, Inc., 3200 W. Valhalla Drive,
Burbank, California 91505. Except as indicated, each person listed below has
sole voting and investment power with respect to the shares set forth opposite
such person's name.
NUMBER OF SHARES BENEFICIALLY
NAME, TITLE AND ADDRESS OWNED (1) PERCENTAGE OWNERSHIP
----------------------- ----------------------------- --------------------
Dean Janes
(includes shares owned by wife, Michele Janes)
Chairman and Chief Executive Officer 59,916,328 15.7%
Christopher Sohn
President and Chief Operating Officer 23,000,000 6.1%
Xavier Aguilera
Director, Chief Financial Officer/Treasurer,
Executive Vice President, and Secretary 200,000 *%
All current Executive Officers as a Group 83,116,328 21.8%
--------------------------------
(*) 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
March 29, 2010.
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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
--------------------------------------------------------------------------------
Mr. Janes is employed pursuant to a consulting agreement for $12,000
per month plus expenses. The Agreement is terminable by either party on 30 days
written notice. The Company owes Mr. Janes $50,766 under the consulting
agreement for the year ended December 31, 2009.
Dean Janes and Michele Janes are husband and wife.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-----------------------------------------------
Kabani & Company, Inc., Certified Public Accountants ("KC") was the
Company's principal auditing firm until January 5, 2009. KC has also provided
other non-audit services to the Company. The Audit Committee approved the
engagement of KC before KC rendered audit and non-audit services to the Company.
Presently and since January 5, 2009, M&K CPAS, PLLC has been and is the
Company's principal auditing firm.
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.
KC AND M&K FEES
2008 2009
------------------------
Audit Fees(1) $39,500 $29,000
Audit Related Fees -0- -0-
All Other Fees(2) 1,350 -0-
------------------------
$40,850 $29,000
========================
----------------------------------------------
(1) Audit Fees consist of fees for the audit of our financial statements and
review of the financial statements included in our quarterly reports. Of
these amounts, $39,500 was paid to Kabani and Associates for year ending
December 31, 2008 and $29,000 was paid to M&K CPAS, PLLC during the year
2009.
(2) Tax fees consist of fees for the preparation of original federal and state
income tax returns and fees for miscellaneous tax consulting services.
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.
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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.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
------------------------------------------------
(a) 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)
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)
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
-------------
(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.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: April 5, 2010 IMAGING3, INC.
By: /s/ Dean Janes
-------------------------------------
Dean Janes, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
By: /s/ Dean Janes Dated: April 5, 2010
----------------------------------------------------
Dean Janes, Chairman of the Board and Chief
Executive Officer (Principal Executive Officer)
By: /s/ Xavier Aguilera Dated: April 5, 2010
---------------------------------------------------
Xavier Aguilera, Chief Financial Officer/Treasurer,
Executive Vice President, Corporate Secretary and
Director (Principal Financial/Accounting Officer)
By: /s/ Christopher Sohn Dated: April 5, 2010
---------------------------------------------------
Christopher Sohn, President
and Chief Operating Officer
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