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EX-32.2 - Grapefruit USA, Incex32-2.htm
EX-32.1 - Grapefruit USA, Incex32-1.htm
EX-31.2 - Grapefruit USA, Incex31-2.htm
EX-31.1 - Grapefruit USA, Incex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For Quarterly Period Ended March 31, 2017

or

 

[  ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Transition period from _______________ to ______________

 

Commission File Number:                                             000-50099

 

IMAGING3, INC.

(Exact name of registrant as specified in its charter)

 

CALIFORNIA   95-4451059
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)

 

3022 North Hollywood Way, Burbank, California 91505

(Address of principal executive offices) (Zip Code)

   

(818) 260-0930

Registrant’s telephone number, including area code

 

 

 

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

Yes  [X] No  [  ]

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

Yes  [X] No  [  ]

 

Indicate by check mark 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. (Check One).

 

Large accelerated filer [  ]   Accelerated filer [  ]

Non-accelerated filer

(Do not check if a smaller reporting company)

[  ]   Smaller reporting company [X]

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

Yes  [  ] No  [X]

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

 

As of May 19, 2017, the number of shares outstanding of the registrant’s class of common stock was 259,621,593.

 

 

 

 
 

 

TABLE OF CONTENTS

 

    Page
PART I. FINANCIAL INFORMATION  
Item 1. Condensed Financial Statements (Unaudited) 3
  Condensed Balance Sheets at March 31, 2017 (Unaudited) and December 31, 2016 3
  Condensed Statements of Operations for the Three Months Ended March 31, 2017 and 2016 (Unaudited) 4
  Condensed Statements of Cash Flows for the Three Months Ended March 31, 2017 and 2016 (Unaudited) 5
  Notes to Condensed Financial Statements (Unaudited) 6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 18
Item 4. Controls and Procedures 18
     
PART II. OTHER INFORMATION  
Item 1. Legal Proceedings
Item 1A. Risk Factors 19
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 19
Item 3. Defaults Upon Senior Securities 19
Item 4. Mine Safety Disclosures 19
Item 5. Other Information 19
Item 6. Exhibits 19
     
SIGNATURES 20

 

2 

 

 

PART I. FINANCIAL INFORMATION

 

Item 1. Financial Statements (Unaudited)

 

IMAGING3, INC.

CONDENSED BALANCE SHEETS

AT MARCH 31, 2017 AND DECEMBER 31, 2016

 

   3/31/2017   12/31/2016 
   (Unaudited)     
ASSETS          
           
CURRENT ASSETS:          
Cash and cash equivalents  $17,164   $22,638 
           
Total current assets   17,164    22,638 
           
PROPERTY AND EQUIPMENT, net   -    - 
Total assets  $17,164   $22,638 
           
LIABILITIES AND STOCKHOLDERS’ DEFICIT          
           
CURRENT LIABILITIES          
           
Accounts payable and accrued expenses  $792,366   $1,825,080 
Convertible notes payable, net of discount of $122,930 and $115,822 respectively   876,050    771,028 
Derivative liability   277,627    5,532,898 
Deferred revenue   37,044    41,829 
Total current liabilities  $1,983,087   $8,170,835 
LONG TERM LIABILITIES          
Accounts payable and accrued expenses  $1,017,574   $- 
           
TOTAL LIABILITIES  $3,000,661   $8,170,835 
STOCKHOLDERS’ DEFICIT          

Common stock, authorized 1,000,000,000, no par value and 258,621,593 and 243,844,093 Issued and outstanding as of March 31, 2017 and December 31, 2016 respectively

   8,477,648    7,829,273 
Accumulated deficit   (11,461,145)   (15,977,470)
Total stockholders’ deficit   (2,983,497)   (8,148,197)
Total liabilities and stockholders’ deficit  $17,164   $22,638 

 

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

 

3 

 

 

IMAGING3, INC.

CONDENSED STATEMENTS OF OPERATIONS

March 31, 2017 and 2016

(UNAUDITED)

 

  

Three months ended

March 31, 2017

  

Three months ended

March 31, 2016

 
         
Net revenues  $4,785   $11,627 
           
Cost of goods sold   -    5,377 
Gross profit   4,785    6,250 
           
Operating expenses:          
General and administrative expenses   349,015    22,261 
Total operating expenses   349,015    22,261 
           
Loss from operations   (344,230)   (16,011)
           
Other income (expense):          
Interest expense   (288,654)   (88,375)
Other income (expense), net   5,149,208    2,972 
Total other income (expense)   4,860,554    (85,403)
           
Income (Loss) before income taxes   4,516,324    (101,414)
           
Provision for income taxes   -    - 
           
Net income (loss)  $4,516,324   $(101,414)
           
Net income (loss) per share - Basic  $0.02   $(0.00)
Net income (loss) per share - Diluted  $0.02   $(0.00)
Weighted average common stock outstanding - Basic   253,890,722    191,406,060 
Weighted average common stock outstanding - Diluted   296,413,503    191,406,060 

 

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

 

4 

 

 

IMAGING3, INC.

CONDENSED STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED

MARCH 31, 2017 AND 2016

(UNAUDITED)

 

   Three months ended
March 31, 2017
   Three months ended
March 31, 2016
 
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net income (loss)  $4,516,324   $(101,414)
Adjustments to reconcile net income (loss) to net cash used for operating activities:          
Non Cash Interest   272,415    77,000 
(Gain) loss on extinguishment of debt   (3,668,776)   - 
Change in value of derivatives   (1,473,532)   (372)
Shares issued for services   210,000    12,500 
(Increase) / decrease in current assets:          
Accounts receivable   -    51,067 
Increase / (decrease) in current liabilities:          
Accounts payable and accrued expenses   (14,155)   (66,040)
Deferred revenue   (4,785)   (11,627)
Net cash used for operating activities   (162,509)   (38,886)
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Proceeds from issuance of notes payable   150,035    - 
Proceeds from sale of stock, net of offering costs   7,000    29,400 
Net cash provided for financing activities   157,035    29,400 
           
NET DECREASE IN CASH & CASH EQUIVALENTS   (5,474)   (9,486)
           
CASH & CASH EQUIVALENTS, BEGINNING BALANCE   22,638    9,508 
           
CASH & CASH EQUIVALENTS, ENDING BALANCE  $17,164   $22 
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY          
Notes and accrued interest converted to common stock  $196,797   $- 
Promissory notes issued for no cash consideration  $152,820   $- 

 

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

 

5 

 

 

IMAGING3, INC.

Notes to Condensed Financial Statements

(Unaudited)

 

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

 

Imaging3, Inc. (the “Company”, “us”, “we”, “Imaging3”) 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 refurbishment 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 new or renewed replacement parts for c-arms.

 

The Company has developed a proprietary medical technology designed to produce 3D medical diagnostic images in real time. We believe Imaging3 technology has the potential to contribute to the improvement of healthcare. Our 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. This technology is still in development and the Company intends to seek approval from the Food and Drug Administration (“FDA”), which will allow us to offer our product to healthcare providers.

 

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

On September 13, 2012 (the “Petition Date”), the Company filed a voluntary petition with the federal bankruptcy court in Los Angeles, California, to enter bankruptcy under Chapter 11 of the United States Bankruptcy Code. On or about July 15, 2013, our Plan of Reorganization was approved by the United States Bankruptcy Court. On July 30, 2013, we emerged from bankruptcy and continued operations under the terms and conditions of our Bankruptcy Reorganization Plan as it applies to post bankruptcy operations. For accounting purposes, management deemed the effective date of the Chapter 11 Plan (the “Plan”) to be June 30, 2013. The Company’s operations between July 1, 2013 and July 30, 2013 were not significant. The Plan adopted by Imaging3, Inc. is a reorganizing plan. Payments under the Plan were made by utilizing existing cash on hand, borrowings on a secured and unsecured basis, future cash flow, if any, capital raised through the sale of our common stock in private placements, and by conversion of debt to equity.

 

Upon emergence from bankruptcy, Imaging3 adopted fresh-start accounting which resulted in Imaging3 becoming a new entity for financial reporting purposes. Imaging3 applied fresh start accounting as of July 1, 2013. As a result of the application of fresh start accounting and the effects of the implementation of the plan of reorganization, the financial statements on or after July 1, 2013 are not comparable with the financial statements prior to that date.

 

The accompanying unaudited interim financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for the presentation of interim financial information, but do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments, consisting of normal recurring adjustments, considered necessary for a fair presentation have been included. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2016. The Company follows the same accounting policies in preparation of interim reports. Results of operations for the interim periods are not indicative of annual results.

 

6 

 

 

Going Concern

 

The Company’s financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has historically incurred net losses. The continuing losses have adversely affected the liquidity of the Company.

 

In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to raise additional capital, obtain financing and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary as a result of the Company’s going concern uncertainty.

 

Management’s plan regarding this matter is to, amongst other things, seek additional equity financing by selling our equity securities, increase our sales volume, and continue seeking approval from the FDA to bring to market our smart scan technology imaging platform. We cannot assure you that funds from these sources will be available when needed or, if available, will be on terms favorable to us or to our stockholders. If we raise additional funds or settle liabilities by issuing equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities may provide for rights, preferences or privileges senior to those of the holders of our common stock. Our ability to execute our business plan and continue as a going concern may be adversely affected if we are unable to raise additional capital or operate profitably.

 

The Company anticipates that further equity/debt financings will be necessary to continue to fund operations in the future and there is no guarantee that such financings will be available or, if available, on acceptable terms.

 

A summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:

 

Use of Estimates

 

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

Cash and Cash Equivalents

 

The Company considers all liquid investments with a maturity of three months or less from the date of purchase that are readily convertible into cash to be cash equivalents. The Company maintains its cash in bank deposit accounts that may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company had no cash equivalents at March 31, 2017.

 

Revenue Recognition

 

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. Warranty revenues are deferred and recognized on a straight line basis over the term of the contract or as services are performed.

 

Deferred Revenue

 

Deferred revenue consists substantially of amounts received from customers in advance of the Company’s performance service period. Deferred revenue is recognized as revenue on a systematic basis that is proportionate to the period that the underlying services are rendered, which in certain arrangements is straight-line over the remaining contractual term or estimated customer life of an agreement.

 

7 

 

 

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.

 

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 all assets with estimated lives of three to eight years.

 

Impairment of Long-Lived Assets

 

Long-lived assets are 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, 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.

 

Basic and Diluted Net Loss Per Share

 

Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. During 2016, potentially dilutive securities were excluded from the computation of weighted average shares outstanding-diluted because their effect was anti-dilutive.

 

Numerator:    
Net income attributable to common shareholders  $4,516,324 
      
Denominator:     
Weighted-average number of common shares outstanding during the period   253,890,722 
Dilutive effect of stock options, warrants, and convertible promissory notes   42,522,781 
Common stock and common stock equivalents used for diluted earnings per share   296,413,503 

 

Derivative Financial Instruments

 

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

 

8 

 

 

Fair Value of Financial Instruments

 

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

 

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

 

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

 

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

 

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

 

   Level 1   Level 2   Level 3   Total 
Derivative Liabilities  $-   $-   $277,627   $277,627 

 

Income Taxes

 

The Company accounts for income taxes in accordance with ASC 740-10, “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.

 

Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.

 

Inventory

 

Inventory is stated at the lower of cost or net realizable with cost determined using the first-in, first-out method.

 

Research and Development

 

Costs and expenses that can be clearly identified as research and development are charged to expense as incurred in accordance with FASB ASC 730-10. Included in research and development costs are operating costs, facilities, supplies, external services, clinical trial and manufacturing costs, and overhead directly related to the Company’s research and development operations, as well as costs to acquire technology licenses.

 

Recent Accounting Pronouncements

 

In May 2014, FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 is effective for annual and interim periods beginning after December 15, 2017. Early adoption is not permitted. The revenue recognition standard is required to be applied retrospectively, including any combination of practical expedients as allowed in the standard. We are evaluating the impact, if any, of the adoption of ASU 2014-09 to our financial statements and related disclosures. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

9 

 

 

In August 2014, the FASB issued ASU 2014-15, Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU 2014-15 changes to the disclosure of uncertainties about an entity’s ability to continue as a going concern. These changes require an entity’s management to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that financial statements are issued. Substantial doubt is defined as an indication that it is probable that an entity will be unable to meet its obligations as they become due within one year after the date that financial statements are issued. If management has concluded that substantial doubt exists, then the following disclosures should be made in the financial statements: (i) principal conditions or events that raised the substantial doubt, (ii) management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations, (iii) management’s plans that alleviated the initial substantial doubt or, if substantial doubt was not alleviated, management’s plans that are intended to at least mitigate the conditions or events that raise substantial doubt, and (iv) if the latter in (iii) is disclosed, an explicit statement that there is substantial doubt about the entity’s ability to continue as a going concern. These changes became effective for the Company for the 2017 annual period. The adoption of these changes did not have a material impact on the financial statements.

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance on accounting for leases in “Leases (Topic 840)” and generally requires all leases to be recognized in the consolidated balance sheet. ASU 2016-02 is effective for annual and interim reporting periods beginning after December 15, 2018; early adoption is permitted. The provisions of ASU 2016-02 are to be applied using a modified retrospective approach. The Company is currently evaluating the impact of the adoption of this standard on its consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU affects entities that issue share-based payment awards to their employees. The ASU is designed to simplify several aspects of accounting for share-based payment award transactions which include – the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. ASU 2016-09 will become effective for the Company in the first quarter of fiscal 2018. Early adoption is permitted in any interim or annual period. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.

 

In April 2016, the FASB issued AS 2016-10, Revenue from Contracts with Customers (Topic 606), which amends certain aspects of the Board’s new revenue standard, ASU 2014-09, Revenue from Contracts with Customers. The standard should be adopted concurrently with adoption of ASU 2014-09 which is effective for annual and interim periods beginning after December 15, 2017. The Company has not yet selected a transition method nor has it determined the effect of the standard on its ongoing financial reporting.

 

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 reserve amount for uncollectible accounts was $-0- and $-0- as of March 31, 2017 and December 31, 2016, respectively.

 

10 

 

 

4. ACCRUED EXPENSES

 

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 $2,578 per month on a total liability of $39,622 as of March 31, 2017, including interest. The Company recognized a reduction of accrued liability of approximately $200,000 relating to the settlement with the Internal Revenue Service, which was recorded as other income in 2016. This agreement will cure any default of the Company’s plan payments. The final payment is due on April 16, 2018.

 

5. INCOME TAXES

 

The Company’s book losses and other timing differences result in a net deferred income tax benefit which is offset by a valuation allowance for a net deferred asset of zero. The Company has concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company may not realize the benefit of all of its deferred tax assets. Accordingly, management has provided a 100% valuation allowance against its deferred tax assets until such time as management believes that its projections of future profits as well as expected future tax rates make the realization of these deferred tax assets more-likely-than-not. Significant judgment is required in the evaluation of deferred tax benefits and differences in future results from our estimates could result in material differences in the realization of these assets. The Company has recorded a full valuation allowance related to all of its deferred tax assets. The Company has performed an assessment of positive and negative evidence regarding the realization of the net deferred tax asset in accordance with FASB ASC 740-10, “Accounting for Income Taxes.” This assessment included the evaluation of scheduled reversals of deferred tax liabilities, the availability of carry forwards and estimates of projected future taxable income. The availability of the Company’s net operating loss carry forwards is subject to limitation if there is a 50% or more change in the ownership of the Company’s stock. The provision for income taxes consists of the state minimum tax imposed on corporations of $800. The Company has adopted guidance issued by the FASB that clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. The Company’s policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. The Company has not recognized any unrecognized tax benefits and does not have any interest or penalties related to uncertain tax positions as of March 31, 2017.

 

6. NOTES PAYABLE

 

During 2015 and 2016, the Company issued promissory notes in the aggregate amount of $942,850 for cash proceeds of $872,500. These notes bear interest at 5%-10% per annum and several were due on various dates throughout 2015 and 2016 and several are due in 2017. These notes are secured by substantially all assets of the Company. The convertible promissory notes are convertible into shares of the Company’s common stock at a rate equal to $0.01-$0.05 per share, subject to downward adjustments for future equity issuances. In connection with these convertible promissory notes, the Company issued warrants to purchase 66,500,000 shares of common stock at an exercise price of $0.01 per share, subject to downward adjustments for future equity issuances. The warrants have a term of 7 years from the date of issuance. The Company is in default under the terms of these notes.

 

The conversion features and warrants are considered derivative liabilities pursuant to ASC 815 and were measured at their grant-date fair value and recorded as a liability and note discount on the date of issuance. Subsequent changes to the value of the derivative liabilities are recorded in earnings. As a result, during the year ended December 31, 2016, the Company recorded an initial note discount of $455,000, with an additional immediate charge to interest expense of $749,809 relating to the excess value of the derivative liabilities over the promissory notes. Amortization of the note discount amounted to $135,580 during the three months ended March 31, 2017 and $77,000 for the three months ended March 31, 2016.

 

On January 5, 2017 the Company entered into a financing arrangement with five accredited investors (the “Investors”), whereby amendments to certain convertible note agreements totaling $662,000 were enacted. The amendments to the convertible note agreements involved (1) extending the maturity dates of the note agreements; and (2) amending the optional conversion provisions of the original note agreements to now describe an adjustable conversion price based on the completion of a qualified financing offering. If the cumulative gross proceeds of such offerings exceed $2.5 million, the conversion price will be adjusted automatically to match the offering’s conversion price and conversion to common shares will occur automatically. If the cumulative gross proceeds of such offerings remain below $2.5 million, the conversion price adjusts to match the offering conversion price for the Investors. Should there be an event of default under these amended notes, the Investors will have, in addition to all the other rights described in that certain Securities Purchaser Agreement, the right, at each Investor’s option, to convert the notes into common shares at $0.01 per share. The Company and certain Investors agreed to amend its warrant agreements to reduce the number of warrants by 75% to 16,625,000. The exercise price remains at $0.01 per share. In consideration of this reduction of the number of warrants, the Company issued to the Investors new convertible promissory notes in total principal amount of $124,688 in the same form as the original convertible notes described above as amended. These additional convertible notes accrue interest beginning on January 9, 2017 and are due August 31, 2017.

 

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The amendment to the notes and warrants were accounted for as an extinguishment of debt, which resulted in a gain on extinguishment of debt totaling $3,668,776 for the quarter ended March 31, 2017. The outstanding derivative liability relating to the amended notes and warrants was approximately $265,000 as of March 31, 2017.

 

The Investors agreed to lend the Company up to $200,000, in increments of $50,000, at the Company’s discretion (the “Additional Loans”), as long as the Original Notes are not in default. These loans will be evidenced by note agreements in the form of the original notes as amended, described above, with a maturity date of August 31, 2017 and bear interest at 10% per annum. These notes have a face value of 118.75% of the funds actually advanced and contain conversion features (conversion price of $0.025 per share) making them derivative instruments. As of March 31, 2017, $150,034 of cash proceeds have been received from this agreement, for a total principal outstanding of $178,166. The Additional Loans are secured by a UCC filing on the Company’s assets. In connection with these note agreements, the derivative liability created by these note agreements and warrants totaled $288,057. The derivative liability in excess of the cash proceeds received was recorded as a charge to interest expense, which totaled $136,835. In addition, the Company issued 3,775,875 warrants in the form of the original Warrants as amended granting the Investor the right to purchase, at $0.01 per share in connection with these notes.

 

The outstanding derivative liability relating to the Additional Loans and the related warrants is approximately $75,000 as of March 31, 2017.

 

The agreement to amend the notes and warrants and to loan additional monies to the Company, as described above, was dependent on the two officers of the Company—Chief Executive Officer Dane Medley and Chief Financial Officer Xavier Aguilera—agreeing to restate their respective employment agreement, which they both have done.

 

On January 10, 2017, certain note holders converted notes to common shares. The total principal and accrued interest balance converted amounted to $196,797. The conversion resulted in the issuance of 8,627,500 common shares. The fair market value of the common shares on the date of conversion totaled $431,375.

 

7. STOCKHOLDERS’ EQUITY

 

Preferred Stock

 

Upon confirmation of the Company’s Chapter 11 Reorganization Plan, the Company is authorized to issue 2,000 shares of preferred stock, no par value. The rights, privileges, and preferences of the preferred stock are to be determined by the Company’s board of directors and may be issued in series. As of January 18, 2016, Imaging3 issued 2,000 preferred voting shares to Dane Medley, CEO/Chairman. Each share constitutes 350,000 voting shares. The estimated value of these shares was not significant. However, Dane Medley relinquished these voting shares during the first quarter ending March 31, 2017.

 

Common Stock

 

The Company is authorized to issue 1,000,000,000 shares of no par value common stock.

 

During the three months ended March 31, 2016, the company issued a total of 1,176,000 shares of common stock for cash proceeds of $29,400 and 500,000 shares of common stock for services, valued at $12,500.

 

During the three months ended March 31, 2017 the Company issued a total of 150,000 shares of common stock for cash in the amount of $7,000 and 7,000,000 shares were issued for services rendered valued at $210,000.

 

As of March 17, 2017, there were approximately 8,375 record holders of our common stock, not including shares held in “street name” in brokerage accounts which is unknown. As of March 31, 2017, there were approximately 258,621,593 shares of our common stock outstanding on record.

 

Stock Option Plan

 

During 2014, the Board of Directors adopted, and the shareholders approved, the 2014 Stock Option Plan under which a total of 27,000,000 shares of common stock had been reserved for issuance. The 2014 Stock Option Plan will terminate in September 2024.

 

Stock Options

 

As of March 31, 2017, employees of the Company hold options to purchase 13,000,000 shares of common stock at an exercise price of $0.025.

 

Transactions in FY 2017  Quantity   Weighted-
Average
Exercise Price
Per Share
   Weighted-
Average
Remaining
Contractual
Life
 
Outstanding, December 31, 2016   13,000,000   $0.025    8.86 
Granted   0           
Exercised   0           
Cancelled/Forfeited   0           
Outstanding ,March 31, 2017   13,000,000   $0.025    8.60 
Exercisable, March 31, 2017   13,000,000   $0.025    8.60 

 

The weighted average remaining contractual life of options outstanding issued under the Plan was 8.60 years at March 31, 2017.

 

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8. WARRANTS

 

Following is a summary of warrants outstanding at March 31, 2017:

 

Warrant Activity     
12-31-2016 Balance   81,648,696 
Granted   3,775,875 
Cancelled/Forfeited   (47,625,000)
03-31-2017 Balance   37,799,571 

 

Number of Warrants   Exercise Price   Expiration Date
 18,148,696   $0.000001   July 2023
 4,275,875   $0.01   April 2022
 6,250,000   $0.01   August 2022
 7,500,000   $0.01   April 2023
 1,625,000   $0.01    August 2023

 

9. DERIVATIVE LIABILITIES

 

The Company’s only asset or liability measured at fair value on a recurring basis was its derivative liability associated with warrants to purchase common stock and the conversion feature embedded in convertible promissory notes.

 

In connection with previous financing transactions, the Company issued warrants to purchase common stock and convertible promissory notes. These instruments included provisions that could result in a reduced exercise price based on specified full-ratchet anti-dilution provisions. The “reset” provisions were triggered in the event the Company subsequently issued common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than contractually specified amounts. Upon triggering the “reset” provisions, the exercise / conversion price of the instrument will be reduced. Accordingly, pursuant to ASC 815, these instruments were not considered to be solely indexed to the Company’s own stock and were not afforded equity treatment.

 

The following table summarizes activity in the Company’s derivative liability during the three months ended March 31, 2017:

 

12-31-2016 Balance  $5,532,898 
Creation  $416,205 
Change in Value and Extinguishment of Debt  $(5,671,476)
03-31-2017 Balance  $277,627 

 

The Company classifies the fair value of these derivative liabilities under level 3 of the fair value hierarchy of financial instruments. The fair value of the derivative liability was calculated using a Black-Scholes model. The Company’s stock price and estimates of volatility are the most sensitive inputs in validation of assets and liabilities at fair value. The liabilities were measured using the following assumptions:

 

Term  0.5 years - 7.0 years 
Dividend Yield   0%
Risk-free rate   0.55% - 1.44%
Volatility   60%

 

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10. COMMITMENTS AND CONTINGENCIES

 

Administrative Claim of Greenberg Glusker Fields Claman & Machtinger LLP

 

On January 30, 2017 the Company entered into a new Agreement. Under the terms of the Agreement, the Company has agreed to pay Greenberg $1,117,574 plus any interest that has accrued at the rate of 6.0% per annum, as follows: (i) $100,000 on or before December 31, 2017; (ii) $150,000 on or before December 31, 2018 (iii) 4.0% of the first $2.5 million of gross proceeds of any private or public offering by the company (an “Offering”); (iv) 2.0% of the next $2.5 million of gross proceeds from such Offerings; (v) 4.0% of any gross proceeds thereafter from such Offerings; and (vi) the remaining balance on or before December 31, 2019.

 

In addition, Greenberg has the option to convert up to $150,000 of the balance into a warrant that would convert on terms that are equal to (or, in certain cases, better than) the terms offered in subsequent rounds of financing.

 

Bankruptcy Closure

 

On January 31, 2017, United States Bankruptcy Judge for the Central District of California, Neil Bason, granted the company’s unopposed motion for entry of final decree and also granted approval of the two stipulations regarding payment of court-approved fees. The Company noted that as a result, the Imaging3 Chapter 11 proceeding is now closed—the company is no longer subject to the jurisdiction of the Bankruptcy Court, and the case cannot be converted to a Chapter 7 proceeding.

 

To clarify, the Judge’s order in its final paragraph stated that “Notwithstanding the foregoing [order closing the bankruptcy case pursuant to 11United States Code Section 350(a)] the bankruptcy case may be reopened on motion as set forth in the Greenberg, Glusker Fee Agreement and/or the Mentor Fee Agreement and thus the court retains jurisdiction for those purposes and as otherwise provided by law or as contemplated by the prior orders and proceedings of this court”. Thusly, technically, the case could possibly be reopened by either of those aforementioned creditors.

 

11. SUBSEQUENT EVENTS

 

Stock

 

As of April 2017, the Company cancelled 11 million shares of common stock issued in 2016. Furthermore, the company intends to cancel an additional 18 million shares pending negotiations relating to officer employment agreements.

 

Effective May 1, 2017, the Board of Directors of the Company authorized the issuance of (i) 36,000,000 warrants to purchase 36,000,000 shares of the Company’s common stock at an exercise price of $0.02 per share for a period of five years from the date of issuance to Mr. Dane Medley, the Chief Executive Officer of the Company, and (ii) 20,000,000 warrants to purchase 20,000,000 shares of the Company’s common stock at an exercise price of $0.02 per share for a period of five years from the date of issuance to Mr. Xavier Aguilera, the Chief Financial Officer of the Company.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Cautionary Statements

 

This Form 10-Q may contain “forward-looking statements,” as that term is used in federal securities laws, about Imaging3, Inc.’s financial condition, results of operations and business. These statements include, among others:

 

statements concerning the potential benefits that Imaging3, Inc. (“Imaging3” or the “Company”) may experience from its business activities and certain transactions it contemplates or has completed; and
   
statements of Imaging3’s expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts. These statements may be made expressly in this Form 10-Q. You can find many of these statements by looking for words such as “believes,” “expects,” “anticipates,” “estimates,” “opines,” or similar expressions used in this Form 10-Q. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause Imaging3’s actual results to be materially different from any future results expressed or implied by Imaging3 in those statements. The most important facts that could prevent Imaging3 from achieving its stated goals include, but are not limited to, the following:

 

  (a) volatility or decline of Imaging3’s stock price;
     
  (b) potential fluctuation in quarterly results;
     
  (c) failure of Imaging3 to earn revenues or profits;
     
  (d) inadequate capital to continue or expand its business, inability to raise additional capital or financing to implement its business plans;
     
  (e) failure to commercialize Imaging3’s technology or to make sales;
     
  (f) changes in demand for Imaging3’s products and services;
     
  (g) rapid and significant changes in markets;
     
  (h) litigation with or legal claims and allegations by outside parties;
     
  (i) insufficient revenues to cover operating costs, resulting in persistent losses;
     
  (j) dilution in the ownership of the Company through the issuance by us of additional securities and the conversion of outstanding warrants, notes and other securities; and
     
  (k) failure of Imaging3 to obtain approval of its proprietary medical imaging technology and device from the Federal Food and Drug Administration.

 

There is no assurance that Imaging3 will be profitable. Imaging3 may not be able to successfully develop, manage or market its products and services. Imaging3 may not be able to attract or retain qualified executives and technology personnel. Imaging3 may not be able to obtain customers for its products or services. Imaging3’s products and services may become obsolete. Government regulation may hinder Imaging3’s business. Imaging3 may not be able to obtain the required approvals from the United States Food and Drug Administration for its products and services. Additional dilution in outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, or the exercise of outstanding warrants and stock options, or the conversion of notes. Imaging3 is exposed to other risks inherent in its businesses.

 

Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Imaging3 cautions you not to place undue reliance on the statements, which speak only as of the date of this Form 10-Q. 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 Imaging3 or persons acting on its behalf may issue. Imaging3 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-Q, or to reflect the occurrence of unanticipated events.

 

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Current Overview

 

Though our efforts have been to market our refurbished equipment, a significant portion of our sales and revenues derive from services and the sale of parts, 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.

 

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, broadcast 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 company.

 

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

 

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. Warranty revenues are deferred and recognized on a straight-line basis over the term of the contract or as services are performed.

 

Deferred Revenue

 

Deferred revenue consists substantially of amounts received from customers in advance of the Company’s performance service period. Deferred revenue is recognized as revenue on a systematic basis that is proportionate to the period that the underlying services are rendered, which in certain arrangements is straight-line over the remaining contractual term or estimated customer life of an agreement.

 

Research and Development

 

Costs and expenses that can be clearly identified as research and development are charged to expense as incurred in accordance with FASB ASC 730-10. Included in research and development costs are operating costs, facilities, supplies, external services, clinical trial and manufacturing costs, and overhead directly related to the Company’s research and development operations, as well as costs to acquire technology licenses.

 

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 operations, the first quarter of each fiscal year is always a financial concern due to slow collections after the holidays.

 

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Results of Operation for the Three Months Ended March 31, 2017 Compared to the Three Months Ended March 31, 2016

 

We had revenues in the first quarter of 2017 of $4,785 compared to $11,627 in 2016. The decrease in revenue is due to decreased sales.

 

Our cost of revenue was $0 in the first quarter of 2017 compared to $5,377 in the first quarter of 2016. The decrease in cost of revenue was as a result of decreased sales. We had a gross profit in the first quarter of 2017 of $4,785 compared to $6,250 in the first quarter of 2016. Again, lack of sales had a direct impact on decreased gross profit margin. Our operating expenses increased to$349,015 in the first quarter of 2017 as compared to $22,261 in the first quarter of 2016, primarily due to stock based compensation. Our loss on operations increased to $344,230 in the first quarter of 2017 compared to $16,011 in the first quarter of 2016. Our net income was $4,516,324 in the first quarter of 2017 compared to a net loss of $101,414 in the first quarter of 2016 as a result of a derivative liability adjustment and gains on the extinguishment of debt.

 

Liquidity and Capital Resources

 

The Company’s cash position was $17,164 at March 31, 2017, compared to $22,638 at December 31, 2016.

 

As of March 31, 2017, the Company has a working capital deficit of $1,965,923 as compared to $8,148,197 at December 31, 2016.

 

Net cash used in operating activities amounted to $162,509 for the three month period ended March 31, 2017, as compared to net cash used in operating activities of $38,886 for the three month period ended March 31, 2016 due primarily to increased operating expenses.

 

Net cash provided by financing activities amounted to $157,035 and $29,400 for the three month periods ended March 31, 2017 and 2016, respectively. The increase in 2017 as compared to 2016 resulted mainly from an increase in proceeds from the issuance of notes payable during the period.

 

The Company does not have sufficient capital to meet its current cash needs, which include the costs of compliance with the continuing reporting requirements of the Securities Exchange Act of 1934, as amended. The Company intends to seek additional capital and long term debt financing to attempt to overcome its working capital deficit. The Company will need between $50,000 and $100,000 annually to maintain its reporting obligations. The Company may attempt to do more private placements of its stock in the future to raise capital, but there is no assurance that the Company can raise sufficient capital or obtain sufficient financing to enable it to obtain approval of its prototype from the Federal Food and Drug Administration and to sustain monthly operations. In order to address its working capital deficit, the Company also intends to endeavor to (i) reduce operating costs, (ii) reduce general, administrative and selling costs, (iii) increase sales of its existing products and services, and (iv) obtain the approval of the United States Food and Drug Administration to the Company’s proprietary medical imaging device so that the Company can commence marketing and selling it. There may not be sufficient funds available to the Company to enable it to remain in business and the Company’s needs for additional financing are likely to persist.

 

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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 years ended December 31, 2016, 2015, 2014, 2013 and 2012. 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” might make it substantially more difficult to raise capital.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures

 

Our management is responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 15d-15(e) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

 

At the end of the period covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2017, the disclosure controls and procedures of our Company were not effective to ensure that the information required to be disclosed in our Exchange Act reports was recorded, processed, summarized and reported on a timely basis.

 

Imaging3 is undertaking to improve its internal control over financial reporting and improve its disclosure controls and procedures. As of March 31, 2017 we had identified the following material weaknesses which still exist as of March 31, 2017 and through the date of this report:

 

1. As of March 31, 2017, and as of the date of this report, 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 March 31, 2017, and as of the date of this report, 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.

 

3. As of March 31, 2017, and as of the date of this report, we did not maintain adequate segregation of duties. Accordingly, management has determined that this control deficiently constitutes a material weakness.

 

Changes in Internal Control Over Financial Reporting

 

There were no changes in internal controls over financial reporting that occurred during the quarter ended March 31, 2017, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

Administrative Claim of Greenberg Glusker Fields Claman & Machtinger LLP

 

On January 30, 2017 the Company entered into a new Agreement. Under the terms of the Agreement, the Company has agreed to pay Greenberg $1,117,574 plus any interest that has accrued at the rate of 6.0% per annum, as follows: (i) $100,000 on or before December 31, 2017; (ii) $150,000 on or before December 31, 2018 (iii) 4.0% of the first $2.5 million of gross proceeds of any private or public offering by the company (an “Offering”); (iv) 2.0% of the next $2.5 million of gross proceeds from such Offerings; (v) 4.0% of any gross proceeds thereafter from such Offerings; and (vi) the remaining balance on or before December 31, 2019.

 

In addition, Greenberg has the option to convert up to $150,000 of the balance into a warrant that would convert on terms that are equal to (or, in certain cases, better than) the terms offered in subsequent rounds of financing.

 

Bankruptcy Closure

 

On January 31, 2017, United States Bankruptcy Judge for the Central District of California, Neil Bason, granted the company’s unopposed motion for entry of final decree and also granted approval of the two stipulations regarding payment of court-approved fees. The Company noted that as a result, the Imaging3 Chapter 11 proceeding is now closed—the company is no longer subject to the jurisdiction of the Bankruptcy Court, and the case cannot be converted to a Chapter 7 proceeding.

 

Imaging3 Chapter 11 proceeding is now closed—the company is no longer subject to the jurisdiction of the Bankruptcy Court, and the case cannot be converted to a Chapter 7 proceeding.

 

To clarify, the Judge’s order in its final paragraph stated that “Notwithstanding the foregoing [order closing the bankruptcy case pursuant to 11United States Code Section 350(a)] the bankruptcy case may be reopened on motion as set forth in the Greenberg, Glusker Fee Agreement and/or the Mentor Group Fee Agreement and thus the court retains jurisdiction for those purposes and as otherwise provided by law or as contemplated by the prior orders and proceedings of this court”. Thusly, technically, the case could possibly be reopened by either of those aforementioned creditors.

 

Item 1A. Risk Factors

 

Not applicable because we are a smaller reporting company.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

 

There were no unregistered sales of equity securities during the period covered by this quarterly report.

 

Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not Applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

(a) Exhibits

 

EXHIBIT NO.   DESCRIPTION
31.1   Section 302 Certification of Chief Executive Officer
31.2   Section 302 Certification of Chief Financial Officer
32.1   Section 906 Certification
32.2   Section 906 Certification
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

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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.

 

  IMAGING3, INC.
     
Dated: May 22, 2017 By: /s/ Dane Medley
    Dane Medley
   

Chief Executive Officer

and Chairman (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.

 

/s/ Dane Medley   Dated: May 22, 2017
Dane Medley, Chief Executive Officer    
and Chairman (Principal Executive Officer)    
     
     
/s/ Xavier Aguilera   Dated: May 22, 2017
Xavier Aguilera, Chief Financial Officer,    
Secretary, and Executive Vice President    
(Principal Financial/Accounting Officer)    

 

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