Grapefruit USA, Inc - Annual Report: 2012 (Form 10-K)

In 2012 we believed that our products would be classified as Class II (Medium Risk) devices by the FDA. Accordingly, clinical studies with our products would be considered to be Non-Significant Risk Studies, except that our 501(k) application with the FDA for our proprietary medical imaging device has not yet been approved as a Class II device. 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. We are also regulated by the FDA’s Quality Systems Regulation, which is similar to the ISO9000 and the European EN46000 quality control regulations. All of our 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, to a legally marketed device that is not subject to pre-market approval. 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 substantially equivalent to a predicate device. The data in a 510(k) is to show comparability, that is, substantially equivalent of a new device to a predicate device.

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 our research of this database we determined several Class II devices meet our criteria for submission. These devices are listed in the table below.

This is a broad range of devices with which to compare our device functionality. The FDA requires the manufacturer to submit an application, whether it is a 510(k) or pre-market approval 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 our 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 us are not manufactured by us. 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 we are not required to submit any FDA submission for these devices. In some instances, we have 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:

As to our new product and its potential for classification, the FDA requires us, as the manufacturer, to submit an application in whichever classification we choose in the submission form we choose, meaning 510(k) or pre-market approval application. The FDA reviews the submission and determines whether the application is appropriately filed and in the correct submission format. The criteria they use for determination on a 510(k) is substantially equivalent, 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 to a Class I, II, or III (Class III requiring 510(k)), then a pre-market approval 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.

Our 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 we believe is unlikely, since the majority of our 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, then a pre-market approval application must be filed. The pre-market approval application is the most stringent type of device marketing application required by the FDA. The applicant must receive FDA approval of its pre-market approval application prior to marketing the device. Pre-market approval is based on a determination by the FDA that the pre-market approval contains sufficient valid scientific evidence to assure that the device is safe and effective for its intended use(s). An approved pre-market approval application is, in effect, a private license granting the applicant (or owner) permission to market the device. The pre-market approval owner, however, can authorize use of its data by another.

The pre-market approval 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 pre-market approval application and make a determination. In reality, the review time is normally longer. Before approving or denying a pre-market approval application, the appropriate FDA advisory committee may review the pre-market approval 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 pre-market approval 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 pre-market approval 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 pre-market approval application, but good science and scientific writing is a key to the approval of a pre-market approval application. If a pre-market approval application lacks elements listed in the administrative checklist, the FDA will refuse to accept a pre-market approval application and will not proceed with the in-depth review of scientific and clinical data. If a pre-market approval application lacks valid clinical information and scientific analysis based on sound scientific reasoning, it will delay the FDA’s review and approval. Pre-market approval applications that are incomplete, inaccurate, inconsistent, omit critical information, and are poorly organized have resulted in delays in consideration.

Three categories of the pre-market approval 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 must be identified as such.

We are listed with the FDA as a new device manufacturer, our Registration Number is 20300565, and our Owner Operator Number is 9023393. Though we do not currently manufacture new devices, the FDA requires our registration as a remanufacturer. Imaging3 is subject to the FDA’s Radiological Health Program, under the Center for Devices Radiological Health division of the FDA.

We must be in compliance with Good Manufactures Practices (“GMP”), Quality Control, and Medical Device Reporting (“MDR”). The FDA may from time to time, usually every two to three years, audit us 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 of 1990. The Safe Medical Devices Act of 1990 requires user facilities to report:

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 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.

We are also required to report under the MDR requirements, which are for injuries and deaths, of which we have had none since our registration.

For all devices manufactured or remanufactured by us, the FDA may request updated information regarding any device with a previously approved 510(k) or pre-market approval 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.

Our last audit with the FDA was in 2010 and we expect a new audit to take place shortly after our new device is resubmitted to the FDA in a 510(k) application.

In an audit performed by the FDA, our 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 us 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 our registration with the FDA in 1995, we have had two audits. We did not receive any notice or correspondence of non-compliance due to those audits. We received only one suggestion regarding our record keeping process, which addressed preventive maintenance forms being included in all customer files for which we provide service.

We are 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.

We have 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.

We intend to seek to obtain FDA approval of our proprietary medical imaging device in 2016, although we cannot assure that this approval will be granted when expected. All of our marketing efforts for the new device must start from the date the FDA approves the device to be marketed. Since we are already registered with the FDA as a new device manufacturer and have been through an audit performed by the FDA, the FDA is already familiar with us and our processes. The FDA may wish to obtain updated information about us and may require more time to process our planned 510(k) resubmission than estimated.

To enter the European market, our products as well as our 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, we may plan to go through this process as a part of our 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 and Safety Checklist Contractors certified, providing a full suite of services, including CE Marking assistance, electromagnetic compatibility, 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. We intend to comply with applicable requirements if and when we decide to enter those markets.

Status of Bankruptcy Proceedings

On September 13, 2012, the Company commenced a bankruptcy case by filing a voluntary Chapter 11 petition under the United States Bankruptcy Code (“Bankruptcy Code”). The Chapter 11 Plan (the “Plan”) adopted by Imaging3, Inc. on July 31, 2013 is a reorganizing plan. Payments under the Plan are made by utilizing existing cash on hand, borrowings on a secured and unsecured basis, future revenues for claims that are paid in cash, and by conversion of debt to equity. The effective date of the Plan was July 31, 2013 (the “Effective Date”).

Administrative expenses are claims for costs or expenses of administering the Company’s Chapter 11 case. The Bankruptcy Code requires that all administrative claims be paid on the Effective Date of the Plan, unless a particular claimant agrees to a different treatment. The Company paid approximately $463,146 on the Effective Date for administrative expenses. Priority tax claims are certain unsecured income, employment and other taxes. The Company is paying approximately $71,974 of priority tax claims to the IRS, Los Angeles County, California State Board of Equalization and City of Los Angeles in monthly installments, plus interest, through September 2017. Secured claims are claims secured by liens on the Company’s property. The Company has agreed to pay approximately $105,525 in cash installments, $60,247 of which are over 36 months and $45,278 of which is a one-time payment due in September 2015, for certain secured claims. The Company issued approximately 56,439,176 shares of new common stock to pay approximately $1,073,033 of outstanding debt owed to Gemini Master Fund, LLC, Alpha Partners, LLC and Brio Capital, LLC, whereupon their liens on Company assets were released. In addition, the Company issued approximately 18,148,696 new warrants to purchase common stock to Gemini and Alpha, exercisable for a period of five years from the Effective Date at $0.01 per share. The Company issued approximately 15,536,859 additional shares of new common stock to pay approximately $298,142 of additional secured claims. An additional 58,823,965 shares of new common stock are authorized to be issued by the Company to raise up to $1,000,000 of financing for the Company before and after the Effective Date; which may be in the form of collateralized debt.

General unsecured claims are unsecured claims not entitled to priority. The Company paid approximately $1,936,402 of unsecured claims by issuing 21,513,051 shares of its new common stock pro rata among the holders of such debt. An unsecured claim for $359,938 owed to Dean Janes, the former Chief Executive Officer of the Company, was paid in full by issuance of 3,986,949 shares of new common stock to him on the Effective Date. The Company’s stockholders were issued 8,500,000 shares of new common stock in the Company, and all of their old common stock was cancelled. All old outstanding preferred stock was also cancelled. All options to acquire old common stock and warrants to purchase securities of the Company’s outstanding old common stock immediately prior to the Effective Date were cancelled and extinguished on the Effective Date.

On the Effective Date, the Plan provided for the Company to adopt a new equity incentive plan authorizing the award of up to 15% of the shares of new common stock outstanding from time to time, to the Company’s employees, officers, directors and consultants in the form of stock option grants or restricted stock grants or stock awards, as determined by the Company’s board of directors. The Company has not yet adopted the Plan.

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. We believe that we are materially complying with applicable laws, however, we have not received or applied for a legal opinion from counsel or from any federal or state judicial or regulatory authority. Additionally, many aspects of our business have not been the subject of state or federal regulatory interpretation. The laws applicable to us are subject to evolving interpretations. If our operations are reviewed by a government authority, we may receive a determination that could be adverse to us. Furthermore, laws that are applicable to us may be amended in a manner that could adversely affect us.

Only a small portion of our revenues come through a government system. Virtually all of our revenues are obtained from sales and service to vendees who pay us directly. We have not been subject to Medicare, Medicaid, or any other federally funded health care program.

ITEM 1A. RISK FACTORS

Purchasing shares of common stock in Imaging3 entails substantial risk. You should be able to bear a complete loss of your investment. You should carefully consider the following factors, among others.

Forward-Looking Statements

The discussions and information in our public reports with the Securities and Exchange Commission (collectively, the “Reports”), including the documents incorporated by reference may contain both historical and forward-looking statements. To the extent that the Reports contain forward-looking statements regarding the financial condition, operating results, our business prospects or any other aspect of our business, please be advised that our actual financial condition, operating results and business performance may differ materially from that projected or estimated by management in forward-looking statements. We have attempted to identify, in context, certain of the factors that management currently believes may cause actual future experience and results to differ from our current expectations. The differences may be caused by a variety of factors, including but not limited to adverse economic conditions, decrease in demand for medical imaging and other equipment, intense competition, including entry of new competitors, increased or adverse federal, state and local government regulation, failure by us to obtain the approval of the FDA for our proprietary 3D medical imaging device currently in the prototype phase, inadequate capital, unexpected costs, lower revenues and net income than forecast, failure to complete the development of our proprietary products currently under development, technological obsolescence of our products, failure to commercialize or sell any new or existing products developed by us, price increases for supplies, inability to raise prices, failure to obtain customers, the risk of litigation and administrative proceedings involving us and our employees, higher than anticipated labor costs, the possible fluctuation and volatility of operating results and financial condition, failure to make planned business acquisitions, failure of new businesses, if acquired, to be economically successful, decline in our stock price, dilution of ownership in us due to the issuance of additional securities by us or the conversion or exercise of outstanding convertible and other securities, adverse publicity and news coverage, inability to carry out marketing and sales plans, loss of key executives, changes in interest rates, inflationary factors, and other specific risks that may be alluded to in Reports filed by us.

Due to the restructuring process under Chapter 11 of the United States Bankruptcy Code, our future operations are uncertain and are affected by a number of risks and uncertainties over which we have little or no control. We are subject to a number of risks and uncertainties associated with the filing of voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code, which may lead to potential adverse effects on our liquidity, results of operations, brand and/or business prospects. We cannot assure you of the outcome and repercussions of our Chapter 11 proceedings. Risks associated with the Chapter 11 proceedings may adversely impact our business, and include an adverse impact on the following:

We have incurred substantial operating deficits since inception and may continue to incur losses in the future. To date, our revenue from component and equipment sales has not been adequate to cover research and development costs for proprietary products under development, marketing costs, operating and overhead costs, and substantial costs incurred in ongoing litigation. Revenue from our old business model of selling nonproprietary medical equipment and components has declined in recent fiscal quarters, and no sales of our proprietary 3D medical imaging product currently under development have yet been made, since it is still in the prototype phase and has not been approved by the FDA for sale or use. We do not have sufficient cash flow from our current operations to enable us to maintain or grow our business. We must raise additional capital in the future to continue to operate our businesses. Failure to secure adequate capital will hinder our growth and may jeopardize us as a going concern.

If we do not generate significant additional revenue we will continue to receive a going concern qualification in our audit. Our financial statements have been prepared on a going concern basis of accounting, which contemplates continuity of operations, realization of assets and liabilities and commitments in the normal course of business. The financial statements do not reflect any adjustments that might result if we are unable to continue as a going concern. We do not generate sufficient revenue and have negative cash flow from operations, which raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, an additional cash infusion. We are actively seeking new investors.

We have not completed the development of our proprietary 3D medical imaging technology. Research and development projects are inherently speculative and subject to cost overruns. We cannot assure that we will be able to complete the development of our real time 3D diagnostic medical imaging technology, that it will be approved by the FDA for sale and use, or that, once developed, our diagnostic medical imaging devices can be sold profitably. We may not develop any new products or services for sale from our research and development efforts.

If we are required by the Food and Drug Administration to conduct clinical trials for our 3D medical imaging technology and device, the additional cost and time incurred before we receive approval from the Food and Drug Administration for the commercial sale and use of our device could be substantial and adversely affect our business, financial condition and operating results. On October 28, 2010, we received a letter from the Food and Drug Administration responding to our 501(k) application for clearance of our 3D medical imaging technology and device. In our application to the Food and Drug Administration we stated that our medical device is substantially equivalent to devices marketed in interstate commerce prior to May 28, 1976 and therefore should be approved for commercial sale and use as a Class II device, without the necessity for clinical trials. The Food and Drug Administration responded by rejecting our position that our medical device is substantially equivalent to such prior devices, citing several deficiencies in our submission. We plan to re-file our application to the Food and Drug Administration in the near future to again seek Class II approval, in which we will endeavor to address the deficiencies. We have engaged special outside professional counsel to assist us with the preparation and submission of our next filing with the Food and Drug Administration. While we disagree with the Food and Drug Administration’s position and we plan to re-file our application with additional information supporting our application for clearance, we cannot assure that such approval will be obtained or that we may not ultimately be required to file our application under Class III where clinical trials would be required, significantly delaying or preventing our device from being approved for commercial sale and use.

Our business may be adversely affected by competition. The diagnostic medical imaging industry is characterized by intense competition. We are subject to competition from other firms, many of which have greater financial resources, more recognition, more management experience, and longer operating histories than we have. We cannot assure that we will be able to compete successfully or profitably in the diagnostic medical imaging business.

We may not achieve the revenue predicted by us in our business model. We plan to implement a business model that calls for us to sell medical diagnostic imaging devices, based on our proprietary technology. We will incur substantial operating losses until such time as we are able to generate revenues from the sale of these products. We cannot assure that businesses and customers will adopt our products and technology in the volume that we project, or that businesses and prospective customers will agree to pay the prices that we propose to charge. In the event our customers resist paying prices at the rate we propose, our financial conditions and results of operations will be materially and adversely affected.

If products utilizing our medical diagnostic imaging technology are determined to be unsafe, our business will be adversely affected. As medical diagnostic imaging has become an ever-more important and prominent part of everyday life, dramatic growth in the use of medical diagnostic imaging devices has given rise to occasional questions about safety. In the event that our products are deemed unsafe, we could face substantial liability and our financial conditions and results of operations will be materially and adversely affected.

Our failure to achieve brand recognition could have an adverse affect on our business. We believe that establishing and maintaining brand recognition for our medical diagnostic imaging technology will be a critical aspect of our efforts to attract and expand our customer base. Promotion and enhancement of the Imaging3 brand will depend largely on our success in providing high quality products and services. In order to attract and retain customers and to promote the Imaging3 brand in response to competitive pressures, we may find it necessary to increase substantially our financial commitment to creating and maintaining the Imaging3 brand. We cannot assure that we will obtain brand recognition for Imaging3. Our failure to provide high quality products and services or to obtain and maintain brand recognition could have a material adverse effect on our business, results of operations, and financial condition.

We must adapt quickly to changes in technology. Medical diagnostic imaging is a rapidly evolving technology. We must keep abreast of this technological evolution. To do so, we must continually improve the performance, features and reliability of our medical imaging equipment and related products. If we fail to maintain a competitive level of technological expertise, then we will not be able to compete in our market.

Our inability to respond timely to technological advances could have an adverse affect on our business. We must be able to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. We can offer no assurance that we will be able to successfully use new technologies effectively or adapt our products in a timely manner to a competitive standard. If we are unable to adapt in a timely manner to changing technology, market conditions or customer requirements, then we may not be able to successfully compete in our market.

We may not be able to repay our indebtedness. We have substantial indebtedness to related parties and to unaffiliated third parties, as disclosed in more detail in our reports, financial statements and notes to financial statements filed with the Securities and Exchange Commission. The indebtedness includes outstanding indebtedness owed by us to our chief executive officer, payable on demand. We cannot assure that we will be able to repay all or any of our indebtedness, or that the indebtedness does not and will not continue to have a material adverse impact on our financial condition, operating results and business performance, including but not limited to our ability to continue as a going concern.

We cannot assure that we will achieve profitability. We cannot assure that we will be able operate profitability in the future. Profitability, if any, will depend in part upon our ability to successfully develop, obtain FDA approval, and market our proprietary medical diagnostic imaging technology, and other products and services. We may not be able to successfully transition from our current stage of business to a stabilized operation having sufficient revenues to cover expenses. While attempting to make this transition, we will be subject to all the risks inherent in a small business, including the needs to adequately service and expand our customer base and to maintain and enhance our current services. Our future profitability will be affected by all the risk factors described herein.

We are exposed to various possible claims relating to our business and our insurance may not fully protect us. We cannot assure that we will not incur uninsured liabilities and losses as a result of the conduct of our business. We generally do not maintain theft or casualty insurance and has modest liability and property insurance coverage, along with workmen’s compensation and related insurance. However, should uninsured losses occur, our shareholders could lose their invested capital.

We may face additional litigation in the future. We have had a substantial amount of litigation. The adverse resolution of such litigation to us could impair our ability to continue in business if judgment holders were to seek to liquidate our business through levy and execution. We have incurred and may continue to incur substantial legal fees and costs in connection with past and possibly future litigation. If we fail in our payment schedule, or fail in our defense to future pending actions, or become subject to a levy and execution on our assets and business, we could be forced to liquidate or to file for bankruptcy and be unable to continue in our business. Investors who purchase shares of our common stock will be subject to the risk of total loss if the risks described herein are realized, because there may be insufficient assets with which to pay our debts, which would leave shareholders with no recovery.

The loss of the services of any or our management or key executives could adversely affect our business. Our success is substantially dependent on the performance of our executive officers and key employees. The loss of an officer or director of Imaging3 could have a material adverse impact on us. We are generally dependent upon our executive officers, Dean Janes and Xavier Aguilera, for the direction, management and daily supervision of our operations.

Our ability to protect our intellectual property is uncertain. We have applied to the U.S. Patent and Trademark Office to register “Imaging3” as a service mark and as a trademark. There are no assurances that these applications will be approved and the registrations granted or that any other person will not challenge the registration or attempt to infringe upon our marks. If we are unable to protect our rights to our trademarks or if such marks infringe on the rights of others, our business would be materially adversely affected.

We may not be able to withstand fluctuations in our industry because our business is not diverse. Because of the limited financial resources that we have, it is unlikely that we will be able to diversify our operations. Our probable inability to diversify our activities into more than one area will subject us to economic fluctuations within a particular business or industry and therefore increase the risks associated with our operations.

Our medical diagnostic imaging devices are subject to government regulation. Under the Medical Device Amendments of 1976 to the Federal Food, Drug and Cosmetic Act, all medical devices are classified by the Food and Drug Administration into one of three classes. A Class I device is subject only to certain controls, such as labeling requirements and manufacturing practices; a Class II device must comply with certain performance standards established by the FDA; and a Class III device must obtain pre-market approval from the FDA prior to commercial marketing. We must receive Class II approval to market our real time 3D medical diagnostic imaging devices. We cannot be certain when, if ever, we will receive this approval. In the absence of FDA approval, we will not be able to market or sell our proprietary diagnostic medical imaging device, resulting in a material adverse impact to our potential operating results and financial condition. Other laws and regulations may be adopted in the future that address the manufacture, sale and use of medical diagnostic imaging devices that could adversely affect our business.

Our business is generally subject to government regulation. We are subject to regulations applicable to businesses generally. The adoption of any additional laws or regulations may decrease the growth of our business, decrease the demand for services and increase our cost of doing business. Changes in tax laws also could have a significant adverse effect on our operating results and financial condition.

Our stock does not currently trade, but if trading resumes, our stock price could be volatile, as it was in the past, and could decline again. Trading in our stock was suspended in 2012 after we filed for bankruptcy, and has not yet resumed. We may still be delinquent in filing our reports currently with the Securities and Exchange Commission (“SEC”). We have asked the Office of the Chief Accountant of the SEC for an accommodation and waiver to relieve us of having to file our Annual Report on Form 10-K for our fiscal year ending on December 31, 2012. There is no assurance that our stock will resume trading on the OTC or any other public securities trading market, that the SEC will grant our waiver request, or that we will cure our reporting delinquencies. Our stock price has been volatile. The stock market in general has been extremely vulnerable and management cannot promise that the price of our common stock will not decline. Shares issued under the Chapter 11 Reorganization Plan are free trading. We may register more shares of our stock in the future, free trading shares of our common stock may be issued upon the conversion or exercise of outstanding securities or pursuant to court approved settlements, or restrictive transfer legends on outstanding securities may be removed pursuant to Rule 144 of the Securities Act of 1933, as amended, potentially increasing the supply of free trading shares and possibly exerting downward pressure on our stock price.

We recently settled a lawsuit on terms that will cause the substantial dilution of our outstanding common stock, and we may in the future be subject to other litigation. On November 29, 2011, we were served with a Motion to Compel Arbitration by Cranshire Capital, LLC (the “Plaintiff” or “Cranshire”), one of two Warrant holders with whom we completed a private placement for the sale of common stock and warrants for $1,000,000 in October 2010. The Plaintiff alleged that it and Freestone Advantage Partners, L.P. are the holders of Series A Warrants, Series B Warrants and Series C Warrants (collectively, the “Warrants”) and that our entry into a transaction in October 2011 had the effect of triggering the anti-dilution provision in the Warrants. They alleged that the effect of the application of the anti-dilution provisions was to substantially lower the exercise price of the Warrants and increase the number of them. We believe that we had meritorious defenses to the Plaintiff’s claims. Nevertheless, the parties have agreed to settle the claims. Accordingly, on or about March 28, 2012, we entered into a Claims Exchange Agreement (the “Cranshire Agreement”) with Cranshire and a Settlement Agreement (the “Freestone Agreement”) with Freestone Advantage Partners, L.P. (“Freestone”), the other holder of Warrants, in order to settle the disputes between us and Cranshire and us and Freestone. Pursuant to the Cranshire Agreement, we and Cranshire have agreed that as a result of the issuance of securities by us pursuant to the transaction in October 2011, Cranshire is entitled to (i) an exercise price under each of Cranshire’s Warrants of $0.0119 per share, and (ii) the following as a result thereof: (a) 103,466,396.17 shares of our common stock issuable upon exercise of Cranshire’s Series A Warrant, (b) 22,868,151.26 shares of our common stock issuable upon exercise of Cranshire’s Series B Warrant and (c) 103,466,396.17 shares of common stock issuable upon exercise of Cranshire’s Series C Warrant. Cranshire also agreed that its Series B Warrant will terminate and be cancelled simultaneously with the occurrence of the closing under the Cranshire Agreement, and we will have no further obligation to deliver any shares of our common stock under Cranshire’s Series B Warrant. Pursuant to the Freestone Agreement, we and Freestone have agreed that as a result of the issuance of securities by the Company pursuant to the transaction in October 2011, Freestone is entitled to (i) an exercise price under each of Freestone’s Warrants of $0.0119 per share, and (ii) the following as a result thereof: (a) 1,575,645.38 shares of our common stock issuable upon exercise of Freestone’s Series A Warrant, (b) 1,260,516.30 shares of our common stock issuable upon exercise of Freestone’s Series B Warrant, and (c) 1,575,645.38 shares of common stock issuable upon exercise of Freestone’s Series C Warrant. Freestone also agreed that its Series B Warrant will terminate and be cancelled simultaneously with the occurrence of the closing under the Cranshire Agreement, and we will have no further obligation to deliver any shares of our common stock under Freestone’s Series B Warrant. Our shareholders could incur additional dilution in their ownership of us as a result of the full ratchet anti-dilution provisions of other outstanding convertible securities that may be triggered by the adjustments made in the settlement. Additionally, we cannot assure that future litigation in which we may become involved will not have a material adverse effect on our financial condition, operating results, business performance and business reputation. Investors who purchase shares of our common stock will be subject to the risk of total loss if the risks described herein are realized, because there may be insufficient assets with which to pay our debts, leaving shareholders with no recovery.

Shareholders could experience dilution in their ownership of us. Our board of directors has the authority to cause the Company to issue additional securities and convertible securities at such prices and on such terms as it determines in its discretion without the consent of the stockholders, including without limitation common stock, preferred stock, warrants and convertible notes. The Company has issued securities to professional investment firms that have full ratchet anti-dilution provisions and other adjustments for certain potentially dilutive transactions. These provisions may be triggered, causing adjustments resulting in lower exercise prices and more securities outstanding, thereby causing existing shareholders to experience more dilution than originally anticipated when those securities were first issued by the Company. Consequently, our shareholders are subject to the risk that their ownership in the Company will be substantially diluted in the future.

We have issued Series A Preferred Stock having additional voting rights to our chief executive officer. The Company has issued 3,000 shares of Series A Preferred Stock to Dean Janes, our chief executive officer. Each share of Series A Preferred Stock has a par value of $0.001 and the equivalent of 350,000 votes. The Series A Preferred Stock is not convertible into the Company’s common stock. The holder of the Series A Preferred Stock is entitled to dividends only to the extent of the number of shares of Series A Preferred Stock held by him (i.e. 3,000) in proportion to the total number of outstanding shares of preferred and common stock. The liquidation preference of each share of the Series A Preferred Stock is $0.001, its par value. Consequently, by virtue of his ownership of the Series A Preferred Stock, Mr. Janes will have a majority of the outstanding voting stock of the Company and will generally be able to control the actions by the shareholders, subject to the cumulative voting rights of all shareholders.

ITEM 2. PROPERTIES

We currently maintain and lease our administrative offices and production facility at 3022 N. Hollywood Way, Burbank, California 91505. This facility contains 1,800 square feet of space, and we currently pay rent at a rate of $2.00 per square foot, gross.

ITEM 3. LEGAL PROCEEDINGS

On November 29, 2011, we were served with a Motion to Compel Arbitration by Cranshire Capital, L.P. (“Cranshire”), a warrant holder with whom we completed a private placement for the sale of common stock and warrants for $1,000,000 in the aggregate in October 2010. Cranshire alleged that it is a holder of Series A Warrants, Series B Warrants, and Series C Warrants issued by us (collectively, the “Warrants”) and that our entry into a transaction in October 2011 had the effect of triggering the anti-dilution provision in the Warrants. They alleged that the effect of the application of the anti-dilution provisions was to substantially lower the exercise price of the Warrants and increase the number of shares issuable upon exercise of the Warrants. We believe that we had meritorious defenses to the Plaintiff’s claims. Nevertheless, the parties have agreed to settle the claims.

Accordingly, on or about March 28, 2012, we entered into a Claims Exchange Agreement (the “Cranshire Agreement”) with Cranshire and a Settlement Agreement (the “Freestone Agreement”) with Freestone Advantage Partners, L.P. (“Freestone”), the other holder of Warrants, in order to settle the disputes between us and Cranshire and us and Freestone.

Pursuant to the Cranshire Agreement, we have agreed with Cranshire that as a result of the issuance of securities by us pursuant to the transaction in October 2011, Cranshire is entitled to (i) an exercise price under each of Cranshire’s Warrants of $0.0119 per share, and (ii) the following as a result thereof: (a) 103,466,396.17 shares of our common stock issuable upon exercise of Cranshire’s Series A Warrant, (b) 22,868,151.26 shares of our common stock issuable upon exercise of Cranshire’s Series B Warrant and (c) 103,466,396.17 shares of common stock issuable upon exercise of Cranshire’s Series C Warrant. Cranshire also agreed that its Series B Warrant will terminate and be cancelled simultaneously with the occurrence of the closing under the Cranshire Agreement, and we will have no further obligation to deliver any shares of our common stock under Cranshire’s Series B Warrant.

On the first business day immediately following the closing of the transactions contemplated by the Cranshire Agreement, Cranshire agreed to exercise its Series A Warrant for 8,277,311 Warrant Shares (as defined in the Series A Warrant) for an aggregate exercise price in cash equal to $98,500. The Cranshire Agreement also provides for the mandatory cash exercise of Series A Warrants and Series C Warrants, subject to the satisfaction of certain conditions on a monthly basis, such that the we would receive cash proceeds from exercises thereof of $78,800 per month from Cranshire if the conditions for mandatory exercise for that month are satisfied.

Pursuant to the Freestone Agreement, we have agreed with Freestone that as a result of the issuance of securities by the Company pursuant to the transaction in October 2011, Freestone is entitled to (i) an exercise price under each of Freestone’s Warrants of $0.0119 per share, and (ii) the following as a result thereof: (a) 1,575,645.38 shares of our common stock issuable upon exercise of Freestone’s Series A Warrant, (b) 1,260,516.30 shares of our common stock issuable upon exercise of Freestone’s Series B Warrant, and (c) 1,575,645.38 shares of common stock issuable upon exercise of Freestone’s Series C Warrant. Freestone also agreed that its Series B Warrant will terminate and be cancelled simultaneously with the occurrence of the closing under the Cranshire Agreement, and we will have no further obligation to deliver any shares of our common stock under Freestone’s Series B Warrant.

On the first business day immediately following the closing of the transactions contemplated by the Cranshire Agreement, Freestone agreed to exercise its Series A Warrant for 126,051 Warrant Shares (as defined in the Series A Warrant) for an aggregate exercise price in cash equal to $1,500.01. The Freestone Agreement also provides for the mandatory cash exercise of Series A Warrants and Series C Warrants, subject to the satisfaction of certain conditions on a monthly basis, such that we would receive cash proceeds from exercises thereof of $1,200 per month from Freestone if the conditions for mandatory exercise for that month are satisfied.

Under the Cranshire Agreement but subject to receipt of court approval, we are required to issue to Cranshire a number of shares of our common stock equal to the quotient of (x) $275,000 divided by (y) 80% of the closing sale price of our common stock on the trading day immediately preceding the entry of the Court Order (as defined in the Cranshire Agreement). Such shares will be issued in exchange for Cranshire’s claims, and, subject to the receipt of court approval, will be issued pursuant to the exemption from registration provided by Section 3(a)(10) of the Securities Act of 1933, as amended.

The Company was involved in the following additional litigation: Securities and Exchange Commission v. Imaging3 & Dean Janes, Civil Action No. CV13-04616 GAF (AJWx) (U.S. Dist. Ct., C.D. Ca.), for which Fulbright & Jaworski LLP is counsel of record. The Company settled this action by entering into a Deferred Prosecution Agreement with the SEC in which the Company covenanted to comply with federal and state securities laws through December 31, 2017, which, among other covenants, includes providing written notification to the SEC, within five days, if the Company has been charged or convicted of an offense by any federal, state, or local law enforcement organization or regulatory agency; providing written notification to the SEC, within five days, if a formal or informal complaint has been made against the Company or disciplinary action has been taken against the Company by any self-regulatory organization; that the Company adopt policies governing correspondence with the U.S. Food and Drug Administration, communications with shareholders and the posting of communications on the Company website, press releases and the advanced review of such releases, regular review of the Company’s policies and procedures on communications to remain in compliance with federal securities laws; and requiring all existing officers and directors of Imaging3, and all persons who become officers or directors in the future, to participate in a training session with Imaging3’s outside counsel regarding compliance with federal securities laws. The SEC staff may make reasonable requests for further evidence of compliance, and Imaging3 agrees to provide such evidence.

We may be involved in other 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 our business or financial condition.

PETITION FOR RELIEF UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

On September 13, 2012, 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. The Chapter 11 Plan (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. The effective date of the Plan was July 30, 2013 (the “Effective Date”). For accounting purposes and convenience, the Effective Date was deemed to be July 1, 2013. There was very little activity between July 1, 2013 and July 30, 2013. The following is a brief summary of the Plan as adopted on the Effective Date:

Administrative expenses are claims for costs or expenses of administering the Company’s Chapter 11 case. The Bankruptcy Code requires that all administrative claims be paid on the Effective Date of the Plan, unless a particular claimant agrees to a different treatment.

ITEM 4. MINE SAFETY DISCLOSURES

None.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON STOCK, RELATED STOCKHOLDER MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES

Common Stock

Our common stock traded on the OTC Bulletin Board Market under the symbol “IMGG,” until approximately December 15, 2012, when trading was suspended due to the Company’s bankruptcy and delinquency in filing its public reports with the Securities and Exchange Commission. The range of high and low bid quotations for each fiscal quarter within the last two fiscal years was as follows:

The above quotations reflect inter-dealer prices, without retail markup, mark-down, or commission and may not necessarily represent actual transactions.

Dividends

We have not declared or paid any cash dividends on our common stock and do not anticipate paying dividends for the foreseeable future.

Equity Compensation Plan Information

We have not yet, but may in the future, establish a management stock incentive plan pursuant to which stock options and restricted stock grant awards may be authorized and granted to our executive officers, directors, employees and key consultants. In the event we establish a stock incentive plan, we expect to authorize approximately 15% of our outstanding shares of common stock for future issuance.

Warrants

As of December 31, 2012, we had a total of 233,490,164 warrants to purchase 233,490,164 shares of our common stock outstanding, subject to possible further adjustment pursuant to the full ratchet anti-dilution provisions in those warrants. As a result of the full ratchet anti-dilution provisions in the warrants, the number of outstanding warrants may be revised substantially higher, and their exercise prices revised substantially lower, in the near future.

Preferred Stock

Effective March 20, 2012, the Company issued 3,000 shares of Series A Preferred Stock to Dean Janes, our Chief Executive Officer. Each share of Series A Preferred Stock has a par value of $0.001 and the equivalent of 350,000 votes. The Series A Preferred Stock is not convertible into the Company’s common stock. The holder of the Series A Preferred Stock is entitled to dividends only to the extent of the number of shares of Series A Preferred Stock held by him (i.e. 3,000) in proportion to the total number of outstanding shares of preferred and common stock. The liquidation preference of each share of the Series A Preferred Stock is its par value, $0.001 per share. These shares were cancelled effective July 31, 2013 in accordance with the Company’s Chapter 11 reorganization plan adopted on that date.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL AND PLAN OF OPERATIONS

Cautionary Statements

This Form 10-K contains financial projections and other “forward-looking statements,” as that term is used in federal securities laws, about Imaging3, Inc.’s financial condition, results of operations and business. These statements include, among others, statements concerning the potential for revenues and expenses and other matters that are not historical facts. These statements may be made expressly in this Form 10-K. You can find many of these statements by looking for words such as “believes,” “expects,” “anticipates,” “estimates,” or similar expressions used in this Form 10-K. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause our actual results to be materially different from any future results expressed or implied by us in those statements. The most important facts that could prevent us from achieving our stated goals include, but are not limited to, the following:

We cannot assure that we will be profitable. We may not be able to develop, manage or market our products and services successfully. We may not be able to attract or retain qualified executives and technology personnel. We may not be able to obtain customers for our products or services. Our products and services may become obsolete. Government regulation may hinder our business. Additional dilution in outstanding stock ownership will be incurred due to the issuance or exercise of more shares, warrants and other convertible securities.

Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. We caution you not to place undue reliance on the statements, which speak only as of the date of this Form 10-K. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward-looking statements that we or persons acting on our behalf may make. We do not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Form 10-K or to reflect the occurrence of unanticipated events.

The following discussion should be read in conjunction with our financial statements and notes to those statements. In addition to historical information, the following discussion and other parts of this annual report contain forward-looking information that involves risks and uncertainties.

Current Overview

In February 2002, a fire destroyed our manufacturing facility and headquarters building along with our entire inventory, all office equipment and internal infrastructure. Rebuilding our 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 we have made significant strides, we continue on the path of rebuilding.

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, we contact 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.

On October 28, 2010, we received a letter from the United States Food and Drug Administration responding to our application to the FDA for clearance of our 3D medical imaging technology and device. In our application to the FDA under Section 510(k) of the applicable federal legislation, we stated that our medical device is substantially equivalent to devices marketed in interstate commerce prior to May 28, 1976 and therefore should be approved for commercial sale and use as a Class II device, without the necessity for clinical trials. The FDA responded by rejecting our position that our medical device is substantially equivalent to such prior devices. We disagree with the FDA’s position and plan to re-file our application with additional information supporting our application for clearance.

Upon receipt of the deficiency letter from the FDA denying our application to market our Dominion DViS product in the United States, we decided to hire a professional independent consulting firm with expertise in FDA filings and their resolution. Since the process has taken longer than management anticipated, management felt it prudent to engage outside consultants with sufficient experience to assist us in the process. While we remain confident of eventually achieving FDA approval of our medical device as a Class II device, we cannot assure that such approval will be obtained or that we may not ultimately be required to file it under Class III where clinical trials would be required.

In the absence of FDA approval for our medical device, we currently do not and cannot rely upon it as a future source of sales and revenue. We are subject to the uncertainty of not knowing whether or when our proprietary medical device will be approved and can be sold. Under those circumstances, management believes that we will continue our current trend of incurring operating losses, possibly requiring us to raise additional capital or financing from outside sources. We cannot assure that we will be able to raise sufficient capital or financing to maintain our business while we are incurring operating losses, and we cannot assure that we will become profitable if our proprietary medical device is approved by the FDA.

On September 13, 2012, we filed a voluntary petition under Chapter 11 of Title 11 of the United States Code, 11 U.S.C. ss. 101 et seq., in the United States Bankruptcy Court for the Central District of California, Los Angeles Division, as case No. 2:12-bk-41206-NB. See “Business- Status of Bankruptcy Proceedings.”

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 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 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, we contact 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.

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. The rental revenues were insignificant in the twelve month periods ended December 31, 2011 and 2012. Written rental or operating lease agreements are used in all instances.

Derivative Liability. Derivative financial instruments should be recorded as liabilities in the consolidated balance sheet and measured at fair value. For purposes of the valuation, the consultant utilized fair value as the basis for formulating its opinion which has been defined by the Financial Accounting Standards Board (“FASB”) as “the amount for which an asset (or liability) could be exchanged in a current transaction between knowledgeable, unrelated willing parties when neither party is acting under compulsion.” The FASB has provided guidance that its definition of fair value is consistent with the definition of fair market value in IRS Rev. Rule 59-60. In determining the fair value of the derivatives the consultant assumed that the Company’s business would be conducted as a going concern. These derivative liabilities will need to be marked-to-market each quarter with the change in fair value recorded in the income statement. The FASB and IRS have provided guidance that its definition of fair value is consistent with the definition of fair market value in IRS Rev. Rule 59-60. The opinion of Fair Value relied on a “value in use” or “going concern” premise. To properly apply this fair value standard, the consultant gave consideration to the holder’s intentions regarding whether or not the securities purchases were to be held, sold or abandoned. Its analysis also reflects assumptions that would be made by market participants if these market participants were to buy or sell each identified asset on an individual basis.

The calculation of derivative liability arising from the Series A, Series B, and Series C Warrants issued by us in a private placement on October 15, 2010 is based on the full ratchet anti-dilution provisions in those warrants, and the assumptions made in the valuation analysis prepared for us by an outside professional consulting firm. These full ratchet provisions may result in a “reset” of the warrant exercise prices. The calculation of derivative liability arising from the secured convertible notes and 12,000,000 warrants issued to Gemini Strategies, LLC as agent for designated lenders in October 2011 is based on the full ratchet anti-dilution provisions of those warrants, and the assumptions made in the valuation analysis prepared for us by an outside professional consulting firm. These full ratchet provisions may result in the “reset” of the warrant exercise price of those warrants. The factors and assumptions utilized in the valuation analysis include the terms and conditions in the warrants, the market price of our common stock, our stock price volatility, an interest rate factor, and the probability of a future financing during the terms of the warrants that would result in an adjustment for the benefit of warrant holders and at our expense.

Stock-Based Compensation. We record stock-based compensation as a charge to earnings net of the estimated impact of forfeited awards. As such, we recognize 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 our 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 our 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 our 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. The compensation expected to be earned is recognized as compensation cost in earnings in the period of the revision.

Provision for Sales Returns, Allowances and Bad Debts. We maintain 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 did not have to deal with significant amounts of obsolete inventory for a period of 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 significant factor in our business.

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.

Recently Issued Accounting Standards-New Accounting Pronouncements

Presentation of an Unrecognized Tax Benefit when a Net Operating Loss Carryforward exists. In July 2013, the FASB issued ASU 2013-11, Income Taxes (Topic 740): Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists, (“ASU 2013-02”), which eliminates diversity in practice for the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss or a tax credit carryforward is available to reduce the taxable income or tax payable that would result from disallowance of a tax position. ASU 2013-11 affects only the presentation of such amounts in an entity’s balance sheet and is effective for fiscal years beginning after December 15, 2013 and interim periods within those years. Early adoption is permitted. The adoption of ASU 2013-11 is not expected to have a material effect on our consolidated financial position or results of operations.

Disclosures about Reclassification Adjustments out of Accumulated Other Comprehensive Income. In February 2013, the Financial Accounting Standards Board (“FASB”) issued an accounting standards update which adds new disclosure requirements for items reclassified out of accumulated other comprehensive income. The update requires entities to disclose additional information about reclassification adjustments, including changes in accumulated other comprehensive income balances by component and significant items reclassified out of accumulated other comprehensive income. The update will be effective for us in the first quarter of 2013, but early adoption is permitted. The update will primarily impact our disclosures, but otherwise is not expected to have a material impact on our consolidated financial position, results of operations or cash flows.

Testing Indefinite-Lived Intangible Assets for Impairment. In July 2012, the FASB issued an accounting standards update which provides, subject to certain conditions, the option to perform a qualitative, rather than quantitative, assessment to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is less than its carrying amount. The update will be effective for us in the first quarter of 2013, but early adoption is permitted. The update may, under certain circumstances, reduce the complexity and costs of testing indefinite-lived intangible assets for impairment, but otherwise is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Testing Goodwill for Impairment. In September 2011, the FASB issued an accounting standards update which provides, subject to certain conditions, the option to perform a qualitative, rather than quantitative, assessment to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. This update was effective and adopted by the Company in the first quarter of 2012 and did not have a material impact on the Company’s consolidated financial position,

results of operations or cash flows.

Presentation of Comprehensive Income. In June 2011, the FASB issued an accounting standards update which revises the manner in which entities present comprehensive income in their financial statements. The new guidance removes the presentation options in existing guidance and requires entities to report components of comprehensive income in either (1) a continuous statement of comprehensive income or (2) two separate but consecutive statements. Under the two-statement approach, the first statement would include components of net income, which is consistent with the income statement format previously used by us, and the second statement would include components of other comprehensive income (“OCI”). The update does not change the items that must be reported in OCI and must be applied retrospectively for all periods presented in the financial statements. This update was effective and adopted by the Company in the first quarter of 2012 and impacted the Company’s financial statement presentation, but otherwise did not impact the Company’s consolidated financial position, results of operations or cash flows.

Disclosures about Fair Value Measurements. In May 2011, the FASB issued an accounting standards update which amends the definition of fair value measurement principles and disclosure requirements to eliminate differences between U.S. GAAP and International Financial Reporting Standards. The update requires new quantitative and qualitative disclosures about the sensitivity of recurring Level 3 measurement disclosures, as well as disclosures of transfers between Level 1 and Level 2 of the fair value hierarchy. This update was effective and adopted by the Company in the first quarter of 2012 and impacted the Company’s disclosures, but otherwise did not have a material impact on the Company’s condensed consolidated financial position, results of operations or cash flows.

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.

The following sets forth selected items from our statements of operations for the year ended December 31, 2012 and the year ended December 31, 2011.

Results of Operations for the Year Ended December 31, 2011 as Compared to the Year Ended December 31, 2012.

We had revenues for the year ended December 31, 2011 of $1,068,617 as compared to $1,052,541 for the year ended December 31, 2012, which represented a 1% decrease. The decrease in sales was attributed directly to an decrease in equipment sales for this period. Our rental revenue has been a little more than 8% 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.

Our cost of revenue was $505,865 for the year ended December 31, 2011 as compared to $585,794 for the year ended December 31, 2012, which represents an increase of $79,929 or 15%. This increase resulted directly from increased costs for equipment, parts, sales and services. Our gross profit margin for the year ended December 31, 2011 was $562,752 as compared to $466,747 for the year ended December 31, 2012, a 17% decrease. This is due to increased costs of sales in 2012. Our total operating expenses decreased in 2011from $2,947,140 to $1,862,073 for the year ended December 31, 2012, a decrease of 36% due to decreased interest and legal expenses. Our net loss for the fiscal year ending December 31, 2011 was $17,926,713 as compared to net income of $2,636,484 for the fiscal year ending December 31, 2012. This decrease in loss is attributed directly to Gain/Loss on change of Derivative Liability account which was calculated at approximately less at year end December 31, 2012 than for the year end December 31, 2011.

At December 31, 2012, we had a balance due to our chief executive officer amounting to $350,000 for the amount borrowed by us. This amount is due on demand, secured and interest free. At December 31, 2011, the balance due to our chief executive officer on the same terms was $344,938.

We filed our tax return for 2000 as an S-corporation and changed our 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 C-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 the year ended December 31, 2012).

We expect the trend of operating losses by us to continue into the future at the current or greater rate as we spend money on product development and marketing. We cannot assure that we can achieve profitability. We do not expect litigation against us to expand and believe litigation is on a decreasing trend, although we can give no assurances in relation to future litigation.

In 2012, we spent and recorded $126,173 for research and development of our technology, which includes software design, mechanical design and the manufacturing of the prototype. In 2011, we spent and recorded $255,904 for research and development of our technology. Costs for individuals employed by Imaging3 are absorbed in normal operating expenses and are not separated into different categories at this time for simplicity.

Liquidity and Capital Resources

Our total current assets decreased from $670,748 as of December 31, 2011, to $29,106 as of December 31, 2012, a difference of $641,642 or 96%. The cash account as of December 31, 2011 was $449,733, compared to $6,869 as of December 31, 2012 and the inventory writeoff of $149,628 in December 31, 2012 affected the difference.

Our total current liabilities decreased to $3,767,021 as of December 31, 2012 from $20,532,397 as of December 31, 2011. This decrease is due in large part to the decrease in the derivative liability account by $17,555,812 for this reporting period. The derivative liability account derives from the Series A, Series B, and Series C Warrants issued by us in a private placement on October 15, 2010 and the convertible note and warrants issued in a private placement on October 3, 2011.

During the year ended December 31, 2011, we used $1,762,259 of net cash for operating activities as the company required working capital, as compared to $845,696 during the year ended December 31, 2012. Net cash provided by financing activities during the year ended December 31, 2011 was $1,844,414, as compared to $402,832 during the year ended December 31, 2012.

We plan to continue to make private placements of our common stock to raise working capital to sustain the Company until we can earn sufficient net revenue from operations to maintain and possibly grow the Company’s business, of which there is no assurance.

Going Concern Qualification

We have incurred significant losses from operations, and such losses are expected to continue. Our auditors have included a “Going Concern Qualification” in their report for the year ended December 31, 2012. In addition, we have limited working capital. The foregoing raises substantial doubt about our ability to continue as a going concern. Management’s plans include seeking additional capital and/or debt financing. We cannot guarantee that additional capital and/or debt financing will be available when and to the extent required, or that if available it will be on terms acceptable to us. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The “Going Concern Qualification” may make it substantially more difficult for us to raise capital.

Off-Balance Sheet Arrangements

None.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

IMAGING3, INC.

FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2012 and 2011

CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Shareholders

Imaging3, Inc.

Burbank, California

We have audited the accompanying balance sheet of Imaging3, Inc. (the Company) as of December 31, 2012 and the related statements of operations, stockholders’ deficit, and cash flows for the year then ended. 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 audits.

We conducted our audit in accordance with the standards established by 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 audits 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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, 2012, and the results of its operations and its cash flows in conformity with accounting principles generally accepted in the United States of America.

As discussed in Note 5 to the financial statements, the Company filed a petition on September 13, 2012 with the United States Bankruptcy Court for the Central District of California for reorganization under the provisions of Chapter 11 of the Bankruptcy Code. The Company’s First Amended Chapter 11 Plan of Reorganization of Imaging3, Inc. (as revised, the “Plan”) was confirmed by the Court on July 9, 2013 and the Company emerged from bankruptcy on July 30, 2013. In connection with its emergence from bankruptcy, the Company adopted fresh start accounting on July 1, 2013.

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 14 to the financial statements, the Company has incurred recurring net losses, used cash in operations and recently declared bankruptcy. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters also are described in Note 14. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Rose, Snyder & Jacobs LLP

Encino, California

November 11, 2015

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors

Imaging3, Inc.

Burbank, California

We have audited the accompanying balance sheets of Imaging3, Inc. as of December 31, 2011 and the related statements of operations, changes in stockholders deficit, and cash flows for the period ended December 31, 2011. 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 audits.

We conducted our audits 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. 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, 2011, and the results of its operations and cash flows for the periods 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 suffered a recurring losses from operations and maintains a working capital deficit, which raises substantial doubt about its ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.See note 13 to the financial statements for further information regarding this uncertainty.

/s/ M&K CPAS, PLLC

www.mkacpas.com

Houston, Texas

April 16, 2012

IMAGING3, INC.

 DEBTOR IN POSSESSION

BALANCE SHEETS

AT DECEMBER 31, 2012 AND DECEMBER 31, 2011

The accompanying notes form an integral part of these financial statements

IMAGING3, INC.

DEBTOR IN POSSESSION

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

The accompanying notes form an integral part of these financial statements

IMAGING3, INC.

DEBTOR IN POSSESSION

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 2012 AND 2011

The accompanying notes form an integral part of these financial statements

IMAGING3, INC.

DEBTOR IN POSSESSION

STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2011 AND 2012