Grapefruit USA, Inc - Quarter Report: 2012 June (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For Quarterly Period Ended June 30, 2012
or
o TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Transition period from _______________ to ______________
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Commission File Number:
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000-50099
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IMAGING3, INC.
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(Exact name of registrant as specified in its charter)
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CALIFORNIA
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95-4451059
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(State or other jurisdiction of incorporation or organization)
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(I.R.S. Employer Identification No.)
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3200 West Valhalla Drive, Burbank, California 91505
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(Address of principal executive offices) (Zip Code)
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(818) 260-0930
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Registrant’s telephone number, including area code
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_____________________________________
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(Former name, former address and former fiscal year, if changed since last report)
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Yes
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x
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No
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o
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Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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Yes
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x
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No
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o
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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check One).
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Large accelerated filer
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o
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Accelerated filer
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o
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Non-accelerated filer
(Do not check if a smaller reporting company)
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o
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Smaller reporting company
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x
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Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
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Yes
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o
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No
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x
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Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.
As of December 16, 2015, the number of shares outstanding of the registrant’s class of common stock was 204,167,393.
TABLE OF CONTENTS
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Page
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PART I.
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FINANCIAL INFORMATION
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Item 1.
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1
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1
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2
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3
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4
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Item 2.
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14
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Item 4.
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17
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PART II.
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OTHER INFORMATION
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Item 1.
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19
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Item 1A.
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19
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Item 2.
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23
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Item 3.
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23
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Item 4.
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24
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Item 5.
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24
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Item 6.
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24
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25
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IMAGING3, INC.
BALANCE SHEETS
AT JUNE 30, 2012 (UNAUDITED) AND DECEMBER 31, 2011
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6/30/2012
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12/31/2011
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(Unaudited)
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ASSETS
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CURRENT ASSETS:
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Cash and cash equivalents
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$ | 3,312 | $ | 449,733 | ||||
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Accounts receivable, net
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73,361 | 49,772 | ||||||
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Inventory, net
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268,697 | 148,914 | ||||||
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Deferred financing costs, net
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3,928 | 11,532 | ||||||
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Prepaid expenses
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5,437 | 10,797 | ||||||
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Total current assets
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354,735 | 670,748 | ||||||
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PROPERTY AND EQUIPMENT, net
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9,714 | 12,013 | ||||||
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OTHER ASSETS
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31,024 | 31,024 | ||||||
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Total assets
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$ | 395,473 | $ | 713,785 | ||||
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LIABILITIES AND STOCKHOLDERS' DEFICIT
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CURRENT LIABILITIES:
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Accounts payable
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$ | 368,696 | $ | 275,684 | ||||
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Accrued expenses
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1,725,109 | 1,805,136 | ||||||
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Deferred revenue
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123,355 | 168,974 | ||||||
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Equipment deposits
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263,213 | 89,250 | ||||||
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Due to an officer
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348,778 | 344,938 | ||||||
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Stock subscription payable
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- | 563,014 | ||||||
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Convertible notes payable, net of discount
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550,959 | 292,603 | ||||||
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Derivative liability
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2,210,190 | 17,555,812 | ||||||
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Total current liabilities
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5,590,300 | 21,095,411 | ||||||
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STOCKHOLDERS' DEFICIT:
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Preferred stock, authorized shares 1,000,000;
3,000 and 0 shares issued and outstanding; 350,000 votes per share
at June 30, 2012 and December 31, 2011
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532,391 | - | ||||||
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Common stock, no par value; authorized shares 750,000,000;
506,705,442 and 414,388,151 issued and outstanding |
27,751,201 | 14,344,878 | ||||||
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Accumulated deficit
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(33,478,419 | ) | (34,726,504 | ) | ||||
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Total stockholders' deficit
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(5,194,827 | ) | (20,381,626 | ) | ||||
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Total liabilities and stockholders' deficit
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$ | 395,473 | $ | 713,785 | ||||
The accompanying notes form an integral part of these unaudited financial statements
IMAGING3, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
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Three months ended
June 30,
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Six months ended
June 30,
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2012
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2011
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2012
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2011
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Net revenues
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$ | 311,356 | $ | 216,210 | $ | 520,834 | $ | 482,972 | ||||||||
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Cost of goods sold
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114,370 | 109,076 | 163,721 | 238,060 | ||||||||||||
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Gross profit
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196,985 | 107,134 | 357,113 | 244,912 | ||||||||||||
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Operating expenses:
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General and administrative expenses
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563,185 | 506,749 | 1,384,950 | 1,065,428 | ||||||||||||
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Total operating expenses
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563,185 | 506,749 | 1,384,950 | 1,065,428 | ||||||||||||
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Loss from operations
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(366,199 | ) | (399,615 | ) | (1,027,837 | ) | (820,516 | ) | ||||||||
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Other income (expense):
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Interest expense
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(229,247 | ) | (13,269 | ) | (590,129 | ) | (23,836 | ) | ||||||||
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Other income
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- | 400 | - | 400 | ||||||||||||
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Loss on change in derivative liability
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3,421,853 | (1,805,149 | ) | 2,866,850 | (1,589,281 | ) | ||||||||||
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Total other income (expense)
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3,192,606 | (1,818,018 | ) | 2,276,721 | (1,612,717 | ) | ||||||||||
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Gain/(loss) before income tax
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2,826,407 | (2,217,633 | ) | 1,248,884 | (2,433,233 | ) | ||||||||||
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Provision for income taxes
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800 | - | 800 | 800 | ||||||||||||
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Net income/(loss)
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$ | 2,825,607 | $ | (2,217,633 | ) | $ | 1,248,084 | $ | (2,434,033 | ) | ||||||
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Basic net income (loss) per share
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$ | 0.00 | $ | (0.00 | ) | $ | 0.01 | $ | (0.01 | ) | ||||||
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Diluted net income (loss) per share
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$ | 0.00 | $ | (0.00 | ) | $ | 0.00 | $ | (0.01 | ) | ||||||
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Weighted average common stock outstanding - Basic
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478,769,742 | 382,985,335 | 447,639,669 | 381,710,114 | ||||||||||||
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Weighted average common stock outstanding - Diluted
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750,000,000 | 382,985,335 | 750,000,000 | 381,710,114 | ||||||||||||
The accompanying notes form an integral part of these unaudited financial statements
IMAGING3, INC.
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 2012 AND JUNE 30, 2011
(UNAUDITED)
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2012
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2011
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CASH FLOWS FROM OPERATING ACTIVITIES:
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Net income (loss)
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$ | 1,248,084 | $ | (2,434,033 | ) | |||
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Adjustments to reconcile net income (loss) to net cash used for
operating activities: |
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Depreciation
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2,299 | 2,299 | ||||||
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Preferred stock issued to officer
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244,377 | - | ||||||
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Amortization of note discount
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605,960 | - | ||||||
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Shares issued for services
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123,401 | 43,000 | ||||||
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Loss (Gain) on change in derivative liability
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(2,866,850 | ) | 1,589,281 | |||||
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(Increase) / decrease in current assets:
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Accounts receivable
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(23,589 | ) | (39,790 | ) | ||||
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Inventory
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(119,783 | ) | (59,428 | ) | ||||
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Prepaid expenses and other assets
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5,360 | 17,408 | ||||||
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Increase / (decrease) in current liabilities:
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Accounts payable
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226,120 | (2,326 | ) | |||||
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Accrued expenses
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(80,027 | ) | 26,521 | |||||
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Deferred revenue
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(45,618 | ) | 28,185 | |||||
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Equipment deposits
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173,963 | 113,188 | ||||||
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Net cash used for operating activities
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(506,303 | ) | (715,695 | ) | ||||
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CASH FLOWS FROM FINANCING ACTIVITIES:
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Proceeds from officer
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244,650 | 39,618 | ||||||
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Repayments to officer
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(373,918 | ) | - | |||||
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Proceeds from sale of stock, net of offering costs
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89,150 | 419,270 | ||||||
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Proceeds from exercise of warrants
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100,000 | - | ||||||
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Net cash provided for financing activities
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59,882 | 458,888 | ||||||
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NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
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(446,421 | ) | (256,807 | ) | ||||
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CASH & CASH EQUIVALENTS, BEGINNING BALANCE
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449,733 | 367,578 | ||||||
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CASH & CASH EQUIVALENTS, ENDING BALANCE
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$ | 3,312 | $ | 110,771 | ||||
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SUMMARY OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
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Conversion of notes payable to common stock
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$ | 340,000 | $ | - | ||||
The accompanying notes form an integral part of these unaudited financial statements
IMAGING3, INC.
Notes to Financial Statements
(Unaudited)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Imaging3, Inc. (the “Company”, “us”, “we”, “Imaging3”) is a California corporation incorporated on October 29, 1993 as Imaging Services, Inc. The Company filed a certificate of amendment of articles of incorporation to change its name to Imaging3, Inc. on August 20, 2002.
The Company’s primary business is refurbishment and sale of medical equipment, parts and services to hospitals, surgery centers, research labs, physician offices and veterinarians. Equipment sales include new c-arms, c-arms tables, remanufactured c-arms, used c-arm and surgical tables. Part sales comprise new or renewed replacement parts for c-arms.
The Company has developed a proprietary medical technology designed to produce 3d medical diagnostic images in real time. We believe Imaging3 technology has the potential to contribute to the improvement of healthcare. Our technology is designed to cause 3D images to be instantly constructed using high-resolution fluoroscopy. These images can be used as real time references for any current or new medical procedures in which multiple frames of reference are required to perform medical procedures on or in the human body. Management believes that Imaging3 technology has extraordinary market potential in an almost unlimited number of medical applications. This technology is still in development and the Company intends to seek approval from the Food and Drug Administration (“FDA”), which will allow us to offer our product to healthcare providers.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:
The accompanying unaudited interim financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for the presentation of interim financial information, but do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2011. The company follows the same accounting policies in preparation of interim reports. Results of operations for the interim periods are not indicative of annual results.
Use of Estimates
In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all liquid investments with a maturity of three months or less from the date of purchase that are readily convertible into cash to be cash equivalents. The Company maintains its cash in bank deposit accounts that may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company had no cash equivalents at June 30, 2012 or December 31, 2011 respectively.
Revenue Recognition
Revenue is recognized upon shipment, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable and collection of the related receivable is reasonably assured. Revenue is recorded net of estimated product returns, which is based upon the Company’s return policy, sales agreements, management estimates of potential future product returns related to current period revenue, current economic trends, changes in customer composition and historical experience. The Company accrues for warranty costs, sales returns, and other allowances based on its experience. Generally, the Company extends credit to its customers and does not require collateral. The Company performs ongoing credit evaluations of its customers and historic credit losses have been within management’s expectations and has a revenue receivables policy for service and warranty contracts. Equipment sales usually have a one year warranty of parts and service. After a one year period, the Company contacts the buyer to initiate the sale of a new warranty contract for one year. Warranty revenues are deferred and recognized on a straight-line basis over the term of the contract or as services are performed.
Deferred Revenue
Deferred revenue consists substantially of amounts received from customers in advance of the Company's performance service period. Deferred revenue is recognized as revenue on a systematic basis that is proportionate to the period that the underlying services are rendered, which in certain arrangements is straight-line over the remaining contractual term or estimated customer life of an agreement.
Accounts Receivable
The Company’s customer base is geographically dispersed. The Company maintains reserves for potential credit losses on accounts receivable. Management reviews the composition of accounts receivable and analyzes historical bad debts, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the adequacy of these reserves. Reserves are recorded primarily on a specific identification basis.
Property & Equipment
Property and equipment are stated at cost. Expenditures for maintenance and repairs are charged to expenses as incurred and additions, renewals and betterments are capitalized. When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations. Depreciation of property and equipment is provided using the straight-line method for all assets with estimated lives of three to eight years.
Due to Officer
At June 30, 2012 and December 31, 2011, the Company had balances due to the Chief Executive Officer of the Company of $348,778 and $344,938 respectively. The amount was due on demand, interest free and was secured by the assets of the Company. Interest was not imputed since a portion of this amount represented unpaid salaries.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets, including property, plant, equipment and intangible assets subject to periodic amortization, for recoverability at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the net carrying amount is greater than its fair value. Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets. The Company considers historical performance and future estimated results in its evaluation of potential impairment, and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset. If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value. The estimation of fair value is generally measured by discounting expected future cash flows at the rate the Company utilizes to evaluate potential investments. The Company estimates fair value based on the information available in making whatever estimates, judgments and projections are considered necessary.
Basic and Diluted Net Loss Per Share
Basic net loss per share is based upon the weighted average number of common shares outstanding. Diluted net loss per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. During the six and three months ended June 30, 2012 and 2011, potentially dilutive securities were excluded from the computation of weighted average shares outstanding-diluted because their effect was anti-dilutive.
The components of basic and diluted earnings per share for the year ended June 30, 2012 is as follows:
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2012
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Numerator
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Net income attributable to common shareholders
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$
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105,300
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Denominator
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Weighted-average shares outstanding - basic
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499,946,416
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Dilutive effect of warrants and convertible notes
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250,053,584
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Weighted average shares outstanding – diluted
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750,000,000
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Derivative Financial Instruments
The Company generally does not use derivative financial instruments to hedge exposures to cash-flow risks or market-risks that may affect the fair values of its financial instruments. The Company utilizes various types of financing to fund its business needs, including convertible notes and warrants and other instruments not indexed to our stock. The Company is required to record its derivative instruments at their fair value. Changes in the fair value of derivatives are recognized in earnings in accordance with ASC 815. The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated with warrants to purchase common stock and convertible notes.
Fair Value of Financial Instruments
The fair value accounting standard creates a three-level hierarchy to prioritize the inputs used in the valuation techniques to derive fair values. The basis for fair value measurements for each level within the hierarchy is described below with Level 1 having the highest priority and Level 3 having the lowest.
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Level 1: Observable prices in active markets for identical assets or liabilities.
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Level 2: Observable prices for similar assets or liabilities in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs are observable in the market.
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Level 3: Valuations derived from valuation techniques in which one or more significant inputs are unobservable. These unobservable assumptions reflect estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flow models, and similar techniques.
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The following table summarizes the Company’s financial assets and liabilities measured at fair value on a recurring basis as of June 30, 2012:
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Level 1
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Level 2
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Level 3
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Total
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Derivative Liabilities
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$
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-
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$
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-
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$
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2,210,190
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$
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2,210,190
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Income Taxes
The Company accounts for income taxes in accordance with ASC 740-10, “Income Taxes” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns.
Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. The provision for income taxes represents the tax payable for the period and the change during the period in deferred tax assets and liabilities.
Inventory
Inventory is stated at the lower of cost or market with cost determined using the first-in, first-out method.
Research and Development
Costs and expenses that can be clearly identified as research and development are charged to expense as incurred in accordance with FASB ASC 730-10. Included in research and development costs are operating costs, facilities, supplies, external services, clinical trial and manufacturing costs, and overhead directly related to the Company’s research and development operations, as well as costs to acquire technology licenses.
Recent Pronouncements
In September 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08, Intangibles – Goodwill and Other (Topic 350): Testing Goodwill for Impairment. The guidance in ASU 2011-08 is intended to reduce complexity and costs by allowing an entity the option to make a qualitative evaluation about the likelihood of goodwill impairment to determine whether it should calculate the fair value of a reporting unit. The amendments also improve previous guidance by expanding upon the examples of events and circumstances that an entity should consider between annual impairment tests in determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Also, the amendments improve the examples of events and circumstances that an entity having a reporting unit with a zero or negative carrying amount should consider in determining whether to measure an impairment loss, if any, under the second step of the goodwill impairment test. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, including for annual and interim goodwill impairment tests performed as of a date before September 15, 2011, if an entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company adopted this standard on January 1, 2012 and it did not have a material impact on the Company’s financial position or results of operations.
During July 2012, FASB issued ASU No. 2012-02, "Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment". Under the amendments in Update 2012-02, entities have the option first to assess qualitative factors to determine whether the existence of events and circumstances indicates that it is more likely than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with Subtopic 350-30. The amendments in this update are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The adoption of this standard did not have a material impact on our financial statements.
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.
3. ACCOUNTS RECEIVABLE
All accounts receivable are trade related. These receivables are current and management believes are collectible except for which a reserve has been provided. The reserve amount for uncollectible accounts was $5,101 and $6,829 as of June 30, 2012 and December 31, 2011, respectively.
4. PROPERTY AND EQUIPMENT
Net property and equipment were as follows:
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June 30, 2012
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June 30, 2011
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Furniture and office equipment
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$
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242,249
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$
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242,249
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||||
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Less accumulated depreciation
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(232,535
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)
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(230,236
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)
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Net Property and Equipment
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$
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9,714
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$
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12,013
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||||
Depreciation expenses were $ $2,299 and $2,299 for the six months ended June 30, 2012 and 2011 respectively.
5. ACCRUED EXPENSES
During 2003, the Company paid payroll net of taxes and accrued said taxes without payment due to cash flow limitations resulting from a 2002 warehouse fire that incinerated our inventory. The Company subsequently received a tax lien in 2005 related to 2003 payroll taxes from the Internal Revenue Service and continued to accrue interest and penalty charges. The original amount was $104,052. In 2008, payments were made and the Internal Revenue Service issued a tax lien release for this amount and the liability carried on the Company’s books was relieved. In 2009, the Company was notified by the Internal Revenue Service that additional payroll taxes, interest, and penalty charges were still owed. After researching, it is believed that the Internal Revenue Service double booked the original payments made and released the lien in error. Settlement was reached and the Company is currently paying $2,000 per month on a total liability of $115,252 as of June 30, 2012, including interest and penalties, with a potential balloon payment in one year subject to re-negotiation after one year with the IRS.
6. INCOME TAXES
The Company’s book losses and other timing differences result in a net deferred income tax benefit which is offset by a valuation allowance for a net deferred asset of zero. The Company has concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company may not realize the benefit of all of its deferred tax assets. Accordingly, management has provided a 100% valuation allowance against its deferred tax assets until such time as management believes that its projections of future profits as well as expected future tax rates make the realization of these deferred tax assets more-likely-than-not. Significant judgment is required in the evaluation of deferred tax benefits and differences in future results from our estimates could result in material differences in the realization of these assets. The Company has recorded a full valuation allowance related to all of its deferred tax assets. The Company has performed an assessment of positive and negative evidence regarding the realization of the net deferred tax asset in accordance with FASB ASC 740-10, “Accounting for Income Taxes.” This assessment included the evaluation of scheduled reversals of deferred tax liabilities, the availability of carry forwards and estimates of projected future taxable income. The availability of the Company’s net operating loss carry forwards is subject to limitation if there is a 50% or more change in the ownership of the Company’s stock. The provision for income taxes consists of the state minimum tax imposed on corporations of $800. The Company has adopted guidance issued by the FASB that clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. The Company’s policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. The Company has not recognized any unrecognized tax benefits and does not have any interest or penalties related to uncertain tax positions as of June 30, 2012.
Convertible Notes - 2011
During the year ended December 31, 2011, the Company issued secured convertible promissory notes in the total principal amount of $1,200,000 from which the Company received $1,000,000 of cash. The notes had no stated rate of interest. The convertible promissory notes were convertible into shares of the Company’s common stock at a rate the lesser of (a) $0.10 per share, or (b) 80% of the average of the three (3) lowest daily VWAP’s (volume weighted average prices) during the 22 consecutive trading days immediately preceding the applicable conversion date, but not less than $0.05 per share, subject to full ratchet anti-dilution provisions. The notes included a total of 12,000,000 warrants that also had full ratchet anti-dilution provisions and other potential adjustments. On their face, they were exercisable at $0.10 per share for a period of five years from the date of issue. The notes were secured by all personal property of the Company, including inventory, equipment, contract rights including all intangible assets, etc. The Company incurred financing costs of $15,250 related to the issuance of the convertible note and warrants. These financing costs have been deferred and are being amortized on a straight line basis over the life of convertible promissory note. It was determined that the convertible notes and warrants included embedded derivatives.
A discount on the convertible promissory notes totaled $1,200,000. This discount is amortized using the effective interest method over the term of the note. The notes were due in October 2012 and the remaining note discount of $907,397 was amortized during the year ended December 31, 2012. As of June 30, 2012, $340,000 of these convertible notes were converted into 69,817,627 shares of common stock at the option of the note holder. The remaining balance of convertible notes and accrued interest was settled by the issuance of common shares in connection with the Company’s Chapter 11 Reorganization Plan.
Convertible Notes – 2012
The notes are convertible into shares of common stock at 80% of the average 5 closing prices immediately preceding the applicable conversion date, but not less than $0.0119 per share. The conversion features were determined to be a derivative liability. In connection with these notes, the Company recognized a note discount of $71,545.
8. WARRANTS
In connection with previous financing transactions, the Company issued warrants to purchase common stock. These warrants included provisions that could result in a variable exercise price or a variable number of shares to be issued based on specified full-ratchet anti-dilution provisions.
9. STOCKHOLDERS' EQUITY
Preferred Stock
On November 17, 2011, the Company authorized the issuance of up to 1,000,000 shares of preferred stock. The Company also granted 1,000 shares of Series A Preferred Stock on this date to the Company’s Chief Executive Officer. The Company granted an additional 2,000 shares on March 9, 2012. A total of 3,000 shares were issued on March 20, 2012. There were no further issuances after this period.
Series A Preferred Stock
These shares have the right to receive dividends, when declared, on a ratable basis with the holders of the Company’s common stock based on the number of shares of Series A Preferred Stock then outstanding in relation to the total number of shares of Series A Preferred Stock and common stock then outstanding. These shares have voting rights that permit the holders to vote 350,000 votes for each share of Series A Preferred Stock. The holders of Series A Preferred Stock will vote with the holders of common stock as one class. In the event of liquidation, dissolution, or winding up of the Company, the Series A Preferred Stock then outstanding will be entitled to be paid a preference of $0.001 per share of the then outstanding Series A Preferred Stock.
The Company estimated the Series A Preferred Stock at the fair market value of $532,391. The shares granted on November 17, 2011 were valued at $288,014. The shares granted on March 9, 2012 were valued at $244,377. The holder of this preferred stock along with other common share holdings, represent a controlling voting interest in the Company. As a result, a determination of the control premium was determined to estimate the value of the shares. The control premium is based on publicly traded companies or comparable entities which have been recently acquired in arm’s length transactions. This control premium was determined to be 10% of the market value of the common shares required for control on the date the shares were granted. The market value of the shares required for control was calculated to be $2,880,140 and $2,443,767 at November 17, 2011 and March 9, 2012, respectively. The number of common shares required for control is based on the number required to be held by the holder of the preferred stock in order for the preferred stock to give that holder control of the Company. The Company performed the valuation with the assistance of a valuations specialist.
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 equal to $0.001 per share.
Common Stock
During the six month period ended June 30, 2012, the Company issued 10,403,362 of common stock for $200,000. A total of 8,403,362 shares were issued due to the exercise of warrants for cash received of $100,000. An additional 2,000,000 shares were issued for cash received of $100,000, and paid offering costs of $10,850.
During the six month period ended June 30, 2012, the Company issued 500,000 of common stock for $37,500 for services rendered. The shares were valued using the stock price on the date of grant.
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The Company issued 2,000,000 shares of common stock for net cash proceeds of $89,150.
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-
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The Company issued 50,668,446 shares of common stock for the cashless exercise of warrants.
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-
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The Company issued 8,403,362 shares of common stock for net cash proceeds of $100,000 relating to the exercise of warrants.
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-
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The Company issued 73,655,130 shares of common stock for the conversion of convertible notes and accrued interest totaling $407,133.
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Warrant Activity
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||||
| 12/31/2011 Balance |
222,313,442
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|||
|
Warrants issued
|
229,358
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Warrants exercised
|
(77,892,972
|
)
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||
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Warrants issued due to reset provisions
|
88,840,336
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| 06/30/2012 Balance |
218,776,636
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10. DERIVATIVE LIABILITIES
The Company’s only asset or liability measured at fair value on a recurring basis is its derivative liability associated with its warrants to purchase common stock.
During the year ended December 31, 2010, in conjunction with the Company’s issuance of 4,587,157 shares of common stock for cash amounting to $1,000,000, the Company issued 13,761,471 warrants in three series (A, B, and C) each consisting of 4,587,157 common stock warrants, which have exercise prices that are subject to “reset” provisions in the event the Company subsequently issues common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than $0.2725, $0.2180, and $0.2725, respectively. If these provisions are triggered, the exercise price of all their warrants will be reduced. Accordingly, the warrants are not considered to be solely indexed to the Company’s own stock and are not afforded equity treatment. On March 28, 2012, the Company settled litigation with the holders of these warrants. The settlement specified an exercise price under which 160,084,072 additional warrant shares would be issuable pursuant to the exercise price “reset” provisions. The number of additional warrant shares issuable was included in the derivative valuation as of December 31, 2011.
During the year ended December 31, 2011, the Company issued secured convertible promissory notes in the total principal amount of $1,200,000 from which the Company received $1,000,000 of cash. The convertible promissory note is convertible into shares of the Company’s common stock at a rate the lesser of (a) $0.10 per share, or (b) 80% of the average of the three (3) lowest daily VWAP’s (volume weighted average prices) during the 22 consecutive trading days immediately preceding the applicable conversion date, but not less than $0.05 per share, subject to full ratchet anti-dilution provisions. The notes included a total of 12,000,000 warrants that also have full ratchet anti-dilution provisions and other potential adjustments. On their face, they are exercisable at $0.10 per share for a period of five years from the date of issue. If these provisions are triggered, the exercise price of all their warrants and convertible notes will be reduced. Accordingly, the warrants and convertible notes are not considered to be solely indexed to the Company’s own stock and are not afforded equity treatment.
As a result, the Company’s securities containing exercise price reset provisions were classified as a derivative liability, in accordance with ASC 815. As of December 31, 2011, the fair value of the warrants issued was $17,555,812 and recognized as an expense and an increase in derivative liability. The change in fair value during the period from December 31, 2011 to June 30, 2012 of $2,866,850 is recorded as a gain on change in fair market value of derivative in the accompanying Statements of Operations. As of June 30, 2012, the fair value of these warrants was $2,210,190. The derivative liability decreased by $15,345,622 due to the exercise of warrants during the six months ended June 30, 2012.
The Company classifies the fair value of these warrants under level three of the fair value hierarchy of financial instruments. The fair value of the derivative liability was calculated using a Monte Carlo simulation model that values the embedded derivatives based on several inputs, assumptions and probabilities. This model is based on future projections of the various potential outcomes. The embedded derivatives that were analyzed and incorporated into the model included the exercise feature with the full ratchet reset.
The following inputs and assumptions were used to value the warrants originally issued in October 2010 as of June 30, 2012:
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·
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The warrant term is 60 months for series A and C; 9 months for series B.
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·
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The warrant exercise prices were $0.2725 for series A and C; $0.2180 for series B, with a ratchet exercise price being $0.0119 based on recent transactions.
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·
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The computed volatility was 126% and risk free rate of 1.10% for all three series.
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·
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The probability of the company obtaining future financing was 90% for series A and C; 0% for series B.
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·
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The series C warrants are only exercisable if the series B warrants are exercised and only in the same percentage as the series B warrants are exercised. All series B warrants were exercised during the period.
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·
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Full ratchet anti-dilution includes exercise price adjustment upon subsequent financings at a lower price and an increase in the warrants issued upon an exercise price adjustment.
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The following inputs and assumptions were used to value the secured convertible notes and warrants originally issued in October 2011 as of June 30, 2012:
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The warrant term is 60 months.
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·
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The warrant exercise prices were $0.10, adjusted to $0.0119 as of June 30, 2012.
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·
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The computed volatility was 120% and risk free rate of 1.04%.
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·
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The probability of the company obtaining future financing was 90%.
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·
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Full ratchet anti-dilution includes exercise price adjustment upon subsequent financings at a lower price and an increase in the warrants issued upon an exercise price adjustment.
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The following inputs and assumptions were used in the current year to value the warrants that were issued in October 2010 (229,358 warrants) but initially included in the derivative liability in the six months ended June 30, 2012 due to the fact that the Company’s equity environment became tainted during that time period:
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·
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The warrant remaining term was 3.5 years.
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·
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The warrant exercise price was $0.31.
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·
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Computed volatility was 136.9% and risk free rate was 0.51%.
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·
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The warrants do not have ratchet anti-dilution provisions.
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11. GOING CONCERN
The Company’s financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has historically incurred net losses and through the effective date of the Chapter 11 Reorganization Plan, had an accumulated deficit totaling $33 M. During the six months ended June 30, 2012 and 2011, the Company utilized an aggregate of $506 K cash in operating activities and incurred an aggregate net loss from operations of $1 M. The continuing losses have adversely affected the liquidity of the Company.
In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to raise additional capital, obtain financing and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary as a result of the Company’s going concern uncertainty.
Management's plan regarding this matter is to, amongst other things, seek additional equity financing by selling our equity securities, increase our sales volume, and continue seeking approval from the FDA to bring to market our real-time imaging platform. We cannot assure you that funds from these sources will be available when needed or, if available, will be on terms favorable to us or to our stockholders. If we raise additional funds or settle liabilities by issuing equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities may provide for rights, preferences or privileges senior to those of the holders of our common stock. Our ability to execute our business plan and continue as a going concern may be adversely affected if we are unable to raise additional capital or operate profitably.
The Company anticipates that further equity/debt financings will be necessary to continue to fund operations in the future and there is no guarantee that such financings will be available or, if available, on acceptable terms.
12. COMMITMENTS AND CONTINGENCIES
Concentrations.
Four customers represent 49% of accounts receivable as of June 30, 2012.
No customers represented more than 10% of the Company’s account receivable as of December 31, 2011.
Litigation
On or about November 23, 2011, Cranshire Capital, LP, an Illinois limited partnership, filed an Application to Compel Arbitration Under the Illinois Uniform Arbitration Act (case number 11 CH 40508 in the Circuit Court of Cook County, Illinois), regarding a dispute concerning the issuance and pricing of warrants and shares issued by the Company. During March 2012, the Company issued 6,365,741 shares of common stock to settle this matter.
On or about October 27, 2011, Exhibit Source, Inc. filed an action (Civil Action No. 11-cv-7652) in the United States District Court for the Northern District of Illinois. The plaintiff claims that a display used by the Company at an Illinois trade show violated its copyright. The Company disputed the plaintiff’s claims of copyright infringement. It is believed that this matter was resolved in the Company’s bankruptcy proceeding.
On May 16, 2012, the Company and its directors were named in a Complaint purporting to be a shareholder’s derivative action by John M. Vuksich, Plaintiff. The action was filed in the Glendale Superior Court (North Central District) as case number EC058516. This action was stayed by the Company’s bankruptcy filing, and is believed to have been disposed of in that bankruptcy case subject to appeals.
13. RELATED PARTY TRANSACTION
The Company had a consulting agreement with the prior Chief Executive Officer of the Company under which he received compensation of $12,000 per month. The prior Chief Executive Officer provided management, administrative, marketing, and financial services to the Company pursuant to the consulting agreement which was terminable on 30 days notice by either party. The consulting agreement commenced on January 1, 2002 and continued until the adoption of the Company’s Chapter 11 Reorganization Plan, when it was terminated. As of June 30, 2012, the Company owed the former CEO $348,778 pursuant to this consulting agreement and advances.
14. SUBSEQUENT EVENTS
During the year ended December 31, 2014, the Company issued 23,250,000 shares of its common stock for net cash proceeds of $581,250 and 6,708,000 shares of its common stock for services, valued at $164,322.
During the period from January 1, 2015 through October 31, 2015, the Company issued a total of 18,380,000 shares of common stock. 12,005,000 of these shares were issued for cash proceeds of $188,875. The remaining 6,375,000 shares were issued for services rendered.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statements
This Form 10-Q may contain “forward-looking statements,” as that term is used in federal securities laws, about Imaging3, Inc.’s financial condition, results of operations and business. These statements include, among others:
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statements concerning the potential benefits that Imaging3, Inc. (“Imaging3” or the “Company”) may experience from its business activities and certain transactions it contemplates or has completed; and
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statements of Imaging3’s expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts. These statements may be made expressly in this Form 10-Q. You can find many of these statements by looking for words such as “believes,” “expects,” “anticipates,” “estimates,” “opines,” or similar expressions used in this Form 10-Q. These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause Imaging3’s actual results to be materially different from any future results expressed or implied by Imaging3 in those statements. The most important facts that could prevent Imaging3 from achieving its stated goals include, but are not limited to, the following:
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(a)
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volatility or decline of Imaging3’s stock price;
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(b)
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potential fluctuation in quarterly results;
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(c)
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failure of Imaging3 to earn revenues or profits;
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(d)
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inadequate capital to continue or expand its business, inability to raise additional capital or financing to implement its business plans;
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(e)
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failure to commercialize Imaging3’s technology or to make sales;
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(f)
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changes in demand for Imaging3’s products and services;
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(g)
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rapid and significant changes in markets;
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(h)
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litigation with or legal claims and allegations by outside parties;
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(i)
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insufficient revenues to cover operating costs, resulting in persistent losses;
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(j)
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dilution in the ownership of the Company through the issuance by us of additional securities and the conversion of outstanding warrants, notes and other securities; and
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(k)
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failure of Imaging3 to obtain approval of its proprietary medical imaging technology and device from the Federal Food and Drug Administration.
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There is no assurance that Imaging3 will be profitable. Imaging3 may not be able to successfully develop, manage or market its products and services. Imaging3 may not be able to attract or retain qualified executives and technology personnel. Imaging3 may not be able to obtain customers for its products or services. Imaging3’s products and services may become obsolete. Government regulation may hinder Imaging3’s business. Imaging3 may not be able to obtain the required approvals from the United States Food and Drug Administration for its products and services. Additional dilution in outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, or the exercise of outstanding warrants and stock options, or the conversion of notes. Imaging3 is exposed to other risks inherent in its businesses.
Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements. Imaging3 cautions you not to place undue reliance on the statements, which speak only as of the date of this Form 10-Q. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward-looking statements that Imaging3 or persons acting on its behalf may issue. Imaging3 does not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Form 10-Q, or to reflect the occurrence of unanticipated events.
Current Overview
Though our efforts have been to market our refurbished equipment, a significant portion of our sales and revenues derive from services and the sale of parts, either from extended warranty purchases at the time of purchase of the refurbished equipment, or service contracts and time and material revenue realized upon warranty expiration, the majority of which is realized one year from equipment purchase as warranties expire.
Our sales effort through direct mail, broadcast facsimile and broadcast email to thousands of potential customers throughout the United States generates leads of potential customers desiring to purchase equipment either immediately or in the course of one year. This lead generation through direct mail, broadcast facsimile and email will continue on a quarterly basis with the goal of increasing the total number of our leads for our sales staff. Management expects that the marketing program will also eventually help stabilize the amount of refurbished equipment sold on a monthly basis, since the carry-over of leads not looking for immediate purchase will overlap with the immediate sales leads. The greater the number of leads generated, whether immediate or long term, the greater the opportunity to eventually create a consistent number of sales.
Critical Accounting Policies
Our discussion and analysis of our financial condition and results of operations are based upon our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We monitor our estimates on an on-going basis for changes in facts and circumstances, and material changes in these estimates could occur in the future. Changes in estimates are recorded in the period in which they become known. We base our estimates on historical experience and other assumptions that we believe to be reasonable under the circumstances. Actual results may differ from our estimates if past experience or other assumptions do not turn out to be substantially accurate.
We have identified the policies below as critical to our business operations and the understanding of our results of operations.
Revenue Recognition. We recognize revenue in accordance with the Securities and Exchange Commission’s (“SEC”) Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (“SAB 104”). We recognize revenue upon shipment, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. We record revenue net of estimated product returns, which is based upon our return policy, sales agreements, management estimates of potential future product returns related to 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 which are “final” with a payment arrangement. We do not make consignment sales, nor inventory sales subject to a “buy back” or return arrangement from customers.
Provision for Sales Returns, Allowances and Bad Debts. The Company maintains a provision for sales allowances, returns and bad debts. Sales returns and allowances result from equipment damaged in delivery or customer dissatisfaction, as provided by agreement. The provision is provided for by reducing gross revenue by a portion of the amount invoiced during the relevant period. The amount of the reduction is estimated based on historical experience.
Reserve for Obsolete/Excess Inventory. Inventories are stated at the lower of cost or market. We regularly review our inventories and, when required, will record a provision for excess and obsolete inventory based on factors that may impact the realizable value of our inventory including, but not limited to, technological changes, market demand, regulatory requirements and significant changes in our cost structure. If ultimate usage varies significantly from expected usage, or other factors arise that are significantly different than those anticipated by management, inventory write-downs or increases in reserves may be required.
A fire in 2002 incinerated our inventory, so we have not had to deal with significant amounts of obsolete inventory since that time. Our procedure is now to maintain only limited inventory, based on our experience in service and repair, necessary for current service and repair contracts or orders anticipated within the following 60 days. We have supply relationships with long term suppliers to provide additional parts on an as needed, prompt basis for the vast majority of repair and service parts, so obsolescence is no longer a factor in our business. We have not recorded any material amounts as charges to obsolescence since the fire in 2002 destroyed our warehouse.
Rental income is recognized when earned and expenses are recognized when incurred. The rental periods vary based on customer's needs ranging from 5 days to 6 months. An operating lease agreement is utilized. The rental revenues were insignificant in the Six month periods ended June 30, 2012 and 2011.. Written rental agreements are used in all instances.
Other Accounting Factors
The effects of inflation have not had a material impact on our operation, nor are they expected to in the immediate future.
Although we are unaware of any major seasonal aspect that would have a material effect on the financial condition or results of operations, 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 whatever reason a customer order is cancelled the deposit would be returned as stated in the terms of sale, minus a restocking fee.
No depositor is a related party of any officer or employee of Imaging3, Inc.
Our terms of deposit typically are 50% down with the balance of the sale price due upon delivery.
Results of Operations for the Six Months Ended June 30, 2011 Compared to the Six Months Ended June 30, 2012
We had revenues in the second quarter of 2011 of $482,972 compared to $520,834 in 2012, which represents a 8% increase. The increase in revenue is due to increased sales. Our equipment sales were $262,177 in the first six months of 2011, compared to $231,035 in the first six months of 2012, representing a decrease in equipment sales of $31,142 in 2012 or 12%. Our service and parts sales for the second quarter of 2012 were $37,041compared to $54,475 in the first six months of 2011. We will continue to focus on increasing its revenue in this area as well.
Our cost of revenue was $238,060 in the second quarter of 2011 compared to $163,721 in the second quarter of 2012, which represents a decrease of $74,339 or 32%. This decrease is due in part to a decrease in cost of parts and service parts. We had an increase in gross profit margin in the second quarter of 2012 to $357,113 compared to $244,912 in the second quarter of 2011. Our operating expenses increased to$1,384,950 in the second quarter of 2012 as compared to $1,065,428 in the second quarter of 2011, a 30% increase mostly due to increased legal fees. Our loss on operations increased to $1,027,837 in the second quarter of 2012 compared to $820,516 in the second quarter of 2011, a 26% increase. This increase is attributed to the overall increase in general operating expense for this same period. Our net increase was $1,248,084 in the second quarter of 2012 compared to a net loss of $2,434,033 in the second quarter of 2011, primarily as a result of an increased loss on change in derivative liability and increased interest expense.
Results of Operation for the Three Months Ended June 30, 2011 Compared to the Three Months Ended June 30, 2012
We had revenues in the second quarter of 2011 of $216,210 compared to $311,356 in 2012, which represents a 44% increase. The increase in revenue is due to increased sales. Our equipment sales were $100,435 in the first three months of 2011, compared to $175,500 in the second three months of 2012, representing an increase in equipment sales of $74,565 in 2012 or 75%. Our service and parts sales for the second quarter of 2012 were $17,983 compared to $30,020 in the second three months of 2011. We will continue to focus on increasing its revenue in this area as well.
Our cost of revenue was $109,076 in the second quarter of 2011 compared to $114,370 in the second quarter of 2012, which represents an increase of $5,294 or 5%. This increase is due in part to an increase in sales and in part to the increase in cost of parts and service parts. We had an increase in gross profit margin in the second quarter of 2012 to $196,986 compared to $107,134 in the second quarter of 2011. Our operating expenses increased to$504,161 in the second quarter of 2012 as compared to $506,749 in the second quarter of 2011. Our loss on operations decreased to $366,199 in the second quarter of 2012 compared to $399,615 in the second quarter of 2011, a 9% decrease. This decrease is attributed to the overall increase in net revenues for this same period. Our net income was $2,825,607 in the second quarter of 2012 compared to a loss of $2,217,633 in the second quarter of 2011, primarily as a result of an decreased loss on change in derivative liability.
Liquidity and Capital Resources
The Company's cash position was $3,312 at June 30, 2012, compared to $449,733 at December 31, 2011. The reason for the decrease in cash at the end of the second quarter of 2012 as compared to December 31, 2011 is primarily due to increased expenses.
As of June 30, 2012, the Company has current assets of $354,735, non-current assets of $40,738, and current liabilities of $5,590,300, and as of December 31, 2011, current assets of $670,748, non-current assets of $43,037 and current liabilities of $20,530,397. The reason for the decrease in current assets at the end of the second quarter of 2012 as compared to December 31, 2011 is primarily due to the decrease in the Company’s cash position.
Net cash used in operating activities amounted to $506,303 for the six month period ended June 30, 2012, as compared to net cash used in operating activities of $715,695 for the six month period ended June 30, 2011. The decrease in 2012 as compared to 2011 resulted from larger reductions in accrued expenses and deferred revenue in 2012 as compared to 2011.
Net cash provided by financing activities amounted to $59,882 and $458,888 for the six month periods ended June 30, 2012 and 2011, respectively. The decrease in 2012 as compared to 2011 resulted from a decrease in proceeds from the issuance and sale of stock during the period.
The Company does not have sufficient capital to meet its current cash needs, which include the costs of compliance with the continuing reporting requirements of the Securities Exchange Act of 1934, as amended. The Company intends to seek additional capital and long term debt financing to attempt to overcome its working capital deficit. The Company will need between $50,000 to $100,000 annually to maintain its reporting obligations. The Company may attempt to do more private placements of its stock in the future to raise capital, but there is no assurance that the Company can raise sufficient capital or obtain sufficient financing to enable it to obtain approval of its prototype from the Federal Food and Drug Administration and to sustain monthly operations. In order to address its working capital deficit, the Company also intends to endeavor to (i) reduce operating costs, (ii) reduce general, administrative and selling costs, (iii) increase sales of its existing products and services, and (iv) obtain the approval of the United States Food and Drug Administration to the Company’s proprietary medical imaging device so that the Company can commence marketing and selling it. There may not be sufficient funds available to the Company to enable it to remain in business and the Company’s needs for additional financing are likely to persist.
Going Concern Qualification
The Company has incurred significant losses from operations, and such losses are expected to continue. The Company’s auditors have included a "Going Concern Qualification" in their report for the year ended December 31, 2011. In addition, the Company has limited working capital. The foregoing raises substantial doubt about the Company's ability to continue as a going concern. Management's plans include seeking additional capital and/or debt financing. There is no guarantee that additional capital and/or debt financing will be available when and to the extent required, or that if available, it will be on terms acceptable to the Company. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The "Going Concern Qualification" might make it substantially more difficult to raise capital.
Item 4T. Controls and Procedures
Our management is responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 15d-15(e) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
At the end of the period covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of March 31, 2012, the disclosure controls and procedures of our Company were not effective to ensure that the information required to be disclosed in our Exchange Act reports was recorded, processed, summarized and reported on a timely basis.
Imaging 3 is undertaking to improve its internal control over financial reporting and improve its disclosure controls and procedures. As of December 31, 2011, we had identified the following material weaknesses which still exist as of June 30, 2012 and through the date of this report:
1. As of December 31, 2011 and as of the date of this report, we did not maintain effective controls over the control environment. Specifically, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B. Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.
2. As of December 31, 2011 and as of the date of this report, we did not maintain effective controls over financial statement disclosure. Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements. Accordingly, management has determined that this control deficiency constitutes a material weakness.
Changes in Internal Control Over Financial Reporting
There were no changes in internal controls over financial reporting that occurred during the quarter ended June 30, 2012, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company may be involved in legal actions and claims arising in the ordinary course of business from time to time, none of which at this time is considered to be material to the Company’s business or financial condition.
Item 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 following cautionary statements are made pursuant to the Private Securities Litigation Reform Act of 1995 in order for I3 to avail itself of the “safe harbor” provisions of that Act. The discussions and information in the Company’s 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, I3’s business prospects or any other aspect of I3’s business, please be advised that I3’s actual financial condition, operating results and business performance may differ materially from that projected or estimated by management in forward-looking statements. I3 has attempted to identify, in context, certain of the factors that management currently believes may cause actual future experience and results to differ from I3’s 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 I3 to obtain the approval of the Federal Food and Drug Administration (“FDA”) for its proprietary 3D medical imaging device currently in the prototype phase and subject to patent applications filed and pending, inadequate capital, unexpected costs, lower revenues and net income than forecast, failure to complete the development of I3’s proprietary products currently under development, technological obscelence of I3’s products, failure to commercialize or sell any new or existing products developed by I3, price increases for supplies, inability to raise prices, failure to obtain customers, the risk of litigation and administrative proceedings involving I3 and its 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 I3’s stock price, additional dilution of the existing shareholders’ ownership of I3, 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 I3.
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 I3’s proprietary 3D medical imaging product currently under development have yet been made, since it is still in the prototype phase. 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 I3 as a going concern.
If we do not generate significant additional revenue we will continue to receive a going concern qualification in our audit. The financial statements of I3 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. I3 does not generate significant revenue, and has negative cash flows from operations, which raise substantial doubt about the I3’s ability to continue as a going concern. The ability of I3 to continue as a going concern and appropriateness of using the going concern basis is dependent upon, among other things, an additional cash infusion. I3 is 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 refile 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. I3 is subject to competition from other firms, many of which have greater financial resources, more recognition, more management experience, and longer operating histories than I3. 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. I3 will incur substantial operating losses until such time as it is 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 business and prospective customers will agree to pay the prices that we proposes to charge. In the event I3’s customers resist paying prices at the rate I3 proposes, I3’s 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. I3 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. I3 must be able to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. I3 can offer no assurance that it will be able to successfully use new technologies effectively or adapt I3’s products in a timely manner to a competitive standard. If I3 is unable to adapt in a timely manner to changing technology, market conditions or customer requirements, then I3 may not be able to successfully compete in its market.
We may not be able to repay our indebtedness. I3 has substantial indebtedness to related parties and to unaffiliated third parties, as disclosed in more detail in its 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 have risks related to third party loans incurred by one of our executive officers. Our chief executive officer pledged approximately 34,838,131 shares of his I3 common stock as collateral for different third party loans incurred by him. The lenders perfected their security interest in the shares by taking possession of stock certificates representing the shares. As a result, in the event our chief executive officer defaults on any of these loans, or the lenders otherwise exert control over the disposition of the collateral, a lender could immediately sell all of the shares securing the lender’s loan into the market without any further action on our part which could cause our stock price to decline. Mr. Janes has disclaimed the beneficial ownership of all pledged shares.
There is no assurance that we will achieve profitability. We cannot assure that I3 will be able operate profitability in the future. Profitability, if any, will depend in part upon I3’s ability to successfully develop, obtain FDA approval, and market its 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. I3’s 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. I3 generally does 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, I3’s shareholders could lose their invested capital.
We may face additional litigation in the future. I3 has had a substantial amount of litigation. The adverse resolution of such litigation to I3 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 I3 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.
We have only one independent director. Currently, the only members of the Board of Directors are Dean Janes, Raul Carrega and Xavier Aguilera. Mr. Carrega is the only director who would be considered an “independent director,” as defined under FINRA listing standards and the Nasdaq Marketplace Rules. Therefore, all decisions of the Board of Directors will be made by persons who are not considered independent directors.
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 I3 would have a material adverse impact on I3. I3 will generally be dependent upon its executive officers, Dean Janes and Xavier Aguilera, for the direction, management and daily supervision of I3’s operations.
The relationship of our management team to us could create conflicts of interest. The relationship of management to us creates conflicts of interest. We lease our executive offices from our Chief Executive Officer pursuant to a lease that was not determined at arms length. Management’s compensation from I3 has not been determined pursuant to arm’s-length negotiation. Management believes that it will have the resources necessary to fulfill its management obligations to all entities for which it is responsible.
Our ability to protect our intellectual property is uncertain. I3 has 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 I3’s marks. If I3 is unable to protect its rights to its trademarks or if such marks infringe on the rights of others, I3’s 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 (“FDA”) 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. I3 must receive Class II approval to market its 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 price may continue to be volatile and could continue to decline. 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 on the OTC Bulletin Board will not decline. We may register more shares of our stock in the future, 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. Since March 28, 2012, the date of the settlement agreements, Cranshire and Freestone have exercised a total of 28,677,221 Series A Warrants, 8,403,362 of which were exercised on a cash basis for an aggregate exercise price of $100,000 and the issuance of 8,403,362 shares of our common stock, and 20,273,859 of which were exercised on a cashless basis, resulting in the issuance of a total of 12,271,178 shares of our common stock. 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 will 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, including a group of lenders represented by Gemini Strategies, LLC, 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.
Our common stock is currently a “penny stock,” which may make it more difficult for our investors to sell their shares. Our common stock is currently and may continue in the future to be subject to the “penny stock” rules adopted under Section 15(g) of the Exchange Act. The penny stock rules generally apply to companies whose common stock is not listed on The NASDAQ Stock Market or other national securities exchange and trades at less than $4.00 per share, other than companies that have had average revenue of at least $6,000,000 for the last three years or that have tangible net worth of at least $5,000,000 ($2,000,000 if the company has been operating for three or more years). These rules require, among other things, that brokers who trade penny stocks to persons other than “established customers” complete certain documentation, make suitability inquiries of investors and provide investors with certain information concerning trading in the security, including a risk disclosure document and quote information under certain circumstances. Many brokers have decided not to trade penny stocks because of the requirements of the penny stock rules and, as a result, the number of broker-dealers willing to act as market makers in such securities is limited. If we remain subject to the penny stock rules for any significant period, it could have an adverse effect on the market, if any, for our securities. Since our securities are subject to the penny stock rules, investors may find it more difficult to dispose of our securities.
We may not pay dividends in the future. Any return on investment may be limited to the value of our common stock. We do not anticipate paying cash dividends in the foreseeable future. The payment of dividends on our common stock will depend on earnings, financial condition, and other business and economic factors affecting us at such time as our board of directors may consider relevant. Our current intention is to apply net earnings, if any, in the foreseeable future to increasing our capital base and marketing. Prospective investors seeking or needing dividend income or liquidity should therefore not purchase the Shares. If we do not pay dividends, our common stock may be less valuable because a return on investment will only occur if our stock price appreciates.
Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline. If our stockholders sell substantial amounts of our common stock in the public market, or upon the expiration of any statutory holding period under Rule 144, or issued upon the exercise of outstanding options or warrants, it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
During the six month period ended June, 2012, the Company did not issue common stock.
During the six month period ended June 30, 2012, the Company did not issue common stock for services rendered.
On or about the second quarter of, 2012, the Company issued 83,063,118 shares of its common stock pursuant to the cashless exercise of Warrants, for which the Company did not receive any capital.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
(a) Exhibits
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EXHIBIT NO.
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DESCRIPTION
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31.1
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31.2
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32.1
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32.2
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101.INS
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XBRL Instance Document
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101.SCH
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XBRL Taxonomy Extension Schema Document
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document
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101.DEF
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XBRL Taxonomy Extension Definition Linkbase Document
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101.LAB
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XBRL Taxonomy Extension Label Linkbase Document
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101.PRE
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XBRL Taxonomy Extension Presentation Linkbase Document
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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IMAGING3, INC.
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Dated: January 12, 2016
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By:
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/s/ Dane Medley
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Dane Medley
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Chief Executive Officer
and Chairman (Principal Executive Officer)
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
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/s/ Dane Medley
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Dated: January 12, 2016 | |
| Dane Medley, Chief Executive Officer
and Chairman (Principal Executive Officer)
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| /s/ Xavier Aguilera |
Dated: January 12, 2016
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Xavier Aguilera, Chief Financial Officer,
Secretary, and Executive Vice President
(Principal Financial/Accounting Officer)
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