Grapefruit USA, Inc - Annual Report: 2018 (Form 10-K)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended: December 31, 2018

Commission file number 000-50099

IMAGING3, INC.

(Exact name of registrant as specified in its charter)

4919 Noeline Ave., Encino, California 91436

(Address of principal executive offices) (Zip Code)

(805) 908-5719

Registrant’s telephone number, including area code

Securities registered pursuant to Section 12(g) of the Act:

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes [  ] No [X]

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes [  ] No [X]

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. Yes [  ] No [X]

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

The aggregate market value of voting stock held by non-affiliates of the registrant was approximately $0 as of December 31, 2018 (computed by reference to the fact that no last sale price of a share of the registrant’s Common Stock on that date was reported by any securities exchange or public securities trading market.)

There were 49,689,768 shares outstanding of the registrant’s Common Stock as of April 16, 2019.

TABLE OF CONTENTS

PART I

ITEM 1. BUSINESS

General

Imaging3, Inc. (the “Company”) (OTCQB: IGNG) is a development stage medical device company. The Company has developed a portable, proprietary, X-ray imaging technology designed to produce 3D images in real time. The Company’s devices are designed to operate flexibly to serve varying imaging applications with less radiation exposure in a lower cost, lower weight and easily transportable format that does not require specialized power sources when compared to currently available 3D imaging devices. The Company’s lead device, the Dominion Smartscan, for which the Company plans to submit a 510K application with the FDA in 2020, will be easily transportable and will operate on conventional 110V power sources. While the Company’s primary focus is on applications for the healthcare industry (human and veterinary), there are many potential non-healthcare related applications for the Company’s technology, including agricultural and industrial parts inspection and security screening.

Importantly and discussed in greater detail in the Recent Development and Subsequent Events sections, the Company began discussions with Grapefruit Boulevard Investments, Inc. (GBI) of Westwood, CA, on March 1, 2019, regarding the possible reverse acquisition of Company by GBI.

BUSINESS

Overview

Imaging3 Inc. is a medical device company that has developed a patented fluoroscopic imaging device, the Dominion Smartscan™ (“Dominion”) that can produce real-time 2D, 3D and CT-like slice-through images in one second of imaging time and without the radiation associated with other much more costly and time-consuming technologies. In 2018, the Company was focused on securing the financing necessary for efforts towards gaining FDA marketing authorization via the 510K process, further developing the final product, expanding of the existing patent estate, and building the management team necessary to execute these steps towards successful commercialization. Currently, efforts are focused exclusively on the US market. The Dominion system is not currently available for sale in any market.

Near-term, the Dominion is an easily transportable imaging system which allows for basic 2D X-rays (e.g., imaging of bone and soft tissue) and can do so in one second or less of imaging time using radiation levels at or below equivalent X-ray imaging devices. Unlike other current technologies, from one second of imaging time the Dominion can also produce precise 3D models and 3D CT-like slice through imaging, which we believe will offer healthcare providers unusually valuable information about their patient, in settings where this is not normally available with current technologies. In the future, the use of the Dominion to provide real-time “live” (continuous) 3D imaging offers the potential to use the device to guide minimally invasive surgery (MIS).

The Company believes that the Dominion has potential uses where a flexible X-ray/CT-like image is desired without the need for a special room, where real-time “live” imaging would be beneficial, and in populations where traditional higher radiation dosing modalities must be avoided. Examples of these applications could be in clinics or communities that cannot justify the multi-million dollar expense of a CT device, in clinics or environments such as pediatrics where a one-second 2D or 3D image of an injury would be beneficial, in transport-dependent military combat and disaster management applications, in developing countries, and ultimately, where minimally invasive surgery is practiced.

The Dominion system utilizes an O-ring design, where the X-ray image capture technology circles the target area. During 180 degrees of travel, the system typically takes 180 images. The data from these images are processed through a proprietary algorithm and software to produce a 3D model of the volume that was imaged, which can then be sliced and analyzed from any angle to provide images and information that maximize value to the healthcare provider and patient. This process is completed fast enough that the 3D image can be delivered effectively in real-time.

Historical

In June 2010, the Company submitted a 510(k) application to the FDA for the Dominion system. In March 2012, the FDA notified the Company that the Dominion Smartscan system did not meet the required criteria for substantial equivalence based upon the live surgical guidance performance claims requested and the data and information submitted by the Company in the 510(k) submission. The founder and CEO of the Company was convicted of fraudulent misrepresentations and was completely eliminated from the management and direction of the Company, and the Company subsequently declared bankruptcy under Chapter 11 and was delisted by the SEC. Following these interactions with the FDA and an extended period of rebuilding the Company for a re-start, the Company determined that a new 510(k) application would need to be submitted with more modest initial claims in 2D and 3D fluoroscopy in order to facilitate an early FDA clearance for the Dominion Smartscan system. The Company has engaged expert regulatory consultants to facilitate an FDA clearance for the Dominion Smartscan system, to be followed by initial commercialization in the USA.

Pursuant to the above, in recent years the Company has reduced its workforce, abandoned certain equipment designs, canceled certain contracts, written down inventory, written off certain patents, completed financial restructuring and successfully emerged from bankruptcy, as well as completed a multi-year SEC remediation and release process. The Company believes that it is now repositioned with new leadership and a clear opportunity to achieve its goals for the development and commercialization of the Dominion SmartScan system.

We believe that future outcomes of minimally invasive surgeries will be enhanced through the combination of the Dominion’s more advanced tools and imaging functionality, which are designed to: (i) empower the surgical team with improved precision, surgical guidance options and visualization; (ii) improve patient satisfaction and post-operative recovery; and (iii) provide a cost-effective imaging system, compared to existing alternatives, for a wide range of clinical applications that are currently un-served or underserved with medical imaging solutions.

Our business strategy is to focus on the development and commercialization of the Dominion Smartscan system, through tiered levels of performance claims, regulatory approvals, and commercialization in an expanding portfolio of application areas.

Market Overview

Over the past two decades, fluoroscopic imaging (C-arm devices) has emerged as a lower radiation dosing and more operationally convenient alternative to CT scans in minimally invasive surgery applications. In C-arm imaging, two views are necessary to provide orthogonal diagnostic view perspectives. The process of repositioning the C-arm to generate the two images and their subsequent translation into a 3D image and/or slice analysis, typically requires seconds or minutes of elapsed time. This makes it impossible to create a “live” real-time 3D image and slice analysis. Additionally, working from just two orthogonal images requires significant extrapolation and consequent imprecision or error in 3D image reconstruction.

Beyond the particularly high-value surgical guidance applications, billions of 2D and 3D imaging procedures across a broad range of clinical applications are now performed each year worldwide. The majority of these imaging procedures continue to be traditional 2D X-rays, although the value of these procedures is now dwarfed by the value delivered and captured in 3D imaging and slice analysis, and in live 3D guidance procedures.

While C-arm surgical guidance imaging has decreased the invasiveness of many previously open surgical procedures, it still has many limitations. These traditional imaging techniques still require multiple x-rays and extended time delays to achieve the visualization and triangulation required to provide successful surgical guidance results. Many such traditional imaging instruments are relatively rigid instruments that lack the external articulation required to provide the equipment dexterity needed for complex imaging tasks. Most x-ray imaging is performed with two-dimensional (“2D”) visualization of the subject or operative field, making the often-important dimension of depth perception difficult.

A persistent challenge associated with x-ray imaging is the utilization of tissue-damaging ionizing radiation. The introduction of lower radiation dosing solutions that achieve equivalent outcomes versus current higher radiation dosing modalities will always be a compelling additional value proposition in the comparison of imaging technologies.

Despite its limitations, traditional fluoroscopy remains the prevalent technique in minimally invasive surgery. We believe that the Dominion device, with its CT-like imaging with lower radiation dosing capabilities, will provide higher value to facilitate adoption by radiologists and will enhance surgical outcomes over use of traditional imaging methods.

Modern imaging technologies, including computer-controlled automated slice analyses, have developed as technologies that offer the potential to improve upon many aspects of the traditional 2D or C-arm 3D x-ray imaging experience. Hundreds of thousands of CT radiological procedures are now performed each year worldwide, but they remain a small fraction of the total imaging procedures performed. While initial widespread adoption of imaging was focused on 2D x-ray images, and CT scanning procedures were primarily performed in high-cost, custom-built rooms, CT scanning has been more recently applied to many other clinical applications, particularly in general surgery. Despite recent advances, we believe there remain many limitations associated with current fluoroscopic and CT imaging systems used in connection with minimally invasive surgeries.

Product Overview

With the introduction of the Dominion, the Company intends to provide a unique tool to provide access in many non-traditional settings to better visualization of a wide variety of healthcare related issues and to facilitate better-informed decision-making, ranging from basic 2D X-rays to 3D imaging and slice analyses, and ultimately, to guidance of minimally invasive surgical procedures. In addition to human medical applications, the Dominion is expected to deliver unique new value in many non-traditional settings for inspection of foods, industrial parts, and in security screenings.

Current Product Offering

Dominion Smartscan system

The Dominion Smartscan system is a multi-functional imaging system that allows up to 360 images to be obtained from a single 360-degree orbit of its O-ring design. The Dominion utilizes a fluoroscopic cone beam X-ray emitter such as those used in some modern fluoroscopic C-arm systems, but unlike the two images that are typically utilized from the use of the C-arm, the 3D images generated from the Dominion system are constructed in real time from approximately 180 images. The Company believes that the additional data provided allows for more complete, accurate and precise 3D image reconstruction, and does not rely as heavily on the extrapolated volume-filling of current software solutions based upon two orthogonal images. The Company also believes that the Dominion will deliver its benefits at a significant cost savings to the healthcare system.

Key features of the Dominion Smartscan system are:

Business Strategy

Our current strategy is to focus our resources on FDA clearance and commercialization of the Dominion Smartscan system, initially for performance claims focusing on 2D and 3D fluoroscopy. Following market introduction of the Dominion and establishment of appropriate clinical collaborations, an expanding portfolio of application claims will be pursued for higher value applications. After interactions with the FDA, we have prioritized our short-term operational strategy around the finalization and prosecution of an initial 510(k) application for The Dominion Smartscan system, with the assistance of an expert regulatory consultancy team.

We believe that:

Marketing

Imaging3 competes in the medical diagnostic imaging market, and this market continues to grow vigorously in installed equipment base and numbers of procedures performed. This vitality is due primarily to continual technological improvements that lead to faster and higher-resolution imaging, greater patient safety, and the provision of these capabilities to a geographically disperse and rapidly growing global population. This has resulted in vigorous competition to create the most cost-effective diagnostic imaging systems, still preponderantly focused on high resolution imaging.

According to a Freedonia Group study, the medical imaging equipment market in the US is greater than $9.5 billion and has a projected growth rate greater than that for overall national healthcare expenditures. Growth will be stimulated by ever increasing utilization in patient procedures involving diagnostic imaging, driven by factors including demographics of an aging population, advances in noninvasive surgical procedures, expanding demonstrations of improved medical outcomes from utilization of medical imaging, and decreasing cost of medical imaging due to competitive intensity.

Intellectual Property

We believe that our intellectual property and expertise is an important competitive resource. We intend to maintain an active program of intellectual property protection, both to assure that the proprietary technology developed by the Company is appropriately protected and, where necessary, to assure that there is no infringement of our proprietary technology by competitors.

The following summarizes our current patent and patent application portfolio.

Patents and Patent Applications Owned by the Company: The Company holds one United States patent, and it has more than 21 patent amendments filed in the United States. In each instance, we own all right, title and interest, and no licenses, security interests or other encumbrances have been granted on such patents and patent applications.

Our issued patent resulted from filings related to the Dominion Smartscan system. The patent will remain in force until 2024 and we intend to seek further patent and other intellectual property protection in the United States and internationally, where available and when appropriate, as we continue our product development efforts.

Competition

Our industry is highly competitive, subject to change and significantly affected by new product introductions and other activities of industry participants. Many of our competitors have significantly greater financial and human resources than we do and have established reputations with traditional target customers, as well as worldwide distribution channels that are well developed and established.

There are many competitive offerings in the field of radiology imaging. Several companies have launched devices that enable reduced radiation without real-time 3D imaging. Our imaging competitors include, but are not limited to: Fujifilm, GE, Siemens, Medtronic, Samsung, Shimadzu, Carestream, Hitachi, Hologic, Esaote, Toshiba, Striker, Phillips, Ziehm, and OEC. In addition, non-ionizing radiation imaging modalities including but not limited to ultrasound imaging continue to make important advances.

In addition to imaging device manufacturer competitors, there are many products and therapies that are designed to reduce the need for or attractiveness of imaging intervention. These products and therapies may impact the overall volume of imaging procedures and negatively impact our business.

Our ability to compete may be affected by the failure to fully educate physicians in the use of our products and products in development, or by the level of physician expertise. This may have the effect of making our products less attractive. Some medical device companies are actively engaged in research and development of imaging systems or other medical devices and tools used in minimally invasive surgery procedures. We cannot predict the basis upon which we will compete with new products marketed by others.

Government Regulation of our Product Development Activities

The U.S. government and foreign governments regulate the medical device industry through various agencies, including but not limited to, the U.S. FDA, which administers the Federal Food, Drug and Cosmetic Act (the “FDCA”). The design, testing, manufacturing, storage, labeling, distribution, advertising, and marketing of medical devices are subject to extensive regulation by federal, state and local governmental authorities in the United States, including the FDA, and by similar agencies in other countries, including the European Union. Any device product that we develop must receive all requisite regulatory approvals or clearances, as the case may be, before it may be marketed in a particular country.

Device Development, Marketing Clearance and Approval

Medical devices are subject to varying levels of pre-market regulatory requirements. The FDA classifies medical devices into one of three classes: (i) Class I devices are relatively simple and can be manufactured and distributed with general controls; (ii) Class II devices are somewhat more complex and receive greater scrutiny from the FDA and have heightened regulatory clearance requirements; and (iii) Class III devices are new, high risk devices, and frequently are permanently implantable or help sustain life and generally require a Pre-Market Approval (“PMA”) by the FDA.

In the United States, a company typically can obtain permission to distribute a new medical device in one of two ways. The first applies to any device that is substantially equivalent to a device first marketed prior to May 1976, or to another device marketed after that date, but which was substantially equivalent to a pre-May 1976 device. These devices are either Class I or Class II devices. To obtain FDA clearance to distribute the medical device, a company generally must submit a Section 510(k) notification, and receive an FDA order finding substantial equivalence to a predicate device (pre-May 1976 device or post-May 1976 device that was substantially equivalent to a pre-May 1976 device) and permitting commercial distribution of that medical device for its intended use. A 510(k) notification must provide information supporting a claim of substantial equivalence to a single medical device, the predicate device. If clinical data from human experience are required to support the 510(k) notification, these data must be gathered in compliance with investigational device exemption (“IDE”) regulations for investigations performed in the United States. The 510(k) process is normally used for products of the type that the Company is developing and proposes to market and sell. The FDA review process for premarket notifications submitted pursuant to Section 510(k) takes 90 days, pursuant to statutory requirements, but it can take substantially longer if the FDA has questions regarding the regulatory submission. It is possible for Section 510(k) clearance procedures to take from six to twenty-four months, depending on the concerns raised by the FDA and the complexity of the device. There is no guarantee that the FDA will “clear” a medical device for marketing, in which case the device cannot be distributed in the United States. There is also no guarantee that the FDA will deem the applicable device subject to the 510(k) process, as opposed to the more time-consuming, resource-intensive and challenging PMA process described below. In 2011, the FDA issued a series of draft guidance documents designed to reform the 510(k) clearance process. Similarly, the Medical Device User Fee Amendments of 2012 authorized the FDA to collect user fees for the review of certain pre-market submissions received on or after October 1, 2012, including 510(k) notifications.

The second, more comprehensive, approval process applies to a new device that is not substantially equivalent to a pre-1976 product or that is to be used in supporting or sustaining life or preventing impairment. These devices are normally Class III devices. For example, most implantable devices are subject to the approval process as a Class III device. Two steps of FDA approval are generally required before a company can market a product in the United States that is subject to pre-market approval, as a Class III device. First, a company must comply with IDE regulations in connection with any human clinical investigation of the device. These regulations permit a company to undertake a clinical study of a “non-significant risk” device without formal FDA approval. Prior express FDA approval is required if the device is a significant risk device. Second, the FDA must approve the company’s PMA application, which contains, among other things, clinical information acquired under the IDE. Additionally, devices subject to PMA approval may be subject to a panel review to obtain marketing approval and are required to pass a factory inspection in accordance with the current “good manufacturing practices” standards in order to obtain approval. The FDA will approve the PMA application if it finds there is reasonable assurance that the device is safe and effective for its intended use. The PMA process takes substantially longer than the 510(k) process, approximately one to two years or more. However, in some instances the FDA may find that a device is new and not substantially equivalent to a predicate device but is also not a high-risk device as is generally the case with Class III PMA devices. In these instances, FDA may allow a device to be down classified from Class III to Class I or II.

The de novo classification option is an alternate pathway to classify novel devices of low to moderate risk that had automatically been placed in Class III after receiving a “not substantially equivalent” (“NSE”) determination in response to a 510(k) notification. The regulations have also been amended to allow a sponsor to submit a de novo classification request to the FDA for novel low to moderate risk devices without first being required to submit a 510(k) application. These types of applications are referred to as “Evaluation of Automatic Class III Designation” or “de novo.” In instances where a device is deemed not substantially equivalent to a Class II predicate device, the candidate device may be filed as a de novo application which may lead to delays in regulatory decisions by the FDA. FDA review of a de novo application may lead the FDA to identify the device as either a Class I or II device and worthy of either an exempt or 510(k) regulatory pathway.

We believe that the Dominion Smartscan system should be approvable as a Class II device for 2D and 3D imaging and slice analysis applications, and we are in the process of pursuing such a Section 510(k) clearance for the Dominion Smartscan system. Later FDA submissions are expected to address expanded claims for live real-time 3D surgical guidance imaging applications, and these will seek to utilize a Class II device 510(k) clearance with suitable comparison to predicate devices. The FDA might find that a 510(k) submission does not provide the evidence required to prove that the Dominion Smartscan system is substantially equivalent to marketed Class II devices. If that were to occur, we could be required to undertake the more complex and costly PMA process or perhaps be considered for a de novo reclassification. For either the 510(k), de novo, or the PMA process, the FDA could require us to conduct clinical trials, which would take more time, cost more money and pose other risks and uncertainties.

Clinical studies conducted in the U.S. or used in any U.S. application on an unapproved medical device require approval from the FDA prior to initiation. Even when a clinical study has been approved by the FDA or deemed approved, the study is subject to factors beyond a manufacturer’s control, including, but not limited to, the fact that the institutional review board (IRB) at a specified clinical site might not approve the study, might decline to renew approval, or might suspend or terminate the study before its completion. There is no assurance that a clinical study at any given site will progress as anticipated. In addition, there can be no assurance that the clinical study will provide sufficient evidence to assure the FDA that the product is safe and effective, a prerequisite for FDA approval of a PMA, or substantially equivalent in terms of safety and effectiveness to a predicate device, a prerequisite for clearance under Section 510(k). Even if the FDA approves or clears a device, it may limit its intended uses in such a way that manufacturing and distribution of the device may not be commercially feasible.

After clearance or approval to market is given, the FDA and foreign regulatory agencies, upon the occurrence of certain serious adverse events, are authorized under various circumstances to withdraw the clearance or approval of the device, or require changes to a device, its manufacturing process or its labeling or require additional proof that regulatory requirements have been met.

A manufacturer of a device approved through the PMA process is not permitted to make changes to the device which affect its safety or effectiveness without first submitting a supplement application to its PMA and obtaining FDA approval for that supplement, prior to marketing the modified device. In some instances, the FDA may require clinical trials to support a supplement application. A manufacturer of a device cleared through the 510(k) process must submit an additional premarket notification if it intends to make a change or modification in the device that could significantly affect the safety or effectiveness of the device, such as a significant change or modification in design, material, chemical composition, energy source, labeling or manufacturing process. Any change in the intended uses of a PMA device or a 510(k) device requires an approval supplement or new cleared premarket notification. Exported devices are subject to the regulatory requirements of each country to which the device is exported, as well as certain FDA export requirements.

Continuing FDA Regulation

After a device is placed on the market, numerous FDA and other regulatory requirements continue to apply. These include:

We are required to and have registered with the FDA and the International Organization for Standardization (“ISO”) as medical device manufacturers, and must obtain all necessary permits and licenses to operate our business. As manufacturers, we and our suppliers are subject to announced and unannounced inspections by the FDA to determine our compliance with the Quality System Regulation (“QSR”) and other regulations.

In Europe, we need to comply with the requirements of the Medical Devices Directive (“MDD”) and appropriately affix the CE Mark on our products to attest to such compliance. To achieve compliance, our products must meet the “Essential Requirements” of the MDD relating to safety and performance and we must successfully undergo verification of our regulatory compliance, or conformity assessment, by a notified body selected by us. The level of scrutiny of such assessment depends on the regulatory class of the product. We are subject to continued surveillance by our notified body and will be required to report any serious adverse incidents to the appropriate authorities. We also must comply with additional requirements of individual countries in which our products are marketed. In the European Community, we are required to maintain certain ISO certifications in order to sell products. These regulations require us or our manufacturers to manufacture products and maintain documents in a prescribed manner with respect to design, manufacturing, testing, labeling and control activities.

Impact of Regulation

Failure to comply with the applicable regulatory requirements can result in enforcement action by the FDA, which may include, among other things, any of the following sanctions:

Further, the levels of revenues and profitability of medical device companies like the Company may be affected by the continuing efforts of government and third party payers to contain or reduce the costs of health care through various means. For example, in certain foreign markets, pricing or profitability of products is subject to governmental control. In the United States, there have been, and we expect that there will continue to be, a number of federal and state proposals to implement similar governmental controls.

Therefore, we cannot assure you that any of our products will be considered cost effective, or that, following any commercialization of our products, coverage and reimbursement will be available or sufficient to allow us to manufacture and sell them competitively and profitably.

Health Care Regulation

Our business activities are subject to additional healthcare regulation and enforcement by the federal government and by authorities in the states and foreign jurisdictions in which we conduct our business. Such laws include, without limitation, state and federal anti-kickback, fraud and abuse, false claims, privacy and security and physician payment transparency laws. If our operations are found to be in violation of any of such laws that apply to us, we may be subject to penalties, including, without limitation, civil and criminal penalties, damages, fines, the curtailment or restructuring of our operations, exclusion from participation in federal and state healthcare programs and imprisonment, any of which could adversely affect our ability to operate our business and our financial results.

In the United States, there have been, and we expect there to continue to be, a number of legislative and regulatory initiatives, at both the federal and state government levels, to change the healthcare system in ways that, if approved, could affect our ability to sell our products profitably. At the current time, our products are not defined as durable medical equipment (“DME”). Non-DME devices used in imaging systems procedures are normally paid directly by the hospital or health care provider and not reimbursed separately by third-party payers. Instead, the hospital or health care provider is reimbursed based on the procedure performed and the inpatient or outpatient stay. As a result, these types of devices are subject to intense price competition that can place a small manufacturer at a competitive disadvantage as hospitals, ambulatory surgery centers and health care providers attempt to negotiate lower prices for products such as the ones we develop and sell.

In March 2010, President Obama signed into law both the Patient Protection and Affordable Care Act (the “Affordable Care Act”) and the reconciliation law known as Health Care and Education Reconciliation Act (the “Reconciliation Act,”) and together (the “2010 Health Care Reform Legislation”). The constitutionality of the 2010 Health Care Reform Legislation was confirmed twice by the Supreme Court of the United States. Both Congressional leaders and President Trump have announced plans to repeal or modify the 2010 Health Care Reform Legislation. At this time the Company is not certain as to the impact of federal health care legislation on its business.

The 2010 Health Care Reform Legislation subjects manufacturers of medical devices to an excise tax of 2.3% on certain U.S. sales of medical devices beginning in January 2013. This excise tax was suspended in December 2015 for two years, and we anticipate that this may be repealed. If eventually implemented, this excise tax will likely increase our expenses in the future.

Further, the 2010 Health Care Reform Legislation includes the Open Payments Act (formerly referred to as the Physician Payments Sunshine Act), which, in conjunction with its implementing regulations, requires certain manufacturers of certain drugs, biologics, and devices that are reimbursed by Medicare, Medicaid and the Children’s Health Insurance Program to report annually certain payments or “transfers of value” provided to physicians and teaching hospitals and to report annually ownership and investment interests held by physicians and their immediate family members during the preceding calendar year. We have provided reports under the Open Payments Act to the Centers for Medicare & Medicaid Services since 2014. The failure to report appropriate data accurately, timely, and completely could subject us to significant financial penalties. Other countries and several states currently have similar laws and more may enact similar legislation.

International Regulation and Potential Impact

Through marketing and acquisition of Dominion Smartscan systems, the Company intends to expand into international markets. Some of these markets maintain unique regulatory requirements outside of or in addition to those of the U.S. FDA and the European Union. The Dominion Smartscan system is not CE marked, which would allow us to offer the product for sale in a number of jurisdictions, including select countries in Europe, the Middle East, Asia and Latin America. Due to the variations in regulatory requirements within territories, the Company may be required to perform additional safety or clinical testing or fulfill additional agency requirements for specific territories. The Company may also be required to apply for registration using third parties within those territories and may be dependent upon the third parties’ successful regulatory processes to file, register and list the product applications and associated labeling, which could lead to significant investments and resource use. These additional requirements may result in delays in international registrations and commercialization of our products in certain countries.

Recent Developments

On March 11, 2019 the Company signed a non-binding letter of intent (“LOI”) to be acquired in a reverse acquisition (the “Acquisition”) by Grapefruit Boulevard Investments, Inc., a privately held Los Angeles area cannabis company (the “Acquirer”). The Acquirer holds licenses issued by the State of California to manufacture and distribute cannabis products in California. The Acquirer commenced operations in mid-2018 and has received more than $550,000.00 in revenue from operations since they commenced. The Acquirer maintains facilities near Palm Springs in Riverside County, California. On Thursday, March 7, 2019 the Acquirer obtained its final permit and clearance from the local fire department to commence operation of an ethanol extraction laboratory at such facilities and will initiate related extraction and post processing operations as soon as practicable. The Acquirer’s laboratory will be able to extract CBD hemp under Federal law pursuant to the recently signed 2018 Farm Act that classifies CBD hemp as an insurable commodity.

Pursuant to the terms of the LOI, the Company and the Acquirer have initiated negotiations intended to result in completion of a definitive Exchange Agreement (the “Agreement”) encompassing all of the material terms of the Agreement during the second quarter of 2019. Pursuant to the terms of the LOI, the Agreement will provide that upon conclusion of the Acquisition, the Acquirer’s designees shall own 80% of the then outstanding common shares of the Company and the Company’s current shareholders shall own 20% of such outstanding common shares. In addition, the Company will be required to settle certain outstanding creditor obligations on terms acceptable to both the Acquirer and the Company.

Furthermore, the Acquirer is required to obtain a commitment for a bridge loan of not less than $1,250,000.00 to be funded upon the closing of the Acquisition and an equity infusion of at least $5,000,000.00 at a pre-money valuation of at least $15,000,000.00 to be funded upon the closing of the Acquisition.

Simultaneous with a successful closing of the Acquisition, the Company will assign all rights to its intellectual property and assets relating to its Dominion imaging technology to a private closely held Company (the “Dominion Enterprise”) to be owned by IGNG, current IGNG management and board members, certain other persons currently associated with the Company and the Acquirer’s designees in percentages to be negotiated among those persons prior to the closing of the transaction. The Dominion Enterprise will thereafter execute its business plan as previously articulated in IGNG’s periodic reports to the SEC.

At the closing, current IGNG officers and directors shall appoint the Acquirer’s designees to officers’ and directors’ positions at post acquisition IGNG and resign their officer and director positions.

Employees

As of December 31, 2018, we had 2 employees, including 1 full time employee. The Company considers its relationships with its employees to be good.

Corporate Information

Imaging3 is a Delaware corporation.

Available Information

The Company maintains a website at www.imaging3.com. Our Code of Business Conduct and Ethics, as reviewed and updated on October 26, 2017, is available on our website. Our annual reports on Form 10-K, quarterly reports on Form 10-Q and current reports on Form 8-K, and amendments to those reports, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act, are available free of charge on our website as soon as practicable after electronic filing of such material with, or furnishing it to, the U.S. Securities and Exchange Commission (the SEC”). This information may be read and copied at the Public Reference Room of the SEC at 100 F Street, N.E., Washington D.C. 20549. The SEC also maintains an internet website that contains reports, proxy statements, and other information about issuers, like Imaging3, Inc., who file electronically with the SEC. The address of the site is http://www.sec.gov.

ITEM 2. PROPERTIES

Our administrative office is located at 4919 Noeline Ave, Encino, CA 91436.

ITEM 3. LEGAL PROCEEDINGS

Bankruptcy Closure

On January 31, 2017, United States Bankruptcy Judge for the Central District of California, Neil Bason, granted the Company’s unopposed motion for entry of final decree and also granted approval of the two stipulations regarding payment of court-approved fees. As a result, the Imaging3 Chapter 11 proceeding is now closed. The Company is no longer subject to the jurisdiction of the Bankruptcy Court, and the case cannot be converted to a Chapter 7 proceeding, except that the Judge’s order in its final paragraph stated that “Notwithstanding the foregoing [order closing the bankruptcy case pursuant to 11 United States Code Section 350(a)] the bankruptcy case may be reopened on motion as set forth in the Greenberg, Glusker Fee Agreement and/or the Mentor Fee Agreement and thus the court retains jurisdiction for those purposes and as otherwise provided by law or as contemplated by the prior orders and proceedings of this court”. Thus, technically, the case could possibly be reopened by either of those aforementioned creditors. As of the date of filing of this report, the Company is in default of certain terms of the Greenberg, Glusker and Mentor agreements, however, the Company maintains open and cordial relations with Greenberg, Glusker and Mentor.

Pending Litigation

On September 13, 2017, Alpha Capital Anstalt and Brio Capital Master Fund, LTD, two minority members of a group of investors in the Company (the “Plaintiff”) filed a lawsuit seeking damages and injunctive relief in the United States District Court for the Southern District of New York claiming that the Company breached certain Note and Warrant agreements among the parties to the action. The holders of the majority of the investment involved in the above lawsuit chose not to join in the lawsuit and have informed the Company that they believe the lawsuit to be baseless. On November 21, 2017, the Court denied the Plaintiff’s request for injunctive relief against the Company. As a result, the case essentially became an action for money damages against the Company, which the Company believes to be without merit and has defended. However, on July 27, 2018 United States District Court for the Southern District of New York granted the plaintiffs motion for summary judgement, awarding them approximately $1.4 million dollars. The Company is, as of the date of this report, in advanced negotiations to settle this judgment.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

PART II

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

Common Stock

After meeting all the filing requirements of the SEC, the Company commenced trading on the OTCQB effective June 22, 2016 under the new trading symbol “IGNG”. The OTCQB is part of the quality-controlled segment of the over-the-counter market, available only to SEC reporting companies which are current in their regulatory filing requirements and maintain a minimum bid price.

The range of high and low bid quotations for each fiscal quarter within the last two fiscal years was as follows:

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

As of April 15, 2019, there were approximately 580 record holders of our common stock, not including shares held in “street name” in brokerage accounts which is unknown. As of December 31, 2018, there were approximately 40,426,983 shares of our common stock outstanding on record.

Dividends

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

Stock Option Plan

During 2014, the Board of Directors adopted, and the shareholders approved, the 2014 Stock Option Plan under which a total of 1,811,401 shares of common stock had been reserved for issuance. The 2014 Stock Option Plan will terminate in September 2024.

Stock Options

As of December 31, 2018, employees of the Company hold options to purchase 250,000 shares of common stock at an exercise price of $0.50.

The weighted average remaining contractual life of options outstanding issued under the Plan was 6.57 years at December 31, 2018.

Warrants

Following is a summary of warrants outstanding at December 31, 2018:

ITEM 6. SELECTED FINANCIAL DATA

Not applicable because we are a smaller reporting company.

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

Cautionary Statements

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

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

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

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

Current Overview

During 2018, we 1) completed a critical transition in leadership, recruiting a highly-experienced professional team, 2) established strategic partnering with leading regulatory, marketing and medical device R&D consulting organizations to support our objective of gaining 510(k) marketing clearance from the FDA for our lead product, the Dominion SmartScan™ system, and 3) advanced constructive debt renegotiation with existing lenders.

Our first additions to the leadership team were announced in January 2018, with the formation of our Scientific Advisory Board. Our first two members, Doctors Douglas P. Beal and Brooke Spencer, brought valuable and varied practice and research perspectives from the radiology community. In early March, we announced the appointment of Joe Biehl as Chief Financial Officer, who brought highly relevant experience to the Company from both smaller and larger companies, and important hands-on financial leadership experience in rapidly expanding companies. Continuing our Board evolution, in an effort to build a strong, independent board with relevant technical and commercial experience to guide and accelerate the Company through its next phase, we announced in March the addition of Jeffrey N. Peterson to the Board, and his appointment as Chairman. Mr. Peterson received BSChE and MSChE engineering degrees from MIT, and brought broad, global senior management experience from diverse businesses within GE, Abbott Laboratories, consulting roles, entrepreneurial startups, and as chairman of Pressure BioSciences (PBIO:OTCQB). The following month, we added Dr. George Zdasiuk to the Board and to the Scientific Advisory Board. Dr. Zdasiuk earned a PhD in applied physics from Stanford, and continued into a 30-year career at Varian Medical Systems, including 15 years as their Chief Technology Officer and VP of R&D. His deep scientific understanding spanning all medical imaging modalities is an invaluable resource for Imaging3 going forward.

Beginning our efforts to establish strong strategic partners for regulatory, marketing and medical device R&D activities, in January 2018, we engaged the highly-regarded technology, strategy and marketing consultants of Halteres Associates to help define and lead the Company through critical strategy planning. In March 2018, we announced the selection of the Experien Group, a renowned medical device regulatory consultancy, to help lead our regulatory preparation and submission activities. The Experien Group have successfully assisted hundreds of companies like Imaging3 with their FDA submissions. In November 2018, we commenced work with a highly-experienced contract consulting team with particularly relevant radiology product R&D experience, on the evaluation and further instrument development planning around the Dominion SmartScan’s uniquely distinguishing algorithmic and software capabilities.

In preparation for fund-raising and a step-wise progression towards a later uplist to a major stock exchange, the Company announced the successful completion of a 1:20 reverse split in April of 2018, which addressed the Company’s capital and debt structure as we improve our ability to attract new capital. In May 2018, three of our note holders chose to complete the conversion of their debt investments entirely over into equity.

In the absence of FDA approval for our medical device, we currently do not and cannot rely upon it as a future source of sales and revenue. We are subject to the uncertainty of not knowing whether or when our proprietary medical device will be approved and can be sold. Under those circumstances, management believes that we will continue our current trend of incurring operating losses, requiring us to raise additional capital or financing from outside sources. We have raised $782,831 via equity and debt during 2018, sufficient to continue Company operations, and believe that we will be able to close on additional monies in the near future to accelerate progress on the Company’s stated plans. We cannot assure that we will be able to raise sufficient capital or financing to maintain our business while we are incurring operating losses, and we cannot assure that we will become profitable if our proprietary medical device is approved by the FDA.

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.

Stock-based Compensation

We measure and recognize compensation expense for all share-based payment awards made to employees and directors based on the grant date fair values of the awards. For stock option awards to employees with service and/or performance based vesting conditions, the fair value is estimated using the Black-Scholes option pricing model. The value of an award that is ultimately expected to vest is recognized as expense over the requisite service periods in our statements of operations. Our stock-based awards are comprised principally of shares issued for services and stock options.

We account for stock options issued to non-employees in accordance with the guidance for equity-based payments to non-employees. Stock option awards to non-employees are accounted for at fair value using the Black-Scholes option pricing model. Management believes that the fair value of stock options is more reliably measured than the fair value of the services received. The fair value of the unvested portion of the options granted to non-employees is re-measured each period. The resulting increase in value, if any, is recognized as expense during the period the related services are rendered.

The Black-Scholes option pricing model requires management to make assumptions and to apply judgment in determining the fair value of our awards. The most significant assumptions and judgments include estimating the fair value of our underlying stock, the expected volatility and the expected term of the award. In addition, the recognition of stock-based compensation expense is impacted by estimated forfeiture rates.

Revenue Recognition

Effective January 1, 2018, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in FASB Accounting Standards Codification (“ASC”) 605, Revenue Recognition, and is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The adoption of ASU 2014-09, using the modified retrospective approach, had no significant impact on the Company’s results of operation, cash flows or financial position.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing services. All revenue is recognized when the Company satisfies its performance obligations under the contract. The majority of the Company’s contracts have a single performance obligation and are short term in nature. Generally, the Company extends credit to its customers and does not require collateral. The Company performs ongoing credit evaluations of its customers and historic credit losses have been within management’s expectations. The Company 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.

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.

The following sets forth selected items from our statements of operations for the years ended December 31, 2018 and 2017.

Results of Operations for the Year Ended December 31, 2018 as compared to the Year Ended December 31, 2017.

We are focusing on our development stage medical device efforts. The legacy C-arm activity was completely wound down in 2017. We had no revenues for the year ended December 31, 2018 as compared to $41,829 for the year ended December 31, 2017.

For the year ended December 31, 2018 there was no cost of revenue as compared to $14,263 of revenue for the year ended December 31, 2017. This decrease was a result of no outside labor related to C-Arm repairs. There was no gross profit margin for the year ended December 31, 2017 compared to $27,565 for the year ended December 31, 2017.

Our total operating expenses increased in 2018 to $6,321,546 from $1,654,541 for the year ended December 31, 2017, an increase of 282% primarily as a result of stock based compensation and outside consulting activity.

Other expenses increased as a result of derivative liability activity and the extinguishment of debt. Our net loss for the fiscal year ending December 31, 2018 was $8,130,155 as compared to a net income of $2,773,037 for the fiscal year ending December 31, 2017.

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

Liquidity and Capital Resources

Our total current assets increased to $14,214 as of December 31, 2018, from $3,594 as of December 31, 2017. The cash account as of December 31, 2018 was $14,214 compared to $3,594 as of December 31, 2017.

Our total current liabilities increased to $5,324,379 as of December 31, 2018 from $2,579,582 as of December 31, 2017. This increase is due in large part to the reclassification of the administrative claims payable balance to current from long-term and a number of notes payable issued for this reporting period.

The cash account as of December 31, 2018 was $14,214 compared to $3,594 as of December 31, 2017. Cash raised through financing activities was expended primarily on: (i) day-to-day business operations in connection with preparation for our 510K submittal and legal and audit fees.

During the year ended December 31, 2018, we used $772,211 of net cash for operating activities, as compared to $731,679 used during the year ended December 31, 2017. Net cash provided by financing activities during the year ended December 31, 2018 was $669,223, as compared to $712,635 during the year ended December 31, 2017.

We expect our working capital requirements in the next twelve months to be met primarily by the proceeds of private placements of common stock, convertible instruments and other securities to our existing shareholders and other investors. We expect to need additional working capital from outside sources to cover our anticipated operating deficits and to finance the re-filing of our application to the FDA for our proprietary 3D medical imaging device. There is no assurance that the Company will be able to raise sufficient additional capital or financing to continue in business or to effectively execute its business plan.

Going Concern Qualification

We have incurred significant losses from operations, and such losses are expected to continue. In their report on our financial statements as of and for the period ended December 31, 2018, our auditors have expressed substantial doubt about our ability to continue as a going concern. In addition, we have limited working capital. The foregoing raises substantial doubt about our ability to continue as a going concern. Management’s plan includes, among other things, seeking additional equity financing by selling our equity securities, obtaining funds through the issuance of debt, and continue seeking approval from the FDA to bring to market our real-time imaging platform; or, possibly merge with another operating organization. We cannot guarantee that additional capital and/or debt financing will be available when and to the extent required, or that if available it will be on terms acceptable to us. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The “Going Concern Qualification” may make it substantially more difficult for us to raise capital.

Off-Balance Sheet Arrangements

None.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

IMAGING3, INC.

FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 2018 and 2017

CONTENTS

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Imaging3, Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Imaging3, Inc. (the Company) as of December 31, 2018 and 2017, and the related statements of operations, stockholders’ deficit, and cash flows for each of the years in the two-year period ended December 31, 2018, and the related notes (collectively referred to as the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2018, in conformity with accounting principles generally accepted in the United States of America.

Explanatory Paragraph – Going Concern

The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 5 to the financial statements, the Company has incurred recurring losses from operations and negative cash flows from operations, resulting in an accumulated deficit of approximately $21.3 million as of December 31, 2018. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans with regard to these matters are also described in Note 5. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

Rose, Snyder & Jacobs LLP

We have served as the Company’s auditor since 2015

Encino, CA

April 16, 2019

IMAGING3, INC.

BALANCE SHEETS

*The financial statements have been retroactively restated to reflect the 1-for-20 reverse-stock split that occurred on March 16, 2018.

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

IMAGING3, INC.

STATEMENTS OF OPERATIONS

*The financial statements have been retroactively restated to reflect the 1-for-20 reverse-stock split that occurred on March 16, 2018.

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

IMAGING3, INC.

STATEMENTS OF CASH FLOWS

*The financial statements have been retroactively restated to reflect the 1-for-20 reverse-stock split that occurred on March 16, 2018.

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

IMAGING3, INC.

STATEMENT OF STOCKHOLDERS’ DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 2018 AND 2017

*The financial statements have been retroactively restated to reflect the 1-for-20 reverse-stock split that occurred on March 16, 2018.

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

IMAGING3, INC.

Notes to Financial Statements

1. ORGANIZATION AND DESCRIPTION OF BUSINESS

Imaging3, Inc. (the “Company”, “us”, “we”, “Imaging3”) is a corporation incorporated on October 29, 1993 as Imaging Services, Inc. in the state of California. The Company filed a certificate of amendment of articles of incorporation to change its name to Imaging3, Inc. on August 20, 2002. In March of 2018, the Company incorporated in Delaware.

The Company is a development stage medical device company. The Company has developed a portable proprietary imaging technology designed to produce 3D x-ray images in real time. The Company’s devices have the potential to use less radiation and require less specialized power sources than many currently available x-ray imaging devices. The Company’s lead device, the Dominion Smartscan, for which the Company plans to submit a 510K application with the FDA in 2020, will be easily transportable and works off conventional household current. While the primary focus is applications for the healthcare industry, there are many potential non-healthcare related uses for the Company’s technology, including agriculture and security.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

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

On March 16, 2018, the Company completed a 1-for-20 reverse stock split. The accompanying financial statements have been retroactively restated to reflect the 1-for-20 reverse-stock split.

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 December 31, 2018 or 2017.

Revenue Recognition

Effective January 1, 2018, the Company adopted the Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU 2014-09 supersedes the revenue recognition requirements in FASB Accounting Standards Codification (“ASC”) 605, Revenue Recognition, and is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, timing, and uncertainty of revenue, cash flows arising from customer contracts, including significant judgments and changes in judgments, and assets recognized from costs incurred to obtain or fulfill a contract. The adoption of ASU 2014-09, using the modified retrospective approach, had no significant impact on the Company’s results of operation, cash flows or financial position.

Revenue is measured as the amount of consideration the Company expects to receive in exchange for transferring products or providing services. All revenue is recognized when the Company satisfies its performance obligations under the contract. The majority of the Company’s contracts have a single performance obligation and are short term in nature. Generally, the Company extends credit to its customers and does not require collateral. The Company performs ongoing credit evaluations of its customers and historic credit losses have been within management’s expectations. The Company has a revenue receivables policy for service and warranty contracts. Equipment sales usually have a one-year warranty of parts and service. After a one-year period, the Company contacts the buyer to initiate the sale of a new warranty contract for one year. Warranty revenues are deferred and recognized on a straight line basis over the term of the contract or as services are performed.

Basic and Diluted Net Income Per Share

Basic net income per share is based upon the weighted average number of common shares outstanding. Diluted net income per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period. During 2018, potentially dilutive securities were excluded from the computation of weighted average shares outstanding-diluted because their effect was anti-dilutive.

Derivative Financial Instruments

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

Fair Value of Financial Instruments

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

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

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

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

The Company had the following assets or liabilities measured at fair value on a recurring basis at December 31, 2018 and 2017 respectively.

Income Taxes

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

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

Research and Development

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

Recent Accounting Pronouncements

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

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. This ASU affects entities that issue share-based payment awards to their employees. The ASU is designed to simplify several aspects of accounting for share-based payment award transactions which include – the income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows and forfeiture rate calculations. ASU 2016-09 became effective for the Company in the first quarter of fiscal 2018. The adoption of this standard had no material impact on the Company’s financial position or results of operations.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.

3. INCOME TAXES

The Company’s book losses and other timing differences result in a net deferred income tax benefit which is offset by a valuation allowance for a net deferred asset of zero. The Company has concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company may not realize the benefit of all of its deferred tax assets. Accordingly, management has provided a 100% valuation allowance against its deferred tax assets until such time as management believes that its projections of future profits as well as expected future tax rates make the realization of these deferred tax assets more-likely-than-not. Significant judgment is required in the evaluation of deferred tax benefits and differences in future results from our estimates could result in material differences in the realization of these assets. The Company has recorded a full valuation allowance related to all of its deferred tax assets. The Company has performed an assessment of positive and negative evidence regarding the realization of the net deferred tax asset in accordance with FASB ASC 740-10, “Accounting for Income Taxes.” This assessment included the evaluation of scheduled reversals of deferred tax liabilities, the availability of carry forwards and estimates of projected future taxable income. The availability of the Company’s net operating loss carry forwards is subject to limitation if there is a 50% or more change in the ownership of the Company’s stock. The provision for income taxes consists of the state minimum tax imposed on corporations of $800. The Company has adopted guidance issued by the FASB that clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. The Company’s policy is to include interest and penalties related to unrecognized tax benefits in income tax expense. The Company has not recognized any unrecognized tax benefits and does not have any interest or penalties related to uncertain tax positions as of December 31, 2017 or December 31, 2018.

As of December 31, 2018, the Company is still determining the amount of net operating loss (NOL) available or offset future taxable income.

The components of the net deferred income taxes at December 31, 2017 and 2018 are summarized below:

The following is a reconciliation of the provision for income taxes at the U.S. federal income tax rate to the income taxes reflected in the Statement of Operations:

Income tax expense for the period ended December 31, 2017 and the year ended December 31, 2018 is summarized below.

4. NOTES PAYABLE

During 2015 and 2016, the Company issued promissory notes in the aggregate amount of $942,850 for cash proceeds of $872,500. These notes bear interest at 5%-10% per annum and several were due on various dates between 2015 and 2017. These notes are secured by substantially all assets of the Company. The convertible promissory notes are convertible into shares of the Company’s common stock at a rate equal to $0.20-$1.00 per share, subject to downward adjustments for future equity issuances. In connection with these convertible promissory notes, the Company issued warrants to purchase 3,325,000 shares of common stock at an exercise price of $0.20 per share, subject to downward adjustments for future equity issuances. The warrants have a term of 7 years from the date of issuance. The Company is in default under the terms of these notes.

The conversion features and warrants are considered derivative liabilities pursuant to ASC 815 and were measured at their grant-date fair value and recorded as a liability and note discount on the date of issuance. Subsequent changes to the value of the derivative liabilities are recorded in earnings.

On January 5, 2017 the Company entered into a financing arrangement with five accredited investors (the “Investors”), whereby amendments to certain convertible note agreements totaling $662,000 were enacted. The amendments to the convertible note agreements involved (1) extending the maturity dates of the note agreements; and (2) amending the optional conversion provisions of the original note agreements to now describe an adjustable conversion price based on the completion of a qualified financing offering. If the cumulative gross proceeds of such offerings exceed $2.5 million, the conversion price will be adjusted automatically to match the offering’s conversion price and conversion to common shares will occur automatically. If the cumulative gross proceeds of such offerings remain below $2.5 million, the conversion price adjusts to match the offering conversion price for the Investors. Should there be an event of default under these amended notes, the Investors will have, in addition to all the other rights described in that certain Securities Purchaser Agreement, the right, at each Investor’s option, to convert the notes into common shares at $0.20 per share. The Company and certain Investors agreed to amend its warrant agreements to reduce the number of warrants by 75% to 831,250. The exercise price remains at $0.20 per share. In consideration of this reduction of the number of warrants, the Company issued to the Investors new convertible promissory notes in total principal amount of $124,688 in the same form as the original convertible notes described above as amended. These additional convertible notes accrue interest beginning on January 9, 2017 and are due May 18, 2018.

The amendment to the notes and warrants were accounted for as an extinguishment of debt, which resulted in a gain on extinguishment of debt totaling $3,668,776 for the year ended December 31, 2017.

The Investors agreed to lend the Company up to $200,000, in increments of $50,000, at the Company’s discretion (the “Additional Loans”), as long as the Original Notes are not in default. These loans will be evidenced by note agreements in the form of the original notes as amended, described above, with a maturity date of May 18, 2018 and bear interest at 10% per annum. These notes have a face value of 118.75% of the funds actually advanced and contain conversion features (conversion price of $0.50 per share) making them derivative instruments. As of December 31, 2017, $150,034 of cash proceeds have been received from this agreement, for a total principal outstanding of $178,166. The Additional Loans are secured by a UCC filing on the Company’s assets. In connection with these note agreements, the derivative liability created by these note agreements and warrants totaled $288,057. The derivative liability in excess of the cash proceeds received was recorded as a charge to interest expense, which totaled $136,835. In addition, the Company issued 187,500 warrants in the form of the original Warrants as amended granting the Investor the right to purchase, at $0.20 per share in connection with these notes. These warrants were valued using the black-scholes valuation model with the assumptions and inputs discussed in note 6.

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

On January 10, 2017, certain note holders converted notes to common shares. The total principal and accrued interest balance converted amounted to $196,797 along with $234,578 of derivative liability associated with conversion features that were settled upon conversion. The conversion resulted in the issuance of 431,375 common shares. The fair market value of the common shares on the date of conversion totaled $431,375.

On May 25, 2017 the Company completed the sale of $500,000 of Convertible Promissory Notes (the “Notes”) to two accredited investors (the “Investors”) that are due May 23, 2018 (the “Maturity Date”). After transaction costs, the company netted $425,000 from the sale of the Notes. These Notes bear interest at the rate of 12% per annum to the Maturity Date and may be redeemed by the Company for 125% of face value within 90 days of issuance and at 135% of face value from 91 days after issuance and before 180 days after issuance. Any amount of principal or interest on these notes which is not paid when due shall bear interest at the rate of 24% per annum from the due date thereof until the same is paid. If the Notes are not repaid by the end of this period, any balance due is convertible—at the option of the note holders—into common stock at 60% of the lowest closing price for the prior 20 trading days. In connection with the sale of the Notes, the Investors received a commitment fee totaling 900,000 shares valued at $180,000, and the holders of a majority of the principal amount of the Company’s notes outstanding at May 18, 2017 (the “Prior Notes”) executed, as of that date, an Omnibus Amendment that enabled the transaction by (i) extending the maturity date of these Prior Notes to May 18, 2018 and (ii) restricting the rights of all the holders of the Prior Notes, including their right to convert until certain conditions are met. In addition, the holders of these Prior Notes were relieved of their obligation to provide the final note tranche of $50,000. In connection with these notes, the Company recorded note discounts totaling $648,750 and an immediate charge to interest of $411,725 related to the excess value of the conversion feature derivative over the carrying value of the notes.

During 2018, the Company issued promissory notes in the amount of $101,000 that bear interest at 2% per annum and were due in the fourth quarter of 2018. The notes also provided for the issuance of 101,000 shares to the note holders. During the first quarter of 2019, $76,000 of the above-mentioned notes have been converted to 1,534,960 shares of common stock.

During the fourth quarter of 2018, the Company issued a promissory note in the amount of $56,750 that bears interest at 12% and was due the fourth quarter of 2018. The Company is in default on this note.

During 2018, debt and accrued interest in the amount of $574,524 were converted to 6,811,151 shares of common stock. As a result of these conversions, the Company recognized approximately $100,000 as a gain on extinguishment of debt, accrued interest, and derivative liabilities.

Amortization of note discounts amounted to $449,717 during the year ended December 31, 2018 and $449,281 for the year ended December 31, 2017.

5. 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 as of December 31, 2018 had an accumulated deficit totaling $21.3 million. During the years ended December 31, 2018 and 2017, the Company utilized an aggregate of $1.5 million of cash in operating activities and incurred an aggregate net loss of $5.28 million. 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, obtaining funds through the issuance of debt, and continue seeking approval from the FDA to bring to market our real-time imaging platform; or, possibly merge with another operating organization. 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.

6. STOCKHOLDERS’ EQUITY

Preferred Stock

The Company has authorized 1,000,000 shares of preferred stock. During 2017, 2,000 shares of preferred shares were cancelled. As of December 31, 2018 and 2017, there are no shares of preferred stock outstanding.

Common Stock

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

During the year ended December 31, 2017 the Company issued a total of 7,500 shares of common stock for cash in the amount of $7,000 and 2,541,500 shares were issued for services rendered valued at $648,300. In addition, the Company raised $130,600 of capital related to shares of common stock, however these shares were not issued as of December 31, 2017 and are presented as a subscription payable on the accompanying balance sheet.

During the year ended December 31, 2018, the Company issued 18,058,539 shares related to services valued at $5,442,076, of which 3,100,001 shares were cancelled during 2018, 2,325,146 shares were issued for cash proceeds of $377,418, 6,811,151 shares related to conversions of notes payable, and 857,694 shares related to the satisfaction of $111,500 of subscriptions payable.

As of December 31, 2018, there were approximately 580 record holders of our common stock, not including shares held in “street name” in brokerage accounts which is unknown. As of December 31, 2018, there were 40,426,983 shares of our common stock outstanding on record.

Stock Option Plan

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

Stock Options