Attached files
FORM 10-K
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended: December 31, 2010
COMMISSION FILE NUMBER 000-50099
IMAGING3, INC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4451059
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(State of Incorporation) (I.R.S. Employer Identification No.)
3200 W. VALHALLA DRIVE, BURBANK, CALIFORNIA 91505
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(Address of principal executive offices) (Zip Code)
(818) 260-0930
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Registrant's telephone number, including area code
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
NAME OF EACH EXCHANGE ON
TITLE OF EACH CLASS WHICH REGISTERED
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COMMON STOCK OTC
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
Yes |_| No |X|
Indicate by check mark if the registrant is not required to 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 if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
Yes |_| No |X||
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definitions of "large accelerated filer," "accelerated filer" and
"smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [___] Accelerated filer [_X_]
Non-accelerated filer [___] Smaller reporting company [___]
(Do not check if a smaller
reporting company)
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act).
Yes |_| No |X|
The aggregate market value of voting stock held by non-affiliates of
the registrant was approximately $69,873,005 as of June 30, 2010 (computed by
reference to the last sale price of a share of the registrant's Common Stock on
that date as reported by OTC Bulletin Board).
There were 380,420,723 shares outstanding of the registrant's Common
Stock as of March 14, 2011.
TABLE OF CONTENTS
PART 1
ITEM 1 Business..........................................................2
ITEM 1A Risk Factors......................................................15
ITEM 2 Properties........................................................19
ITEM 3 Legal Proceedings.................................................19
ITEM 4 [Removed and Reserved]............................................19
PART II
ITEM 5 Market for Registrant's Common Equity, Related Stockholder
Matters, and Issuer Purchases of Equity Securities................20
ITEM 6 Selected Financial Data...........................................21
ITEM 7 Management's Discussion and Analysis of Financial Condition
and Results of Operations.........................................22
ITEM 8 Financial Statements and Supplementary Data.......................28
ITEM 9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure..........................................48
ITEM 9A Controls and Procedures...........................................48
ITEM 9B Other Information.................................................49
PART III
ITEM 10 Directors, Executive Officers, and Corporate Governance...........49
ITEM 11 Executive Compensation............................................53
ITEM 12 Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters...................................57
ITEM 13 Certain Relationships and Related Transactions, and Director
Independence......................................................57
ITEM 14 Principal Accounting Fees and Services............................59
ITEM 15 Exhibits, Financial Statement Schedules...........................60
SIGNATURES ..................................................................62
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PART I
ITEM 1. BUSINESS
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GENERAL
Imaging3, Inc. has developed a proprietary medical technology designed
to produce 3D medical diagnostic images in real time. In the future, healthcare
workers using Imaging3 devices will potentially be able to instantly view 3D,
high-resolution images of virtually any part of the human body.
HISTORY
We were founded as Imaging Services, Inc. on October 29, 1993 by Dean
Janes. We initially served as a low cost, third party service alternative for
equipment made by Orthopedic Equipment Company Medical Systems ("OEC"). OEC is
the largest manufacturer of mobile surgical C-arms with over a 60% market share
in the United States. A C-arm is an integral component of a fluoroscopic imaging
system used for various types of surgery. Management believes that prior to our
inception, no company existed solely focused on providing third party service
for OEC equipment.
In early 1994, Imaging3 began offering upgrades for OEC C-arms. Our
most successful upgrade was a CCD (Charged Coupled Device) camera, which
improved the image quality of older systems to be comparable with that of brand
new products. This offering became so successful that we integrated this upgrade
with used OEC C-arms and built custom units for NASA, Harvard, University of
California at Irvine, University of California at Davis, Baylor University,
Baxter Healthcare, and other prestigious healthcare organizations. Later that
year, Imaging3 applied for and received United States Food and Drug
Administration approval for this device, described as the NASA II CCD C-arm.
In mid 1995, Imaging3 purchased the assets of ProMedCo. ProMedCo had an
exclusive agreement with OEC to remanufacture OEC C-arms for OEC Medical
Systems. Though the purchase did not transfer the agreement, it eliminated one
of our competitors and provided a substantial inventory of replacement parts.
Access to these replacement parts allowed us to increase immediately our
production levels and created the opportunity to remanufacture OEC's complete
product line, thereby increasing the models we could offer our customers. Also,
this purchase allowed us to enter the lucrative parts sales business.
In 2000, we continued our expansion by purchasing a sales company in
San Diego, California. This asset purchase brought an extensive database with
the contact information for over 43,000 physicians, hospitals, medical centers
and surgery centers as well as a streamlined automated sales force. Also, as
part of this expansion, several key employees, most of whom were former
employees of OEC, were hired to increase our service presence in Arizona,
Washington, Nevada, Florida, and Hawaii with a national service presence as the
ultimate goal. In 2002, we closed our San Diego office and consolidated our
operations in Burbank, California.
On February 19, 2002, a fire gutted our principal operating facility,
causing an estimated $4.3 million in damage. The 10,800-square-foot structure
was subsequently rebuilt and we have reoccupied it. In the interim, we leased
temporary facilities. The damage to the building and the loss of our equipment
were partially covered by liability insurance. Nevertheless, the fire disrupted
our operations.
In order to better position us for our future direction away from
service and toward providing proprietary medical imaging products, we changed
our name from Imaging Services, Inc. to Imaging3, Inc. on August 20, 2002.
In April 2007, we completed building our first prototype medical
diagnostic imaging device. On November 25, 2009, we filed with the FDA a 510(k)
application for approval of our medical diagnostic imaging device for sale in
the United States. On October 28, 2010, we received a letter from the FDA
responding to our application by rejecting our position that our medical device
is substantially equivalent to prior devices and therefore our rejected 510(k)
application to have our device approved for commercial sale and use as a Class
II device. We disagree with the FDA's position and plan to re-file our
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application with additional information supporting our application for
clearance. Assuming that the FDA grants approval of our revised application, we
intend to follow up and apply to sell the product in the European and then
worldwide markets.
BUSINESS OPERATIONS
Imaging3 technology has the potential to contribute to the improvement
of healthcare. Our technology is designed to cause 3D images to be instantly
constructed using high-resolution fluoroscopy. These images can be used as real
time references for any current or new medical procedures in which multiple
frames of reference are required to perform medical procedures on or in the
human body. Management believes that Imaging3 technology has extraordinary
market potential in an almost unlimited number of medical applications,
including:
o TRAUMA CENTER. Imaging3 technology would allow a surgeon to
immediately view exactly where a bullet is lodged in a gunshot victim.
At any point during the procedure, the surgeon could continue to view
3D images in real-time.
o CARDIOLOGY. Imaging3 technology could provide a 3D view of a heart and
allow a cardiologist to record the heartbeat in real-time. The entire
heart would be visible, including veins that are wrapped around the
"back" side.
o PAIN MANAGEMENT. Imaging3 technology could provide a 3D view of the
spine, nerve endings, and injection points and help guide the needle
for spinal procedures. 3D images in real-time could also be used to
view disk compression.
o NEURO-VASCULAR. Imaging3 technology could provide a 3D view of the
skull and brain to diagnose neuro-vascular diseases. 3D images in
real-time could be used to view the rupture of vessels or arterial
blockages diminishing blood flow to the brain.
o ORTHOPEDIC. Imaging3 technology could provide a 3D view of bones and
joints to help diagnose orthopedic conditions. An orthopedic surgeon
could view a 3D image in real-time to line up a screw with the hole in
a hip pinning.
o VASCULAR. Imaging3 technology could provide a 3D view of veins
throughout the body. After injecting dye, a 3D image in real-time
could pinpoint clots and occlusions and help diagnose vascular
diseases.
MULTI-FUNCTION DEVICE
A diagnostic medical imaging device built with Imaging3 technology can
perform several functions and can potentially replace or supplement a number of
existing devices, resulting in considerable cost savings for hospitals and
healthcare centers. These functions include:
o Perform real-time, 3D medical imaging;
o Emulate a computerized tomography scanner (at a fraction of the
capital cost); and
o Perform standard fluoroscopy.
Our management believes that this multi-function capability will be
especially attractive in foreign markets, where the cost of a computed
tomography ("CT") scanner is beyond the means of most hospitals and healthcare
centers.
EXISTING BASE OF BUSINESS TO LAUNCH A PROPRIETARY PRODUCT
Imaging3 is an established company with revenues and an industry
reputation. While we began as a service provider, we quickly expanded to include
equipment and parts sales, both new and renewed. Management believes that
Imaging3 is one of the largest remanufacturer of C-arms in the world. We offer
new, demonstration, remanufactured, refurbished, and pre-owned systems in all
price ranges from every major manufacturer including OEC, General Electric,
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Imaging3, Inc., Philips, Siemens, FluoroScan, XiScan and Ziehm. We supply
full-size, compact and mini C-arms.
Management believes that Imaging3 is also the largest distributor of
C-arm tables in the United States. We offer new, demonstration, remanufactured,
refurbished, and pre-owned C-arm tables in all price ranges from every major
manufacturer. We also supply pain management tables, surgery tables, urology
tables, and vascular tables. Imaging3's management intends to use our base of
operations and channels of distribution to launch our new medical imaging
devices business, based on our breakthrough Imaging3 technology.
BUSINESS AND REVENUE MODELS
Our business strategy is straight-forward: (1) continue to build our
base of C-arm remanufacturing and service business, (2) develop medical
diagnostic imaging devices, based on our breakthrough Imaging3 technology for
the $5 billion medical imaging market, (3) sell our new medical diagnostic
imaging devices directly to healthcare providers, as well as through channel
partners and distributors, and (4) license our breakthrough Imaging3 technology
to other medical diagnostic imaging device manufacturers.
Our management believes that most of our future revenues will come from
the sale of medical imaging devices, based on our Imaging3 technology. Other
revenues are expected to be derived from the licensing of our proprietary
technology to other medical diagnostic imaging device manufacturers. The
smallest portion of our future revenue is projected to come from the sale and
service of C-arms.
PROPRIETARY TECHNOLOGY
PATENT
On June 23, 2004, U.S. Patent No. 6,754,297 was granted in the name of
Dean Janes, entitled Apparatus and Method for Three-Dimensional Real-Time
Imaging System. The rights to this patent have been assigned to us.
ABSTRACT OF THE PATENT DISCLOSURE
A computing device in a three-dimensional imaging system utilizes a
plurality of distance readings and reference readings from at least one subject
sensor to determine a subject location and a subject volume and establish a base
three-dimensional map of a subject. A plurality of two-dimensional image
exposures along with a plurality of associated reference locations are created
by rotating an image source and an image receptor around an inner circumference
of an imaging gantry. The plurality of two-dimensional image exposures is
digitized to create a plurality of digital two-dimensional image exposures. The
computing device receives the plurality of digital two-dimensional image
exposures and the plurality of associated reference locations. The overlaying,
interpolating and pasting of the plurality of digital two-dimensional image
exposures on the base three-dimensional map creates a base three-dimensional
image exposure, which is displayed on a display device.
GENERAL DESCRIPTION
Real-time 3D medical diagnostic imaging will be accomplished by
scanning the patient, either partially or completely in a 360-degree
circumference under fluoroscopy (or other type of image exposure), utilizing a
single or multiple x-ray source and image receptor. The information acquired
under fluoroscopy (or other type of image exposure) will be digitized at a frame
rate of between 30 to 60 frames per second. This information will be sent to a
computer system to be incorporated into a three-dimensional image to be
displayed on a computer monitor. The image created can then be manipulated
and/or rotated to view the scanned image of the patient's anatomy in any
direction or orientation desired by the user. The user could then choose a
specific area of the image to update. Once an area is selected, the computer
displaying the image would then "gang" or align the x-ray source(s) and image
receptor(s) to begin updating scans of new images to be overlaid upon the
existing three-dimensional model. This process would then be updated and/or
repeated as many times as necessary for the specific procedure to be completed.
At any time, a new reference area or scan could be selected or initiated.
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THE "O" DEVICE
Part of our invention is based on an "O" device to create a circular
gantry similar to that used with CT to scan a patient a full 360 degrees with
fluoroscopic radiation. This approach is expected to allow imaging of the
patient from any frame of reference or angulation (current medical imaging
devices are limited to 150 degrees to 360 degrees with mechanical orientation or
manipulation). 3D imaging requires an "O" device to scan the patient in
increments of 360 degrees to allow construction of a three-dimensional image. By
scanning the patient in 360 degrees and acquiring images at 30 to 60 frames per
second, management believes a three-dimensional image can be constructed.
IMAGING3 TECHNOLOGY DIFFERS FROM OTHER APPROACHES
The "O" device approach is similar to that used in a CT scan. The
difference is CT is used to image a "slice" of the anatomy and not intended for
real-time fluoroscopic imaging. The slice is obtained by using a fulcrum
reference point and rotating the X-ray source and image receptor in reference to
that point. This basic geometry creates a 2D image in any depth desired, in any
region of the body. The "O" device would use a similar fulcrum point to
reference depth, but the scan would not create a slice but instead a real-time
image captured at 30 to 60 frames per second in 360 degrees. Further, management
believes that the "O" device would be used for conventional fluoroscopic imaging
with the advantage of positioning the X-ray source and receptor at any
angulation desired.
Currently, 3D imaging is used only for reconstructive post processing
reference images. Magnetic resonance imaging ("MRI"), CT and ultrasound
currently have this capability. The 3D images are created by multiple scans of
2D images that require a long period of time to process into a three-dimensional
image. The image created is then used only for reference, not real-time
manipulation in the body. We anticipate that our 3D images will be constructed
almost instantly and will be available to be used as real-time references
whenever multiple frames of reference are required to perform medical procedures
on or in the human body.
THE MARKET
We compete in the medical diagnostic imaging market and this market has
never been healthier than it is today. This vitality is due primarily to
continual technological improvements that lead to faster and better resolution
imaging, greater patient safety, and the provision of these capabilities to a
growing and aging population. The result has been a vigorous competition to
create the most cost-effective diagnostic imaging systems.
Diagnostic imaging is an evolving part of modern medicine and is now
entering a new era of digital imaging. The field has evolved from the early
X-rays by Roentgen over 100 years ago to imaging of organs by CT and MRI that
are 20 years old. Medical imaging is used for diagnosis in the leading causes of
death, heart attacks, strokes, and cancer. What was once called the radiology
department is now called the diagnostic imaging department because of the wealth
of new technologies available beyond x-rays. A trauma victim's internal injuries
are imaged with a CT scanner. Breast cancer, a leading cause of death in women,
is detected with mammography and ultrasound.
According to a Freedonia Group study, the medical imaging equipment
market in the U.S. will register gains faster than the projected growth in
national health expenditures. Growth is stimulated by an increasing incidence of
patient procedures involving diagnostic imaging, partly the result of an aging
population and partly reflecting advances in noninvasive imaging technology.
Our management believes that opportunities exist not only for new
companies in imaging products but also for software companies for image
processing and Picture Archiving and Communication Systems networks.
Technological developments continue, which consistently result in new products.
Diagnostic imaging is an important part of medical diagnosis. It ranges
from a dentist's X-ray to find tooth decay to angiograms done to aid a
cardiologist in performing an angioplasty. The aging baby boomer population will
need the new imaging capabilities for cancer and heart disease detection. The
revolution in medical imaging is being fueled not only by new medical imaging
technology, but also by advances in computer hardware and software. New systems
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such as spiral CT or multi-slice CT would not be possible without today's faster
processors. Better software algorithms for image analysis and compression make
the process more accurate and efficient. The growth of diagnostic imaging could
be an important source of revenue for computer manufacturers and software
companies specializing in diagnostic imaging.
INDUSTRY OVERVIEW
Diagnostic imaging services are noninvasive procedures that generate
representations of the internal anatomy and convert them to film or digital
media. Diagnostic imaging systems facilitate the early diagnosis of diseases and
disorders, often minimizing the cost and amount of care required and reducing
the need for costly and invasive diagnostic procedures.
MAGNETIC RESONANCE IMAGING
MRI involves the use of high-strength magnetic fields to produce
computer-processed cross-sectional images of the body. Due to its superior image
quality, MRI is the preferred imaging technology for evaluating soft tissue and
organs, including the brain, spinal cord and other internal anatomy. With
advances in MRI technology, MRI is increasingly being used for new applications
such as imaging of the heart, chest and abdomen. Conditions that can be detected
by MRI include multiple sclerosis, tumors, strokes, infections, and injuries to
the spine, joints, ligaments, and tendons. Unlike x-rays and computed
tomography, which are other diagnostic imaging technologies, MRI does not expose
patients to potentially harmful radiation.
MRI technology was first patented in 1974, and MRI systems first became
commercially available in 1983. Since then, manufacturers have offered
increasingly sophisticated MRI systems and related software to increase the
speed of each scan and improve image quality. Magnet strengths are measured in
tesla, and MRI systems typically use magnets with strengths ranging from 0.2 to
1.5 tesla. The 1.0 and 1.5 tesla strengths are generally considered optimal
because they are strong enough to produce relatively fast scans but are not so
strong as to create discomfort for most patients. Manufacturers have worked to
gradually enhance other components of the machines to make them more versatile.
Many of the hardware and software systems in recently manufactured machines are
modular and can be upgraded for much lower costs than purchasing new systems.
The MRI industry has experienced growth as a result of:
o Recognition of MRI as a cost-effective, noninvasive diagnostic tool.
o Superior soft-tissue image quality of MRI versus that of other
diagnostic imaging technologies.
o Wider physician acceptance and availability of MRI technology.
o Growth in the number of MRI applications.
o MRI's safety when compared to other diagnostic imaging technologies,
because it does not use potentially harmful radiation.
o Increased overall demand for healthcare services, including diagnostic
services, for the aging population.
POSITRON EMISSION TOMOGRAPHY ("PET")
PET is a nuclear medicine procedure that produces pictures of the
body's metabolic and biologic functions. PET can provide earlier detection of
certain cancers, coronary diseases or neurologic problems than other diagnostic
imaging systems. It is also useful for the monitoring of these conditions.
COMPUTED TOMOGRAPHY
In CT imaging, a computer analyzes the information received from an
x-ray beam to produce multiple cross-sectional images of a particular organ or
area of the body. CT imaging is used to detect tumors and other conditions
affecting bones and internal organs.
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OTHER SERVICES
Other diagnostic imaging technologies include x-ray, single photon
emission computed tomography, and ultrasound.
DIGITAL IMAGING TECHNOLOGIES
New techniques for the digital capture, display, storage, and
transmission of x-ray images are poised to revolutionize the diagnostic imaging
market. Although digital technologies and techniques have been in use in other
diagnostic imaging areas (such as CT scans, MRI scans, and ultrasound),
technical problems have kept x-ray technologies in the era of film. However, new
methods of digitally capturing x-ray images are under development and promise to
revolutionize x-ray imaging.
The need to cut costs and improve services in healthcare delivery is
driving the move to digital systems. The requirement for hospitals to implement
electronic access to medical images and other types of information is now widely
accepted and regarded as inevitable. The trend toward storing, distributing and
viewing medical images in digital form is being fueled by both changes in the
economic structure of the healthcare system and by rapidly evolving
technologies. In particular, the new economics of health care will mandate a
shift from film-based radiology to the electronic delivery of digital images,
while new technology promises the additional benefit of vastly improved
diagnostic power.
USERS OF DIAGNOSTIC IMAGING
MRI and other imaging services are typically provided in one of the
following settings:
HOSPITALS AND CLINICS
Imaging systems are located in and owned and operated by a hospital or
clinic. These systems are primarily used for the patients of the hospital or
clinic, and the hospital or clinic bills third-party payors, such as health
insurers, Medicare or Medicaid.
INDEPENDENT IMAGING CENTERS
Imaging systems are located in permanent facilities not generally owned
by hospitals or clinics. These centers depend upon physician referrals for their
patients and generally do not maintain dedicated, contractual relationships with
hospitals or clinics. In fact, these centers may compete with hospitals or
clinics that have their own systems to provide Imaging3 to these patients. Like
hospitals and clinics, these centers bill third-party payors for their services.
OUTSOURCED
Imaging systems, largely located in mobile trailers but also provided
in fixed facilities, provide services to a hospital or clinic on a
shared-service or full-time basis. Generally, the hospital or clinic contracts
with the imaging service provider to perform scans of its patients, and the
imaging service provider is paid directly by that hospital or clinic instead of
by a third-party payor.
INDUSTRY CHALLENGES
In a recent report, U.S. MEDICAL IMAGING INDUSTRY OUTLOOK, Frost &
Sullivan identified several challenges facing the diagnostic imaging industry.
Low reimbursement rates have become a major challenge, not only for end users,
but for manufacturers as well. Imaging reimbursements for many procedures may be
inadequate given the expense of the equipment and the expertise required to
create and interpret results.
Lack of adequate compensation is a concern for all industry
participants, as many healthcare centers are delaying or canceling purchases of
high-priced items. Until the financial rewards for imaging are increased
substantially, and definitively, low reimbursement will be the foremost hurdle
for manufacturers.
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COMPETITION
COMPETITIVE LANDSCAPE
The healthcare industry in general and the market for imaging products
in particular is highly competitive. We compete with a number of companies, many
of which have substantially greater financial, marketing, and other resources
than we have. Our competitors include large companies such as General Electric,
Philips, Siemens, Toshiba and Hitachi, which compete in most medical diagnostic
imaging modalities, including x-ray imaging.
A study by Theta Reports, DIAGNOSTIC IMAGING EQUIPMENT AND SYSTEMS
WORLD MARKET, identifies the following 17 key players in the medical diagnostic
imaging market:
o ADAC Laboratories
o Eastman Kodak Co.
o Fonar Corp.
o Fuji Medical Systems U.S.A., Inc.
o General Electric Medical Systems
o Hitachi Medical Systems America, Inc.
o Hologic, Inc.
o Imaging Diagnostic Systems, Inc.
o Imatron, Inc.
o Lumisys, Inc.
o Marconi Medical Systems
o Philips Medical Systems Nederland BV
o PhorMax Corp.
o Siemens Medical Engineering Group
o Sterling Diagnostic Imaging, Inc.
o Trex Medical Corp.
o Varian Medical Systems, Inc.
DIRECT COMPETITORS
At this time, we are not aware of any existing devices in the
marketplace that provide 3D, real-time diagnostic medical imaging, with the
exception of ultrasound.
Ultrasound is a real-time tomographic imaging modality. Not only does
it produce real-time tomograms of the position of reflecting surfaces (internal
organs and structures), but it can also be used to produce real-time images of
tissue and blood motion. However, ultrasound is a low-resolution imaging
modality that does not produce an image as precise and clear as fluoroscopy. Our
devices will rely instead on the use of fluoroscopy, a high-resolution imaging
modality, to produce "live" x-ray images of living patients in 3D.
MARKETING AND SALES PLAN
MARKETING STRATEGY
Our marketing strategy is to create a favorable environment to sell our
medical diagnostic imaging devices. We intend to enhance, promote and support
the fact that Imaging3 technology is the most complete and comprehensive medical
diagnostic imaging solution available in the marketplace.
PRODUCT AND SERVICE DIFFERENTIATION
The differentiating attributes of Imaging3 technology include:
o The only 3D, real-time medical diagnostic imaging device in
the market that will produce high resolution images;
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o Reasonably priced;
o Easy-to-install;
o Vast array of features; and o Highly reliable.
The Imaging3 medical device will be reasonably priced because it will
cost considerably less than comparable MRI and CT Scan machines. It will be easy
to install because it is lighter and will be more mobile than the MRI and CT
Scan machines. It will have more features than MRI and CT Scan machines because
it will provide 3D instant real time images and real time CT emulation, which
the other machines do not provide. Management believes that the Imaging3 medical
device will be more reliable than competing MRI and CT Scan machines because it
needs less radiation to provide its 3D images, and its assembled components are
simpler, more efficient, and standard (i.e. "off-the-shelf"), rather than
customized.
VALUE PROPOSITION
Our value proposition is simple: diagnostic imaging devices with
Imaging3 technology allow healthcare providers to easily produce 3D, real-time,
high resolution images at a reasonable cost.
POSITIONING
Management believes that Imaging3 can be positioned as offering the
superior solution for producing medical diagnostic images. Management believes
that our unique advantage is that we can offer a diagnostic imaging solution
that will allow healthcare providers to view real-time references for virtually
any procedure. We plan to reposition our competitors by demonstrating that their
offerings are inadequate because they:
o Do not provide 3D images;
o Do not provide images in real-time;
o Do not provide high resolution images; and
o Are too costly.
SALES STRATEGY
After undertaking a marketing campaign, we intend to aggressively sell
our medical diagnostic imaging devices in the United States. International sales
efforts will follow after achieving market penetration in the domestic
marketplace.
SALES MARGIN STRUCTURE
Our management believes that the majority of our sales will be derived
from direct sales to customers, with the balance of sales derived from dealers
and manufacturer's representatives. As a result, the sales margin structure must
be attractive to these independent organizations.
o Direct Sales - Full suggested list price;
o Dealers - 30% off suggested list price; and
o Manufacturer's Representatives - 10% commission.
TARGET MARKET SEGMENT
Our management has identified general medical and surgical hospitals in
the United States as our primary target market segment for Imaging3 technology.
According to D&B/iMarket, there are 12,041 general medical and surgical
hospitals in the United States.
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DISTRIBUTION CHANNELS
We plan to sell our Imaging3 medical diagnostic imaging devices through
several channels of distribution, including:
DIRECT SALES TO END USERS
Our policy is to sell directly to end-users whenever possible. Our
management expects that direct sales will occur most often with larger
customers.
DEALERS AND MANUFACTURERS' REPRESENTATIVES
We plan to supplement our own field sales force by entering into
agreements with dealers and manufacturers' representatives. Because dealers and
manufacturers' representatives carry several product/service lines that are
compatible with our products and services, Imaging3 plans to select dealers and
manufacturers' representatives carrying complementary and compatible products
and services, as well as dealers and manufacturers' representatives that sell
dissimilar products and services yet are appropriate for their customers'
customer.
We have working relationships with a number of independent
organizations that help distribute our current product line. We expect to work
with these independent organizations to help distribute diagnostic medical
imaging devices built with Imaging3 technology. These organizations have
well-established relationships with mid-size to large size customers. Many also
provide specific vertical market applications.
EXECUTIVE SALES
Because many of Imaging3's large customers will tend to be top
healthcare managers, it is important that our president and senior managers
present our products to our large customers.
FIELD SALES FORCE
Management anticipates that the majority of our selling efforts to
large accounts will be handled internally through our field sales force. We have
chosen to use a direct sales force because our large accounts require
considerable customer education and post-sales support directly from us.
Management believes that our price points, pricing structure and profits are
such that our cost of sales warrants a "person-to-person" selling strategy.
EMPLOYEES
We currently employ 12 full-time individuals, all of whom are working
at our offices at 3200 W. Valhalla Drive, Burbank, California 91505. Seven of
those 12 full-time employees are employed in administrative, marketing, and
sales positions, and the remaining five are technical employees employed in
research, development, and production positions. We project that during the next
12 months, our workforce is likely to increase.
To support our need for technical staffing, we have established
relationships with technical staffing organizations that continuously offer
highly qualified personnel to meet our needs, both locally and from out of the
area.
INTELLECTUAL PROPERTY MATTERS
All of our employees have executed agreements that impose nondisclosure
obligations on the employee and in which the employee has assigned to us (to the
extent permitted by California law) all copyrights and other inventions created
by the employee during employment with us. The rights underlying the application
for the patent of the Imaging3 technology have been assigned to us. We have in
place a trade secret protection policy that our management believes to be
adequate to protect our intellectual property and trade secrets.
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GOVERNMENT REGULATORY APPROVAL PROCESS
All of our products are classified as Class II (Medium Risk) devices by
the FDA and clinical studies with our products will be considered to be
Non-Significant Risk Studies, except that our 501(k) application with the FDA
for our proprietary medical imaging device has not yet been approved as a Class
II device. Imaging3's business is governed by the FDA and all products typically
require 510(k) market clearance before they can be put in commercial
distribution. We are also regulated by the FDA's Quality Systems Regulation,
which is similar to the ISO9000 and the European EN46000 quality control
regulations. All of our products currently in production or manufactured by
other vendors are approved for marketing in the United States under the FDA's
510(k) regulations.
A 510(k) is a pre-marketing submission made to the FDA to demonstrate
that the device to be marketed is as safe and effective, that is, substantially
equivalent, to a legally marketed device that is not subject to pre-market
approval. Applicants must compare their 510(k) device to one or more similar
devices currently on the U.S. market and make and support their substantial
equivalency claims. A legally marketed device is a device that was legally
marketed prior to May 28, 1976 (pre-amendments device), or a device which has
been reclassified from Class III to Class II or I, a device which has been found
to be substantially equivalent to such a device through the 510(k) process, or
one established through Evaluation of Automatic Class III Definition. The
legally marketed device(s) to which equivalence is drawn is known as the
"predicate" device(s).
Applicants must submit descriptive data and when necessary, performance
data to establish that their device is substantially equivalent to a predicate
device. The data in a 510(k) is to show comparability, that is, substantially
equivalent of a new device to a predicate device.
Imaging3 has not sought or obtained a determination from the FDA
whether a 510(k) submission is required. The FDA does not offer an opinion or
determination of what submission is required. The FDA does provide a database of
devices, classifications and Regulation numbers. In our research of this
database we determined several Class II devices meet our criteria for
submission. These devices are listed in the table below.
PRODUCT CODE CLASS DESCRIPTION REGULATION
------------ ----- ----------- ----------
IZG II System, X-ray, Photofluorographic 892.1730
JAB II System, X-ray, Fluoroscopic, Non-Image-I 892.1660
JAK II System, X-ray, Tomography, Computed 892.175
This is a broad range of devices with which to compare our device
functionality. The FDA requires the manufacturer to submit an application,
whether it is a 510(k) or pre-market approval submission. Upon receipt of the
submission, the FDA will respond within 30 to 45 days with their determination
of acceptance of the submission, questions and/or comments to the submission or
requests for more information.
All of our current used rebuilt products are Class II devices, FDA
approved through OEM for marketing. Once approved, the FDA will not require the
manufacturer to resubmit an application or change the classification. They may,
however, request further information about the product(s), manufacturer and GMP
requirements. The devices currently sold by us are not manufactured by us. OEC
Medical Systems is the original device manufacturer and responsible for the FDA
submission of their original device(s). Imaging3 remanufactures OEC Medical
Systems devices, thus we are not required to submit any FDA submission for these
devices. In some instances, we have performed modifications to these devices to
improve the devices functionality, and in these instances Imaging3 has submitted
510(k) applications. These modifications are to existing devices with existing
classifications listed in the FDA database and cannot be reclassified. The FDA
database listing for current products is listed below:
PRODUCT CODE CLASS DESCRIPTION REGULATION
------------ ----- ----------- ----------
IZL II System, X-ray, Mobile 892.1720
As to our new product and its potential for classification, the FDA
requires us, as the manufacturer, to submit an application in whichever
classification we choose in the submission form we choose, meaning 510(k) or
pre-market approval application. The FDA reviews the submission and determines
whether the application is appropriately filed and in the correct submission
format. The criteria they use for determination on a 510(k) is substantially
equivalent, which is a comparative analysis of the manufacturer's device in the
submission with existing devices already approved by the FDA. This is the
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purpose of the FDA's Device Classification Database, giving manufacturer's
products with approved submissions and categories of devices to compare new
device submissions. A new type of device may not be found in the product
classification database. If the device is a high risk device (supports or
sustains human life, is of substantial importance in preventing impairment of
human health, or presents a potential, unreasonable risk of illness or injury)
and has been found to be not substantially equivalent to a Class I, II, or III
(Class III requiring 510(k)), then a pre-market approval application will be
required.
If the FDA determines the new device must be classified as a Class III
device, the FDA may still allow the device submission to be a 510(k) submission.
Class III devices, which are equivalent to devices legally marketed before May
28, 1976 may be marketed through the pre-market notification (510(k)) process
until the FDA has published a requirement for manufacturers of that generic type
of device to submit pre-market approval data.
Class III devices are usually those that support or sustain human life,
are of substantial importance in preventing impairment of human health, or which
present a potential, unreasonable risk of illness or injury. Examples of Class
III devices which require a pre-market approval include replacement heart
valves, silicone gel-filled breast implants, and implanted cerebella
stimulators.
Our new product, the "Real-time 3D Imaging Device" is expected to be
submitted as Product Code "IZG," Device Class II, "System, X-ray,
Photofluorographic," Regulation Number 892.1730, since this is the closest
device description. The FDA may at its own choosing and determination wish to
reclassify this device as a Class III, which we believe is unlikely, since the
majority of our device functions are similar to existing products currently
being marketed and as classified above.
If the FDA determines to classify this device as a Class III device,
then a pre-market approval application must be filed. The pre-market approval
application is the most stringent type of device marketing application required
by the FDA. The applicant must receive FDA approval of its pre-market approval
application prior to marketing the device. Pre-market approval is based on a
determination by the FDA that the pre-market approval contains sufficient valid
scientific evidence to assure that the device is safe and effective for its
intended use(s). An approved pre-market approval application is, in effect, a
private license granting the applicant (or owner) permission to market the
device. The pre-market approval owner, however, can authorize use of its data by
another.
The pre-market approval applicant is usually the person who owns the
rights, or otherwise has authorized access, to the data and other information to
be submitted in support of FDA approval. This person may be an individual,
partnership, corporation, association, scientific or academic establishment,
government agency or organizational unit, or other legal entity. The applicant
is often the inventor/developer and ultimately the manufacturer.
FDA regulations provide 180 days to review the pre-market approval
application and make a determination. In reality, the review time is normally
longer. Before approving or denying a pre-market approval application, the
appropriate FDA advisory committee may review the pre-market approval
application at a public meeting and provide the FDA with the committee's
recommendation on whether or not the FDA should approve the submission. After
the FDA notifies the applicant that the pre-market approval application has been
approved or denied, a notice is published on the Internet (1) announcing the
data on which the decision is based, and (2) providing interested persons an
opportunity to petition the FDA within 30 days for reconsideration of the
decision.
A pre-market approval application is a scientific, regulatory
documentation to the FDA to demonstrate the safety and effectiveness of the
Class III device. There are administrative elements of a pre-market approval
application, but good science and scientific writing is a key to the approval of
a pre-market approval application. If a pre-market approval application lacks
elements listed in the administrative checklist, the FDA will refuse to accept a
pre-market approval application and will not proceed with the in-depth review of
scientific and clinical data. If a pre-market approval application lacks valid
clinical information and scientific analysis based on sound scientific
reasoning, it will delay the FDA's review and approval. Pre-market approval
applications that are incomplete, inaccurate, inconsistent, omit critical
information, and are poorly organized have resulted in delays in consideration.
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Three categories of the pre-market approval application are very
important:
TECHNICAL SECTIONS. The technical sections containing data and
information should allow the FDA to determine whether to approve or disapprove
the application. These sections are usually divided into non-clinical laboratory
studies and clinical investigations.
NON-CLINICAL LABORATORY STUDIES' SECTION. The non-clinical laboratory
studies' section includes information on microbiology, toxicology, immunology,
biocompatibility, stress, wear, shelf life, and other laboratory or animal
tests. Non-clinical studies for safety evaluation must be conducted in
compliance with 21CFR Part 58 (Good Laboratory Practice for Nonclinical
Laboratory Studies).
CLINICAL INVESTIGATIONS SECTION. The clinical investigations section
includes study protocols, safety and effectiveness data, adverse reactions and
complications, device failures and replacements, patient information, patient
complaints, tabulations of data from all individual subjects, results of
statistical analyses, and any other information from the clinical
investigations. Any investigation conducted under an Investigational Device
Exemption must be identified as such.
We are listed with the FDA as a new device manufacturer, our
Registration Number is 20300565, and our Owner Operator Number is 9023393.
Though we do not currently manufacture new devices, the FDA requires our
registration as a remanufacturer. Imaging3 is subject to the FDA's Radiological
Health Program, under the Center for Devices Radiological Health division of the
FDA.
We must be in compliance with Good Manufactures Practices ("GMP"),
Quality Control, and Medical Device Reporting ("MDR"). The FDA may from time to
time, usually every two to three years, audit us for compliance. In these audits
the FDA reviews documents, interviews management and reviews all procedures.
The current GMP requirements set forth in the Quality System ("QS")
regulation are promulgated under Section 520 of the Federal Food, Drug and
Cosmetic ("FFD&C") Act. They require that domestic or foreign manufacturers have
a quality system for the design, manufacture, packaging, labeling, storage,
installation, and servicing of finished medical devices intended for commercial
distribution in the United States. The regulation requires that various
specifications and controls be established for devices; that devices be designed
under a quality system to meet these specifications; that devices be
manufactured under a quality system; that finished devices meet these
specifications; that devices be correctly installed, checked and serviced; that
quality data be analyzed to identify and correct quality problems; and that
complaints be processed. Thus, the QS regulation helps assure that medical
devices are safe and effective for their intended use. The FDA monitors device
problem data and inspects the operations and records of device developers and
manufacturers to determine compliance with the GMP requirements in the QS
regulation.
The MDR regulation provides a mechanism for the FDA and manufacturers
to identify and monitor significant adverse events involving medical devices.
The goals of the regulation are to detect and correct problems in a timely
manner. Although the requirements of the regulation can be enforced through
legal sanctions authorized by the FFD&C Act, the FDA relies on the goodwill and
cooperation of all affected groups to accomplish the objectives of the
regulation.
The statutory authority for the MDR regulation is Section 519(a) of the
FFD&C Act as amended by the Safe Medical Devices Act of 1990. The Safe Medical
Devices Act of 1990 requires user facilities to report:
o Device-related deaths to the FDA and the device manufacturer;
o Device-related serious injuries to the manufacturer, or to the FDA if
the manufacturer is not known; and
o Submit to the FDA on an annual basis a summary of all reports
submitted during that period.
When a problem arises with a product regulated by the FDA, the agency
can take a number of actions to protect the public health. Initially, the agency
works with the manufacturer to correct the problem voluntarily. If that fails,
legal remedies include asking the manufacturer to recall a product, having
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federal marshals seize products if a voluntary recall is not done, and detaining
imports at the port of entry until problems are corrected. If warranted, the FDA
can ask the courts to issue injunctions or prosecute those that deliberately
violate the law. When warranted, criminal penalties including prison sentences
are sought.
Once on the market, there are post-market surveillance controls with
which a manufacturer must comply. These requirements include the Quality Systems
(also known as Good Manufacturing Practices), and Medical Device Reporting
regulations. The QS regulation is a quality assurance requirement that covers
the design, packaging, labeling and manufacturing of a medical device. The MDR
regulation is an adverse event reporting program.
We are also required to report under the MDR requirements, which are
for injuries and deaths, of which we have had none since our registration.
For all devices manufactured or remanufactured by us, the FDA may
request updated information regarding any device with a previously approved
510(k) or pre-market approval submission. If any substantial changes are made to
existing approved devices, the FDA may require a 510(k) supplement submission,
which, in most cases, does not require the manufacturer to delay production or
marketing of the modified device. As with all applications, this determination
lies entirely with the FDA.
Our last audit with the FDA was in 2000 and we expect a new audit to
take place shortly after our new device is submitted in a 510(k) application.
In an audit performed by the FDA, our records for service and repair,
quality control, device labeling and serial number tracking are reviewed. If the
FDA finds issues of non-compliance they issue a letter requesting correction,
giving us 30 days to correct the non-compliance. Extensions can be requested to
reply, but most issues, if any, can be handled in a 30-day period.
Since our registration with the FDA in 1995, we have had only one
audit. We did not receive any notice or correspondence of non-compliance due to
that audit. We received only one suggestion regarding our record keeping
process, which addressed preventive maintenance forms being included in all
customer files for which we provide service. We, to our knowledge, have been in
good standing with the FDA, receiving no actions or correspondence.
We are also licensed with the State of California as a Device
Manufacturer, license number 63620. Both require annual renewal registration
updates, listing any new products being manufactured or marketed. The State of
California currently follows the FDA standards and requirements.
We have had no instances of non-compliance with either the FDA or the
State of California. The consequences of non-compliance range from a letter
stating non-compliance and a period to cure, suspension of manufacturing and
distribution, to fines and suspension of operations.
We estimate we will obtain FDA approval this year, although we cannot
assure that this approval will be granted when expected. This estimate for FDA
approval is based on Mr. Janes' past experience with 510(k) submissions. All of
our marketing efforts for the new device must start from the date the FDA
approves the device to be marketed. Since we are already registered with the FDA
as a new device manufacturer and have been through an audit performed by the
FDA, the FDA is already familiar with us and our processes. The FDA may wish to
obtain updated information about us and may require more time to process our
current 510(k) submission than estimated.
In two other 510(k) submissions by Mr. Janes, the process lasted
approximately 120 days, however, these systems were not as complex as our
current submission. Management believes Mr. Janes' familiarity with the process
and experience with 510(k) submissions will help us. Management believes that
having a person in-house having the experience with the process, understanding
510(k) submissions, and direct access to all engineering and proprietary
knowledge, is a distinct advantage and should allow us to effectively navigate
the FDA review process.
To enter the European market, our products as well as our quality
assurance systems will have to be approved and certified by an authorized
certifying body such as Technischer Uberwachungsverein; English translation:
Technical Inspection Association ("TUV"), Underwriters Laboratories ("UL") or
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British Standards Institute ("BSI"). In the future, we may plan to go through
this process as a part of our overall enhancement of the quality systems.
TUV, UL and BSI are all standards testing companies assisting
manufactures to comply with published standards, regulatory standards and laws
necessary for marketing devices throughout the world and the United States.
These three companies provide the UL and CE (the European equivalent of the UL
mark in the United States) marks, demonstrating compliance with the standards
and laws.
TUV is a Nationally Recognized Testing Laboratory and Safety Checklist
Contractors certified, providing a full suite of services, including CE Marking
assistance, electromagnetic compatibility, electrical & mechanical testing, and
many additional global conformity assessment services that help companies gain
product compliance to enter individual country markets.
UL is an independent, not-for-profit product-safety testing and
certification organization. They have tested products for public safety for more
than a century. Since their founding in 1894, they have held the undisputed
reputation as a leader in product- safety testing and certification within the
United States. Management believes that by building on their household name in
the United States, UL is becoming one of the most recognized, reputable
conformity assessment providers in the world. Today, their services extend to
helping companies achieve global acceptance, whether for an electrical device, a
programmable system, or an organization's quality process.
BSI exists to help industry develop new and better products and to make
sure that products meet current and future laws and regulations. It tests
products from medical devices to fire extinguishers to lamps for football
stadiums against published standards.
Far East, Middle East, Eastern European, and Latin American markets
have different regulatory requirements. We intend to comply with applicable
requirements if and when we decide to enter those markets.
OTHER GOVERNMENT REGULATIONS
The delivery of health care services has become one of the most highly
regulated of professional and business endeavors in the United States. Both the
federal government and individual state governments are responsible for
overseeing the activities of individuals and businesses engaged in the delivery
of health care services. Federal law and regulations are based primarily upon
the Medicare and Medicaid programs. Each of these programs is financed, at least
in part, with federal funds. State jurisdiction is based upon the state's
interest in regulating the quality of health care in the state, regardless of
the source of payment. We believe that we are materially complying with
applicable laws, however, we have not received or applied for a legal opinion
from counsel or from any federal or state judicial or regulatory authority.
Additionally, many aspects of our business have not been the subject of state or
federal regulatory interpretation. The laws applicable to us are subject to
evolving interpretations. If our operations are reviewed by a government
authority, we may receive a determination that could be adverse to us.
Furthermore, laws that are applicable to us may be amended in a manner that
could adversely affect us.
Only a small portion of our revenues come through a government system.
Virtually all of our revenues are obtained from sales and service to vendees who
pay us directly. We are not subject to Medicare, Medicaid, or any other
federally funded health care program.
ITEM 1A. RISK FACTORS
----------------------
Purchasing shares of common stock in Imaging3 entails substantial risk.
You should be able to bear a complete loss of your investment. You should
carefully consider the following factors, among others.
FORWARD-LOOKING STATEMENTS
The discussions and information in our public reports with the
Securities and Exchange Commission (collectively, the "Reports"), including the
documents incorporated by reference may contain both historical and
forward-looking statements. To the extent that the Reports contain
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forward-looking statements regarding the financial condition, operating results,
our business prospects or any other aspect of our business, please be advised
that our actual financial condition, operating results and business performance
may differ materially from that projected or estimated by management in
forward-looking statements. We have attempted to identify, in context, certain
of the factors that management currently believes may cause actual future
experience and results to differ from our current expectations. The differences
may be caused by a variety of factors, including but not limited to adverse
economic conditions, decrease in demand for medical imaging and other equipment,
intense competition, including entry of new competitors, increased or adverse
federal, state and local government regulation, failure by us to obtain the
approval of the FDA for our proprietary 3D medical imaging device currently in
the prototype phase and subject to patent applications filed and pending,
inadequate capital, unexpected costs, lower revenues and net income than
forecast, failure to complete the development of our proprietary products
currently under development, technological obscelence of our products, failure
to commercialize or sell any new or existing products developed by us, price
increases for supplies, inability to raise prices, failure to obtain customers,
the risk of litigation and administrative proceedings involving us and our
employees, higher than anticipated labor costs, the possible fluctuation and
volatility of operating results and financial condition, failure to make planned
business acquisitions, failure of new businesses, if acquired, to be
economically successful, decline in our stock price, adverse publicity and news
coverage, inability to carry out marketing and sales plans, loss of key
executives, changes in interest rates, inflationary factors, and other specific
risks that may be alluded to in Reports filed by us.
WE HAVE INCURRED SUBSTANTIAL OPERATING DEFICITS SINCE INCEPTION AND MAY
CONTINUE TO INCUR LOSSES IN THE FUTURE. To date, our revenue from component and
equipment sales has not been adequate to cover research and development costs
for proprietary products under development, marketing costs, operating and
overhead costs, and substantial costs incurred in ongoing litigation. Revenue
from our old business model of selling nonproprietary medical equipment and
components has declined in recent fiscal quarters, and no sales of our
proprietary 3D medical imaging product currently under development have yet been
made, since it is still in the prototype phase. We do not have sufficient cash
flow from our current operations to enable us to maintain or grow our business.
We must raise additional capital in the future to continue to operate our
businesses. Failure to secure adequate capital will hinder 'our growth and may
jeopardize us as a going concern.
IF WE DO NOT GENERATE SIGNIFICANT ADDITIONAL REVENUE WE WILL CONTINUE
TO RECEIVE A GOING CONCERN QUALIFICATION IN OUR audit. Our financial statements
have been prepared on a going concern basis of accounting, which contemplates
continuity of operations, realization of assets and liabilities and commitments
in the normal course of business. The financial statements do not reflect any
adjustments that might result if we are unable to continue as a going concern.
We do not generate significant revenue, and has negative cash flows from
operations, which raise substantial doubt about our ability to continue as a
going concern. Our ability to continue as a going concern and appropriateness of
using the going concern basis is dependent upon, among other things, an
additional cash infusion. We are actively seeking new investors.
WE HAVE NOT COMPLETED THE DEVELOPMENT OF OUR PROPRIETARY 3D MEDICAL
IMAGING TECHNOLOGY. Research and development projects are inherently speculative
and subject to cost overruns. We cannot assure that we will be able to complete
the development of our real time 3D diagnostic medical imaging technology, that
it will be approved by the FDA for sale and use, or that, once developed, our
diagnostic medical imaging devices can be sold profitably. We may not develop
any new products or services for sale from our research and development efforts.
IF WE ARE REQUIRED BY THE FOOD AND DRUG ADMINISTRATION TO CONDUCT
CLINICAL TRIALS FOR OUR 3D MEDICAL IMAGING TECHNOLOGY AND DEVICE, THE ADDITIONAL
COST AND TIME INCURRED BEFORE WE RECEIVE APPROVAL FROM THE FOOD AND DRUG
ADMINISTRATION FOR THE COMMERCIAL SALE AND USE OF OUR DEVICE COULD BE
SUBSTANTIAL AND ADVERSELY AFFECT OUR BUSINESS, FINANCIAL CONDITION AND OPERATING
RESULTS. On October 28, 2010, we received a letter from the Food and Drug
Administration responding to our 501(k) application for clearance of our 3D
medical imaging technology and device. In our application to the Food and Drug
Administration we stated that our medical device is substantially equivalent to
devices marketed in interstate commerce prior to May 28, 1976 and therefore
should be approved for commercial sale and use as a Class II device, without the
necessity for clinical trials. The Food and Drug Administration responded by
rejecting our position that our medical device is substantially equivalent to
such prior devices, citing several deficiencies in our submission. We plan to
refile our application to the Food and Drug Administration in the near future to
again seek Class II approval, in which we will endeavor to address the
deficiencies. We have engaged special outside professional counsel to assist us
with the preparation and submission of our next filing with the Food and Drug
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Administration. While we disagree with the Food and Drug Administration's
position and we plan to refile our application with additional information
supporting our application for clearance, we cannot assure that such approval
will be obtained or that we may not ultimately be required to file our
application under Class III where clinical trials would be required,
significantly delaying or preventing our device from being approved for
commercial sale and use.
OUR BUSINESS MAY BE ADVERSELY AFFECTED BY COMPETITION. The diagnostic
medical imaging industry is characterized by intense competition. We are subject
to competition from other firms, many of which have greater financial resources,
more recognition, more management experience, and longer operating histories
than we have. We cannot assure that we will be able to compete successfully or
profitably in the diagnostic medical imaging business.
WE MAY NOT ACHIEVE THE REVENUE PREDICTED BY US IN OUR BUSINESS MODEL.
We plan to implement a business model that calls for us to sell medical
diagnostic imaging devices, based on our proprietary technology. We will incur
substantial operating losses until such time as we are able to generate revenues
from the sale of these products. We cannot assure that businesses and customers
will adopt our products and technology in the volume that we project, or that
businesses and prospective customers will agree to pay the prices that we
propose to charge. In the event our customers resist paying prices at the rate
we propose, our financial conditions and results of operations will be
materially and adversely affected.
IF PRODUCTS UTILIZING OUR MEDICAL DIAGNOSTIC IMAGING TECHNOLOGY ARE
DETERMINED TO BE UNSAFE, OUR BUSINESS WILL BE ADVERSELY AFFECTED. As medical
diagnostic imaging has become an ever-more important and prominent part of
everyday life, dramatic growth in the use of medical diagnostic imaging devices
has given rise to occasional questions about safety. In the event that our
products are deemed unsafe, we could face substantial liability and our
financial conditions and results of operations will be materially and adversely
affected.
OUR FAILURE TO ACHIEVE BRAND RECOGNITION COULD HAVE AN ADVERSE AFFECT
ON OUR BUSINESS. We believe that establishing and maintaining brand recognition
for our medical diagnostic imaging technology will be a critical aspect of our
efforts to attract and expand our customer base. Promotion and enhancement of
the Imaging3 brand will depend largely on our success in providing high quality
products and services. In order to attract and retain customers and to promote
the Imaging3 brand in response to competitive pressures, we may find it
necessary to increase substantially our financial commitment to creating and
maintaining the Imaging3 brand. We cannot assure that we will obtain brand
recognition for Imaging3. Our failure to provide high quality products and
services or to obtain and maintain brand recognition could have a material
adverse effect on our business, results of operations, and financial condition.
WE MUST ADAPT QUICKLY TO CHANGES IN TECHNOLOGY. Medical diagnostic
imaging is a rapidly evolving technology. We must keep abreast of this
technological evolution. To do so, we must continually improve the performance,
features and reliability of our medical imaging equipment and related products.
If we fail to maintain a competitive level of technological expertise, then we
will not be able to compete in our market.
OUR INABILITY TO RESPOND TIMELY TO TECHNOLOGICAL ADVANCES COULD HAVE AN
ADVERSE AFFECT ON OUR BUSINESS. We must be able to respond to technological
advances and emerging industry standards and practices on a cost-effective and
timely basis. We can offer no assurance that we will be able to successfully use
new technologies effectively or adapt our products in a timely manner to a
competitive standard. If we are unable to adapt in a timely manner to changing
technology, market conditions or customer requirements, then we may not be able
to successfully compete in our market.
WE MAY NOT BE ABLE TO REPAY OUR INDEBTEDNESS. We have substantial
indebtedness to related parties and to unaffiliated third parties, as disclosed
in more detail in our reports, financial statements and notes to financial
statements filed with the Securities and Exchange Commission. The indebtedness
includes outstanding indebtedness owed by us to our Chief Executive Officer,
payable on demand. We cannot assure that we will be able to repay all or any of
our indebtedness, or that the indebtedness does not and will not continue to
have a material adverse impact on our financial condition, operating results and
business performance, including but not limited to our ability to continue as a
going concern.
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WE CANNOT ASSURE THAT WE WILL ACHIEVE PROFITABILITY. We cannot assure
that we will be able operate profitability in the future. Profitability, if any,
will depend in part upon our ability to successfully develop, obtain FDA
approval, and market our proprietary medical diagnostic imaging technology, and
other products and services. We may not be able to successfully transition from
our current stage of business to a stabilized operation having sufficient
revenues to cover expenses. While attempting to make this transition, we will be
subject to all the risks inherent in a small business, including the needs to
adequately service and expand our customer base and to maintain and enhance our
current services. Our future profitability will be affected by all the risk
factors described herein.
WE ARE EXPOSED TO VARIOUS POSSIBLE CLAIMS RELATING TO OUR BUSINESS AND
OUR INSURANCE MAY NOT FULLY PROTECT US. We cannot assure that we will not incur
uninsured liabilities and losses as a result of the conduct of our business. We
generally do not maintain theft or casualty insurance and has modest liability
and property insurance coverage, along with workmen's compensation and related
insurance. However, should uninsured losses occur, our shareholders could lose
their invested capital.
WE MAY FACE ADDITIONAL LITIGATION IN THE FUTURE. We have had a
substantial amount of litigation. The adverse resolution of such litigation to
us could impair our ability to continue in business if judgment holders were to
seek to liquidate our business through levy and execution. We have incurred and
may continue to incur substantial legal fees and costs in connection with past
and possibly future litigation. If we fail in our payment schedule, or fail in
our defense to future pending actions, or become subject to a levy and execution
on our assets and business, we could be forced to liquidate or to file for
bankruptcy and be unable to continue in our business. Investors who purchase
shares of our common stock will be subject to the risk of total loss if the
risks described herein are realized, because there may be insufficient assets
with which to pay our debts, which would leave shareholders with no recovery.
WE DO NOT HAVE ANY INDEPENDENT DIRECTORS. Currently, the only members
of our board of directors are Dean Janes, Xavier Aguilera, and Christopher Sohn.
None of these directors is considered an "independent director," as defined
under the rules and regulations of the Securities and Exchange Commission.
Therefore, all decisions of the board of directors will be made by persons who
are not considered independent directors.
THE LOSS OF THE SERVICES OF ANY OR OUR MANAGEMENT OR KEY EXECUTIVES
COULD ADVERSELY AFFECT OUR BUSINESS. Our success is substantially dependent on
the performance of our executive officers and key employees. The loss of an
officer or director of Imaging3 would have a material adverse impact on us. We
will generally be dependent upon our executive officers, Dean Janes, Christopher
Sohn, and Xavier Aguilera, for the direction, management and daily supervision
of our operations.
THE RELATIONSHIP OF OUR MANAGEMENT TEAM TO US COULD CREATE CONFLICTS OF
INTEREST. The relationship of management to us creates conflicts of interest. We
lease our executive offices from our chief executive officer pursuant to a lease
that was not determined at arm's length. Management's compensation from us has
not been determined pursuant to arm's-length negotiation. Management believes
that it will have the resources necessary to fulfill its management obligations
to all entities for which it is responsible.
OUR ABILITY TO PROTECT OUR INTELLECTUAL PROPERTY IS UNCERTAIN. We have
applied to the U.S. Patent and Trademark Office to register "Imaging3" as a
service mark and as a trademark. There are no assurances that these applications
will be approved and the registrations granted or that any other person will not
challenge the registration or attempt to infringe upon our marks. If we are
unable to protect our rights to our trademarks or if such marks infringe on the
rights of others, our business would be materially adversely affected.
WE MAY NOT BE ABLE TO WITHSTAND FLUCTUATIONS IN OUR INDUSTRY BECAUSE
OUR BUSINESS IS NOT DIVERSE. Because of the limited financial resources that we
have, it is unlikely that we will be able to diversify our operations. Our
probable inability to diversify our activities into more than one area will
subject us to economic fluctuations within a particular business or industry and
therefore increase the risks associated with our operations.
OUR MEDICAL DIAGNOSTIC IMAGING DEVICES ARE SUBJECT TO GOVERNMENT
REGULATION. Under the Medical Device Amendments of 1976 to the Federal Food,
Drug and Cosmetic Act, all medical devices are classified by the Food and Drug
Administration into one of three classes. A Class I device is subject only to
-18-
certain controls, such as labeling requirements and manufacturing practices; a
Class II device must comply with certain performance standards established by
the FDA; and a Class III device must obtain pre-market approval from the FDA
prior to commercial marketing. We must receive Class II approval to market our
real time 3D medical diagnostic imaging devices. We cannot be certain when, if
ever, we will receive this approval. In the absence of FDA approval, we will not
be able to market or sell our proprietary diagnostic medical imaging device,
resulting in a material adverse impact to our potential operating results and
financial condition. Other laws and regulations may be adopted in the future
that address the manufacture, sale and use of medical diagnostic imaging devices
that could adversely affect our business.
OUR BUSINESS IS GENERALLY SUBJECT TO GOVERNMENT REGULATION. We are
subject to regulations applicable to businesses generally. The adoption of any
additional laws or regulations may decrease the growth of our business, decrease
the demand for services and increase our cost of doing business. Changes in tax
laws also could have a significant adverse effect on our operating results and
financial condition.
IF OUR STOCK PRICE CONTINUES TO BE VOLATILE THERE IS A RISK OUR STOCK
PRICE COULD DECLINE. Our stock price has been volatile. The stock market in
general has been extremely vulnerable and management cannot promise that the
price of our common stock on the OTC Bulletin Board will not decline. We may
register more shares of our stock in the future, potentially increasing the
supply of free trading shares and possibly exerting downward pressure on our
stock price.
SHAREHOLDERS WILL EXPERIENCE DILUTION IN THEIR OWNERSHIP OF US AND WE
MAY NOT RECEIVE PROCEEDS FROM THE EXERCISE OF WARRANTS ISSUED BY US IN
CONJUNCTION WITH OUR RECENT PRIVATE PLACEMENT. We recently completed a private
placement with two institutional investors for the sale of common stock and
warrants for $1,000,000. The investment banking firm which acted as the
placement agent for us in the transaction also received warrants with terms
similar to those issued to the investors. Pursuant to the terms of the placement
we agreed to file a registration statement under the Securities Act of 1933, as
amended, with the Securities and Exchange Commission covering the resale of the
common stock and the common stock underlying the warrants. These warrants may be
exercised on a cashless basis because the registration statement covering them
was not declared effective within 120 days of the closing which occurred on
October 12, 2010, so we may not receive any proceeds from the exercise of these
warrants. Furthermore, if these warrants are not exercised we will not receive
any proceeds from them. If all of these warrants are exercised, the issuance of
additional shares of common stock would dilute shareholders' ownership in us.
ITEM 2. PROPERTIES
------------------
We currently maintain our administrative offices and production
facility at 3200 W. Valhalla Drive, Burbank, California 91505. This facility
contains 10,600 square feet of space, and we currently pay rent at a rate of
$1.05 per square foot, gross.
ITEM 3. LEGAL PROCEEDINGS
-------------------------
We may be involved in legal actions and claims arising in the ordinary
course of business, from time to time, none of which at this time is considered
to be material to our business or financial condition.
ITEM 4. [REMOVED AND RESERVED]
------------------------------
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK, RELATED STOCKHOLDER MATTERS, AND
ISSUER PURCHASES OF EQUITY SECURITIES
--------------------------------------------------------------------------------
COMMON STOCK
Our common stock trades on the OTC Bulletin Board Market under the
symbol "IMGG." The range of high and low bid quotations for each fiscal quarter
within the last two fiscal years was as follows:
YEAR ENDED DECEMBER 31, 2009 HIGH LOW
--------------------------------------- -------- -------
First Quarter ended March 31, 2009 $0.065 $0.055
Second Quarter ended June 30, 2009 $0.045 $0.04
Third Quarter ended September 30, 2009 $0.05799 $0.048
Fourth Quarter ended December 31, 2009 $0.76 $0.715
YEAR ENDED DECEMBER 31, 2010 HIGH LOW
--------------------------------------- -------- -------
First Quarter ended March 31, 2010 $0.705 $0.67
Second Quarter ended June 30, 2010 $0.41 $0.371
Third Quarter ended September 30, 2010 $0.299 $0.28
Fourth Quarter ended December 31, 2010 $0.16 $0.151
The above quotations reflect inter-dealer prices, without retail
markup, mark-down, or commission and may not necessarily represent actual
transactions.
As of March 7, 2011, there were approximately 263 record holders of our
common stock, not including shares held in "street name" in brokerage accounts
which is unknown. As of March 7, 2011, there were approximately 380,420,723
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.
EQUITY COMPENSATION PLAN INFORMATION
We have not yet, but may in the future, establish a management stock
option plan pursuant to which stock options may be authorized and granted to our
executive officers, directors, employees and key consultants. In the event we
establish the stock option plan, we expect to authorize approximately 16,000,000
shares or more for future issuance.
WARRANTS
As of December 31, 2010, we had 13,990,829 warrants to purchase
13,990,829 shares of our common stock outstanding, (a) 4,587,157 of which are
exercisable at a price of $0.2725 per share for a period of five (5) years from
the date of issuance, (b) 4,587,157 of which are exercisable at a price of
$0.218 per share for a period of 18 months from the date of issuance, (c)
4,587,157 of which are exercisable at a price of $0.2725 per share for a period
of five (5) years from the date of issuance, exercisable only to the extent that
the warrants described in (b) of this paragraph are exercised, and (d) 229,358
of which are exercisable at a price of $0.31 per share for a period of five
years from the date of issuance. The number of shares issuable upon the exercise
of the warrants described in (a), (b), and (c) of this paragraph and the
exercise prices of the warrants described in (a), (b), and (c) of this paragraph
may be adjusted pursuant to the full-ratchet anti dilution provisions contained
in those warrants. They may be exercised on a cashless basis except the 229,358
warrants described above in subparagraph (d).
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UNREGISTERED ISSUANCE OF EQUITY SECURITIES
The following is a list of the issuance of securities by us during the
fiscal year ending December 31, 2010 in transactions exempt from registration
that were not previously included in a Quarterly Report on Form 10-Q or in a
Current Report on Form 8-K, the proceeds of which were generally used for
working capital or services:
NUMBER OF SHARES DOLLAR AMOUNT SERVICES OR OTHER EXEMPTION FROM
OF CONSIDERATION CONSIDERATION DATE OF SALE REGISTRATION
---------------- ---------------- ----------------- ------------ --------------
4,587,157 $1,000,000 None October 2010 Rule 506 of
Regulation D
ITEM 6. SELECTED FINANCIAL DATA.
-------------------------------
The following selected financial data has been derived from our audited
financial statements. The data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and our financial statements and the notes thereto included
elsewhere herein.
TWELVE MONTHS ENDED DECEMBER 31
-------------------------------
2010 2009 2008 2007 2006
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
RESULTS IN OPERATIONS
Revenues.......................................... $ 1,177 $ 1,365 $ 1,756 $ 1,323 $ 1,386
Cost of revenues.................................. 532 700 662 910 677
Other expenses.................................... 100 -0- -0- -0- 255
Total expenses............................... 2,567 2,592 2,279 2,465 3,009
Net loss.......................................... (4,200) (1,911) (907) (2,061) (2,122)
Net loss attributable to common stockholders...... (4,200) $ (1,911) $ (907) $(2,061) $(2,122)
Net loss per common share --- basic............... $ (0.00) $ (0.01) $ (0.00) $ (0.01) $ (0.01)
Net loss per common share --- diluted............. $ (0.00) $ (0.01) $ (0.00) $ (0.01) $ (0.01)
AS OF DECEMBER 31
-----------------
2010 2009 2008 2007 2006
---- ---- ---- ---- ----
(IN THOUSANDS)
FINANCIAL CONDITION(1)
Property and equipment, net....................... $ 19 $ 27 $ 24 $ 19 $ 33
Total assets...................................... 593 1,193 542 294 692
Long term obligations(2).......................... -0- -0- -0- -0- -0-
Stockholders' Deficit............................. (4,809) (1,611) (2,923) (3,418) (2,955)
----------------------
(1) See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - - Liquidity and Capital Resources."
(2) Long term obligations would include secured loans less current
portion, convertible debt less current portion, estimated fair value
of derivatives embedded within convertible debt, deferred rent and
other liabilities, deferred revenue less current portion, capital
lease obligations less current portion and notes payable less current
portion.
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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:
(a) volatility or decline of our stock price;
(b) potential fluctuation in quarterly results;
(c) our failure to earn revenues or profits;
(d) inadequate capital to continue the business and barriers to
raising the additional capital or to obtaining the financing
needed to implement our business plans;
(e) failure to commercialize our technology or to make sales;
(f) changes in demand for our products and services;
(g) rapid and significant changes in markets;
(h) litigation with or legal claims and allegations by outside
parties, causing us to incur substantial losses and expenses;
(i) insufficient revenues to cover operating costs;
(j) failure to obtain FDA approval for our new medical scanning
device, which is still in its prototype stage.
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 may be incurred due to the
issuance of more shares, warrants, and stock options, and other convertible
securities.
Because the statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the
forward-looking statements. 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.
-22-
CURRENT OVERVIEW
In February 2002, a fire destroyed our manufacturing facility and
headquarters building along with our entire inventory, all office equipment and
internal infrastructure. Rebuilding our inventory and entire infrastructure
continues to this day. The amount of insurance received from this fire was
approximately $2,400,000, which was inadequate to replace inventory and rebuild
the necessary assets and infrastructure required to be rebuilt over eight years
of prior business. Several employees were let go and offices in San Diego,
Arizona, Washington and Florida were closed, which lowered administrative
expenses but negatively impacted revenue and income as well. Although we have
made significant strides, we continue on the path of rebuilding.
Our efforts have been to market our refurbished equipment. The sales
and revenues from service and parts are either from extended warranty purchases
at the time of purchase of the refurbished equipment, or service contracts and
time and material revenue realized upon warranty expiration, the majority of
which is realized one year from equipment purchase as warranties expire.
Equipment sales usually have a one year warranty of parts and service. After a
one year period, we contact the buyer to initiate the sale of a new warranty
contract for one year. These funds are accrued over a one year period and
revenue is recognized quarterly.
Our sales effort through direct mail, broadcast facsimile and broadcast
email to thousands of potential customers throughout the United States generates
leads of potential customers desiring to purchase equipment either immediately
or in the course of one year. This lead generation through direct mail and
broadcast facsimiles and email will continue on a quarterly basis with the goal
of increasing the total number of our leads for our sales staff. Management
expects that the marketing program will also eventually help stabilize the
amount of refurbished equipment sold on a monthly basis, since the carry-over of
leads not looking for immediate purchase will overlap with the immediate sales
leads. The greater the number of leads generated, whether immediate or long
term, the greater the opportunity to eventually create a consistent number of
sales.
On October 28, 2010, we received a letter from the United States Food
and Drug Administration responding to our application to the FDA for clearance
of our 3D medical imaging technology and device. In our application to the FDA
under Section 510(k) of the applicable federal legislation, we stated that our
medical device is substantially equivalent to devices marketed in interstate
commerce prior to May 28, 1976 and therefore should be approved for commercial
sale and use as a Class II device, without the necessity for clinical trials.
The FDA responded by rejecting our position that our medical device is
substantially equivalent to such prior devices. We disagree with the FDA's
position and plan to re-file our application with additional information
supporting our application for clearance.
Upon receipt of the deficiency letter from the FDA denying our
application to market our Dominion DViS product in the United States, we decided
to hire a professional independent consulting firm with expertise in FDA filings
and their resolution. Since the process has taken longer than management
anticipated, management felt it prudent to engage outside consultants with
sufficient experience to assist us in the process. Upon review and discussion of
its FDA application and response letters with the consultants, our management
feels confident in their ability to assist us with the preparation and follow-up
of the re-filing of our 510(k) application.
While we remain confident of eventually achieving FDA approval of our
medical device as a Class II device, we cannot assure that such approval will be
obtained or that we may not ultimately be required to file it under Class III
where clinical trials would be required.
In the absence of FDA approval for our medical device, we currently do
not and cannot rely upon it as a future source of sales and revenue. We are
subject to the uncertainty of not knowing whether or when our proprietary
medical device will be approved and can be sold. Under those circumstances,
management believes that we will continue our current trend of incurring
operating losses, possibly requiring us to raise additional capital or financing
from outside sources. We cannot assure that we will be able to raise sufficient
capital or financing to maintain our business while we are incurring operating
losses, and we cannot assure that we will become profitable if our proprietary
medical device is approved by the FDA.
-23-
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We monitor our estimates on an on-going basis for changes in facts
and circumstances, and material changes in these estimates could occur in the
future. Changes in estimates are recorded in the period in which they become
known. We base our estimates on historical experience and other assumptions that
we believe to be reasonable under the circumstances. Actual results may differ
from our estimates if past experience or other assumptions do not turn out to be
substantially accurate.
We have identified the policies below as critical to our business
operations and the understanding of our results of operations.
REVENUE RECOGNITION. We recognize revenue in accordance with the
Securities and Exchange Commission Staff Accounting Bulletin No. 104, "Revenue
Recognition in Financial Statements" ("SAB 104"). We recognize revenue upon
shipment, provided that evidence of an arrangement exists, title and risk of
loss have passed to the customer, fees are fixed or determinable, and collection
of the related receivable is reasonably assured. We record revenue net of
estimated product returns, which is based upon our return policy, sales
agreements, management estimates of potential future product returns related to
current period revenue, current economic trends, changes in customer composition
and historical experience. We accrue for warranty costs, sales returns, and
other allowances based on our experience. Generally, we extend credit to our
customers and do not require collateral. We perform ongoing credit evaluations
of our customers and historic credit losses have been within our expectations.
We do not ship a product until we have either a purchase agreement or rental
agreement signed by the customer with a payment arrangement. This is a critical
policy, because we want our accounting to show only sales that are "final" with
a payment arrangement. We do not make consignment sales or inventory sales
subject to a "buy back" or return arrangement from customers. Equipment sales
usually have a one year warranty of parts and service. After a one year period,
we contact the buyer to initiate the sale of a new warranty contract for one
year. These funds are accrued over a one year period and revenue is recognized
quarterly.
Rental income is recognized when earned and expenses are recognized
when incurred. The rental periods vary based on customer's needs ranging from
five days to six months. The rental revenues were insignificant in the twelve
month periods ended December 31, 2010 and 2009. Written rental or operating
leaseagreements are used in all instances.
DERIVATIVE LIABILITY. The calculation of derivative liability arising
from the Series A, Series B, and Series C Warrants issued by us in a private
placement on October 15, 2010 is based on the full ratchet anti-dilution
provisions in those warrants, and the assumptions made in the valuation analysis
prepared for us by an outside professional consulting firm. These full ratchet
provisions may result in the "reset" of the warrant exercise prices. The factors
and assumptions utilized in the valuation analysis include the terms and
conditions in the warrants, the market price of our common stock, our stock
price volatility, an interest rate factor, and the probability of a future
financing during the terms of the warrants that would result in an adjustment
for the benefit of warrant holders and at our expense.
STOCK-BASED COMPENSATION. We record stock-based compensation as a
charge to earnings net of the estimated impact of forfeited awards. As such, we
recognize stock-based compensation cost only for those stock-based awards that
are estimated to ultimately vest over their requisite service period, based on
the vesting provisions of the individual grants. The cumulative effect on
current and prior periods of a change in the estimated forfeiture rate is
recognized as compensation cost in earnings in the period of the revision. The
terms of our performance share unit grants allow the recipients of such awards
to earn a variable number of shares based on the achievement of the performance
goals specified in the awards. For performance share unit awards granted prior
to 2008, the actual amount of any stock award earned is based on our earnings
per share growth as measured in accordance with its Amended and Restated
Employee Long-Term Incentive Plan ("ELTIP") for the performance period compared
-24-
to that of a peer group of companies. Beginning with performance share unit
awards granted in 2008, the performance measure for these awards will be based
on the compound annual growth rate of our earnings per share from continuing
operations over a three year period. Stock-based compensation expense associated
with performance share units is recognized based on management's best estimates
of the achievement of the performance goals specified in such awards and the
resulting number of shares that will be earned. The compensation expected to be
earned is recognized as compensation cost in earnings in the period of the
revision.
PROVISION FOR SALES RETURNS, ALLOWANCES AND BAD DEBTS. We maintain a
provision for sales allowances, returns and bad debts. Sales returns and
allowances result from equipment damaged in delivery or customer
dissatisfaction, as provided by agreement. The provision is provided for by
reducing gross revenue by a portion of the amount invoiced during the relevant
period. The amount of the reduction is estimated based on historical experience.
RESERVE FOR OBSOLETE/EXCESS INVENTORY. Inventories are stated at the
lower of cost or market. We regularly review our inventories and, when required,
will record a provision for excess and obsolete inventory based on factors that
may impact the realizable value of our inventory including, but not limited to,
technological changes, market demand, regulatory requirements and significant
changes in our cost structure. If ultimate usage varies significantly from
expected usage, or other factors arise that are significantly different than
those anticipated by management, inventory write-downs or increases in reserves
may be required.
The fire in 2002 incinerated our inventory, so we did not have to deal
with significant amounts of obsolete inventory for a period of time. Recently,
however, it was necessary to impair approximately $166,037 of inventory for the
twelve month period ending December 31, 2010. Our procedure is now to maintain
only limited inventory, based on our experience in service and repair, necessary
for current service and repair contracts or orders anticipated within the
following 60 days. We have supply relationships with long term suppliers to
provide additional parts on an as needed, prompt basis for the vast majority of
repair and service parts, so obsolescence is no longer a factor in our business.
We have not recorded any material amounts as charges to obsolescence since the
fire in 2002 destroyed our warehouse.
OTHER ACCOUNTING FACTORS
The effects of inflation have not had a material impact on our
operation, nor are they expected to in the immediate future.
Although we are unaware of any major seasonal aspect that would have a
material effect on the financial condition or results of operation, the first
quarter of each fiscal year is always a financial concern due to slow
collections after the holidays.
The deposits that are shown in the financials are for pending sales of
existing products and not any new patented product. These are deposits received
from our customers for sales of equipment and services and are only removed as
deposits upon completion of the sale. If for any reason a customer order is
cancelled, the deposit would be returned as stated in the terms of sale, minus a
restocking fee.
No depositor is a related party of any officer or employee of Imaging3,
Inc.
Our terms of deposit typically are 50% down with the balance of the
sale price due upon delivery.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2010 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 2009.
We had revenues for the year ended December 31, 2010 of $1,177,473 as
compared to $1,364,892 for the year ended December 31, 2009, which represented a
14% decrease. The decrease in sales was attributed directly to a decrease in
equipment sales for this period. Our rental revenue has been a little more than
1% of our total revenue in the past two years and is recognized over the term of
the lease agreement. Rental revenues are only deemed earned as collected.
Our cost of revenue was $532,157 for the year ended December 31, 2010
as compared to $700,248 for the year ended December 31, 2009, which represents a
decrease of $168,091 or 24%. This decrease resulted directly from decreased
costs for equipment, parts, sales and services. Our gross profit margin for the
year ended December 31, 2010 was $645,316 as compared to $664,644 for the year
-25-
ended December 31, 2009, a 2.7% decrease. This is due to decreased revenue and
increased costs in 2010. Our total operating expenses increased in 2010 to
$2,566,530 for the year as opposed to $2,592,358 for the year ended December 31,
2009, an increase of 2% due to increased general and administrative expenses.
The taxes account was impacted by other taxes that decreased as evidenced by
decreased sales to clients in the State of California, which reduced taxes owed
to the State Board of Equalization and to the County of Los Angeles. The net
overall decrease in utilities to the Burbank Department of Water and Power was a
result of satisfying most of the debt owed to the City, which mistakenly read
only one meter rather than two meters. Once the City realized its mistake, it
quickly assessed us the difference for the period and arranged a workout with an
advance for payment of the difference. Our net loss for the fiscal year ending
December 31, 2010 was $4,200,621 as compared to $1,912,064 for the fiscal year
ending December 31, 2009. This decrease in loss is attributed directly to
Gain/Loss on change of Derivative Liability account.
At December 31, 2010, we had a balance due to our chief executive
officer amounting to $520,328 for the amount borrowed by us. This amount is due
on demand, secured and interest free.
We filed our tax return for 2000 as an S-corporation and changed our
status to a C-corporation effective August 1, 2001. Under current accounting
guidance, deferred income taxes are reported using the liability method.
Deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences. We
have recorded insignificant liabilities of $800 per year for income taxes due to
adjustments as a result of the conversion from an S-corporation to a
C-corporation for tax purposes. The provision for income taxes was recorded for
the state minimum tax of $800 imposed on corporations. (See Note 7 in financial
statements for year ended December 31, 2010.)
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 as evidenced by the significant drop in
activity in this area, and believe litigation is on a decreasing trend, although
we can give no assurances in relation to future litigation.
In 2010, we spent and recorded $220,163 for research and development of
our patented technology, which includes software design, mechanical design and
the manufacturing of the prototype. Costs for individuals employed by Imaging3
are absorbed in normal operating expenses and are not separated into different
categories at this time for simplicity.
LIQUIDITY AND CAPITAL RESOURCES
Our total current assets decreased from $1,134,654 as of December 31,
2009 to $543,089 as of December 31, 2010, a difference of $591,565 or 52%. The
cash account as of December 31, 2010 was $367,578, a decrease of $265,865
compared to December 31, 2009.
Our total current liabilities increased to $5,402,858 as of December
31, 2010 from $2,803,127 as of December 31, 2009. This increase is due in large
part to the Derivative Liability account of $2,243,466 reported for the first
time. The Derivative Liability account derives from the Series A, Series B, and
Series C Warrants issued by us in a private placement on October 15, 2010.
During the year ended December 31, 2010, we used $1,700,427 of cash for
operating activities, as compared to $1,890,414 during the year ended December
31, 2009. Cash provided by financing activities during the year ended December
31, 2010 was $1,434,562, as compared to $2,450,410 during the year ended
December 31, 2009.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 2009 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 2008.
We had revenues for the year ended December 31, 2009 of $1,364,892 as
compared to $1,755,754 for the year ended December 31, 2008, which represented a
28% decrease. The decrease in sales was attributed directly to a decrease in
equipment sales for this period. Our rental revenue has been a little more than
1% of our total revenue in the past two years and is recognized over the term of
the lease agreement. Rental revenues are only deemed earned as collected.
-26-
Our cost of revenue was $700,248 for the year ended December 31, 2009
as compared to $662,232 for the year ended December 31, 2008, an increase of
$38,016 or 6%. This increase resulted directly from increased costs for
equipment, parts, sales and services. Our gross profit margin for the year ended
December 31, 2009 was $664,644 as compared to $1,093,521 for the year ended
December 31, 2008, a 64% decrease. This is due to decreased revenue and
increased costs in 2009. Our total operating expenses increased in 2009 to
$2,592,358 for the year as opposed to $2,278,720 for the year ended December 31,
2008, an increase of 13% due to increased general and administrative expenses.
Outside consulting expenses decreased by $176,696. Overall professional fees
have increased by $12,621 or 30%. The increase in auto expense was caused
primarily by the increased impact of the overall gasoline price increases for
the year. Travel and entertainment expenses decreased by $11,416. The taxes
account was impacted by other taxes that decreased as evidenced by decreased
sales to clients in the State of California, which reduced taxes owed to the
State Board of Equalization and to the County of Los Angeles. The net overall
decrease in utilities to the Burbank Department of Water and Power was a result
of satisfying most of the debt owed to the City, which mistakenly read only one
meter rather than two meters. Once the City realized its mistake, it quickly
assessed us the difference for the period and arranged a workout with an advance
for payment of the difference. Our net loss for the fiscal year ending December
31, 2009 was $1,912,064 as compared to $906,928 for the fiscal year ending
December 31, 2008. This increased loss is attributed directly to decreased
sales, increased cost of goods sold and higher operating cost.
At December 31, 2009, we had a balance due to our chief executive
officer amounting to $50,766 for the amount borrowed by us. This amount is due
on demand, secured and interest free.
We filed our tax return for 2000 as an S-corporation and changed our
status to a C-corporation effective August 1, 2001. Under current accounting
guidance, deferred income taxes are reported using the liability method.
Deferred tax assets are recognized for deductible temporary differences and
deferred tax liabilities are recognized for taxable temporary differences. We
have recorded insignificant liabilities of $800 per year for income taxes due to
adjustments as a result of the conversion from an S-corporation to a
C-corporation for tax purposes. The provision for income taxes was recorded for
the state minimum tax of $800 imposed on corporations. (See Note 7 in financial
statements for year ended December 31, 2009.)
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. There is no assurance we can achieve profitability. We do not
expect litigation against us to expand as evidenced by the significant drop in
activity in this area, and believe litigation is on a decreasing trend, although
we can give no assurances in relation to future litigation.
In 2009, we spent and recorded $74,693 for research and development of
our patented technology, which includes software design, mechanical design and
the manufacturing of the prototype. Costs for individuals employed by Imaging3
are absorbed in normal operating expenses and are not separated into different
categories at this time for simplicity.
LIQUIDITY AND CAPITAL RESOURCES
Our total current assets increased from $487,484 as of December 31,
2008 to $1,134,654 as of December 31, 2009, a difference of $647,170 or 132%.
The cash account as of December 31, 2009 was $633,443, an increase of $73,447
compared to December 31, 2008. This is due in large part to the increase in the
sale of Company shares during this period.
Our total current liabilities decreased to $2,803,127 as of December
31, 2009 from $3,465,597 as of December 31, 2008. This decrease is due in large
part to the payment of accrued litigation settlements as well as the liquidation
of accounts payable and payments of money owed to our chief executive officer.
During the year ended December 31, 2009, we used $1,890,414 of cash for
operating activities, as compared to $1,557,399 during the year ended December
31, 2008. Cash provided by financing activities during the year ended December
31, 2009 was $2,450,410, as compared to $1,651,544 during the year ended
December 31, 2008.
-27-
GOING CONCERN QUALIFICATION
We have incurred significant losses from operations, and such losses
are expected to continue. Our auditors have included a "Going Concern
Qualification" in their report for the year ended December 31, 2010. In
addition, we have limited working capital. The foregoing raises substantial
doubt about our ability to continue as a going concern. Management's plans
include seeking additional capital and/or debt financing. We cannot guarantee
that additional capital and/or debt financing will be available when and to the
extent required, or that if available it will be on terms acceptable to us. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. The "Going Concern Qualification" may make it
substantially more difficult for us to raise capital.
OFF-BALANCE SHEET ARRANGEMENTS
None.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-----------------------------------------------------
IMAGING3, INC.
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009, AND 2008
CONTENTS
Reports of Independent Registered Public
Accounting Firms............................................................29
Balance Sheets as of December 31, 2010 and 2009..............................32
Statements of Operations for the years ended
December 31, 2010, 2009, and 2008...........................................33
Statement of Changes in Stockholders' Deficit for the years ended
December 31, 2010, 2009, and 2008...........................................34
Statements of Cash Flows for the years ended
December 31, 2010, 2009, and 2008 ..........................................35
Notes to Financial Statements ...............................................36
-28-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors
Imaging3, Inc.
Burbank, California
We have audited the accompanying balance sheets of Imaging3, Inc. (the
"Company") as of December 31, 2010 and 2009 and the related statements of
operations, stockholders' deficit and cash flows for the years then ended. The
financial statements for the year ended December 31, 2008 were audited by other
auditors whose report expressed an unqualified opinion on those statements.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Imaging3, Inc. as of December
31, 2010 and 2009 and the results of its operations and cash flows for the
period described above in conformity with accounting principles generally
accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has suffered recurring
losses from operations and maintains a working capital deficit. These matters
raise substantial doubt about the Company's ability to continue as a going
concern. These financial statements do not include any adjustments relating to
the recoverability and classification of asset carrying amounts or the amount
and classification of liabilities that may result should the Company be unable
to continue as a going concern. See note 10 to the financial statements for
further information regarding this uncertainty.
We have also audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), Imaging3, Inc.'s internal control
over financial reporting as of December 31, 2010, based on criteria established
in Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission and our report dated March 6, 2011
expressed an adverse opinion thereon.
For the year ended December 31, 2009, the Company is not required to have, nor
were we engaged to perform, an audit of its internal control over financial
reporting. Our audit included consideration of internal control over financial
reporting as a basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting.
Accordingly, we express no such opinion.
/s/ M&K CPAS, PLLC
www.mkacpas.com
Houston, Texas
March 6, 2011
-29-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
The Board of Directors and Stockholders
Imaging3, Inc.
We have audited Imaging3, Inc.'s internal control over financial reporting as of
December 31, 2010, based on criteria established in Internal Control --
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). Imaging3, Inc.'s management is
responsible for maintaining effective internal control over financial reporting,
and for its assessment of the effectiveness of internal control over financial
reporting included in the accompanying Management's Report on Internal Control
over Financial Reporting. Our responsibility is to express an opinion on the
company's internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
A material weakness is a deficiency, or a combination of deficiencies, in
internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the entity's financial statements
will not be prevented, or detected and corrected on a timely basis. The
following material weaknesses have been identified:
- There is a lack of segregation of duties
- The company does not have an independent board of directors
- The monthly closing and review process performed by the company
does not ensure that all material adjustments are incorporated in
the financial statements
In our opinion, because of the effect of the material weaknesses described above
on the achievement of the objectives of the control criteria, Imaging3, Inc. has
not maintained effective internal control over financial reporting as of
December 31, 2010, based on criteria established in internal control-integrated
framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (the COSO criteria).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the balance sheets of Imaging3, Inc.
as of December 31, 2010 and 2009, and the related statements of operations,
stockholders' deficit, and cash flows for each of the two years in the period
ended December 31, 2010 of Imaging3, Inc. and our report dated March 6, 2011
expressed an unqualified opinion thereon, except for an explanatory paragraph
expressing our substantial doubt about Imaging3, Inc.'s ability to continue as a
going concern.
/s/ M&K CPAS, PLLC
WWW.MKACPAS.COM
Houston, Texas
March 6, 2011
-30-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
Imaging3, Inc.
We have audited the accompanying balance sheet of Imaging3, Inc. as of December
31, 2008, the related statements of operations, stockholders' equity, and cash
flows for the year ended December 31, 2008. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Imaging3, Inc. as of December
31, 2008 and the results of its operations and its cash flows for the year ended
December 31, 2008, in conformity with accounting principles generally accepted
in the United States of America.
The Company's financial statements are prepared using the generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The Company has deficit accumulated at December 31, 2008 of
$10,687,106 including a net loss of $906,928 for the year ended December 31,
2008. These factors as discussed in Note 12 to the financial statements, raises
substantial doubt about the Company's ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 12. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
/s/ Kabani & Company, Inc.
CERTIFIED PUBLIC ACCOUNTANTS
Los Angeles, California
February 24, 2009
-31-
IMAGING3, INC.
BALANCE SHEETS
AT DECEMBER 31, 2010 AND DECEMBER 31, 2009
12/31/2010 12/31/2009
----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 367,578 $ 633,443
Accounts receivable, net 26,937 220,938
Inventory, net 127,947 249,996
Prepaid expenses 20,625 30,277
----------------- -----------------
Total current assets 543,087 1,134,654
PROPERTY AND EQUIPMENT, net 19,029 26,852
OTHER ASSETS 31,024 31,024
----------------- -----------------
Total assets $ 593,140 $ 1,192,530
================= =================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 249,641 $ 137,145
Accounts payable-related party - 16,092
Accrued expenses 2,191,643 2,253,079
Deferred revenue 135,530 144,408
Equipment deposits 62,250 201,637
Due to an officer 520,328 50,766
Derivative liability 2,243,466 -
----------------- -----------------
Total current liabilities 5,402,858 2,803,127
STOCKHOLDERS' DEFICIT:
Common stock, no par value; authorized shares 500,000,000;
380,420,723 and 375,709,898 issued and outstanding
at December 31, 2010 and December 31, 2009, respectively 11,990,073 10,988,573
Accumulated deficit (16,799,791) (12,599,170)
----------------- -----------------
Total stockholders' deficit (4,809,718) (1,610,597)
----------------- -----------------
Total liabilities and stockholders' deficit $ 593,140 $ 1,192,530
================= =================
The accompanying notes form an integral part of these financial statements
-32-
IMAGING3, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
2010 2009 2008
---------------- ---------------- ----------------
NET REVENUES $ 1,177,473 $ 1,364,892 $ 1,755,754
COST OF GOODS SOLD 532,157 700,248 662,232
---------------- ---------------- ----------------
GROSS PROFIT 645,316 664,644 1,093,522
OPERATING EXPENSES
General and administrative expenses 2,466,929 2,509,257 2,278,720
Impairment 99,601 83,101 -
---------------- ---------------- ----------------
Total operating expense 2,566,530 2,592,358 2,278,720
---------------- ---------------- ----------------
LOSS FROM OPERATIONS (1,921,214) (1,927,714) (1,185,198)
OTHER INCOME (EXPENSE):
Interest expense (55,151) (52,366) (51,790)
Other income 20,010 6,816 330,860
Gain on legal settlement - 62,000 -
Gain on change in derivative liability (2,243,466) - -
---------------- ---------------- ----------------
Total other income (expense) (2,278,607) 16,450 279,070
---------------- ---------------- ----------------
LOSS BEFORE INCOME TAX (4,199,821) (1,911,264) (906,128)
PROVISION FOR INCOME TAXES 800 800 800
---------------- ---------------- ----------------
NET LOSS $ (4,200,621) $ (1,912,064) $ (906,928)
================ ================ ================
BASIC AND DILUTED NET LOSS PER SHARE $ - $ 0.01 $ -
================ ================ ================
BASIC AND DILUTED WEIGHTED AVERAGE 376,722,905 294,511,622 243,552,012
COMMON SHARES OUTSTANDING ================ ================ ================
The accompanying notes form an integral part of these financial statements
-33-
IMAGING3, INC.
STATEMENT OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED DECEMBER, 2010, 2009 AND 2008
COMMON STOCK UNAMORTIZED TOTAL
NUMBER OF CONSULTING ACCUMULATED STOCKHOLDERS'
SHARES AMOUNT FEES DEFICIT DEFICIT
---------------------- ------------- -------------- -------------- ---------------
Balance on January 1, 2008 225,562,085 $ 6,381,316 $ (18,750) $ (9,780,178) $ (3,417,612)
Common stock issued for cash 22,943,634 1,259,072 - - 1,259,072
Common stock issued for services 1,418,333 123,383 18,750 - 142,133
Net loss for December 31, 2008 - - - (906,928) (906,928)
---------------------- ------------- -------------- -------------- ---------------
Balance on December 31, 2008 249,924,052 $ 7,763,771 $ - $ (10,687,106) $ (2,923,335)
====================== ============= ============== ============== ===============
Common stock issued for cash 119,934,027 3,197,476 - - 3,197,476
Common stock offering costs - (113,622) - - (113,622)
Common stock issued for services 687,500 34,375 - - 34,375
Common stock issued for debt conversion 5,164,319 106,573 - - 106,573
Net loss for December 31, 2009 - - - (1,912,064) (1,912,064)
---------------------- ------------- -------------- -------------- ---------------
Balance on December 31, 2009 375,709,898 $ 10,988,573 $ - $ (12,599,170) $ (1,610,597)
====================== ============= ============== ============== ===============
Common Stock issued for services 123,668 36,500 - - 36,500
Common Stock issued for cash 4,587,157 1,000,000 - - 1,000,000
Common Stock offering cost - (35,000) - - (35,000)
Recognition of derivative liability - - - - -
Net loss for December 31, 2010 - - - (4,200,621) (4,200,621)
---------------------- ------------- -------------- -------------- ---------------
Balance on December 31, 2010 380,420,723 $ 11,990,073 $ - $ (16,799,791) $ (4,809,718)
---------------------- ------------- -------------- -------------- ---------------
The accompanying notes form an integral part of these financial statements
-34-
IMAGING3, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008
2010 2009 2008
-------------- -------------- --------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (4,200,621) $ (1,912,064) $ (906,928)
Adjustments to reconcile net loss to net cash used forr
operating activities:
Bad debt expense - - 15,000
Depreciation and amortization 7,823 (3,098) 17,910
Common stock issued for services 36,500 34,375 142,133
Gain on settlement of debt - (62,000) -
Loss on conversion of debt - 6,573 -
Impairment of inventory 99,601 83,101 -
Loss on change in derivative liability 2,243,466 - -
(Increase) / decrease in current assets:
Accounts receivable 194,001 (156,789) (21,769)
Inventory 22,448 (4,357) (164,987)
Prepaid expenses and other assets 9,652 (9,129) (524)
Increase / (decrease) in current liabilities:
Accounts payable 112,496 (22,092) (38,624)
Accounts payable-related party (16,092) - -
Accrued expenses (61,436) 44,441 (452,425)
Deferred revenue (8,878) 25,356 12,347
Equipment deposits (139,387) 85,269 (159,532)
-------------- -------------- --------------
Net cash used for operating activities (1,700,427) (1,890,414) (1,557,399)
-------------- -------------- --------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment - - (22,991)
-------------- -------------- --------------
Net cash used for investing activities - - (22,991)
-------------- -------------- --------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts from / (payments to) officer, net 469,562 (633,444) 392,472
Proceeds from issuance of common stock, net 965,000 3,083,854 1,259,072
-------------- -------------- --------------
Net cash provided by financing activities 1,434,562 2,450,410 1,651,544
-------------- -------------- --------------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (265,865) 559,996 71,154
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 633,443 73,447 2,293
-------------- -------------- --------------
CASH & CASH EQUIVALENTS, ENDING BALANCE $ 367,578 $ 633,443 $ 73,447
============== ============== ==============
The accompanying notes form an integral part of these financial statements
-35-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008, 2009, and 2010
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
---------------------------------------------
Imaging3, Inc. (the "Company") is a California corporation, incorporated on
October 29, 1993 as Imaging Services, Inc. The Company filed a certificate of
amendment of articles of incorporation to change its name to Imaging3, Inc. on
August 20, 2002.
The Company's primary business is production and sale of medical equipment,
parts and services to hospitals, surgery centers, research labs, physician
offices and veterinarians. Equipment sales include new c-arms, c-arms tables,
remanufactured c-arms, used c-arm and surgical tables. Part sales comprise of
new or renewed replacement parts for c-arms.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
-----------------------------------------------
A summary of the Company's significant accounting policies consistently applied
in the preparation of the accompanying financial statements follows:
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
CASH AND CASH EQUIVALENTS
The Company considers all liquid investments with a maturity of three months or
less from the date of purchase that are readily convertible into cash to be cash
equivalents. The Company maintains its cash in bank deposit accounts that may
exceed federally insured limits. The Company has not experienced any losses in
such accounts. The Company had no cash equivalents at December 31, 2010 or 2009.
ACCOUNTS RECEIVABLE
The Company's customer base is geographically dispersed. The Company maintains
reserves for potential credit losses on accounts receivable. Management reviews
the composition of accounts receivable and analyzes historical bad debts,
customer concentrations, customer credit worthiness, current economic trends and
changes in customer payment patterns to evaluate the adequacy of these reserves.
Reserves are recorded primarily on a specific identification basis.
INVENTORIES
Inventories, comprising of finished goods and parts are stated at the lower of
cost (first-in, first-out method) or market. Management compares the cost of
inventories with the market value and allowance is made for writing down the
inventories to their market value, if lower. For the year ended December 31,
2010, the Company experienced an impairment of $99,601 of inventory. For the
year ended December 21, 2009, the Company experienced an impairment of $83,101
of inventory.
DUE TO OFFICER
At December 31, 2010 and 2009, the Company had balances due to the Chief
Executive Officer of the Company of $520,328 and $50,766, respectively, for
amounts owed during those years. The amount is due on demand, interest free and
is secured by the assets of the Company. Interest is not imputed since a portion
of this amount represents unpaid salaries.
-36-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008, 2009, and 2010
PROPERTY & EQUIPMENT
Property and equipment are stated at cost. Expenditures for maintenance and
repairs are charged to expenses as incurred and additions, renewals and
betterments are capitalized. When property and equipment are retired or
otherwise disposed of, the related cost and accumulated depreciation are removed
from the respective accounts, and any gain or loss is included in operations.
Depreciation of property and equipment is provided using the straight-line
method for substantially all assets with estimated lives of three to eight
years.
IMPAIRMENT OF LONG-LIVED ASSETS
Current accounting literature requires that long-lived assets be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable through the estimated
undiscounted cash flows expected to result from the use and eventual disposition
of the assets. Whenever any such impairment exists, an impairment loss will be
recognized for the amount by which the carrying value exceeds the fair value.
The Company tests long-lived assets, including property, plant and equipment and
intangible assets subject to periodic amortization, for recoverability at least
annually or more frequently upon the occurrence of an event or when
circumstances indicate that the net carrying amount is greater than its fair
value. Assets are grouped and evaluated at the lowest level for their
identifiable cash flows that are largely independent of the cash flows of other
groups of assets. The Company considers historical performance and future
estimated results in its evaluation of potential impairment and then compares
the carrying amount of the asset to the future estimated cash flows expected to
result from the use of the asset. If the carrying amount of the asset exceeds
estimated expected undiscounted future cash flows, the Company measures the
amount of impairment by comparing the carrying amount of the asset to its fair
value. The estimation of fair value is generally measured by discounting
expected future cash flows at the rate the Company utilizes to evaluate
potential investments. The Company estimates fair value based on the information
available in making whatever estimates, judgments and projections are considered
necessary. There was no impairment of long-lived assets in the years ended
December 31, 2010 and 2009.
EQUIPMENT DEPOSITS
Equipment deposits represent amounts received from customers against future
sales of goods since the Company recognizes revenue upon shipment of goods.
These deposits are applied to the invoices when the equipment is shipped to the
customers. The balances at December 31, 2010 and 2009 were $62,250 and $201,637,
respectively.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company generally does not use derivative financial instruments to hedge
exposures to cash-flow risks or market-risks that may be affect the fair values
of its financial instruments. The Company utilizes various types of financing to
fund our business needs, including common stock with warrants attached 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 its warrants to purchase common stock. On
October 15, 2010, in conjunction with the Company's issuance of 4,587,157 shares
of common stock for cash amounting to $1,000,000, the Company issued 13,761,471
warrants in three series (A, B, and C) each consisting of 4,587,157 common stock
warrants, which have exercise prices that are subject to "reset" provisions in
the event the Company subsequently issues common stock, stock warrants, stock
options or convertible debt with a stock price, exercise price or conversion
price lower than $0.2725, $0.2180, and $0.2725, respectively. If these
provisions are triggered, the exercise price of all their warrants will be
reduced. As a result, the warrants are not considered to be solely indexed to
the Company's own stock and are not afforded equity treatment.
-37-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008, 2009, and 2010
FAIR VALUE OF FINANCIAL INSTRUMENTS
On January 1, 2008, the Company adopted a new standard related to the accounting
for financial assets and financial liabilities and items that are recognized or
disclosed at fair value in the financial statements on a recurring basis, at
least annually. This standard provides a single definition of fair value and a
common framework for measuring fair value as well as new disclosure requirements
for fair value measurements used in financial statements. Fair value
measurements are based upon the exit price that would be received to sell an
asset or paid to transfer a liability in an orderly transaction between market
participants exclusive of any transaction costs, and are determined by either
the principal market or the most advantageous market. The principal market is
the market with the greatest level of activity and volume for the asset or
liability. Absent a principal market to measure fair value, the Company would
use the most advantageous market, which is the market that the Company would
receive the highest selling price for the asset or pay the lowest price to
settle the liability, after considering transaction costs. However, when using
the most advantageous market, transaction costs are only considered to determine
which market is the most advantageous and these costs are then excluded when
applying a fair value measurement. The adoption of this standard did not have a
material effect on the Company's financial position, results of operations or
cash flows.
On January 1, 2009, the Company adopted an accounting standard for applying fair
value measurements to certain assets, liabilities and transactions that are
periodically measured at fair value. The adoption did not have a material effect
on the Company's financial position, results of operations or cash flows.
In August 2009, the FASB issued an amendment to the accounting standards related
to the measurement of liabilities that are routinely recognized or disclosed at
fair value. This standard clarifies how a company should measure the fair value
of liabilities, and that restrictions preventing the transfer of a liability
should not be considered as a factor in the measurement of liabilities within
the scope of this standard. This standard became effective for the Company on
October 1, 2009. The adoption of this standard did not have a material impact on
the Company's financial statements.
The fair value accounting standard creates a three-level hierarchy to prioritize
the inputs used in the valuation techniques to derive fair values. The basis for
fair value measurements for each level within the hierarchy is described below
with Level 1 having the highest priority and Level 3 having the lowest.
Level 1: Quoted prices in active markets for identical assets or
liabilities.
Level 2: Quoted prices for similar assets or liabilities in active markets;
quoted prices for identical or similar instruments in markets that are not
active; and model-derived valuations in which all significant inputs are
observable in active markets.
Level 3: Valuations derived from valuation techniques in which one or more
significant inputs are unobservable.
The following table presents assets and liabilities that are measured and
recognized at fair value as of December 31, 2010 and 2009 on a recurring basis:
DECEMBER 31, 2010
Total Gains and
Description Level 1 Level 2 Level 3 (Losses)
----------- ---------- ----------------- -----------------
Derivative Liability - - (2,243,466) 1,370,623
----------- ---------- ----------------- -----------------
Total $ - $ - $ (2,243,466) $ 1,370,623
=========== ========== ================= =================
DECEMBER 31, 2009
Description Level 1 Level 2 Level 3 Total Gains and
(Losses)
----------- ---------- ----------------- -----------------
Derivative Liability - - - -
----------- ---------- ----------------- -----------------
Total $ - $ - $ - $ -
=========== ========== ================= =================
-38-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008, 2009, and 2010
REVENUE RECOGNITION
The Company recognizes its revenue in accordance with the Securities and
Exchange Commission ("SEC") Staff Accounting Bulletin No. 104, "Revenue
Recognition in Financial Statements" ("SAB 104"). SAB 104 revises or rescinds
portions of the interpretative guidance included in Topic 13 of the codification
of staff accounting bulletins in order to make this interpretive guidance
consistent with current authoritative accounting and auditing guidance and SEC
rules and regulations. Revenue is recognized upon shipment, provided that
evidence of an arrangement exists, title and risk of loss have passed to the
customer, fees are fixed or determinable and collection of the related
receivable is reasonably assured. Revenue is recorded net of estimated product
returns, which is based upon the Company's return policy, sales agreements,
management estimates of potential future product returns related to current
period revenue, current economic trends, changes in customer composition and
historical experience. The Company accrues for warranty costs, sales returns,
and other allowances based on its experience. Generally, the Company extends
credit to its customers and does not require collateral. The Company performs
ongoing credit evaluations of its customers and historic credit losses have been
within management's expectations and has a revenue receivables policy for
service and warranty contracts. Equipment sales usually have a one year warranty
of parts and service. After a one year period, the Company contacts the buyer to
initiate the sale of a new warranty contract for one year. These funds are
accrued over a one year period and revenue is recognized quarterly.
Rental income is recognized when earned and expenses are recognized when
incurred. The rental periods vary based on customer's needs ranging from five
days to six months. An operating lease agreement is utilized. The rental
revenues were insignificant in the twelve month periods ended December 31, 2010,
2009, and 2008. Written rental agreements are used in all instances.
STOCK-BASED COMPENSATION
The Company records stock-based compensation as a charge to earnings net of the
estimated impact of forfeited awards. As such, the Company recognizes
stock-based compensation cost only for those stock-based awards that are
estimated to ultimately vest over their requisite service period, based on the
vesting provisions of the individual grants. The cumulative effect on current
and prior periods of a change in the estimated forfeiture rate is recognized as
compensation cost in earnings in the period of the revision. The terms of the
Company's performance share unit grants allow the recipients of such awards to
earn a variable number of shares based on the achievement of the performance
goals specified in the awards. For performance share unit awards granted prior
to 2008, the actual amount of any stock award earned is based on the Company's
earnings per share growth as measured in accordance with its Amended and
Restated Employee Long-Term Incentive Plan ("ELTIP") for the performance period
compared to that of a peer group of companies. Beginning with performance share
unit awards granted in 2008, the performance measure for these awards will be
based on the compound annual growth rate of the Company's earnings per share
from continuing operations over a three year period. Stock-based compensation
expense associated with performance share units is recognized based on
management's best estimates of the achievement of the performance goals
specified in such awards and the resulting number of shares that will be earned.
The compensation expected to be earned is recognized as compensation cost in
earnings in the period of the revision.
INCOME TAXES
The Company accounts for income taxes using the liability method. Deferred tax
assets are recognized for deductible temporary differences and deferred tax
liabilities are recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that
some portion or all of the deferred tax assets will not be realized. Deferred
tax assets and liabilities are adjusted for the effects of changes in tax laws
and rates on the date of enactment.
-39-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008, 2009, and 2010
BASIC AND DILUTED NET LOSS PER SHARE
Basic net loss per share is based upon the weighted average number of common
shares outstanding. Diluted net loss per share is based on the assumption that
all dilutive convertible shares and stock options were converted or exercised.
Dilution is computed by applying the treasury stock method. Under this method,
options and warrants are assumed to be exercised at the beginning of the period
(or at the time of issuance, if later), and as if funds obtained thereby were
used to purchase common stock at the average market price during the period. The
Company had no common stock equivalents or other potentially dilutive securities
at December 31, 2009. The effect of the Company's common stock warrants was
anti-dilutive at December 31, 2010.
RECENT PRONOUNCEMENTS
On January 1, 2009, the Company adopted a new accounting standard issued by the
FASB related to accounting for business combinations using the acquisition
method of accounting (previously referred to as the purchase method). Among the
significant changes, this standard requires a redefining of the measurement date
of a business combination, expensing direct transaction costs as incurred,
capitalizing in-process research and development costs as an intangible asset
and recording a liability for contingent consideration at the measurement date
with subsequent re-measurements recorded in the results of operations. This
standard also requires costs for business restructuring and exit activities
related to the acquired company to be included in the post-combination financial
results of operations and also provides new guidance for the recognition and
measurement of contingent assets and liabilities in a business combination. In
addition, this standard requires several new disclosures, including the reasons
for the business combination, the factors that contribute to the recognition of
goodwill, the amount of acquisition related third-party expenses incurred, the
nature and amount of contingent consideration, and a discussion of pre-existing
relationships between the parties.
The application of this standard was not material for 2009, however, it is
likely to have a significant impact on how the Company allocates the purchase
price of certain future business combinations, including the recognition and
measurement of assets acquired and liabilities assumed and the expensing of
direct transaction costs and costs to integrate the acquired business.
On January 1, 2009, the Company adopted a new accounting standard issued by the
FASB related to the disclosure of derivative instruments and hedging activities.
This standard expanded the disclosure requirements about an entity's derivative
financial instruments and hedging activities, including qualitative disclosures
about objectives and strategies for using derivatives, quantitative disclosures
about fair value amounts of and gains and losses on derivative instruments, and
disclosures about credit-risk-related contingent features in derivative
instruments.
Effective June 30, 2009, the Company adopted a newly issued accounting standard
related to accounting for and disclosure of subsequent events in its
consolidated financial statements. This standard provides the authoritative
guidance for subsequent events that was previously addressed only in United
States auditing standards. This standard establishes general accounting for and
disclosure of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued and requires the
Company to disclose the date through which it has evaluated subsequent events
and whether that was the date the financial statements were issued or available
to be issued. This standard does not apply to subsequent events or transactions
that are within the scope of other applicable GAAP that provide different
guidance on the accounting treatment for subsequent events or transactions. The
adoption of this standard did not have a material impact on the Company's
financial statements.
In June 2009, the FASB issued an amendment to the accounting standards related
to the consolidation of variable interest entities ("VIE"). This standard
provides a new approach for determining which entity should consolidate a VIE,
how and when to reconsider the consolidation or deconsolidation of a VIE and
requires disclosures about an entity's significant judgments and assumptions
used in its decision to consolidate or not consolidate a VIE. Under this
standard, the new consolidation model is a more qualitative assessment of power
and economics that considers which entity has the power to direct the activities
that "most significantly impact" the VIE's economic performance and has the
obligation to absorb losses or the right to receive benefits that could be
potentially significant to the VIE. This standard is effective for the Company
as of January 1, 2010 and the Company does not expect the impact of its adoption
to be material to its financial statements.
-40-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008, 2009, and 2010
In October 2009, the FASB issued an amendment to the accounting standards
related to the accounting for revenue in arrangements with multiple deliverables
including how the arrangement consideration is allocated among delivered and
undelivered items of the arrangement. Among the amendments, this standard
eliminates the use of the residual method for allocating arrangement
consideration and requires an entity to allocate the overall consideration to
each deliverable based on an estimated selling price of each individual
deliverable in the arrangement in the absence of having vendor-specific
objective evidence or other third party evidence of fair value of the
undelivered items. This standard also provides further guidance on how to
determine a separate unit of accounting in a multiple-deliverable revenue
arrangement and expands the disclosure requirements about the judgments made in
applying the estimated selling price method and how those judgments affect the
timing or amount of revenue recognition. This standard, for which the Company is
currently assessing the impact, was effective for the Company on January 1,
2011.
In October 2009, the FASB issued an amendment to the accounting standards
related to certain revenue arrangements that include software elements. This
standard clarifies the existing accounting guidance such that tangible products
that contain both software and non-software components that function together to
deliver the product's essential functionality, shall be excluded from the scope
of the software revenue recognition accounting standards. Accordingly, sales of
these products may fall within the scope of other revenue recognition accounting
standards or may now be within the scope of this standard and may require an
allocation of the arrangement consideration for each element of the arrangement.
This standard, for which the Company is currently assessing the impact, was
effective for the Company on January 1, 2011.
In January 2010, the FASB issued an amendment to the accounting standards
related to the disclosures about an entity's use of fair value measurements.
Among these amendments, entities will be required to provide enhanced
disclosures about transfers into and out of the Level 1 (fair value determined
based on quoted prices in active markets for identical assets and liabilities)
and Level 2 (fair value determined based on significant other observable inputs)
classifications, provide separate disclosures about purchases, sales, issuances
and settlements relating to the tabular reconciliation of beginning and ending
balances of the Level 3 (fair value determined based on significant unobservable
inputs) classification and provide greater disaggregation for each class of
assets and liabilities that use fair value measurements. Except for the detailed
Level 3 roll-forward disclosures, the new standard is effective for the Company
for interim and annual reporting periods beginning after December 31, 2009. The
requirement to provide detailed disclosures about the purchases, sales,
issuances and settlements in the roll-forward activity for Level 3 fair value
measurements is effective for the Company for interim and annual reporting
periods beginning after December 31, 2010. The Company does not expect that the
adoption of this new standard will have a material impact to its financial
statements.
3. ACCOUNTS RECEIVABLE
------------------------
All accounts receivable are trade related. These receivables are current and
management believes are collectible except for which a reserve has been
provided. The balance of accounts receivable as of December 31, 2010 and 2009
were $26,937 and $220,938, respectively. The reserve amount for uncollectible
accounts was $1,375 and$675 as of December 31, 2009 and 2010, respectively.
4. INVENTORIES
----------------
Inventory was comprised of the following:
December 31, 2010 December 31, 2009
---------------------- ----------------------
Parts inventory $ 19,921 $ 41,345
Finished goods 79,680 208,651
---------------------- ----------------------
Total $ 99,601 $ 249,996
====================== ======================
For the periods ending December 31, 2009 and 2010, the Company experienced an
impairment of $83,101 and $166,037 respectively in inventory.
-41-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008, 2009, and 2010
5. PROPERTIES AND EQUIPMENT
-----------------------------
Net property and equipment were as follows:
December 31, 2010 December 31, 2009
--------------------- ---------------------
Furniture and office equipment $ 78,695 $ 78,695
Tools and Shop equipment 54,183 54,183
Vehicles 105,871 105,871
--------------------- ---------------------
238,749 238,749
Less accumulated depreciation (216,495) (211,897)
--------------------- ---------------------
Total $ 22,254 $ 26,852
===================== =====================
Depreciation expenses were $7,823 and ($3,098) for the years ended December 31,
2010 and 2009, respectively.
6. ACCRUED EXPENSES
---------------------
Accrued expenses consisted of the following:
December 31, 2010 December 31, 2009
-------------------------- ----------------------
Accrued wages $ 143,718 $ 14,557
Accrued legal fees 396,536 401,109
Accrued prior litigation 1,641,971 1,662,971
Other accrued expenses 9,418 174,442
-------------------------- ----------------------
Total $ 2,191,643 $ 2,253,079
========================== ======================
During 2003, the Company paid payroll net of taxes and accrued said taxes
without payment due to cash flow limitations resulting from a 2002 warehouse
fire that incinerated our inventory. The Company subsequently received a tax
lien in 2005 related to 2003 payroll taxes from the Internal Revenue Service and
continued to accrue interest and penalty charges. The original amount was
$104,052. In 2008, payments were made and the Internal Revenue Service issued a
tax lien release for this amount and the liability carried on the Company's
books was relieved. In 2009, the Company was notified by the Internal Revenue
Service that additional payroll taxes, interest, and penalty charges were still
owed. After researching, it is believed that the Internal Revenue Service double
booked the original payments made and released the lien in error. Settlement was
reached and the Company is currently paying $2,000 per month on a total
liability of $104,052 plus interest and penalties, with a potential balloon
payment in one year subject to re-negotiation after one year with the IRS.
7. INCOME TAXES
-----------------
For the year ended December 31, 2010, the Company incurred net operating losses
for tax purposes of approximately $652,968. The total net operating loss carry
forwards of $15,529,431 may be used to reduce taxable income through the year
2028. The availability of the Company's net operating loss carry forwards are
subject to limitation if there is a 50% or more change in the ownership of the
Company's stock. The provision for income taxes consists of the state minimum
tax imposed on corporations of $800. There are no uncertain tax positions
requiring disclosure
The components of the net deferred tax asset are summarized below:
DECEMBER 31, 2010 DECEMBER 31, 2009 DECEMBER 21, 2008
----------------- ----------------- -----------------
Deferred tax assets
Net operating losses $ 5,280,007 $ 4,638,260 $ 3,981,000
Less: valuation allowance (5,280,007) (4,638,260) (3,981,000)
----------------- ------------------ ----------------
$ - $ - $ -
----------------- ------------------- ----------------
-42-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008, 2009, and 2010
The following is a reconciliation of the provision for income taxes at the U.S.
federal income tax rate to the income taxes reflected in the Statement of
Operations:
DECEMBER 31, 2010 DECEMBER 31, 2009 DECEMBER 31, 2008
----------------------- ----------------------- ----------------------
Tax expense (credit) at statutory rate-federal (34)% (34)% (34)%
State tax expense net of federal tax (6) (6) (6)
Changes in valuation allowance 40 40 40
----------------------- ----------------------- ----------------------
Tax expense at actual rate $ - $ - $ -
======================= ======================= ======================
Income tax expense consisted of the following:
2010 2009 2008
-------------- ------------- -------------
Current tax expense:
$ - $ - -
Federal
State 800 800 800
-------------- ------------- -------------
Total Current $ 800 $ 800 800
Deferred tax credit:
$ 212,074 $ 657,260 306,000
Federal
State 37,425 59,677 51,000
-------------- ------------- -------------
Total deferred $ 249,499 $ 716,937 357,000
Less: valuation allowance (249,499) (716,937) (357,000)
-------------- ------------- -------------
Net Deferred tax credit - - -
-------------- ------------- -------------
Tax expense $ 800 $ 800 800
============== ============= =============
8. STOCKHOLDERS' EQUITY
-------------------------
COMMON STOCK
During the year ended December 31, 2010, the Company issued 4,587,157 shares of
common stock and 13,761,471 warrants to purchase common stock for cash amounting
to $1,000,000. Of the 13,761,471 warrants, (a) 4,587,157 are exercisable at a
price of $0.2725 per share for a period of five (5) years from the date of
issuance, (b) 4,587,157 are exercisable at a price of $0.218 per share for a
period of 18 months from the date of issuance, and (c) 4,587,157 are exercisable
at a price of $0.2725 per share for a period of five (5) years from the date of
issuance, exercisable only to the extent that the warrants described in (b) of
this paragraph are exercised. The number of shares issuable upon the exercise of
the warrants described in (a), (b), and (c) of this paragraph and the exercise
prices of the warrants described in (a), (b), and (c) of this paragraph may be
adjusted pursuant to the full-ratchet anti dilution provisions contained in
those warrants. These warrants may be exercised on a cashless basis. The Company
incurred stock offering cost of $35,000 related to the issuance. The Company
also issued to the placement agent 229,358 warrants valued at $89,941 as
additional compensation for the stock offering.
During the year ended December 31, 2010, the Company issued 123,668 shares of
common stock for consulting services. The expenses amounted to $36,500 based on
the Company's closing stock price on the date of grant.
During the year ended December 31, 2009, the Company issued 119,934,027 shares
of common stock for cash amounting to $3,197,476.
During the year ended December 31, 2009, the Company issued 687,500 shares of
common stock for consulting services. The expenses amounted to $34,375, based on
the Company's closing stock price on the date of the grant.
-43-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008, 2009, and 2010
During the year ended December 31, 2009, the Company incurred fund raising cost
of $113,622. The fund raising cost represented the referral fees payable to
finders for introducing purchasers of the Company's common stock.
During the year ended December 31, 2009, the Company converted loans payable in
the amount of $100,000 to 5,164,319 shares of common stock. 164,319 of these
shares were in excess of the stated conversion price of the loans, resulting in
an expense of $6,573 based on the closing stock price on the date of grant.
During the year ended December 31, 2008, the Company issued 22,943,634 shares of
common stock for cash amounting to $1,376,618.
During the year ended December 31, 2008, the Company issued 1,418,333 shares of
common stock for consulting services. The expenses amounted to $123,383.
9. WARRANTS
-------------
During the year ended December 31, 2010, the Company issued 13,990,829 warrants
to purchase 13,990,829 shares of common stock, (a) 4,587,157 of which are
exercisable at a price of $0.2725 per share for a period of five (5) years from
the date of issuance, (b) 4,587,157 of which are exercisable at a price of
$0.218 per share for a period of 18 months from the date of issuance, (c)
4,587,157 of which are exercisable at a price of $0.2725 per share for a period
of five (5) years from the date of issuance, exercisable only to the extent that
the warrants described in (b) of this paragraph are exercised, and (d) 229,358
of which are exercisable at a price of $0.31 per share for a period of five
years from the date of issuance. The number of shares issuable upon the exercise
of the warrants described in (a), (b), and (c) of this paragraph and the
exercise prices of the warrants described in (a), (b), and (c) of this paragraph
may be adjusted pursuant to the full-ratchet anti dilution provisions contained
in those warrants. They may be exercised on a cashless basis except the 229,358
warrants described above in subparagraph (d)
During the years ended December 31, 2009 and 2008, the Company issued no
warrants.
10. DERIVATIVE LIABILITY
-------------------------
The Company's only asset or liability measured at fair value on a recurring
basis is its derivative liability associated with its warrants to purchase
common stock. On October 15, 2010, in conjunction with the Company's issuance of
4,587,157 shares of common stock for cash amounting to $1,000,000, the Company
issued 13,761,471 warrants in three series (A, B, and C) each consisting of
4,587,157 common stock warrants, which have exercise prices that are subject to
"reset" provisions in the event the Company subsequently issues common stock,
stock warrants, stock options or convertible debt with a stock price, exercise
price or conversion price lower than $0.2725, $0.2180, and $0.2725,
respectively. If these provisions are triggered, the exercise price of all their
warrants will be reduced. As a result, the warrants are not considered to be
solely indexed to the Company's own stock and are not afforded equity treatment.
As a result, the Company's outstanding warrants containing exercise price reset
provisions were classified as a derivative liability, in accordance with ASC
815. These warrants had exercise prices ranging from $0.85 - $1.27 and expire
starting in July 2011. As of October 15, 2010, the fair value of these warrants
of $3,614,089 was recognized as an expense and an increase in derivative
liability. The change in fair value during the period from October 15, 2010 to
December 31, 2010 of $1,370,623 is recorded as a gain on change in fair market
value of derivative in the accompanying Statements of Operations.
The Company classifies the fair value of these warrants under level three of the
fair value hierarchy of financial instruments. The fair value of the derivative
liability was calculated using a Monte Carlo simulation model that values the
embedded derivatives based on several inputs, assumptions and probabilities.
This model is based on future projections of the various potential outcomes. The
embedded derivatives that were analyzed and incorporated into the model included
the exercise feature with the full ratchet reset.
-44-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008, 2009, and 2010
The following inputs and assumptions were used to value the warrants:
o The warrant term is 60 months for series A and C; 9 months for series
B.
o The warrant exercise prices were $0.2725 for series A and C; $0.2180
for series B.
o The computed volatility was 140% and risk free rate of 3.62% for all
three series.
o The probability of the company obtaining future financing was 100% for
series A and C; 0% for series B.
o The series C warrants are only exercisable if the series B warrants
are exercised and only in the same percentage as the series B warrants
are exercised.
o The series B warrants are exercisable until the earlier of 18 months
following the issuance date or 180 days following the effectiveness of
the registration statement covering the securities.
o Full ratchet anti-dilution includes exercise price adjustment upon
subsequent financings at a lower price and an increase in the warrants
issued upon an exercise price adjustment.
The following shows the changes in the level three liability measured on a
recurring basis for the year ended December 31, 2010:
Balance at inception,
October 15, 2010 $ 3,614,089
Derivative gain (1,370,623)
----------------
Balance, December 31, 2010 $ 2,243,466
================
11. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
------------------------------------------
The Company prepares its statements of cash flows using the indirect method.
The Company paid income taxes of $800 and interest of $55,151 during the year
2010. The Company paid income taxes of $800 and interest of $52,366 during the
year ending December 31, 2009.
The Company paid income taxes of $800 and interest of $51,790 during the year
2008.
12. GOING CONCERN
------------------
The Company's financial statements are prepared using the generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. In the years ended December 31, 2009 and 2010, the Company incurred
losses of $1,912,064 and $4,200,621, respectively. The Company has an
accumulated deficit of $16,799,791 as of December 31, 2010. In addition, the
Company had negative cash flow from operating activities amounting to $1,700,427
as of December 31, 2010. The continuing losses have adversely affected the
liquidity of the Company.
In view of the matters described in the preceding paragraph, recoverability of a
major portion of the recorded asset amounts shown in the accompanying balance
sheet is dependent upon continued operations of the Company, which in turn is
dependent upon the Company's ability to raise additional capital, obtain
financing and to succeed in its future operations. The financial statements do
not include any adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities that might
be necessary should the Company be unable to continue as a going concern.
Management has taken the following steps to revise its operating and financial
requirements, which it believes are sufficient to provide the Company with the
ability to continue as a going concern. Management devoted considerable effort
during the years ended December 31, 2010 and 2009, toward (i) obtaining
additional equity capital (ii) controlling salaries and general and
administrative expenses, (iii) management of accounts payable, (iv) evaluation
of its distribution and marketing methods, and (v) increasing marketing and
sales. In order to control general and administrative expenses, the Company has
established internal financial controls in all areas, specifically in hiring and
-45-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008, 2009, and 2010
overhead cost. The Company has also established a hiring policy under which the
Company will refrain from hiring additional employees unless approved by the
Chief Executive Officer and Chief Financial Officer. Accounts payable are
reviewed and approved or challenged on a daily basis and the sales staff is
questioned as to the validity of any expense on a monthly basis. Senior
management reviews the annual budget to ascertain and question any variance from
plan, on a quarterly basis, and to anticipate and make adjustments as may be
feasible.
13. COMMITTMENTS
-----------------
The Company has a facility lease agreement effective October 1, 2004 for five
years with an option to extend for a 60 month period, which the Company
exercised effective October 1, 2009.
Future annual minimum lease commitments, excluding property taxes and insurance,
payable at December 31, 2010 are approximately as follows:
2011 132,840
2012 132,840
2013 132,840
2014 132,840
---------
$ 531,360
Rent expenses for the leased facility were $132,840, $126,840 and $120,840 for
the years ended December 31, 2010, 2009, and 2008, respectively. The Company
exercised its options under the renewal lease agreement during the third quarter
of 2009.
14. CONTINGENCIES & LITIGATION
-------------------------------
Partly in connection with a fire at the Company's facility on or about February
19, 2002, in which the Company's manufacturing, warehouse, and office facilities
were substantially destroyed, the Company became engaged in litigation in
several courts, all of which have reached judgment or been settled or dismissed.
The judgments and settlements are reflected in the liability section of the
Company's balance sheet and total $2,191,643 as of December 31, 2010.
The judgments and settlements are reflected in the liability section of the
Company's balance sheet and total $1,662,971 as of December 31, 2009.
15. OTHER INCOME
-----------------
During 2010, the Company recorded $11,651 as miscellaneous income primarily from
refunds from the State Board of Equalization and a law firm.
16. RELATED PARTY TRANSACTION
------------------------------
The Company has a consulting agreement with the Chief Executive Officer of the
Company under which he receives compensation of $12,000 per month. The Chief
Executive Officer provides management, administrative, marketing, and financial
services to the Company pursuant to the consulting agreement which is terminable
on 30 days notice by either party. The consulting agreement commenced on January
1, 2002 and will continue until such time as the Company terminates the
agreement or the Chief Executive Officer resigns. The accrued compensation has
been included in due to officer.
During the normal course of business, the Chief Executive Officer advanced funds
to the Company. These advances are recorded as due to officer.
-46-
IMAGING3, INC.
Notes to Financial Statements
December 31, 2008, 2009, and 2010
At December 31, 2010 and 2009, the Company had balances due to the Chief
Executive Officer of the Company of $520,328 and $50,766, respectively, for
amounts owed during those years. The amount is due on demand, interest free and
is secured by the assets of the Company. Interest is not imputed since a portion
of this amount represents unpaid consulting fees.
17. CONCENTRATIONS
-------------------
Three customers represent 20%, 19%, and 11%, respectively, of accounts
receivable as of December 31, 2010. These balances were collected subsequent to
December 31, 2010.
Three customers represented 27%, 25%, and 11%, respectively, of the Company's
accounts receivable as of December 31, 2009. These balances were collected
subsequent to December 31, 2009.
Three customers represented 22%, 18%, and 10%, respectively, of the Company's
accounts receivable as of December 31, 2008. These balances were collected
subsequent to December 31, 2008.
18. SUBSEQUENT EVENTS
----------------------
There have been no significant subsequent events from January 1, 2011 through
March 14, 2011, the date the financial statements were issued.
-47-
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
--------------------------------------------------------------------------------
None.
ITEM 9A. CONTROL AND PROCEDURES
-------------------------------
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
We carried out an evaluation, under the supervision and with the
participation of our management, including our principal executive officer and
principal financial officer, of the effectiveness of our disclosure controls and
procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)). Based
upon that evaluation, our principal executive officer and principal financial
officer concluded that, as of the end of the period covered in this report, our
disclosure controls and procedures were not effective to ensure that information
required to be disclosed in reports filed under the Securities Exchange Act of
1934, as amended, is recorded, processed, summarized and reported within the
required time periods and is accumulated and communicated to our management,
including our principal executive officer and principal financial officer, as
appropriate to allow timely decisions regarding required disclosure.
Our management, including our principal executive officer and principal
financial officer, does not expect that our disclosure controls and procedures
or our internal controls will prevent all error or fraud. A control system, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Further,
the design of a control system must reflect the fact that there are resource
constraints and the benefits of controls must be considered relative to their
costs. Due to the inherent limitations in all control systems, no evaluation of
controls can provide absolute assurance that all control issues and instances of
fraud, if any, have been detected. To address the material weaknesses, we
performed additional analysis and other post-closing procedures in an effort to
ensure our consolidated financial statements included in this annual report have
been prepared in accordance with generally accepted accounting principles.
Accordingly, management believes that the financial statements included in this
report fairly present in all material respects our financial condition, results
of operations and cash flows for the periods presented.
MANAGEMENT'S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible for establishing and maintaining adequate
internal control over financial reporting as defined in Rule 13a-15(f) under the
Securities Exchange Act of 1934, as amended. Our management assessed the
effectiveness of our internal control over financial reporting as of December
31, 2010. In making this assessment, our management used the criteria set forth
by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO")
in Internal Control-Integrated Framework. A material weakness is a deficiency,
or a combination of deficiencies, in internal control over financial reporting,
such that there is a reasonable possibility that a material misstatement of our
annual or interim financial statements will not be prevented or detected on a
timely basis. We have identified the following material weaknesses:
1. As of December 31, 2010, we did not maintain effective controls over
the control environment. Specifically, the board of directors does not currently
have any independent members and no director qualifies as an audit committee
financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B. Since these
entity level programs have a pervasive effect across the organization,
management has determined that these circumstances constitute a material
weakness.
2. As of December 31, 2010, we did not maintain effective controls over
financial statement disclosure. Specifically, controls were not designed and in
place to ensure that all disclosures required were originally addressed in our
financial statements. Accordingly, management has determined that this control
deficiency constitutes a material weakness.
3. As of December 31, 2010 we did not maintain adequate segregation of
duties. Accordingly, management has determined that this control deficiently
constitutes a material weakness.
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Because of these material weaknesses, management has concluded that we
did not maintain effective internal control over financial reporting as of
December 31, 2010, based on the criteria established in "Internal
Control-Integrated Framework" issued by the COSO.
INDEPENDENT REGISTERED ACCOUNTANT'S INTERNAL CONTROL ATTESTATION
This annual report includes an attestation report of our public
accounting firm regarding our internal control over financial reporting.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There have been no changes in our internal control over financial
reporting through the date of this report or during the quarter ended December
31, 2010, that materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
CORRECTIVE ACTION
Management plans to make future investments in the continuing education
of our accounting and financial staff. Specifically, we plan to seek specific
public company accounting training during 2011. Improvements in our disclosure
controls and procedures and in our internal control over financial reporting
will, however, depend on our ability to add additional financial personnel and
independent directors to provide more internal checks and balances, and to
provide qualified independence for our audit committee. We believe we will be
able to commence achieving these goals once our sales and cash flow grow and our
financial condition improves.
ITEM 9B. OTHER INFORMATION
--------------------------
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS, AND CORPORATE GOVERNANCE
----------------------------------------------------------------
The following table lists our executive officers and directors as of
March 7, 2011:
NAME AGE POSITION
------------------------ --- --------------------------
Dean Janes 45 Chairman of the Board of
Directors and Chief
Executive Officer
Xavier Aguilera (1) 62 Executive Vice President,
Chief Financial Officer,
Corporate Secretary and
Director
Christopher Sohn 50 President, Chief Operating
Officer, and Director
----------------------------
(1) Member of Audit Committee.
DEAN JANES has been our chairman and chief executive officer since our
inception in October 1993. Mr. Janes founded Imaging Services, Inc. in October
1993 which changed its name to Imaging3, Inc. in 2002. Mr. Janes was the
president and chief executive officer of Imaging Services, Inc. from 1993 to
2001, where his responsibilities included business development and overseeing
operations, sales and marketing, operations and finance. In 2001 Mr. Janes
brought Mr. Christopher Sohn on as president and chief operating officer with
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Mr. Janes taking the position of chairman and chief executive officer. His
duties remain the same with the exception of directly overseeing operations and
finance. Prior to founding Imaging3, Mr. Janes worked for COHR, Center for
Health Resources, from 1992 to 1993 as a Senior Field Service Engineer. His job
responsibilities included technical support for junior engineers and business
development of service contracts and revenues for all makes of medical imaging
equipment. From 1991 to 1992, Mr. Janes worked for Toshiba American Medical
Corporation, where his job title was National Technical Support Engineer. His
primary responsibilities were to assist service engineers throughout the United
States with problems and design errors with Cath Labs and Angio Suites. He
served as a conduit between Japan and the Service Engineers in the United
States. From 1990 to 1991, Mr. Janes worked for OEC Medical Systems, Inc. as a
Senior Field Service Engineer, where his responsibilities were to maintain,
repair and install c-arms and urology systems in the Southern California area.
From 1988 to 1990 Mr. Janes worked for Kaiser Medical Physics as an in-house
X-ray Service Engineer for Kaiser Harbor City Hospital. His responsibilities
were to maintain and repair medical imaging equipment within the hospital and
three outlying clinics. Mr. Janes also served in the United States Army Reserves
as a Biomedical engineer, where his service was from 1983 to 1991, with a tour
in the first Gulf War from December 1990 to April 1991. He majored in
Bio-Medical Electronic Engineering at the University of Colorado Technical
Institute (1984-1988). Mr. Janes is the principal inventor of Imaging3 real-time
3D medical diagnostic imaging technology. Mr. Janes is a member of MENSA.
Mr. Jane's qualifications:
o Leadership experience - Chairman of the board, founder and chief
executive officer of Imaging3 since our inception in October 1993.
o Finance experience - As founder and chief executive officer, Mr. Janes
has supervised our financial management since our inception.
o Industry experience - Mr. Janes is the founder of Imaging3 who has
developed and implemented our business plan since inception, and is
managing our submissions to the FDA. He has senior management
experience with OEC Medical Systems, Inc., Kaiser Medical Physics, the
Center for Health Resources and other firms in the industry.
o Government experience - Mr. Janes served in the United States Army
Reserves as a Biomedical engineer.
o Technology and education experience - Mr. Janes is an inventor of our
proprietary real time 3D medical diagnostic imaging technology, is a
member of MENSA, and majored in Bio-Medical Engineering at the
University of Colorado Technical Institute.
XAVIER AGUILERA has been our executive vice president, chief financial
officer, and corporate secretary since June 1999 and a director since 2005. Mr.
Aguilera's responsibilities include managing our finances, accounting, taxes,
credit facilities and interfacing and developing new relationships with banks
and other financial institutions. Prior to working for Imaging3, Mr. Aguilera
was self-employed as a consultant for Xavier Aguilera & Associates from 1997 to
1999. His responsibilities were to manage and open primary healthcare facilities
throughout Southern California. He provided property management, estate
planning, credit facility and Import/Export consulting for several businesses in
Southern California. From 1995 to 1997, Mr. Aguilera was the chief
administrative officer for East Los Angeles Doctors Hospital, where his
responsibilities were to manage administrative personnel within the hospital,
manage public relations, business development and JCAHO compliance. From 1992 to
1995, Mr. Aguilera was the chief executive officer for El Centro Human Services
Corporation, where his responsibilities were to develop and implement a
community based mental health facility consisting of eight satellite centers. He
managed a $9.4 million budget and a full time staff of 240 employees. From 1990
to 1992, Mr. Aguilera was a deputy director/administrator for Northeast
Community Clinic, where his responsibilities were to implement and administer
the clinics health programs and oversee operations. From 1988 to 1990, Mr.
Aguilera was self employed as a consultant for finance, management and
international finance. He provided these services to banks as well as businesses
throughout Southern California. From 1987 to 1988, Mr. Aguilera was vice
president of international banking marketing for California Commerce Bank, where
his responsibilities were to manage and administer a $14 million portfolio,
develop new business in the Southern California with Hispanic businesses and
develop business relationships with Northern Mexico businesses and banks. From
1981 to 1987, Mr. Aguilera was an assistant general manager/deputy director for
Banco Nacional de Mexico (BANAMEX). He was responsible for $60 million in new
deposits as well as new business development and management of commercial and
personal lending departments. He holds a bachelor degree in business from
California State University at Northridge (1983) and a certificate of medical
management from the University of California at Los Angeles (1995).
-50-
Mr. Aguilera's qualifications:
o Leadership experience - Executive vice president, chief financial
officer and corporate secretary of Imaging3 since June 1999 and
chairman of the audit committee since 2003.
o Finance experience - Mr. Aguilera is currently our chief financial
officer and had extensive experience in financial management with
other companies prior to joining us in June 1999.
o Industry experience - Mr. Aguilera has over 25 years of financial and
management experience in the medical and banking industries.
o Technology and education experience - Mr. Aguilera has a bachelor
degree in business from California State University at Northridge and
a certificate of medical management from the University of California
at Los Angeles.
CHRISTOPHER SOHN has been our president and chief operating officer
since June 2001 and a director since January 2011. As chief operating officer
for Imaging3, Mr. Sohn's responsibilities include developing international
sales, marketing and resourcing network, organizing and strategizing with
manufacturing companies and researching new sources of products from developing
countries for import into the United States, overseeing of business operations
and human resources. Prior to working for Imaging3, Mr. Sohn was president and
chief executive officer of DMI, Inc. from 1994 to 2000. As chief executive
officer for an international trading company of diagnostic medical imaging
system, Mr. Sohn's main responsibility was to develop business relationships and
dealer networks in Central and South American markets, connecting this with the
needs of Asian medical equipment manufactures as well as manufactures in the
United States and North America. Mr. Sohn has also organized and participated in
more than a dozen medical exhibitions during this period including the
Hospitalar (Brazil 1995-2000), and RSNA during the same period. From 2000 to
2001, Mr. Sohn was chief executive officer of ISOL America, Inc., where his
responsibilities included starting up an overseas headquarters for the parent
company ISOL Korea in the United States as well as setting up a distribution and
dealer network in the United States, Central and South America for ISOL's
products, which included MRI, Magnetic Resonance Imaging and Bone Desitometry
Systems. Mr. Sohn also assisted in our efforts to achieve FDA and UL approval of
its products as well as researching manufacturing partners for the assembly and
manufacture of ISOL products within the United States. Mr. Sohn majored in
biochemistry and computer science at the University of California at Los Angeles
(1978-1982).
Mr. Sohn's qualifications:
o Leadership experience - President and chief operating officer of
Imaging3 since June 2001, and previously president and chief executive
officer of DMI, Inc., an international trading company for diagnostic
medical imaging systems.
o Industry experience - Mr. Sohn has organized and participated in more
than a dozen medical exhibitions and serves and has served in senior
management positions with us and other firms in the medical imaging
systems industry.
o Technology and education experience - Mr. Sohn majored in biochemistry
and computer science at the University of California at Los Angeles.
No officer or director is required to make any specific amount or
percentage of his business time available to us. Each of our officers intends to
devote such amount of his or her time to our affairs as is required or deemed
appropriate by us.
LIMITATION OF LIABILITY AND INDEMNIFICATION OF OFFICERS AND DIRECTORS
Under the California Corporation Code, our directors will have no
personal liability to us or our stockholders for monetary damages incurred as
the result of the breach or alleged breach by a director of his "duty of care."
This provision does not apply to the directors' (i) acts or omissions that
involve intentional misconduct or a knowing and culpable violation of law, (ii)
acts or omissions that a director believes to be contrary to the best interests
of the corporation or its shareholders or that involve the absence of good faith
on the part of the director, (iii) approval of any transaction from which a
director derives an improper personal benefit, (iv) acts or omissions that show
a reckless disregard for the director's duty to the corporation or its
shareholders in circumstances in which the director was aware, or should have
been aware, in the ordinary course of performing a director's duties, of a risk
of serious injury to the corporation or its shareholders, (v) acts or omissions
that constituted an unexcused pattern of inattention that amounts to an
abdication of the director's duty to the corporation or its shareholders, or
-51-
(vi) approval of an unlawful dividend, distribution, stock repurchase or
redemption. This provision would generally absolve directors of personal
liability for negligence in the performance of duties, including gross
negligence.
The California Corporations Code grants corporations the right to
indemnify their directors, officers, employees and agents in accordance with
applicable law. Our bylaws provide for indemnification of such persons to the
full extent allowable under applicable law. These provisions will not alter the
liability of the directors under federal securities laws.
We intend to enter into agreements to indemnify our directors and
officers, in addition to the indemnification provided for in our bylaws. These
agreements, among other things, indemnify our directors and officers for certain
expenses (including attorneys' fees), judgments, fines, and settlement amounts
incurred by any such person in any action or proceeding, including any action by
or in the right of Imaging3, arising out of such person's services as a director
or officer of Imgagin3, any subsidiary of Imaging3 or any other company or
enterprise to which the person provides services at our request. We believe that
these provisions and agreements are necessary to attract and retain qualified
directors and officers.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers or persons controlling us pursuant
to the foregoing provisions, we have been informed that in the opinion of the
Securities and Exchange Commission, such indemnification is against public
policy as expressed in the Securities Act and is therefore unenforceable.
BOARD COMMITTEES
Our board of directors has appointed an audit committee. As of March 7,
2011, the sole member of the audit committee is Xavier Aguilera, who may not be
considered to be independent as defined in Rule 4200 of the Financial Industry
National Regulatory Authority's listing standards. The board of directors has
adopted a written charter of the audit committee. The audit committee is
authorized by the board of directors to review, with our independent
accountants, our annual financial statements prior to publication, and to review
the work of, and approve non-audit services performed by, such independent
accountants. The audit committee will make annual recommendations to the board
for the appointment of independent public accountants for the ensuing year. The
audit committee will also review the effectiveness of the financial and
accounting functions and our organization, operations and management. The audit
committee was formed on August 31, 2003. The audit committee held two meetings
during fiscal year ended December 31, 2010.
Our board of directors does not have a compensation committee so all
decisions with respect to management compensation are made by the whole board.
Our board of directors does not have a nominating committee. Therefore, the
selection of persons or election to the board of directors was neither
independently made nor negotiated at arm's length.
REPORT OF THE AUDIT COMMITTEE
Our audit committee has reviewed and discussed our audited financial
statements for the fiscal year ended December 31, 2010 with senior management.
The audit committee has reviewed and discussed with management our audited
financial statements. The audit committee has also discussed with M&K CPAS,
PLLC, our independent auditors, the matters required to be discussed by the
statement on Auditing Standards No. 61 (Communication with Audit Committees) and
received the written disclosures and the letter from M&K required by
Independence Standards Board Standard No. 1 (Independence Discussion with Audit
Committees). The audit committee has discussed with M&K the independence of M&K
as our auditors. Finally, the audit committee has considered whether the
independent auditor's provision of non-audit services to us is compatible with
the auditors' independence. Based on the foregoing, our audit committee has
recommended to the board of directors that our audited financial statements be
included in our Annual Report on Form 10-K for the fiscal year ended December
31, 2009 for filing with the United States Securities and Exchange Commission.
Our audit committee did not submit a formal report regarding its findings.
-52-
AUDIT COMMITTEE
XAVIER AGUILERA
Notwithstanding anything to the contrary set forth in any of our
previous or future filings under the Securities Act of 1933, as amended, or the
Securities Exchange Act of 1934, as amended, that might incorporate this report
in future filings with the Securities and Exchange Commission, in whole or in
part, the foregoing report shall not be deemed to be incorporated by reference
into any such filing.
CODE OF CONDUCT
We have adopted a code of conduct that applies to all of its directors,
officers and employees. The text of the code of conduct has been posted on our
Internet website and can be viewed at www.imaging3.com. Any waiver of the
provisions of the code of conduct for executive officers and directors may be
made only by our audit committee or the full board of directors and, in the case
of a waiver for members of the audit committee, by the board of directors. Any
such waivers will be promptly disclosed to our shareholders.
COMPLIANCE WITH SECTION 16(A) OF EXCHANGE ACT
Our affiliates who are members of our management voluntarily comply
with Section 16 of the Securities Exchange Act of 1934, as amended, even though
we do not have securities registered under Section 12 of Exchange Act. Section
16(a) of the Exchange Act requires a registrant's officers and directors, and
certain persons who own more than 10% of a registered class of a registrant's
equity securities (collectively, "Reporting Persons"), to file reports of
ownership and changes in ownership ("Section 16 Reports") with the Securities
and Exchange Commission. Reporting Persons are required by the SEC to furnish
the registrant with copies of all Section 16 Reports they file.
Based solely on our review of the copies of such Section 16 Reports
received by us, or written representations received from certain Reporting
Persons, all Section 16(a) filing requirements that would be applicable to our
Reporting Persons (i.e. if our securities were registered under Section 12 of
the Exchange Act) during and with respect to the fiscal year ended December 31,
2010 have been complied with on a timely basis. For transactions occurring
during the fiscal year ending December 31, 2009, Mr. Janes, our chief executive
officer, filed one Form 4 late covering a total of one transaction.
ITEM 11. EXECUTIVE COMPENSATION
-------------------------------
COMPENSATION DISCUSSION AND ANALYSIS
The following Compensation Discussion and Analysis describes the
material elements of compensation for our executive officers identified in the
Summary Compensation Table ("Named Executive Officers"), and executive officers
that we may hire in the future. As more fully described below, our board of
directors makes all decisions for the total direct compensation of our executive
officers, including the Named Executive Officers. We do not have a compensation
committee, so all decisions with respect to management compensation are made by
the whole board.
COMPENSATION PROGRAM OBJECTIVES AND REWARDS
Our compensation philosophy is based on the premise of attracting,
retaining, and motivating exceptional leaders, setting high goals, working
toward the common objectives of meeting the expectations of customers and
stockholders, and rewarding outstanding performance. Following this philosophy,
in determining executive compensation, we consider all relevant factors, such as
the competition for talent, our desire to link pay with performance in the
future, the use of equity to align executive interests with those of our
stockholders, individual contributions, teamwork and performance, and each
executive's total compensation package. We strive to accomplish these objectives
by compensating all executives with total compensation packages consisting of a
combination of competitive base salary and, once we grow more and increase our
staff, incentive compensation. Because of our small size and staff to date, we
have not yet adopted a management equity incentive plan, nor have we yet used
equity incentives as part of our management compensation policy.
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While we have not hired at the executive level significantly since
inception because our business has not grown sufficiently to justify increasing
staff, we expect to grow and hire in the future. Our Named Executive Officers
have been with us for many years and their compensation has basically been
static, based primarily on levels at which we can afford to retain them, and
their responsibilities and individual contributions. To date, we have not
applied a formal compensation program to determine the compensation of the Named
Executives. In the future, as we and our management team expand, our board of
directors expects to add independent members, form a compensation committee
comprised of independent directors, adopt a management equity incentive plan and
apply the compensation philosophy and policies described in this section of the
10K.
The primary purpose of the compensation and benefits described below is
to attract, retain and motivate highly talented individuals when we do hire, who
will engage in the behaviors necessary to enable us to succeed in our mission
while upholding our values in a highly competitive marketplace. Different
elements are designed to engender different behaviors, and the actual incentive
amounts which may be awarded to each Named Executive Officer are subject to the
annual review of the board of directors. The following is a brief description of
the key elements of our planned executive compensation structure.
o Base salary and benefits are designed to attract and retain employees
over time.
o Incentive compensation awards are designed to focus employees on the
business objectives for a particular year.
o Equity incentive awards, such as stock options and non-vested stock,
focus executives' efforts on the behaviors within the recipients'
control that they believe are designed to ensure our long-term success
as reflected in increases to our stock prices over a period of several
years, growth in our profitability and other elements.
o Severance and change in control plans are designed to facilitate a
company's ability to attract and retain executives as it competes for
talented employees in a marketplace where such protections are
commonly offered. We currently have not given separation benefits to
any of our Name Executive Officers.
BENCHMARKING
We have not yet adopted benchmarking but may do so in the future. When
making compensation decisions, our board of directors may compare each element
of compensation paid to our Named Executive Officers against a report showing
comparable compensation metrics from a group that includes both publicly-traded
and privately-held companies. Our board believes that while such peer group
benchmarks are a point of reference for measurement, they are not necessarily a
determining factor in setting executive compensation as each executive officer's
compensation relative to the benchmark varies based on scope of responsibility
and time in the position. We have not yet formally established our peer group
for this purpose.
THE ELEMENTS OF IMAGING3'S COMPENSATION PROGRAM
BASE SALARY
Executive officer base salaries are based on job responsibilities and
individual contribution. The board reviews the base salaries of our executive
officers, including our Named Executive Officers, considering factors such as
corporate progress toward achieving objectives (without reference to any
specific performance-related targets) and individual performance experience and
expertise. None of our Named Executive Officers have employment agreements with
us. Additional factors reviewed by the board of directors in determining
appropriate base salary levels and raises include subjective factors related to
corporate and individual performance. For the year ended December 31, 2010, all
executive officer base salary decisions were approved by the board of directors.
Our board of directors determines base salaries for the Named Executive
Officers at the beginning of each fiscal year, and the board proposes new base
salary amounts, if appropriate, based on its evaluation of individual
performance and expected future contributions. We do not have a 401(k) Plan, but
if we adopt one in the future, base salary would be the only element of
compensation that would be used in determining the amount of contributions
permitted under the 401(k) Plan.
-54-
INCENTIVE COMPENSATION AWARDS
The Named Executives have not been paid bonuses and our board of
directors has not yet established a formal compensation policy for the
determination of bonuses. If our revenue grows and bonuses become affordable and
justifiable, we expect to use the following parameters in justifying and
quantifying bonuses for our Named Executive Officers and other officers of
Imaging3: (1) the growth in our revenue, (2) the growth in our earnings before
interest, taxes, depreciation and amortization, as adjusted ("EBITDA"), and (3)
our stock price. The board has not adopted specific performance goals and target
bonus amounts for any of its fiscal years, but may do so in the future.
EQUITY INCENTIVE AWARDS
Our board has not yet adopted a management equity incentive plan and no
stock options or other equity incentive awards have yet been made to any of our
Named Executives or other officers or employees of Imaging3. As stated
previously, in the future we plan to adopt a formal management equity incentive
plan pursuant to which we plan to grant stock options and make restricted stock
awards to members of management, which would not be assignable during the
executive's life, except for certain gifts to family members or trusts that
benefit family members. These equity incentive awards, we believe, would
motivate our employees to work to improve our business and stock price
performance, thereby further linking the interests of our senior management and
our stockholders. The board will consider several factors in determining whether
awards are granted to an executive officer, including those previously
described, as well as the executive's position, his or her performance and
responsibilities, and the amount of options or other awards, if any, currently
held by the officer and their vesting schedule. Our policy will prohibit
backdating options or granting them retroactively.
BENEFITS AND PREREQUISITES
At this stage of our business we have limited benefits and no
prerequisites for our employees other than health insurance and vacation
benefits that are generally comparable to those offered by other small private
and public companies or as may be required by applicable state employment laws.
We do not have a 401(k) Plan or any other retirement plan for our Named
Executive Officers. We may adopt these plans and confer other fringe benefits
for our executive officers in the future if our business grows sufficiently to
enable us to afford them.
SEPARATION AND CHANGE IN CONTROL ARRANGEMENTS
We do not have any employment agreements with our Named Executive
Officers or any other executive officer or employee of Imaging3. None of them
are eligible for specific benefits or payments if their employment or engagement
terminates in a separation or if there is a change of control.
EXECUTIVE COMPENSATION
The following table summarizes compensation paid or accrued by us for
the years ended December 31, 2010 and December 31, 2009 for services rendered in
all capacities, by our chief executive officer and our other most highly
compensated executive officers during the fiscal years ended December 31, 2010
and December 31, 2009.
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SUMMARY COMPENSATION TABLE
---------------------- ------- ----------- -------- ---------- --------------- --------------- -------------- ----------
Non-Equity Non-Qualified
Name and Incentive Deferred
Principal Position Option Plan Compensation All Other
(1) Year Salary Bonus Awards Compensation Earnings Compensation Total
---------------------- ------- ----------- -------- ---------- --------------- --------------- -------------- ----------
Dean Janes, 2009 $149,604 0 0 0 0 0 $149,604
Chief Executive 2010 $149,604 0 0 0 0 0 $149,604
Officer
Christopher Sohn, 2009 $125,008 0 0 0 0 0 $125,008
President and Chief 2010 $125,008 0 0 0 0 0 $125,008
Operating Officer
Xavier Aguilera, 2009 $95,000 0 0 0 0 0 $95,000
Chief Financial 2010 $95,000 0 0 0 0 0 $95,000
Officer/Treasurer,
Executive Vice
President, and
Corporate Secretary
Michele Janes, 2009 $49,998 0 0 0 0 0 $49,998
Vice President of 2010 $49,998 0 0 0 0 0 $49,998
Administration
Officers as a Group 2009 $369,612 0 0 0 0 0 $369,612
2010 $369,612 0 0 0 0 0 $369,612
--------------------------------
(1) All officers serve at will without employment contracts except that Dean
Janes is employed under a consulting agreement under which we pay Mr. Janes
approximately $12,000 per month until either party terminates the Agreement
on 30 days written notice.
EMPLOYMENT AGREEMENTS
We have not entered into any employment agreements with our executive
officers to date, and do not intend to enter into employment agreements with
them at this time. We may enter into employment agreements with them in the
future.
Dean Janes, our chief executive officer, is engaged pursuant to a
consulting agreement.
OUTSTANDING EQUITY AWARDS AT FISCAL YEAR END
None of our executive officers received any equity awards during the
year ended December 31, 2010.
EMPLOYEE BENEFIT PLANS
We have not yet, but may in the future, establish a management stock
option plan pursuant to which stock options may be authorized and granted to the
executive officers, directors, employees and key consultants of Imaging3. In the
event we establish the stock option plan, we expect to authorize approximately
16,000,000 shares or more for future issuance.
DIRECTOR COMPENSATION
None of our directors received any compensation for their respective
services rendered to us as directors during the year ended December 31, 2010.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
--------------------------------------------------------------------------------
The following table sets forth the names of our executive officers and
directors and all persons known by us to beneficially own 5% or more of the
issued and outstanding common stock of Imaging3 at March 7, 2011. Beneficial
ownership is determined in accordance with the rules of the Securities and
Exchange Commission. In computing the number of shares beneficially owned by a
person and the percentage of ownership of that person, shares of common stock
subject to options held by that person that are currently exercisable or become
exercisable within 60 days of March 7, 2011 are deemed outstanding even if they
have not actually been exercised. Those shares, however, are not deemed
outstanding for the purpose of computing the percentage ownership of any other
person. The percentage ownership of each beneficial owner is based on
380,420,723 outstanding shares of common stock. Except as otherwise listed
below, the address of each person is c/o Imaging3, Inc., 3200 W. Valhalla Drive,
Burbank, California 91505. Except as indicated, each person listed below has
sole voting and investment power with respect to the shares set forth opposite
such person's name.
NUMBER OF SHARES
NAME, TITLE AND ADDRESS BENEFICIALLY OWNED (1) PERCENTAGE OWNERSHIP
------------------------------------------------------- ---------------------- --------------------
Dean Janes (includes shares owned by wife, Michele 59,576,328(2) 15.7%
Janes), Chairman and Chief Executive Officer
Christopher Sohn, President and Chief Operating Officer 23,000,000 6.0%
Xavier Aguilera, Director, Chief Financial 200,000 *
Officer/Treasurer, Executive Vice President, and
Secretary
All current Executive Officers as a Group 82,776,328 21.7%
------------------
* Less than 1%.
(1) Except as pursuant to applicable community property laws, the persons named
in the table have sole voting and investment power with respect to all
shares of common stock beneficially owned. The total number of issued and
outstanding shares and the total number of shares owned by each person does
not include unexercised warrants and stock options, and is calculated as of
March 7, 2011.
(2) Does not include 125,000 shares of our common stock owned by Alliance
Acquisitions Inc. Mr. Janes is an officer, director, and minority
shareholder of Alliance Acquisitions, Inc., however, he disclaims any
beneficial ownership of the shares of our common stock owned by Alliance
Acquisitions, Inc. because he has no dispositive or voting power over those
shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
--------------------------------------------------------------------------------
Mr. Janes, Imaging3, and UBS Financial Services entered into an
arrangement pursuant to which Mr. Janes had agreed to invest in us, using the
proceeds from the sale by Mr. Janes of a portion of his existing shares in the
open market. Effective March 23, 2009 and applicable retroactively to February
4, 2008, Mr. Janes modified and terminated his program with Imaging3, Inc. and
UBS Financial Services. Under the modification, Mr. Janes will not have the
right to purchase any shares of our common stock from the proceeds of his sales
of stock in the open market through UBS Financial Services. Furthermore,
effective March 23, 2009, Mr. Janes ceased sales of his common stock in the open
market through UBS Financial Services. Mr. Janes sold a total of 7,557,374
shares of his common stock in Imaging3 in the open market through UBS Financial
Services from February 4, 2008 to March 23, 2009, resulting in net proceeds to
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Mr. Janes of approximately $615,885.34. Since February 4, 2008, Mr. Janes has
loaned substantially all of those proceeds (i.e. $610,039.35 of the $615,885.34
net proceeds) to us without interest, payable to Mr. Janes on demand.
Originally, Mr. Janes had the right to convert those advances into shares of our
common stock, at an aggregate conversion price approximately equal to the net
proceeds from his stock sales, although no such conversions were ever made.
Under the modifications, Mr. Janes does not have the right to convert any of the
advances into shares of common stock. Instead, Mr. Janes and Imaging3 modified
Mr. Janes' demand notes into long-term noninterest bearing loans payable in full
by us on or before December 31, 2012. On December 15, 2008, we prepaid
$140,039.35 of the outstanding balance of these promissory notes to Mr. Janes.
On November 5, 2009, we prepaid $470,000 of the outstanding balance of these
promissory notes to Mr. Janes. We do not intend to resume or to engage in the
future in any other program similar to the one previously conducted with UBS
Financial Services.
As disclosed in our reports on Form 8-K filed with the Securities and
Exchange Commission, during the period from January 25, 2008 to March 23, 2009,
our chief executive officer sold a portion of our stock owned by him through UBS
Financial Services, Inc., a registered member of FINRA, in the open market in a
series of transactions under Rule 144 of the Securities Act of 1933, as amended.
Our chief executive officer then used the net proceeds of those sales to make
loans to us. Initially under the program with UBS, our chief executive officer
had the right to convert those loans into newly issued shares of our common
stock at the same price at which he sold his shares in the open market. The
program was modified to provide that those loans were not convertible into
shares but rather became long-term noninterest bearing loans to us. As a result,
no shares of our common stock were issued to our chief executive officer during
the UBS program or from any notes issued to him from the program. We terminated
the program in March 2009 when we realized that the program with UBS could be
deemed to be the indirect sale of securities by Imaging3 itself without
registration in violation of the Securities Act of 1933, as amended, even though
there was compliance with the conditions of Rule 144, and even after the program
was modified to eliminate the convertibility of the loans made by our chief
executive officer. While we disagree with this interpretation of the UBS
program, we recognize that claims can be made against us for the indirect public
sale of securities without registration as required by the Securities Act of
1933, as amended. We are subject to the risk that purchasers of securities from
our chief executive officer during the program could attempt to seek the
rescission of those sales on the basis that the shares sold should have first
been registered with the Securities and Exchange Commission. If purchasers were
to be successful in making those rescission claims against us and our chief
executive officer, or if the Securities and Exchange Commission were to seek an
enforcement action against us for such sales, we could experience a material
adverse impact on its financial condition and operating results.
To date, we have not been notified of any claim or action nor have we
been threatened with one. Management presently believes that we will not be
subject to private claims or an enforcement action from the Securities and
Exchange Commission because (a) we fully disclosed the UBS program in public
reports filed with the Securities and Exchange Commission from the program's
inception, and modified and then terminated the program promptly upon learning
that we could be interpreted to be a plan to evade the registration requirements
of the Securities Act of 1933, as amended, (b) we complied with the reporting
requirements of Rule 144 of the Securities Act of 1933, as amended, and, other
than late filings for certain transactions (see above, "Security Ownership of
Certain Beneficial Owners and Management - Section 16(a) Beneficial Ownership
Reporting Compliance"), Section 16 of the Securities Exchange Act of 1934, as
amended, and (c) our stock price has appreciated substantially since our chief
executive officer sold his shares. Furthermore, we and our chief executive
officer would vigorously resist such claims on the basis that there was full
compliance with Rule 144 during the UBS program and that the program was
modified so that no new shares of our common stock were ever issued to replace
the shares sold by our chief executive officer. We cannot assure that we or our
chief executive officer would prevail in such a defense, should it ever become
necessary.
Mr. Janes is employed pursuant to a consulting agreement for $12,000
per month plus expenses. The Agreement is terminable by either party on 30 days
written notice. We owe Mr. Janes $520,328 under the consulting agreement for the
year ended December 31, 2010. On November 1, 2008, we issued a noninterest
bearing promissory note to Mr. Janes in the amount of $140,039.35, payable on
demand, for monies loaned by him to us. On March 23, 2009, we issued a
noninterest bearing promissory note to Mr. Janes in the amount of $95,000,
payable on demand, for monies loaned by him to us. On April 2, 2009, we issued a
noninterest bearing promissory note to Mr. Janes in the amount of $375,000,
payable on demand, for monies loaned by him to us. On April 13, 2010, we issued
a noninterest bearing promissory note to Mr. Janes in the amount of $66,500,
payable on demand, for monies loaned by him to us. On June 28, 2010, Mr. Janes
loaned another $100,000 to us pursuant to a noninterest bearing promissory note
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payable on demand. On August 8, 2010 Mr. Janes loaned another $100,000 to us
pursuant to a noninterest bearing promissory note payable on demand. On October
4, 2010 Mr. Janes loaned another $60,000 to us pursuant to a noninterest bearing
promissory note payable on demand. The promissory notes are payable on demand.
The notes in the principal amounts of $140,039.35, $95,000 and $375,000 have
been repaid in full by us, and the other two notes are still outstanding.
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
-----------------------------------------------
Kabani & Company, Inc., Certified Public Accountants ("KC") was our
principal auditing accountant firm for the fiscal year ended December 31, 2008.
KC has also provided other non-audit services to us. The Audit Committee
approved the engagement of KC before KC rendered audit and non-audit services to
us.
Presently and since January 5, 2009, M&K CPAS, PLLC has been and is our
principal auditing firm. The Audit Committee approved the engagement of M&K
CPAS, PLLC before M&K CPAS, PLLC rendered audit services to us.
Each year the retention of the independent auditor to audit our
financial statements, including the associated fee, is approved by the board of
directors before the filing of the previous year's Annual Report on Form 10-K.
KC AND M&K FEES
2008 2009 2010
-----------------------------
Audit Fees(1) $ 39,500 $ 29,000 $ 41,200
Audit Related Fees -0- -0- $7,500
All Other Fees(2) $ 1,350 -0- -0-
-----------------------------
$ 40,850 $ 29,000 $ 48,700
=============================
----------------------------------
(1) Audit Fees consist of fees for the audit of our financial statements and
review of the financial statements included in our quarterly reports. Of
these amounts, $39,500 was paid to KC for the year ending December 31,
2008, $29,000 was paid to M&K CPAS, PLLC for the year ending December 31,
2009, and $41,200 was paid to M&K CPAS, PLLC during the year ending
December 31, 2010. Does not include $7,500 paid by us to KC for KC's
consent to use KC's 2008 audit in this Annual Report and by reference in
our Registration Statement on Form S-3, dated on or about the date of this
Annual Report.
(2) Tax fees consist of fees for the preparation of original federal and state
income tax returns and fees for miscellaneous tax consulting services.
PRE-APPROVAL POLICIES AND PROCEDURES OF AUDIT AND NON-AUDIT SERVICES OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The audit committee's policy is to pre-approve, typically at the
beginning of our fiscal year, all audit and non-audit services, other than de
minimis non-audit services, to be provided by an independent registered public
accounting firm. These services may include, among others, audit services,
audit-related services, tax services and other services and such services are
generally subject to a specific budget. The independent registered public
accounting firm and management are required to periodically report to the full
board of directors regarding the extent of services provided by the independent
registered public accounting firm in accordance with this pre-approval, and the
fees for the services performed to date. As part of the board's review, the
board will evaluate other known potential engagements of the independent
auditor, including the scope of work proposed to be performed and the proposed
fees, and approve or reject each service, taking into account whether the
services are permissible under applicable law and the possible impact of each
non-audit service on the independent auditor's independence from management. At
audit committee meetings throughout the year, the auditor and management may
present subsequent services for approval. Typically, these would be services
such as due diligence for an acquisition, that would not have been known at the
beginning of the year.
The audit committee has considered the provision of non-audit services
provided by our independent registered public accounting firm to be compatible
with maintaining their independence. The audit committee will continue to
approve all audit and permissible non-audit services provided by our independent
registered public accounting firm.
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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
------------------------------------------------
Exhibits
EXHIBIT DESCRIPTION
------- ---------------------------------------------------------------------------------------------
3.1 Articles of Incorporation (1)
3.2 Articles of Amendment dated October 25, 2001, June 24, 2002, and August 13, 2002(1)
3.3 Bylaws (1)
3.4 Certificate of Amendment dated September 30, 2003(2)
3.5 Certificate of Amendment dated October 25, 2001(3)
3.6 Certificate of Amendment June 24, 2002(3)
3.7 Certificate of Amendment August 13, 2002(3)
10.1 Patent No. 6,754,297(3)
10.2 Consulting Agreement(3)
10.3 Assignment(3)
10.6 Commercial Promissory Note dated August 4, 2004(4)
10.7 Security Agreement(4)
10.8 Commercial Promissory Note dated April 24, 2005(5)
10.9 IR Commercial Real Estate Association Standard Industrial/Commercial Single-Tenant Lease
- Net, dated June 21, 2004 by and between Four T's, Bryan Tashjian, Ed Jr. Tashjan, Bruce
Tashjan, Greg Tashjan and Dean Janes DBA Imaging Services, Inc.(6)
10.10 Promissory Note, dated November 1, 2008 in the amount of $140,039.35, payable by
Imaging3, Inc. to Dean Janes(7).
10.11 Promissory Note, dated March 23, 2009 in the amount of $95,000, payable by Imaging3, Inc.
to Dean Janes(7)
10.12 Promissory Note, dated April 2, 2009 in the amount of $375,000, payable by Imaging3, Inc.
to Dean Janes(7)
10.13 Promissory Note, dated April 13, 2010 in the amount of $66,500, payable by Imaging3, Inc.
to Dean Janes(7)
10.14 Promissory Note, dated June 28, 2010 in the amount of $100,000, payable by Imaging3, Inc.
to Dean Janes(7)
10.15 Securities Purchase Agreement by and between Imaging3, Inc. and Cranshire Capital, L.P.,
dated October 4, 2010(8)
10.16 Series A Warrant, dated October 15, 2010 for Cranshire Capital, L.P.(9)
10.17 Series A Warrant dated October 15, 2010 for Freestone Advantage Partners, L.P.(9)
10.18 Series B Warrant, dated October 15, 2010 for Cranshire Capital, L.P.(9)
10.19 Series B Warrant, dated October 15, 2010 for Freestone Advantage Partners, L.P.(9)
10.20 Series C Warrant, dated October 15, 2010 for Cranshire Capital, L.P.(9)
10.21 Series C Warrant, dated October 15, 2010 for Freestone Advantage Partners, L.P.(9)
10.22 Registration Rights Agreement entered into by Imaging3, Inc., Cranshire Capital, L.P. and
Freestone Advantage Partners, L.P., dated October 15, 2010(9)
14.1 Code of Conduct
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification of Chief Executive Officer
32.2 Section 906 Certification of Chief Financial Officer
-----------------------
(1) Incorporated by reference to the Form 10SB/A Registration Statement
filed with the Securities and Exchange Commissioner on December 9,
2002.
(2) Incorporated by reference to Amendment No. 2 to Form SB-2 Registration
Statement filed with the Securities and Exchange Commission on October
6, 2004.
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(3) Incorporated by reference to Amendment No. 3 to Form SB-2 Registration
Statement filed with the Securities and Exchange Commission on October
21, 2004.
(4) Incorporated by reference to Amendment No. 5 to Form SB-2 Registration
Statement filed with the Securities and Exchange Commission on April
18, 2005.
(5) Incorporated by reference to Amendment No. 6 to Form SB-2 Registration
Statement filed with the Securities and Exchange Commission on July 7,
2005.
(6) Incorporated by reference to Amendment No. 8 to Form SB-2 Registration
Statement filed with the Securities and Exchange Commission on
September 9, 2005.
(7) Incorporated by reference to the Report on Form 8-K filed with the
Securities and Exchange Commission on August 30, 2010.
(8) Incorporated by reference to the Report on Form 8-K filed with the
Securities and Exchange Commission on October 5, 2010.
(9) Incorporated by reference to the Report on Form 8-K filed with the
Securities and Exchange Commission on October 21, 2010.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: March 16, 2011 IMAGING3, INC.
By: /s/ Dean Janes
--------------------------------------
Dean Janes, Chairman of the Board
and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf of
the registrant and in the capacities and on the dates indicated.
By: /s/ Dean Janes Dated: March 16, 2011
----------------------------------------------------
Dean Janes, Chairman of the Board and Chief
Executive Officer (Principal Executive Officer)
By: /s/ Xavier Aguilera Dated: March 16, 2011
----------------------------------------------------
Xavier Aguilera, Chief Financial Officer/Treasurer,
Executive Vice President, Corporate Secretary, and
Director (Principal Financial/Accounting Officer)
By: /s/ Christopher Sohn Dated: March 16, 2011
----------------------------------------------------
Christopher Sohn, President Chief Operating Officer,
and Director
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