Imaging3, Inc.

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IMAGING3 : Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-Q)

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08/14/2019 | 09:49 pm

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) dilution in the ownership of the Company through the issuance by us of
additional securities and the conversion of outstanding warrants, notes and
other securities;

(k) failure to obtain FDA approval for our new medical imaging device, which is
still in its prototype stage; and




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



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



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






Current Overview




From January 2018 to June 2019, the Company has 1) completed a critical
transition in leadership, recruiting a highly-experienced professional team, 2)
established strategic partnering with leading regulatory, marketing and medical
device R&D consulting organizations to support our objective of gaining 510(k)
marketing clearance from the FDA for our lead product, the Dominion SmartScan™
system, 3) advanced constructive debt renegotiation with existing lenders, which
resulted in several settlements in the second quarter of 2019 and July 2019, and
4) entered into a reverser merger share purchase agreement with Grapefruit
Boulevard Investments, Inc.
which was consummated July 10, 2019.



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



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



In the absence of FDA approval for our medical device, we currently do not and
cannot rely upon it as a future source of sales and revenue. We are subject to
the uncertainty of not knowing whether or when our proprietary medical device
will be approved and can be sold. Under those circumstances, management believes
that we will continue our current trend of incurring operating losses, requiring
us to raise additional capital or financing from outside sources. We have raised
$782,831 via equity and debt during 2018, and $988,500 during the six months
ended June 30, 2019, sufficient to continue Company operations, and believe that
we will be able to close on additional monies in the near future to accelerate
progress on the Company's stated plans. We cannot assure that we will be able to
raise sufficient capital or financing to maintain our business while we are
incurring operating losses, and we cannot assure that we will become profitable
if our proprietary medical device is approved by the FDA.






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Critical Accounting Policies




Our discussion and analysis of our financial condition and results of operations
are based upon our financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and
expenses, and related disclosure of contingent assets and liabilities. We
monitor our estimates on an on-going basis for changes in facts and
circumstances, and material changes in these estimates could occur in the
future. Changes in estimates are recorded in the period in which they become
known. We base our estimates on historical experience and other assumptions that
we believe to be reasonable under the circumstances. Actual results may differ
from our estimates if past experience or other assumptions do not turn out to be
substantially accurate.



We have identified the policies below as critical to our business operations and
the understanding of our results of operations.






Stock-based Compensation




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



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



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






Revenue Recognition




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



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






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Research and Development




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






Other Accounting Factors




The effects of inflation have not had a material impact on our operation, nor
are they expected to in the immediate future.



The following sets forth selected items from our statements of operations for
six months ended June 30, 2019 and for the six months ended June 30, 2018.






Six Months Six Months
Ended Ended
June 30, 2019 June 30, 2018
Net revenues $ - $ -
Cost of goods sold - -
Gross Profit - -
General and administrative expenses 880,550 6,006,236
Income (loss) from operations (880,550 ) (6,006,236 )
Total other income (expenses) (1,328,273 ) (1,589,073 )
Provision for income taxes - (800 )
Net income (loss) $ (2,208,823 ) $ (7,596,109 )





Results of Operations for the Six Months Ended June 30, 2019 as compared to the
Six Months Ended June 30, 2018.



During the six months ended June 30, 2019, we were focusing on our development
stage medical device efforts. Our legacy C-arm activity from prior years was
completely wound down in 2017. Accordingly, we had no revenues or cost of goods
sold for the six months ended June 30, 2019 and 2018.



Our operating expenses decreased from $6,006,236 in 2018 to $880,550 for the six
months ended June 30, 2019, a decrease of 85% primarily as a result of
stock-based compensation and outside consulting activity.



The Company's other expenses fluctuates as a result of derivative liability
activity and the extinguishment of debt. Currently, our net loss for the six
months ended June 30, 2019 was $2,208,823 as compared to a net loss of
$7,595,309 for the six months ended June 30, 2018.






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, although we can give no assurances in relation to future
litigation.



Three Months Three Months
Ended Ended
June 30, 2019 June 30, 2018
Net revenues $ - $ -
Cost of goods sold - -
Gross Profit - -
General and administrative expenses 685,255 334,939
Income (loss) from operations (685,225 ) (334,939 )
Total other income (expenses) 14,403,428 (530,967 )
Provision for income taxes - (800 )
Net income (loss) $ 13,718,203 $ (866,706 )




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Results of Operation for the Three Months Ended June 30, 2019 Compared to the
Three Months Ended June 30, 2018



Our operating expenses increase from $334,939 in 2018 to $685,255 for the three
months ended June 30, 2019, a increase of 105% primarily as a result of
stock-based compensation and outside consulting activity.



The Company's other expenses fluctuates as a result of derivative liability
activity and the extinguishment of debt. Currently, our net gain for the three
months ended June 30, 2019 was $13,718,203 as compared to a net loss of $866,706
for the three months ended June 30, 2018.



Liquidity and Capital Resources



Our total current assets increased to $311,589 as of June 30, 2019, from $14,214
as of December 31, 2018. The cash and cash equivalent accounts as of June 30,
2019
were $47,539 compared to $14,214 as of December 31, 2018.



Our total current liabilities decreased to $4,946,732 as of June 30, 2019 from
$5,324,379 as of December 31, 2018. The $377,647 decrease is due to a reduction
of notes payable in the amount of $1,547,189 offset by the increase in the
subscription payable of $1,571,396 for the six months ended June 30, 2019.



The cash account as of June 30, 2019 was $47,539 compared to $14,214 as of
December 31, 2018. Cash raised through financing activities was expended
primarily on day-to-day business operations and general and administrative
expenses.



During the six months ended June 30, 2019, we used $955,175 of net cash for
operating activities, as compared to $507,623 used during the six months ended
June 30, 2018. Net cash provided by financing activities for the six months
ended June 30, 2019 was $988,500, as compared to $508,223 during the six months
ended June 30, 2018.



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






Going Concern Qualification




We have incurred significant losses from operations, and such losses are
expected to continue. In their report on our financial statements as of and for
the period ended December 31, 2018, our auditors have expressed substantial
doubt about our ability to continue as a going concern. In addition, we have
limited working capital. The foregoing raises substantial doubt about our
ability to continue as a going concern. Management's plan includes, among other
things, seeking additional equity financing by selling our equity securities,
obtaining funds through the issuance of debt. 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.






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Off-Balance Sheet Arrangements



None.

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