UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

x QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For Quarterly Period Ended June 30, 2013

or

o TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition period from _______________ to ______________

Commission File Number:	000-50099
IMAGING3, INC.
(Exact name of registrant as specified in its charter)
CALIFORNIA	95-4451059
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
3200 West Valhalla Drive, Burbank, California 91505
(Address of principal executive offices) (Zip Code)
(818) 260-0930
Registrant’s telephone number, including area code
_____________________________________
(Former name, former address and former fiscal year, if changed since last report)

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 o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No o

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

Large accelerated filer	o	Accelerated filer	o
Non-accelerated filer (Do not check if a smaller reporting company)	o	Smaller reporting company	x

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date.

As of December 31, 2015, the number of shares outstanding of the registrant’s class of common stock was 204,261,393.

TABLE OF CONTENTS

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	1
	Balance Sheets at June 30, 2013 (Unaudited) and December 31, 2012	1
	Statements of Operations for the Three and Six Months Ended June 30, 2013 and 2012 (Unaudited)	2
	Statements of Cash Flows for the Six Months Ended June 30, 2013 and 2012 (Unaudited)	3
	Notes to Financial Statements (Unaudited)	4
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4.	Controls and Procedures	19
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	20
Item 1A.	Risk Factors	21
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	21
Item 3.	Defaults Upon Senior Securities	21
Item 4.	Mine Safety Disclosures	21
Item 5.	Other Information	21
Item 6.	Exhibits	22
SIGNATURES		23

PART I.            FINANCIAL INFORMATION

Item 1.              Financial Statements (Unaudited)

IMAGING3, INC.

DEBTOR IN POSSESSION

BALANCE SHEETS

AT JUNE 30, 2013 AND DECEMBER 31, 2012

	(Unaudited)
	6/30/2013			12/31/2012
ASSETS
CURRENT ASSETS:
Cash and cash equivalents	$	108,829		$	6,869
Accounts receivable, net		13,119			19,518
Prepaid expenses		2,870			2,719
Total current assets		124,818			29,106
PROPERTY AND EQUIPMENT, net		-			4,442
Total assets	$	124,818		$	33,548
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES NOT SUBJECT TO COMPROMISE:
Accounts payable and accrued expenses	$	864,616		$	158,853
Deferred revenue		54,781			114,096
Total current liabilities not subject to compromise		919,397			272,949
CURRENT LIABILITIES SUBJECT TO COMPROMISE:
Accounts payable and accrued expenses		1,833,117			2,078,182
Due to an officer		422,001			350,000
Convertible notes payable, net of discount		1,745,532			1,065,890
Total current liabilities subject to compromise		4,000,650			3,494,072
Total Current Liabilities		4,920,047			3,767,021
STOCKHOLDERS' DEFICIT:
Preferred stock, authorized shares 1,000,000; 3,000 and 0 shares issued and outstanding; 350,000 votes per share at June 30, 2013 and December 31, 2012		532,391			532,391
Common stock, no par value; authorized shares 750,000,000; 565,291,689 and 414,388,151 issued and outstanding at June 30, 2013 and December 31, 2012		27,824,156			27,824,156
Accumulated deficit		(33,151,776	)		(32,090,020	)
Total stockholders' deficit		(4,795,229	)		(3,733,473	)
Total liabilities and stockholders' deficit	$	124,818		$	33,548

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

1

IMAGING3, INC.

DEBTOR IN POSSESSION

STATEMENTS OF OPERATIONS

(UNAUDITED)

	Three months ended June 30,						Six months ended June 30,
	2013			2012			2013			2012
Net revenues	$	132,519		$	311,356		$	255,079		$	520,834
Cost of goods sold		85,425			114,370			111,508			163,721
Gross profit		47,094			196,986			143,571			357,113
Operating expenses:
General and administrative expenses		519,522			563,185			755,779			1,384,950
Total operating expenses		519,522			563,185			755,779			1,384,950
Loss from operations		(472,428	)		(366,199	)		(612,208	)		(1,027,837	)
Other income (expense):
Reorganization items, net		(175,009	)		-			(350,018	)		-
Interest expense		61,073			(229,247	)		(8,854	)		(590,129	)
Other income (expense), net		(91,568	)		-			(90,676	)		-
Gain (loss) on change in derivative liability		-			3,421,853			-			2,866,850
Total other income (expense)		(205,504	)		3,192,606			(449,548	)		2,276,721
Income (Loss) before income taxes		(677,932	)		2,826,407			(1,061,756	)		1,248,884
Provision for income taxes		-			800			-			800
Net income (loss)	$	(677,932	)	$	2,825,607		$	(1,061,756	)	$	1,248,084
Basic net income (loss) per share	$	(0.00	)	$	0.01		$	(0.00	)	$	0.00
Diluted net income (loss) per share	$	(0.00	)	$	0.00		$	(0.00	)	$	0.00
Weighted average common stock outstanding - Basic		565,291,689			478,769,742			565,291,689			447,639,669
Weighted average common stock outstanding - Diluted		565,291,689			750,000,000			565,291,689			750,000,000

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

2

IMAGING3, INC.

DEBTOR IN POSSESSION

STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED

JUNE 30, 2013 AND 2012

(UNAUDITED)

	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)	$	(1,061,756	)	$	1,248,084
Adjustments to reconcile net income (loss) to net cash used for operating activities:
Depreciation and amortization		4,442			2,299
Preferred stock issued to officer		-			244,377
Amortization of note discount		69,927			605,960
Shares issued for services		-			123,401
Loss (Gain) on change in derivative liability		-			(2,866,850	)
(Increase) / decrease in current assets:
Accounts receivable		6,399			(23,589	)
Inventory		-			(119,783	)
Prepaid expenses and other assets		(151	)		5,360
Increase / (decrease) in current liabilities:
Accounts payable		532,699			146,093
Deferred revenue		(59,315	)		(45,618	)
Equipment deposits		-			173,963
Net cash used for operating activities		(507,755	)		(506,303	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from officer advance		-			244,650
Repayments of officer advance		-			(373,918	)
Proceeds from sale of stock, net of offering costs		-			89,150
Proceeds from exercise of warrants		-			100,000
Proceeds from issuance of notes payable		609,715			-
Net cash provided for financing activities		609,715			59,882
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS		101,960			(446,421	)
CASH & CASH EQUIVALENTS, BEGINNING BALANCE		6,869			449,733
CASH & CASH EQUIVALENTS, ENDING BALANCE	$	108,829		$	3,312

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

3

IMAGING3, INC.

Notes to Financial Statements

1.           ORGANIZATION AND DESCRIPTION OF BUSINESS

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

The Company’s primary business is refurbishment and sale of medical equipment, parts and services to hospitals, surgery centers, research labs, physician offices and veterinarians.  Equipment sales include new c-arms, c-arms tables, remanufactured c-arms, used c-arm and surgical tables.  Part sales comprise new or renewed replacement parts for c-arms.

The Company has developed a proprietary medical technology designed to produce 3d medical diagnostic images in real time. We believe Imaging3 technology has the potential to contribute to the improvement of healthcare.  Our technology is designed to cause 3D images to be instantly constructed using high-resolution fluoroscopy.  These images can be used as real time references for any current or new medical procedures in which multiple frames of reference are required to perform medical procedures on or in the human body. Management believes that Imaging3 technology has extraordinary market potential in an almost unlimited number of medical applications. This technology is still in development and the Company intends to seek approval from the Food and Drug Administration (“FDA”), which will allow us to offer our product to healthcare providers.

2.           BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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

Upon emergence from bankruptcy, Imaging3 adopted fresh-start accounting which resulted in Imaging3 becoming a new entity for financial reporting purposes. Imaging3 applied fresh start accounting as of July 1, 2013. As a result of the application of fresh start accounting and the effects of the implementation of the plan of reorganization, the financial statements on or after July 1, 2013 are not comparable with the financial statements prior to that date. Refer to Note 4, “Petition for relief under Chapter 11 of the Bankruptcy Code”, for additional information.

Subsequent to the Petition Date, all expenses, gains and losses directly associated with the reorganization proceedings are reported as Reorganization items, net in the accompanying Consolidated Statement of Operations. In addition, Liabilities subject to compromise during the chapter 11 proceedings were distinguished from liabilities that were not expected to be compromised and from post-petition liabilities in the accompanying Balance Sheets.

References to “Successor” or “Successor Company” relate to Imaging3 on and subsequent to July 1, 2013. References to “Predecessor” or “Predecessor Company” refer to Imaging3 prior to July 1, 2013.

The accompanying unaudited interim financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission for the presentation of interim financial information, but do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements.  In the opinion of management, all adjustments considered necessary for a fair presentation have been included.  It is suggested that these condensed financial statements be read in conjunction with the financial statements and notes thereto included in the Company’s annual report on Form 10-K for the fiscal year ended December 31, 2012.  The Company follows the same accounting policies in preparation of interim reports.  Results of operations for the interim periods are not indicative of annual results.

A summary of the Company’s significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:

4

IMAGING3, INC.

Notes to Financial Statements

Going Concern

The Company’s financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has historically incurred net losses and through the effective date of the Chapter 11 Reorganization Plan had an accumulated deficit. The continuing losses have adversely affected the liquidity of the Company.

In view of the matters described in the preceding paragraph, recoverability of a major portion of the recorded asset amounts shown in the accompanying balance sheet is dependent upon continued operations of the Company, which in turn is dependent upon the Company’s ability to raise additional capital, obtain financing and to succeed in its future operations.  The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary as a result of the Company’s going concern uncertainty.

Management's plan regarding this matter is to, amongst other things, seek additional equity financing by selling our equity securities, increase our sales volume, and continue seeking approval from the FDA to bring to market our real-time imaging platform. We cannot assure you that funds from these sources will be available when needed or, if available, will be on terms favorable to us or to our stockholders. If we raise additional funds or settle liabilities by issuing equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities may provide for rights, preferences or privileges senior to those of the holders of our common stock. Our ability to execute our business plan and continue as a going concern may be adversely affected if we are unable to raise additional capital or operate profitably.

The Company anticipates that further equity/debt financings will be necessary to continue to fund operations in the future and there is no guarantee that such financings will be available or, if available, on acceptable terms.

Use of Estimates

In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and revenues and expenses during the reporting period.  Actual results could differ from those estimates.

Cash and Cash Equivalents

The Company considers all liquid investments with a maturity of three months or less from the date of purchase that are readily convertible into cash to be cash equivalents.  The Company maintains its cash in bank deposit accounts that may exceed federally insured limits.  The Company has not experienced any losses in such accounts. The Company had no cash equivalents at June 30, 2013.

Revenue Recognition

Revenue is recognized upon shipment, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable and collection of the related receivable is reasonably assured.  Revenue is recorded net of estimated product returns, which is based upon the Company’s return policy, sales agreements, management estimates of potential future product returns related to current period revenue, current economic trends, changes in customer composition and historical experience. The Company accrues for warranty costs, sales returns, and other allowances based on its experience. Generally, the Company extends credit to its customers and does not require collateral.  The Company performs ongoing credit evaluations of its customers and historic credit losses have been within management’s expectations and has a revenue receivables policy for service and warranty contracts.  Equipment sales usually have a one year warranty of parts and service.  After a one year period, the Company contacts the buyer to initiate the sale of a new warranty contract for one year.  Warranty revenues are deferred and recognized on a straight-line basis over the term of the contract or as services are performed.

Deferred Revenue

Deferred revenue consists substantially of amounts received from customers in advance of the Company's performance service period. Deferred revenue is recognized as revenue on a systematic basis that is proportionate to the period that the underlying services are rendered, which in certain arrangements is straight-line over the remaining contractual term or estimated customer life of an agreement.

5

IMAGING3, INC.

Notes to Financial Statements

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.

Bankruptcy Reorganization Plan

As a result in part of the Vuksich Litigation, on September 13, 2012, the Company filed a voluntary Chapter 11 petition with the federal bankruptcy court in Los Angeles, California.  On or about July 9, 2013, our Plan of Reorganization (“Plan”) was approved by the United States Bankruptcy Court.  On July 30, 2013, the order confirming the Company’s Plan became effective.  The Plan adopted by Imaging3, Inc. is a reorganizing plan.  Payments under the Plan were made by utilizing existing cash on hand, borrowings on a secured and unsecured basis, future cash flow, if any, capital raised through the sale of our common stock in private placements, and by conversion of debt to equity. For accounting purposes and convenience, the Effective Date was deemed to be July 1, 2013. There was very little activity between July 1, 2013 and July 30, 2013. The following is a brief summary of the Plan as adopted on the Effective Date:

Administrative expenses are claims for costs or expenses of administering the Company’s Chapter 11 case, and for other expenses incurred during the Chapter 11.  The Bankruptcy Code requires that all administrative claims be paid on the Effective Date of the Plan, unless a particular claimant agrees to a different treatment.  The Company paid approximately $463,146 on the Effective Date for administrative expenses.  Priority tax claims are certain unsecured income, employment and other taxes.  The Company is paying approximately $71,974 of priority tax claims to the IRS, Los Angeles County, California State Board of Equalization and City of Los Angeles in monthly installments, plus interest, through September 2017.  Secured claims are claims secured by liens on the Company’s property.  The Company has agreed to pay approximately $105,525 in cash installments, $60,247 of which are over 36 months and $45,278 of which is a one-time payment due in September 2015, for certain secured claims.  The Company issued approximately 38,290,480 shares of new common stock to pay approximately $1,073,033 of outstanding debt owed to the Class 3 Creditors (Gemini Master Fund, Ltd, Alpha Capital Anstalt, and Brio Capital, L.P.), whereupon their liens on Company assets were released.  In addition, the Company issued approximately 18,148,696 new warrants to purchase common stock to Gemini and Alpha, exercisable for a period of ten years from the Effective Date at $0.000001 per share.  The Company issued approximately 15,994,749 shares of new common stock to creditors represented by Jeffrey K. Lee as their collateral agent to pay approximately $298,142 of additional secured claims.  An additional 58,823,965 shares of new common stock are authorized to be issued by the Company to creditors represented by Dane Medley as their collateral agent to raise up to $1,000,000 of financing for the Company before and after the Effective Date, which may be in the form of collateralized debt. After the Effective Date, the Company issued 40,057,289 for $744,577 of notes and accrued interest, which represented a portion of the $1,000,000 it was authorized to raise.

General unsecured claims are unsecured claims not entitled to priority.  The Company paid approximately $1,936,402 of unsecured claims by issuing 21,513,051 shares of its new common stock pro rata among the holders of such debt.  An unsecured claim for $359,938 owed to Dean Janes, the former Chief Executive Officer of the Company, was paid in full by issuance of 3,986,949 shares of new common stock to him on the Effective Date. In addition, Dean Janes received 10,200,000 shares of new common stock, which was given to him by the Class 3 Creditors out of shares they would have received pursuant to the Chapter 11 Reorganization Plan. The Company’s common stockholders were issued 8,500,000 shares of new common stock in the Company, and all of their old common stock was cancelled.  All old outstanding preferred stock was also cancelled.  All options to acquire old common stock and warrants to purchase securities of the Company outstanding immediately prior to the Effective Date were cancelled and extinguished on the Effective Date.

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

As of January 8, 2016, the Company is in default on certain of its covenants under the Plan.  

Property & Equipment

Property and equipment are stated at cost.  Expenditures for maintenance and repairs are charged to expenses as incurred and additions, renewals and betterments are capitalized.  When property and equipment are retired or otherwise disposed of, the related cost and accumulated depreciation are removed from the respective accounts, and any gain or loss is included in operations.  Depreciation of property and equipment is provided using the straight-line method for all assets with estimated lives of three to eight years. 

6

IMAGING3, INC.

Notes to Financial Statements

Impairment of Long-Lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable through the estimated undiscounted cash flows expected to result from the use and eventual disposition of the assets. Whenever any such impairment exists, an impairment loss will be recognized for the amount by which the carrying value exceeds the fair value.

The Company tests long-lived assets, including property, plant, equipment and intangible assets subject to periodic amortization, for recoverability at least annually or more frequently upon the occurrence of an event or when circumstances indicate that the net carrying amount is greater than its fair value.  Assets are grouped and evaluated at the lowest level for their identifiable cash flows that are largely independent of the cash flows of other groups of assets.  The Company considers historical performance and future estimated results in its evaluation of potential impairment, and then compares the carrying amount of the asset to the future estimated cash flows expected to result from the use of the asset.  If the carrying amount of the asset exceeds estimated expected undiscounted future cash flows, the Company measures the amount of impairment by comparing the carrying amount of the asset to its fair value.  The estimation of fair value is generally measured by discounting expected future cash flows at the rate the Company utilizes to evaluate potential investments.  The Company estimates fair value based on the information available in making whatever estimates, judgments and projections are considered necessary.

Basic and Diluted Net Loss Per Share

Basic net loss per share is based upon the weighted average number of common shares outstanding.  Diluted net loss per share is based on the assumption that all dilutive convertible shares and stock options were converted or exercised.  Dilution is computed by applying the treasury stock method.  Under this method, options and warrants are assumed to be exercised at the beginning of the period (or at the time of issuance, if later), and as if funds obtained thereby were used to purchase common stock at the average market price during the period.  During the periods ended June 30, 2013, potentially dilutive securities were excluded from the computation of weighted average shares outstanding-diluted because their effect was anti-dilutive.

The components of basic and diluted earnings per share for the periods ended June 30, 2012 is as follows:

	Three Months Ended		Six Months Ended
	June. 30, 2012		June 30, 2012
Numerator
Net income attributable to common shareholders	$	2,825,607	$	1,248,084
Denominator
Weighted-average shares outstanding - basic		478,769,742		447,639,669
Dilutive effect of warrants and convertible notes		271,230,258		302,360,331
Weighted average shares outstanding – diluted		750,000,000		750,000,000

Derivative Financial Instruments

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

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IMAGING3, INC.

Notes to Financial Statements

Fair Value of Financial Instruments

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

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

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

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

Income Taxes

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

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

Inventory

Inventory is stated at the lower of cost or market with cost determined using the first-in, first-out method.

Research and Development

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

Due to Officer

At June 30, 2013, the Company had balances due to the Chief Executive Officer of the Company of $422,001. The amount was due on demand, interest free and was secured by the assets of the Company.  Interest was not imputed since a portion of this amount represented unpaid salaries. This debt was converted to shares of common stock effective June 30, 2013 in accordance with the Company’s Chapter 11 Reorganization Plan.

3.           ACCOUNTS RECEIVABLE

All accounts receivable are trade related.  These receivables are current and management believes are collectible except for which a reserve has been provided.  The reserve amount for uncollectible accounts was $4,502 and $4,502 as of June 30, 2013 and December 31, 2012, respectively.

8

IMAGING3, INC.

Notes to Financial Statements

4.           PETITION FOR RELIEF UNDER CHAPTER 11 OF THE BANKRUPTCY CODE

On September 13, 2012, the Company filed a voluntary petition with the federal bankruptcy court in Los Angeles, California, to enter bankruptcy under Chapter 11 of the United States Bankruptcy Code.  On or about July 9, 2013, our Plan of Reorganization was approved by the United States Bankruptcy Court.  On July 30, 2013, we emerged from bankruptcy and continued operations under the terms and conditions of our Bankruptcy Reorganization Plan as it applies to post bankruptcy operations.  The Chapter 11 Plan (the “Plan”) adopted by Imaging3, Inc. is a reorganizing plan.  Payments under the Plan were made by utilizing existing cash on hand, borrowings on a secured and unsecured basis, future cash flow, if any, capital raised through the sale of our common stock in private placements, and by conversion of debt to equity.  The effective date of the Plan was July 30, 2013 (the “Effective Date”). For accounting purposes and convenience, the Effective Date was deemed to be July 1, 2013. There was very little activity between July 1, 2013 and July 30, 2013. The following is a brief summary of the Plan as adopted on the Effective Date:

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

The Company paid approximately $463,146 on the Effective Date for administrative expenses.  Priority tax claims are certain unsecured income, employment and other taxes.

The Company is paying approximately $71,974 of priority tax claims to the IRS, Los Angeles County, California State Board of Equalization and City of Los Angeles in monthly installments, plus interest, through September 2017.  Secured claims are claims secured by liens on the Company’s property.  The Company has agreed to pay approximately $105,525 in cash installments, $60,247 of which are over 36 months and $45,278 of which is a one-time payment due in September 2015, for certain secured claims.

The Company issued approximately 38,290,480 shares of new common stock to pay approximately $1,073,033 of outstanding debt owed to the Class 3 Creditors (Gemini Master Fund, Ltd, Alpha Capital Anstalt, and Brio Capital, L.P.), whereupon their liens on Company assets were released.  In addition, the Company issued approximately 18,148,696 new warrants to purchase common stock to Gemini and Alpha, exercisable for a period of ten years from the Effective Date at $0.000001 per share.

The Company issued approximately 15,994,749 additional shares of new common stock to pay approximately $298,142 of additional secured claims.

An additional 58,823,965 shares of new common stock are authorized to be issued by the Company to raise up to $1,000,000 of financing for the Company before and after the Effective Date, which may be in the form of collateralized debt. The Company issued 40,057,289 for $744,577 of notes and accrued interest, which represented a portion of the $1,000,000 it was authorized to raise.

General unsecured claims are unsecured claims not entitled to priority.  The Company paid approximately $1,936,402 of unsecured claims by issuing 21,513,051 shares of its new common stock pro rata among the holders of such debt.

An unsecured claim for $359,938 owed to Dean Janes, the former Chief Executive Officer of the Company, was paid in full by issuance of 3,986,949 shares of new common stock to him on the Effective Date. In addition, Dean Janes received 10,200,000 shares of new common stock, which was given to him by the Class 3 Creditors out of shares they would have received pursuant to the Chapter 11 Reorganization Plan.

The Company’s common stockholders were issued 8,500,000 shares of new common stock in the Company, and all of their old common stock was cancelled.  All old outstanding preferred stock was also cancelled.  All options to acquire old common stock and warrants to purchase securities of the Company outstanding immediately prior to the Effective Date were cancelled and extinguished on the Effective Date.

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

9

IMAGING3, INC.

Notes to Financial Statements

Under Chapter 11, certain claims against the Company (“Debtor”) in existence before the filing of the petition for relief under the federal bankruptcy laws are stayed while the Debtor continues business operations as Debtor-in-possession.  These claims are reflected in the December 31, 2012 balance sheet as liabilities subject to compromise.  Additional claims (liabilities subject to compromise) may arise after the filing date resulting from rejection of executory contracts, including leases, and from the determination by the Bankruptcy Court (or agreed to by parties in interest) of allowed claims for contingencies and other disputed amounts.  Claims secured against the Debtor’s assets (secured claims) also are stayed, although the holders of such claims have the right to move the court for relief from the stay.  Secured claims are secured primarily by liens on the Debtor’s property, plant, and equipment.

The Debtor received approval from the Bankruptcy Court to pay or otherwise honor certain of its prepetition obligations, including employee wages and product warranties.

The Company’s reorganization value computed immediately before the Effective Date was estimated to be $4,100,000, which consisted of the following:

Cash in excess of normal operating requirements generated by operations	$	-
Net realizable value of asset dispositions		-
Present value of discounted cash flows of the emerging entity		4,100,000
Reorganization value over liabilities	$	4,100,000

The Company adopted fresh-start reporting because holders of existing voting shares immediately before filing and confirmation of the Plan received less than 50% of the voting shares of the emerging entity, and its reorganization value is less than the aggregate of all post-petition liabilities and allowed claims, as shown in the following table:

Post-petition current liabilities	$	919,397
Liabilities deferred pursuant to Chapter 11 proceeding		4,629,370
Total post-petition liabilities and allowed claims		5,548,767
Reorganization value		4,963,957
Excess of liabilities over reorganization value	$	584,810

The reorganization value of the Company was determined in consideration of several factors and by reliance on various valuation methods, including discounting cash flow and price/earnings and other applicable ratios.  The factors considered by the Company included all of the following:

a.    Forecasted operating and cash flow results that gave effect to the estimated impact of both of the following:

1.   Corporate restructuring and other operating program changes

2.   Limitations on the use of available net operating loss carryovers and other tax attributes resulting from the plan of reorganization and other events.

b.   The probability of the Company obtaining FDA approval for its imaging platform

c.   Market share and position

d.   Competition and general economic considerations

e.   Projected sales growth and potential profitability

f.   Changes in technology

After consideration of the Company’s debt capacity and other capital structure considerations, such as industry norms, projected earnings to fixed charges, earnings before interest and taxes to interest, free cash flow to interest, and free cash flow to debt service and other applicable ratios, and after extensive negotiations among parties in interest, it was agreed that the Company’s reorganization capital structure should be as follows:

Postpetition current liabilities	$	863,957
Common stock		4,100,000
Reorganization capital structure	$	4,963,957

10

IMAGING3, INC.

Notes to Financial Statements

The following table summarizes the adjustments required to record the reorganization and the issuance of the various securities in connection with the implementation of the plan (Plan of Reorganization Recovery Analysis):

				Recovery							Common Stock					Total Recovery
				Elimination of Debt and Equity			Surviving Debt		Payables		%			Value		$		%
Postpetition liabilities	$	619,592		$	(55,440	)	$	564,152	$	-		-		$	-	$	564,152	91	%
Claims or Interest
Secured debt		1,745,532			-			-		-		68	%		2,791,954		2,791,954	160	%
Priority tax claims		71,975			-			-		71,975		-			-		71,975	100	%
Secured accounts payable		159,318			-			-		159,318		-			-		159,318	100	%
Secured tax claims		5,775			-			-		5,775		-			-		5,775	100	%
Trade and other miscellaneous items		1,833,117			-			-		-		16	%		636,653		636,653	35	%
Unsecured, non-priority tax claims		62,737			-			-		62,737		-			-		62,737	100	%
Insider secured (but unperfected) claim		422,001			-			-		-		10	%		419,846		419,846	99	%
		4,300,455
Preferred stockholders		532,391			(532,391	)		-		-		-			-		-
Common stockholders		27,824,156			(27,572,416	)		-		-		6	%		251,547		251,547
Accumulated deficit		(33,151,776	)		33,151,776			-		-		-			-		-
	$	124,818		$	4,991,529		$	564,152	$	299,805		100	%	$	4,100,000	$	4,963,957

5.           ACCRUED EXPENSES

During 2003, the Company paid payroll net of taxes and accrued said taxes without payment due to cash flow limitations resulting from a 2002 warehouse fire that incinerated our inventory.  The Company subsequently received a tax lien in 2005 related to 2003 payroll taxes from the Internal Revenue Service and continued to accrue interest and penalty charges.  The original amount was $104,052.  In 2008, payments were made and the Internal Revenue Service issued a tax lien release for this amount and the liability carried on the Company’s books was relieved.  In 2009, the Company was notified by the Internal Revenue Service that additional payroll taxes, interest, and penalty charges were still owed.  After researching, it is believed that the Internal Revenue Service double booked the original payments made and released the lien in error.  Settlement was reached and the Company is currently paying $2,000 per month on a total liability of $49,748 as of June 30, 2013, including interest and penalties, with a potential balloon payment in one year subject to re-negotiation after one year with the IRS.

6.           INCOME TAXES

The Company’s book losses and other timing differences result in a net deferred income tax benefit which is offset by a valuation allowance for a net deferred asset of zero. The Company has concluded, in accordance with the applicable accounting standards, that it is more likely than not that the Company may not realize the benefit of all of its deferred tax assets. Accordingly, management has provided a 100% valuation allowance against its deferred tax assets until such time as management believes that its projections of future profits as well as expected future tax rates make the realization of these deferred tax assets more-likely-than-not. Significant judgment is required in the evaluation of deferred tax benefits and differences in future results from our estimates could result in material differences in the realization of these assets. The Company has recorded a full valuation allowance related to all of its deferred tax assets. The Company has performed an assessment of positive and negative evidence regarding the realization of the net deferred tax asset in accordance with FASB ASC 740-10, “Accounting for Income Taxes.” This assessment included the evaluation of scheduled reversals of deferred tax liabilities, the availability of carry forwards and estimates of projected future taxable income. The availability of the Company’s net operating loss carry forwards is subject to limitation if there is a 50% or more change in the ownership of the Company’s stock.  The provision for income taxes consists of the state minimum tax imposed on corporations of $800. The Company has adopted guidance issued by the FASB that clarifies the accounting for uncertainty in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold of more likely than not and a measurement process for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. In making this assessment, a company must determine whether it is more likely than not that a tax position will be sustained upon examination, based solely on the technical merits of the position and must assume that the tax position will be examined by taxing authorities. The Company’s policy is to include interest and penalties related to unrecognized tax benefits in income tax expense.  The Company has not recognized any unrecognized tax benefits and does not have any interest or penalties related to uncertain tax positions as of June 30, 2013.

11

IMAGING3, INC.

Notes to Financial Statements

7.           NOTES PAYABLE

Convertible Notes - 2011

During the year ended December 31, 2011, the Company issued secured convertible promissory notes in the total principal amount of $1,200,000 from which the Company received $1,000,000 of cash.  The notes had no stated rate of interest.  The convertible promissory notes were convertible into shares of the Company’s common stock at a rate the lesser of (a) $0.10 per share, or (b) 80% of the average of the three (3) lowest daily VWAP’s (volume weighted average prices) during the 22 consecutive trading days immediately preceding the applicable conversion date, but not less than $0.05 per share, subject to full ratchet anti-dilution provisions.  The notes included a total of 12,000,000 warrants that also had full ratchet anti-dilution provisions and other potential adjustments.  On their face, they were exercisable at $0.10 per share for a period of five years from the date of issue.  The notes were secured by all personal property of the Company, including inventory, equipment, contract rights including all intangible assets, etc.  The Company incurred financing costs of $15,250 related to the issuance of the convertible note and warrants.  These financing costs have been deferred and are being amortized on a straight line basis over the life of convertible promissory note.  It was determined that the convertible notes and warrants included embedded derivatives.

A discount on the convertible promissory notes totaled $1,200,000.  This discount is amortized using the effective interest method over the term of the note.  The notes were due in October 2012 and the remaining note discount of $907,397 was amortized during the nine months ended September 30, 2012. During 2012, $407,133 of these convertible notes were converted into 73,655,130 shares of common stock at the option of the note holder. The remaining balance of convertible notes and accrued interest was settled by the issuance of common shares in connection with the Company’s Chapter 11 Reorganization Plan.

Convertible Notes – 2012 and 2013

During 2012 and the six months ended June 30, 2013, respectively, the Company issued convertible promissory notes in the aggregate amount of $342,950 and $652,215, for a total of $995,165. The notes are convertible into shares of common stock at 80% of the average 5 closing prices immediately preceding the applicable conversion date, but not less than $0.0119 per share. The conversion features were determined to be a derivative liability. In connection with these notes, the Company recognized a note discount of $71,545. Amortization of these note discounts amounted to $1,618 and $69,927 during 2012 and 2013, respectively. The notes were settled by the issuance of common shares in connection with the Company’s Chapter 11 Reorganization Plan.

8.           STOCKHOLDERS’ EQUITY

Preferred Stock

Successor

Upon confirmation of the Company’s Chapter 11 Reorganization Plan, the Company is authorized to issue 1,000,000 shares of preferred stock, no par value. The rights, privileges, and preferences of the preferred stock are to be determined by the Company’s board of directors and may be issued in series. As of June 30, 2013, there were no shares of preferred stock outstanding.

Predecessor

Prior to the Chapter 11 Reorganization Plan, the Company was authorized to issue up to 1,000,000 shares of preferred stock.  During 2012, the Company issued 3,000 shares of Series A Preferred Stock to the Company’s prior Chief Executive Officer. These shares were valued at $532,391 and recognized as an expense between 2011 and 2012.

Predecessor Series A Preferred Stock

These shares had the right to receive dividends, when declared, on a ratable basis with the holders of the Company’s common stock based on the number of shares of Series A Preferred Stock then outstanding in relation to the total number of shares of Series A Preferred Stock and common stock then outstanding.  These shares had voting rights that permitted the holders to vote 350,000 votes for each share of Series A Preferred Stock.  The holders of Series A Preferred Stock would vote with the holders of common stock as one class.  In the event of liquidation, dissolution, or winding up of the Company, the Series A Preferred Stock then outstanding would be entitled to be paid a preference of $0.001 per share of the then outstanding Series A Preferred Stock.

The holder of the preferred stock along with other common share holdings, represented a controlling voting interest in the Company.  These shares of Series A Preferred Stock were cancelled pursuant to the Company’s Chapter 11 Reorganization Plan.

12

IMAGING3, INC.

Notes to Financial Statements

Common Stock

Successor

The Company is authorized to issue 1,000,000,000 shares of no par value common stock. Upon confirmation of the Chapter 11 Reorganization Plan, the Company reorganized by issuing 138,544,393 shares of common stock and 18,148,696 warrants to purchase common stock at an exercise price of $0.000001 per share.

Predecessor

Prior to the Chapter 11 Reorganization Plan, the Company was authorized 750,000,000 shares of no par value common stock.

There was no common stock transactions in the predecessor company during the six months ended June 30, 2013.

Warrants

In connection with previous financing transactions, the Company issued warrants to purchase common stock. These warrants included provisions that could result in a variable exercise price or a variable number of shares to be issued based on specified full-ratchet anti-dilution provisions. Upon confirmation of the Chapter 11 Reorganization Plan, all pre-petition warrants to purchase common stock were cancelled.

Pursuant to the Chapter 11 Reorganization Plan, the Company issued 7,861,472 and 10,287,224 warrants to Gemini Master Fund, Ltd and Alpha Capital, respectively. These warrants are exercisable at an exercise price of $0.000001 per share and expire July 30, 2023.

9.           DERIVATIVE LIABILITIES

The Company’s only asset or liability measured at fair value on a recurring basis was its derivative liability associated with warrants to purchase common stock and the conversion feature embedded in convertible promissory notes, all of which were cancelled or settled with successor company shares and/or warrants on the effective date of the Company’s Chapter 11 Reorganization Plan.

In connection with previous financing transactions, the Company issued warrants to purchase common stock and convertible promissory notes. These instruments included provisions that could result in a variable exercise price or a variable number of shares to be issued based on specified full-ratchet anti-dilution provisions. The “reset” provisions were triggered in the event the Company subsequently issued common stock, stock warrants, stock options or convertible debt with a stock price, exercise price or conversion price lower than contractually specified amounts. Upon triggering the “reset” provisions, the exercise / conversion price of the instrument would be reduce and/or the number of shares issuable upon exercise / conversion of the instrument would increase. In addition, the Company’s convertible notes were convertible at a price based on a discount of 80% of the volume weighted average price (VWAP) for a specified period prior to conversion. Accordingly, pursuant to ASC 815, these instruments were not considered to be solely indexed to the Company’s own stock and were not afforded equity treatment. As of December 31, 2012, the fair value of the Company’s derivative liabilities was estimated at $0 and management estimated that there was no change in value during the six months ended June 30, 2013.

10.         COMMITMENTS AND CONTINGENCIES

Litigation

The Company was involved in the following additional litigation: Securities and Exchange Commission v. Imaging3 & Dean Janes, Civil Action No. CV13-04616 GAF (AJWx) (U.S. Dist. Ct., C.D. Ca.), for which Fulbright & Jaworski LLP is counsel of record.  The Company settled this action by entering into a Deferred Prosecution Agreement with the SEC in which the Company covenanted to comply with federal and state securities laws through December 31, 2017, among other covenants.

13

IMAGING3, INC.

Notes to Financial Statements

On September 13, 2012, the Company filed In re Imaging3, Inc., Case No.  2:12-bk-41206-NB (Bankr. C.D. Ca.) (the “Bankruptcy Case”), a voluntary petition under Chapter 11 of Title 11 of the United States Code.  The Company’s plan of reorganization thereunder (the “Plan”) was confirmed on July 9, 2013 pursuant to the court’s Order Confirming Debtor's First Amended Chapter 11 Plan of Reorganization Dated March 5, 2013, as Modified (the “Order”).  Pursuant to the Order, the Plan became effective on July 30, 2013 (“Effective Date”).  The Plan requires that the Company pay certain obligations on the Effective Date of the Plan. Of the Company’s obligations under the Plan, the Company is delinquent with regard to the obligations described in the chart below:

Class of Claim(s)	Payment Recipient	Amount of Each Periodic Payment & Amount of Total Claim	Payment Due Date	Status of Payment
Administrative Expense Claim	Greenberg Glusker Fields Claman & Machtinger LLP	$50,000.00 (monthly) Total Claim: Approximately $900,000.00	*Greenberg Glusker agreed to be paid as follows: $50,000.00 on September 1, 2013 and thereafter no less than $50,000.00 per month on or before the 15th of each month, commencing on October 2013. Interest will be charged on the outstanding balance at the rate of 10% per annum from July 30, 2013	Not paid
Administrative Expense Claim	Mentor Group	Approx. $18,000	Effective Date	Not paid
Priority Tax Claims	IRS	$1,484.00 (monthly) Total Claim: $53,240.24	Monthly payment of $1,484 until 9/12/2017	Not Paid
Priority Tax Claims	State Board of Equalization	$341.00 (monthly) Total Claim: $14,917.94	Monthly payment of $341 until 9/12/2017 Modified by Stipulation Dated June 23, 2015 as follows: 1.   Pay the balance of the Administrative Claim in the amount of $196.01 2.   Pay all of the arrearages for Priority Tax Claims by payment of $6,240.70 3.   Cure post-Stipulation Effective Date taxes in the aggregate amount of $31,367.12 together with monthly interest accruing after July 1, 2015 (“Post Stipulation Effective Date Taxes”), by payment of four installments, as follows: a. $8,000 on the Stipulation Effective Date; b. $8,000 sixty days from the Stipulation Effective Date; c. $8,000 ninety days from the Stipulation Effective Date; d. the balance of the Post Stipulation Effective Date Taxes one hundred twenty days from the Stipulation Effective Date.	Paid in accordance with the terms of the Stipulation with the State Board of Equalization
Class 1	North Surgery Center, L.P.	$1,673.00 (monthly) Total Claim: $53,792.83	Pay monthly with first payment due on first business day of the first calendar month following the Effective Date	Paid as scheduled until December 2013; Not Paid in and after January 2014.
Class 2	Precision Forging Dies	Total Claim: $45,278.06	Pay in full by the first business day of the thirteenth calendar month following the Effective Date (September 1, 2014)	Not Paid
Class 9	IRS (unsecured portion of tax claims)	Total Claim: $62,736.92	Cash equal to the value of  pro rata shares of New Common Stock outstanding on the Effective Date	Not Paid

14

IMAGING3, INC.

Notes to Financial Statements

Section IV, F of the Plan provides “A creditor or party in interest may bring a motion to convert or dismiss the case under § 1112(b), after the Plan is confirmed, if there is a default in performing the Plan. If the Court orders the case converted to Chapter 7 after the Plan is confirmed, then all property that had been property of the Chapter 11 estate, and that has not been disbursed pursuant to the Plan, will revest in the Chapter 7 estate, and the automatic stay will be reimposed upon the revested property only to the extent that relief from stay was not previously granted by the Court during this case.”

In May of 2012, John M. Vuksich (“Vuksich”), a shareholder who alleges to hold shares or proxies totaling more than 30,000,000 shares in the Company (approximately 5.95 % of the outstanding stock in the Company at the time of the filing prior to the Company’s bankruptcy filing), filed a shareholder derivative action in the Los Angeles County Superior Court against the Company or (the “Vuksich Litigation”). In that litigation, Vuksich challenged certain corporate actions taken by the Company beginning in 2010, including the Company’s amendments to its articles of incorporation authorizing the Company to increase the authorized number of shares of common stock and to authorize the issuance of preferred stock. Among other things, Vuksich sought an order voiding certain other financing agreements and sought an order compelling the Company to fill vacancies on its Board of Directors. The Vuksich Litigation, which sought to alter the equity structure and management of the Company, required the Company to expend its already-limited resources both in terms of management time and attorney’s fees. Although the Company believed that the Vuksich Litigation could and would be defeated, it decided that the resources of the Company were better directed towards its business objectives in an effort to create value for the Company’s stakeholders.

There are currently four appeals pending in the “Vuksich Litigation.” If the Ninth Circuit Court of Appeals reverses the Bankruptcy Court and the District Court in any of these appeals, it could have a negative effect on the confirmed Plan:

In addition, appeals of four of the Court’s orders in the Bankruptcy Case remain outstanding, specifically:

•           Order Denying Motion to Dismiss Chapter 11 Case, Case No.: 13-56695 (9th Cir.), appeal filed September 30, 2013, appealing the District Court’s dismissal of the initial appeal of the order.

•           Order Disallowing Claims Nos. 23 and 24, Case No.: 14-55499 (9th Cir.), appeal filed March 31, 2014, appealing the District Court’s order affirming the order of the Bankruptcy Court.

•           Order Denying Motion for Abandonment of Potential Claims Against Officers and Directors, Case No.: 14-55521 (9th Cir.), appeal filed April 2, 2014, appealing the District Court’s order affirming the order of the Bankruptcy Court.

•           Order Confirming Debtor’s First Amended Plan, Case No.: 14-55466 (9th Cir.), appeal filed March 24, 2014, appealing the District Court’s order affirming in part and reversing in part the order of the Bankruptcy Court.

The above appeals were heard by the Ninth Circuit Court of Appeals on December 9, 2015.  The court ruled in favor of the company on December 18, 2015.

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 $42,824 as of December 31, 2014, including interest and penalties, with a potential balloon payment in one year subject to re-negotiation after one year with the IRS.  The Company has hired tax counsel to re-negotiate the current tax debt with the IRS.

The Company may have unresolved payroll tax matters for various fiscal years through 2014. Additional amounts may be assessed by the taxing authorities upon final resolution. As of June 30, 2013, the Company is unable to estimate the range of additional amounts, if any, that may be assessed upon final resolution.

11.         RELATED PARTY TRANSACTION

The Company had a consulting agreement with the prior Chief Executive Officer of the Company under which he received compensation of $12,000 per month.  The prior Chief Executive Officer provided management, administrative, marketing, and financial services to the Company pursuant to the consulting agreement which was terminable on 30 days notice by either party.  The consulting agreement commenced on January 1, 2002 and continued until the adoption of the Company’s Chapter 11 Reorganization Plan, when it was terminated. As of June 30, 2013, the Company owed the former CEO $422,001 pursuant to this consulting agreement and advances.

15

Item 2.              Management’s Discussion and Analysis of Financial Condition and Results of Operations

Cautionary Statements

This Form 10-Q may contain “forward-looking statements,” as that term is used in federal securities laws, about Imaging3, Inc.’s financial condition, results of operations and business.  These statements include, among others:

·   statements concerning the potential benefits that Imaging3, Inc. (“Imaging3” or the “Company”) may experience from its business activities and certain transactions it contemplates or has completed; and

·   statements of Imaging3’s expectations, beliefs, future plans and strategies, anticipated developments and other matters that are not historical facts.  These statements may be made expressly in this Form 10-Q.  You can find many of these statements by looking for words such as “believes,” “expects,” “anticipates,” “estimates,” “opines,” or similar expressions used in this Form 10-Q.  These forward-looking statements are subject to numerous assumptions, risks and uncertainties that may cause Imaging3’s actual results to be materially different from any future results expressed or implied by Imaging3 in those statements.  The most important facts that could prevent Imaging3 from achieving its stated goals include, but are not limited to, the following:

(a) volatility or decline of Imaging3’s stock price;

(b) potential fluctuation in quarterly results;

(c) failure of Imaging3 to earn revenues or profits;

(d) inadequate capital to continue or expand its business, inability to raise additional capital or financing to implement its business plans;

(e) failure to commercialize Imaging3’s technology or to make sales;

(f) changes in demand for Imaging3’s products and services;

(g) rapid and significant changes in markets;

(h) litigation with or legal claims and allegations by outside parties;

(i) insufficient revenues to cover operating costs, resulting in persistent losses;

(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; and

(k) failure of Imaging3 to obtain approval of its proprietary medical imaging technology and device from the Federal Food and Drug Administration.

There is no assurance that Imaging3 will be profitable.  Imaging3 may not be able to successfully develop, manage or market its products and services. Imaging3 may not be able to attract or retain qualified executives and technology personnel. Imaging3 may not be able to obtain customers for its products or services. Imaging3’s products and services may become obsolete. Government regulation may hinder Imaging3’s business. Imaging3 may not be able to obtain the required approvals from the United States Food and Drug Administration for its products and services. Additional dilution in outstanding stock ownership may be incurred due to the issuance of more shares, warrants and stock options, or the exercise of outstanding warrants and stock options, or the conversion of notes. Imaging3 is exposed to other risks inherent in its businesses.

Because the statements are subject to risks and uncertainties, actual results may differ materially from those expressed or implied by the forward-looking statements.  Imaging3 cautions you not to place undue reliance on the statements, which speak only as of the date of this Form 10-Q.  The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward-looking statements that Imaging3 or persons acting on its behalf may issue.  Imaging3 does not undertake any obligation to review or confirm analysts’ expectations or estimates or to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date of this Form 10-Q, or to reflect the occurrence of unanticipated events.

16

Current Overview

Though our efforts have been to market our refurbished equipment, a significant portion of our sales and revenues derive from services and the sale of parts, either from extended warranty purchases at the time of purchase of the refurbished equipment, or service contracts and time and material revenue realized upon warranty expiration, the majority of which is realized one year from equipment purchase as warranties expire.

Our sales effort through direct mail, broadcast facsimile and broadcast email to thousands of potential customers throughout the United States generates leads of potential customers desiring to purchase equipment either immediately or in the course of one year.  This lead generation through direct mail, broadcast facsimile and email will continue on a quarterly basis with the goal of increasing the total number of our leads for our sales staff.  Management expects that the marketing program will also eventually help stabilize the amount of refurbished equipment sold on a monthly basis, since the carry-over of leads not looking for immediate purchase will overlap with the immediate sales leads. The greater the number of leads generated, whether immediate or long term, the greater the opportunity to eventually create a consistent number of sales.

Critical Accounting Policies

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

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

Revenue Recognition

Revenue is recognized upon shipment, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable and collection of the related receivable is reasonably assured.  Revenue is recorded net of estimated product returns, which is based upon the Company’s return policy, sales agreements, management estimates of potential future product returns related to current period revenue, current economic trends, changes in customer composition and historical experience. The Company accrues for warranty costs, sales returns, and other allowances based on its experience. Generally, the Company extends credit to its customers and does not require collateral.  The Company performs ongoing credit evaluations of its customers and historic credit losses have been within management’s expectations and has a revenue receivables policy for service and warranty contracts.  Equipment sales usually have a one year warranty of parts and service.  After a one year period, the Company contacts the buyer to initiate the sale of a new warranty contract for one year.  Warranty revenues are deferred and recognized on a straight-line basis over the term of the contract or as services are performed.

Deferred Revenue

Deferred revenue consists substantially of amounts received from customers in advance of the Company's performance service period. Deferred revenue is recognized as revenue on a systematic basis that is proportionate to the period that the underlying services are rendered, which in certain arrangements is straight-line over the remaining contractual term or estimated customer life of an agreement.

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.

Although we are unaware of any major seasonal aspect that would have a material effect on the financial condition or results of operations, the first quarter of each fiscal year is always a financial concern due to slow collections after the holidays.

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Results of Operations for the Six Months Ended June 30, 2013 Compared to the Six Months Ended June 30, 2012

We had revenues in the second quarter of 2013 of $255,079 compared to $520,834 in 2012, which represents a 51% decrease.  The decrease in revenue is due to decreased sales activity. Our equipment sales were $11,000 in the first six months of 2013, compared to $230,500 in the first six months of 2012, representing a decrease in equipment sales of $219,500 in 2013 or 96%.  

Our cost of revenue was $111,508 in the second quarter of 2013 compared to $163,721 in the second quarter of 2012, which represents a decrease of $52,213 or 32%. This decrease is due in part to a decrease in machinery and equipment costs.  We had an decrease in gross profit margin in the second quarter of 2013 to $143,571 compared to $357,113 in the second quarter of 2012. Our operating expenses decreased to $755,779 in the second quarter of 2013 as compared to $1,384,950 in the second quarter of 2012, a 46% decrease mostly due to decreased legal fees. Our loss on operations decreased to $612,208 in the second quarter of 2013 compared to $1,027,837 in the second quarter of 2012, a 41% decrease.  This decrease is attributed to the overall decrease in general operating expense for this same period. Our net loss was $1,061,756 in the second quarter of 2013 compared to net income of $1,248,084 in the second quarter of 2012, primarily as a result of an increased gain on change in derivative liability in 2012.

Results of Operation for the Three Months Ended June 30, 2013 Compared to the Three Months Ended June 30, 2012

We had revenues in the second quarter of 2013 of $132,519 compared to $311,356 in 2012, which represents a 58% decrease.  The decrease in revenue is due to decreased equipment sales. Our equipment sales were $600 in the second three months of 2013, compared to $175,500 in the second three months of 2012, representing a decrease in equipment sales of $174,900 in 2013 or 100%.  

Our cost of revenue was $85,425 in the second quarter of 2013 compared to $114,370 in the second quarter of 2012, which represents a decrease of $28,945 or 26%. This decrease is due in part to a decrease in machinery and equipment costs.  We had a decrease in gross profit margin in the second quarter of 2013 to $47,094 compared to $196,986 in the second quarter of 2012. Our operating expenses decreased to$519,522 in the second quarter of 2013 as compared to $563,185 in the second quarter of 2012, an 8% decrease mostly due to decreased legal fees. Our loss on operations increased to $472,428 in the second quarter of 2013 compared to $366,199 in the same quarter of 2012, a 29% increase.  This increase is attributed mainly to the overall decrease in net revenues for this same period. Our net loss was $677,932 in the second quarter of 2013 compared to net income of $2,825,607 in the second quarter of 2012, primarily as a result of an increased gain on change in derivative liability in 2012.

Liquidity and Capital Resources

The Company's cash position was $108,829 at June 30, 2013, compared to $6,869 at December 31, 2012.  The reason for the increase in cash is primarily due to decreased expenses as well as note proceeds.

As of June 30, 2013, the Company has a working capital deficit of $4,795,229 as compared to net gain of $3,737,915 at June 30, 2012. The reason for the decrease in working capital is primarily due to the company reorganization.

Net cash used in operating activities amounted to $507,755 for the six month period ended June 30, 2013, as compared to net cash used in operating activities of $506,303 for the six month period ended June 30, 2012.  The increase in 2013 as compared to 2012 resulted from changes in the derivative liability and in accrued expenses in 2013 as compared to 2012.

Net cash provided by financing activities amounted to $609,715 and $59,882 for the six month periods ended June 30, 2013 and 2012, respectively.  The increase in 2013 as compared to 2012 resulted from an increase in proceeds from the issuance of notes payable during 2013.

The Company does not have sufficient capital to meet its current cash needs, which include the costs of compliance with the continuing reporting requirements of the Securities Exchange Act of 1934, as amended.  The Company intends to seek additional capital and long term debt financing to attempt to overcome its working capital deficit. The Company will need between $50,000 and $100,000 annually to maintain its reporting obligations.  The Company may attempt to do more private placements of its stock in the future to raise capital, but there is no assurance that the Company can raise sufficient capital or obtain sufficient financing to enable it to obtain approval of its prototype from the Federal Food and Drug Administration and to sustain monthly operations.  In order to address its working capital deficit, the Company also intends to endeavor to (i) reduce operating costs, (ii) reduce general, administrative and selling costs, (iii) increase sales of its existing products and services, and (iv) obtain the approval of the United States Food and Drug Administration to the Company’s proprietary medical imaging device so that the Company can commence marketing and selling it.  There may not be sufficient funds available to the Company to enable it to remain in business and the Company’s needs for additional financing are likely to persist.

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Going Concern Qualification

The Company has incurred significant losses from operations, and such losses are expected to continue. The Company’s auditors have included a "Going Concern Qualification" in their report for the years ended December 31, 2014, 2013, and 2012.  In addition, the Company has limited working capital. The foregoing raises substantial doubt about the Company's ability to continue as a going concern. Management's plans include seeking additional capital and/or debt financing. There is no guarantee that additional capital and/or debt financing will be available when and to the extent required, or that if available, it will be on terms acceptable to the Company. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.  The "Going Concern Qualification" might make it substantially more difficult to raise capital.

Item 3.            Quantitative and Qualitative Disclosures about Market Risk

Not applicable.

Item 4.            Controls and Procedures

Our management is responsible for establishing and maintaining disclosure controls and procedures that are designed to ensure that information required to be disclosed in our reports under the Securities Exchange Act of 1934 (the “Exchange Act”) is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the Securities and Exchange Commission (the “SEC”), and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 15d-15(e) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

At the end of the period covered by this Quarterly Report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of June 30, 2013, the disclosure controls and procedures of our Company were not effective to ensure that the information required to be disclosed in our Exchange Act reports was recorded, processed, summarized and reported on a timely basis.

Imaging 3 is undertaking to improve its internal control over financial reporting and improve its disclosure controls and procedures.  As of December 31, 2012, we had identified the following material weaknesses which still exist as of June 30, 2013 and through the date of this report:

1.  As of December 31, 2012 and as of the date of this report, we did not maintain effective controls over the control environment.  Specifically, the Board of Directors does not currently have any independent members and no director qualifies as an audit committee financial expert as defined in Item 407(d)(5)(ii) of Regulation S-B.  Since these entity level programs have a pervasive effect across the organization, management has determined that these circumstances constitute a material weakness.

2.  As of December 31, 2012 and as of the date of this report, we did not maintain effective controls over financial statement disclosure.  Specifically, controls were not designed and in place to ensure that all disclosures required were originally addressed in our financial statements.   Accordingly, management has determined that this control deficiency constitutes a material weakness.

3. As of December 31, 2012 and as of the date of this report, we did not maintain adequate segregation of duties.  Accordingly, management has determined that this control deficiently constitutes a material weakness.

Changes in Internal Control Over Financial Reporting

There were no changes in internal controls over financial reporting that occurred during the quarter ended June 30, 2013, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

This report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting.

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PART II.           OTHER INFORMATION

Item 1.              Legal Proceedings

The Company was involved in the following additional litigation: Securities and Exchange Commission v. Imaging3 & Dean Janes, Civil Action No. CV13-04616 GAF (AJWx) (U.S. Dist. Ct., C.D. Ca.), for which Fulbright & Jaworski LLP is counsel of record.  The Company settled this action by entering into a Deferred Prosecution Agreement with the SEC in which the Company covenanted to comply with federal and state securities laws through December 31, 2017, among other covenants.

On September 13, 2012, the Company filed In re Imaging3, Inc., Case No.  2:12-bk-41206-NB (Bankr. C.D. Ca.) (the “Bankruptcy Case”), a voluntary petition under Chapter 11 of Title 11 of the United States Code.  The Company’s plan of reorganization thereunder (the “Plan”) was confirmed on July 9, 2013 pursuant to the court’s Order Confirming Debtor's First Amended Chapter 11 Plan of Reorganization Dated March 5, 2013, as Modified (the “Order”).  Pursuant to the Order, the Plan became effective on July 30, 2013 (“Effective Date”).  The Plan requires that the Company pay certain obligations on the Effective Date of the Plan. Of the Company’s obligations under the Plan, the Company is delinquent with regard to the obligations described in the chart below:

Class of Claim(s)	Payment Recipient	Amount of Each Periodic Payment & Amount of Total Claim	Payment Due Date	Status of Payment
Administrative Expense Claim	Greenberg Glusker Fields Claman & Machtinger LLP	$50,000.00 (monthly) Total Claim: Approximately $900,000.00	*Greenberg Glusker agreed to be paid as follows: $50,000.00 on September 1, 2013 and thereafter no less than $50,000.00 per month on or before the 15th of each month, commencing on October 2013. Interest will be charged on the outstanding balance at the rate of 10% per annum from July 30, 2013	Not paid
Administrative Expense Claim	Mentor Group	Approx. $18,000	Effective Date	Not paid
Priority Tax Claims	IRS	$1,484.00 (monthly) Total Claim: $53,240.24	Monthly payment of $1,484 until 9/12/2017	Not Paid
Priority Tax Claims	State Board of Equalization	$341.00 (monthly) Total Claim: $14,917.94	Monthly payment of $341 until 9/12/2017 Modified by Stipulation Dated June 23, 2015 as follows: 1.   Pay the balance of the Administrative Claim in the amount of $196.01 2.   Pay all of the arrearages for Priority Tax Claims by payment of $6,240.70 3.   Cure post-Stipulation Effective Date taxes in the aggregate amount of $31,367.12 together with monthly interest accruing after July 1, 2015 (“Post Stipulation Effective Date Taxes”), by payment of four installments, as follows: a. $8,000 on the Stipulation Effective Date; b. $8,000 sixty days from the Stipulation Effective Date; c. $8,000 ninety days from the Stipulation Effective Date; d. the balance of the Post Stipulation Effective Date Taxes one hundred twenty days from the Stipulation Effective Date.	Paid in accordance with the terms of the Stipulation with the State Board of Equalization
Class 1	North Surgery Center, L.P.	$1,673.00 (monthly) Total Claim: $53,792.83	Pay monthly with first payment due on first business day of the first calendar month following the Effective Date	Paid as scheduled until December 2013; Not Paid in and after January 2014.
Class 2	Precision Forging Dies	Total Claim: $45,278.06	Pay in full by the first business day of the thirteenth calendar month following the Effective Date (September 1, 2014)	Not Paid
Class 9	IRS (unsecured portion of tax claims)	Total Claim: $62,736.92	Cash equal to the value of  pro rata shares of New Common Stock outstanding on the Effective Date	Not Paid

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Section IV, F of the Plan provides “A creditor or party in interest may bring a motion to convert or dismiss the case under § 1112(b), after the Plan is confirmed, if there is a default in performing the Plan. If the Court orders the case converted to Chapter 7 after the Plan is confirmed, then all property that had been property of the Chapter 11 estate, and that has not been disbursed pursuant to the Plan, will revest in the Chapter 7 estate, and the automatic stay will be reimposed upon the revested property only to the extent that relief from stay was not previously granted by the Court during this case.”

In addition, appeals of four of the Court’s orders in the Bankruptcy Case remain outstanding, specifically:

•           Order Denying Motion to Dismiss Chapter 11 Case, Case No.: 13-56695 (9th Cir.), appeal filed September 30, 2013, appealing the District Court’s dismissal of the initial appeal of the order.

•           Order Disallowing Claims Nos. 23 and 24, Case No.: 14-55499 (9th Cir.), appeal filed March 31, 2014, appealing the District Court’s order affirming the order of the Bankruptcy Court.

•           Order Denying Motion for Abandonment of Potential Claims Against Officers and Directors, Case No.: 14-55521 (9th Cir.), appeal filed April 2, 2014, appealing the District Court’s order affirming the order of the Bankruptcy Court.

•           Order Confirming Debtor’s First Amended Plan, Case No.: 14-55466 (9th Cir.), appeal filed March 24, 2014, appealing the District Court’s order affirming in part and reversing in part the order of the Bankruptcy Court.

The above appeals were heard by the Ninth Circuit Court of Appeals on December 9, 2015.  The court ruled in favor of the company on December 18, 2015.

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 $42,824 as of December 31, 2014, including interest and penalties, with a potential balloon payment in one year subject to re-negotiation after one year with the IRS.  The Company has hired tax counsel to re-negotiate the current tax debt with the IRS.

The Company may have unresolved payroll tax matters for various fiscal years through 2014. Additional amounts may be assessed by the taxing authorities upon final resolution. As of June 30, 2013, the Company is unable to estimate the range of additional amounts, if any, that may be assessed upon final resolution.

Item 1A.           Risk Factors

Not applicable because we are a smaller reporting company.

Item 2.              Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of equity securities during the period covered by this quarterly report.

Item 3.              Defaults Upon Senior Securities

None.

Item 4.              Mine Safety Disclosures

Not Applicable.

Item 5.              Other Information

None.

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Item 6.              Exhibits

(a)           Exhibits

EXHIBIT NO.	DESCRIPTION
31.1	Section 302 Certification of Chief Executive Officer
31.2	Section 302 Certification of Chief Financial Officer
32.1	Section 906 Certification
32.2	Section 906 Certification
101.INS	XBRL Instance Document
101.SCH	XBRL Taxonomy Extension Schema Document
101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF	XBRL Taxonomy Extension Definition Linkbase Document
101.LAB	XBRL Taxonomy Extension Label Linkbase Document
101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

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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.

	IMAGING3, INC.
Dated: January 12, 2016	By:	/s/ Dane Medley
		Dane Medley
		Chief Executive Officer and Chairman (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.

/s/ Dane Medley Dated: January 12, 2016  

Dane Medley, Chief Executive Officer

and Chairman (Principal Executive Officer)

/s/ Xavier Aguilera Dated: January 12, 2016 

Xavier Aguilera, Chief Financial Officer,

Secretary, and Executive Vice President

(Principal Financial/Accounting Officer)

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