Blurred Lines

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Imaging3 Inc.’s bankruptcy filing last year marked a spectacular flameout for a company once valued at more than $700 million. Now, the Burbank medical device maker is attempting a comeback – despite pending fraud charges and previous rejections of its product by regulators.

Imaging3, a developer of diagnostic imaging technologies, emerged from bankruptcy this month after a judge confirmed the company’s modified plan of reorganization. The company announced it would focus on resubmitting its major product, a 3-D medical image scanner, for approval by the Food and Drug Administration, which rejected the scanner in 2010. It also said Chief Executive Dean Janes would continue in his post.

But observers said the road looks rough.

The 2010 approval process continues to haunt the company: The Securities and Exchange Commission filed fraud charges against Imaging3 and Janes in June for allegedly misleading investors about FDA approvals in 2010. That could make it hard to raise more capital for the company, which is trying to get its stock trading again on the Over-the-Counter market.

Kevin Scanlon, chairman of investment group Pasadena Angels, said the fact that the company and its investors are pressing on despite so many red flags speaks to the lure of biomedical startups, which can provide huge returns.

“This is an example of another relatively good product not following what the FDA asked them to do, not getting FDA approval. And now that their CEO was (allegedly) not honest with his investors, that’s a death knell,” he said. “But if they do get FDA approval, there is enormous payoff because the company will get acquired.”

Steven Winters, managing member of San Diego’s Gemini Master Fund Ltd., a previous investor that has been issued an 8 percent stake in the reorganized company, said he remains optimistic.

“We know that it’s a company that has challenges ahead of it, but there is potential for great success as well,” he said. “This isn’t a high dividend-paying utility stock.”

Janes did not return calls for comment.


Hot commodity

Janes founded Imaging3 in 1993, primarily as a maker of 2-D X-ray imaging systems. He had previously worked as a tech support representative at Toshiba American Medical Systems and as an X-ray service engineer at Kaiser Harbor City Hospital.

In 2005, the company began trading on the OTC Bulletin Board; in 2007, it constructed the prototype of its 3-D scanner.

Imaging3 saw a meteoric rise from penny stock to biotech startup du jour in 2009. Investors were drawn to the promise of its Dominion Volumetric Imaging Scanner, which was designed to produce 3-D images of a patient’s body in real time, and they bet big that FDA approval would be imminent. Shares rose 6,000 percent in about three months, with the market capitalization of the 13-employee company topping out at more than $700 million that November.

But in October 2010, the FDA rejected the application – for the third time. The company indicated it would reapply, but never did, and it posted a loss in 2011 of $17.9 million on $1.1 million in revenue, mostly from selling other medical imaging devices. Last September, it filed for bankruptcy protection; by that time, shares had plummeted to less than a half-cent from its all-time high of $1.95.

Much of the enthusiasm around the company was encouraged by Janes. He made paid-for appearances on “Money TV,” a show carried on cable and satellite networks, saying that he expected FDA approval by the end of November 2009.

“This is definitely close to the end, if not the end of this actual process,” he said during one appearance.

Janes’ statements after the FDA rejection have become the subject of litigation by the SEC, which has alleged in a complaint filed in U.S. District Court in Los Angeles that he did not disclose the FDA’s safety and quality concerns to investors, including concerns over the device’s potential for overheating, and that some sample images the company submitted were deemed “scientifically invalid and useless.”

Janes allegedly denied in an investor conference call in November 2010 that the FDA’s rejection was safety related or involved image quality, saying there was “really and honestly not one question about the technology or its consistency.”

The SEC is seeking civil penalties and injunctions against him serving as an officer or director of a public company.

Even as the company’s losses mounted, Janes’ compensation was prodigious.

His personal stock sales and salary from 2007 to 2012 totaled around $9 million in value, according to regulatory filings. In February 2010, he transferred 2.6 million shares to a lender to pay off $1.9 million in personal debt. The value of those shares had dropped to $1,800 by the time of the bankruptcy filing.

His track record could be a hindrance to recruiting new investors. But Janes remaining as chief executive was never really an issue to the company’s board, according to Jeffrey Krieger, an attorney at Century City’s Greenberg Glusker Fields Claman & Machtinger LLP, which handled Imaging3’s bankruptcy.

“Dean Janes was the founder of the company and so there was no real question as to whether or not he was the critical person that this company needed,” he said.

The company’s legal team was able to resolve prebankruptcy lawsuits filed by shareholders against the company by issuing the litigants new shares. For now, that clears the way for Imaging3’s comeback.

Winters, whose firm has a warrant to raise its stake of the company to 12 percent, said he understood there were big risks involved.

“Any time you’re looking for home runs, you’ve got the opportunity to strike out,” he said.

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