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, 2009
or
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the Transition period from _______________ to ______________
CALIFORNIA 95-4451059
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(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
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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 proceeding 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[__] No[_X_]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check One).
Large accelerated filer [___] Accelerated filer [___] Non-accelerated filer [___] Smaller reporting company [_X_] (Do not check if a smaller reporting company) |
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes[__] No[_X_]
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date.
As of July 15, 2009, the number of shares outstanding of the registrant's class of common stock was 263,361,552.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION...........................................................................1
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)................................................................1
BALANCE SHEETS AT JUNE 30, 2009 (UNAUDITED) AND
DECEMBER 31, 2008......................................................................2
STATEMENTS OF OPERATIONS FOR THE THREE AND SIX MONTHS
ENDED JUNE 30, 2009 AND JUNE 30, 2008 (UNAUDITED)..................................... 3
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND JUNE 30, 2008 (UNAUDITED)............................................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........11
ITEM 4. CONTROLS AND PROCEDURES........................................................................15
PART II. OTHER INFORMATION.......................................................................................17
ITEM 1. LEGAL PROCEEDINGS..............................................................................17
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS....................................17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................................17
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................17
ITEM 5. OTHER INFORMATION..............................................................................17
ITEM 6. EXHIBITS.......................................................................................18
SIGNATURES ...............................................................................................19
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
IMAGING3, INC.
BALANCE SHEETS
AT JUNE 30, 2009 (UNAUDITED) AND DECEMBER 31, 2008
ASSETS
6/30/2009 12/31/2008
---------------- --------------
CURRENT ASSETS:
Cash and cash equivalents $ 58,820 $ 73,447
Accounts receivable, net 61,520 64,149
Inventory, net 333,023 328,740
Prepaid expenses 29,361 21,148
---------------- --------------
Total current assets 482,724 487,484
PROPERTY AND EQUIPMENT, NET 13,842 23,755
OTHER ASSETS 31,024 31,024
---------------- --------------
Total assets $ 527,590 $ 542,263
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 196,896 $ 175,329
Accrued expenses 2,435,588 2,270,638
Deferred revenue 138,887 119,052
Equipment deposits 128,508 116,368
Due to an officer 854,409 784,210
---------------- --------------
Total current liabilities 3,754,288 3,465,597
STOCKHOLDERS' DEFICIT:
Common stock, no par value; authorized shares 500,000,000;
263,361,552 and 249,924,052 issued and outstanding
at June 30, 2009 and December 31, 2008, respectively 8,293,647 7,763,772
Accumulated deficit (11,520,345) (10,687,106)
---------------- --------------
Total stockholders' deficit (3,226,698) (2,923,334)
---------------- --------------
Total liabilities and stockholders' deficit $ 527,590 $ 542,263
================ ==============
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The accompanying notes form an integral part of these unaudited financial statements
IMAGING3, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three month periods For the six month periods
ended June 30, ended June 30,
2009 2008 2009 2008
-------------- -------------- -------------- ---------------
NET REVENUES $ 260,127 $ 462,775 $ 574,496 $ 902,062
COST OF GOODS SOLD 131,375 218,259 257,368 294,225
-------------- -------------- -------------- ---------------
GROSS PROFIT 128,752 244,516 317,128 607,837
OPERATING EXPENSES:
General and administrative expenses 621,080 528,564 1,120,320 1,139,407
-------------- -------------- -------------- ---------------
Total operating expenses 621,080 528,564 1,120,320 1,139,407
-------------- -------------- -------------- ---------------
LOSS FROM OPERATIONS (492,328) (284,048) (803,192) (531,570)
OTHER INCOME (EXPENSE):
Interest expense (13,666) (19,091) (29,275) (36,669)
Other income - 1,977 28 1,977
-------------- -------------- -------------- ---------------
Total other income (expense) (13,666) (17,114) (29,247) (34,692)
-------------- -------------- -------------- ---------------
LOSS BEFORE INCOME TAX (505,994) (301,162) (832,439) (566,262)
PROVISION FOR INCOME TAXES 800 - 800 800
-------------- -------------- -------------- ---------------
NET LOSS $ (506,794) $ (301,162) $ (833,239) $ (567,062)
============== ============== ============== ===============
BASIC AND DILUTED NET LOSS PER SHARE $ (0.00) $ (0.00) $ (0.00) $ (0.00)
============== ============== ============== ===============
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING 261,454,134 242,455,448 257,872,256 236,313,848
============== ============== ============== ===============
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The accompanying notes form an integral part of these unaudited financial statements
IMAGING3, INC.
STATEMENTS OF CASH FLOWS FOR THE SIX MONTHS ENDED
JUNE 30, 2009 AND JUNE 30, 2008 (UNAUDITED)
2009 2008
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (833,239) $ (567,062)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 9,913 7,997
Common stock issued for services and R&D 34,375 73,133
Gain on settlement of debt - 1,977
(Increase) / decrease in current assets:
Accounts receivable 2,629 (35,175)
Inventory (4,283) (166,709)
Prepaid expenses and other assets (8,213) (6,148)
Increase / (decrease) in current liabilities:
Accounts payable 21,566 (45,723)
Accrued expenses 164,950 (105,233)
Deferred revenue 19,835 (33,325)
Equipment deposits 12,140 133,083
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Net cash used for operating activities (580,327) (743,185)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment - (22,992)
---------------- ----------------
Net cash used for investing activities - (22,992)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from subscription receivable - 42,000
Receipts from / (payments to) officer, net 70,199 (146,292)
Proceeds from issuance of common stock, net 495,501 1,174,152
---------------- ----------------
Net cash provided by financing activities 565,700 1,069,860
---------------- ----------------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (14,627) 303,683
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 73,447 2,293
---------------- ----------------
CASH & CASH EQUIVALENTS, ENDING BALANCE $ 58,820 $ 305,976
================ ================
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The accompanying notes form an integral part of these unaudited financial statements
IMAGING3, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Imaging3, Inc. (the "Company") is a California corporation, incorporated on October 29, 1993, as Imaging Services, Inc. The Company filed a certificate of amendment of articles of incorporation to change its name to Imaging3, Inc. on August 20, 2002.
The Company's primary business is production and sale of medical equipment, parts and services to hospitals, surgery centers, research labs, physician offices and veterinarians. Equipment sales include new c-arms, c-arm tables, remanufactured c-arms, and used c-arm and surgical tables. Part sales consist of new or renewed replacement parts for c-arms.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the Company's significant accounting policies consistently applied in the preparation of the accompanying financial statements follows:
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 year ended December 31, 2008. 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.
USE OF ESTIMATES
In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reporting period. Actual results could differ from those estimates.
DUE TO OFFICER
At June 30, 2009 and December 31, 2008, the Company had a balance due to the Chief Executive Officer of the Company amounting to $854,409 and $784,210, respectively, for amounts borrowed. The amount is due on demand, is interest free and secured by the assets of the Company. As a portion of this balance is related to services performed by the Chief Executive Officer and as payments are routinely made to the Chief Executive Officer for funds advanced, no interest has been imputed on the balance due.
EQUIPMENT DEPOSITS
Equipment deposits represent amounts received from customers against future sales of goods since the Company recognizes revenue upon shipment of goods. These deposits are applied to the invoices when the equipment is shipped to the customers. The balance at June 30, 2009 and December 31, 2008, was $128,508 and $116,368, respectively.
IMAGING3, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
REVENUE RECOGNITION
The Company recognizes its revenue in accordance with the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" ("SAB 104"). SAB 104 revises or rescinds portions of the interpretative guidance included in Topic 13 of the codification of staff accounting bulletins in order to make this interpretive guidance consistent with current authoritative accounting and auditing guidance and SEC rules and regulations. Revenue is recognized upon shipment, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable and collection of the related receivable is reasonably assured. Revenue is recorded net of estimated product returns, which is based upon the Company's return policy, sales agreements, management estimates of potential future product returns related to current period revenue, current economic trends, changes in customer composition and historical experience. The Company accrues for warranty costs, sales returns, and other allowances based on its experience. Generally, the Company extends credit to its customers and does not require collateral. The Company performs ongoing credit evaluations of its customers and historic credit losses have been within management's expectations. The Company sells warranties and recognizes warranty revenue over the term of the warranty period. Deferred revenue is recognized at the time of warranty sales.
INCOME TAXES
The Company accounts for income taxes under Statement of Financial Accounting Standards No. 109 ("SFAS 109"). Under SFAS 109, deferred income taxes are reported using the liability method. Deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
BASIC AND DILUTED NET LOSS PER SHARE
Net loss per share is calculated in accordance with Statement of Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 superseded Accounting Principles Board Opinion No.15 ("APB 15"). Net loss per share for all periods presented has been restated to reflect the adoption of SFAS 128. 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.
RECENT PRONOUNCEMENTS
In December 2007, the FASB issued FASB Statement No. 160, "Noncontrolling Interests in Consolidated Financial Statements--an amendment of ARB No. 51." This Statement applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding non-controlling interest in one or more subsidiaries or that deconsolidate a subsidiary. Not-for-profit organizations should continue to apply the guidance in Accounting Research Bulletin No. 51, "Consolidated Financial Statements," before the amendments made by this Statement, and any other applicable standards, until the Board issues interpretative guidance. This Statement is effective for fiscal years, and
IMAGING3, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
interim periods within those fiscal years, beginning on or after December 15, 2008 (that is January 1, 2009, for entities with calendar year-ends). Earlier adoption is prohibited. The effective date of this Statement is the same as that of the related Statement 141(R). This Statement shall be applied prospectively as of the beginning of the fiscal year in which this Statement is initially applied, except for the presentation and disclosure requirements. The presentation and disclosure requirements shall be applied retrospectively for all periods presented. This statement has no effect on the financial statements as the Company does not have any outstanding non-controlling interest.
In March 2008, the FASB issued FASB Statement No. 161, "Disclosures about Derivative Instruments and Hedging Activities". The new standard is intended to improve financial reporting about derivative instruments and hedging activities by requiring enhanced disclosures to enable investors to better understand their effects on an entity's financial position, financial performance, and cash flows. It is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged. The new standard also improves transparency about the location and amounts of derivative instruments in an entity's financial statements; how derivative instruments and related hedged items are accounted for under Statement 133; and how derivative instruments and related hedged items affect its financial position, financial performance, and cash flows. FASB Statement No. 161 achieves these improvements by requiring disclosure of the fair values of derivative instruments and their gains and losses in a tabular format. It also provides more information about an entity's liquidity by requiring disclosure of derivative features that are credit risk-related. Finally, it requires cross-referencing within footnotes to enable financial statement users to locate important information. Based on current conditions, the Company does not expect the adoption of SFAS 161 to have a significant impact on its results of operations or financial position.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations." This statement replaces FASB Statement No. 141, "Business Combinations." This statement retains the fundamental requirements in SFAS 141 that the acquisition method of accounting (which SFAS 141 called the purchase method) be used for all business combinations and for an acquirer to be identified for each business combination. This statement defines the acquirer as the entity that obtains control of one or more businesses in the business combination and establishes the acquisition date as the date that the acquirer achieves control. This statement requires an acquirer to recognize the assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree at the acquisition date, measured at their fair values as of that date, with limited exceptions specified in the statement. This statement applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. The Company does not expect the adoption of SFAS 141(R) to have a significant impact on its results of operations or financial position.
3. ACCOUNTS RECEIVABLE
All accounts receivable are trade related. These receivables are current and management believes are collectible except for those for which a reserve has been provided. The balance of accounts receivable as of June 30, 2009 was $61,520 as compared to $64,149 as of December 31, 2008. The reserve amount for uncollectible accounts was $1,375 as of June 30, 2009 and December 31, 2008, respectively.
IMAGING3, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
4. INVENTORIES
Inventory consisted of the following:
06/30/09 12/31/08
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Parts inventory $ 215,703 $ 137,048
Finished goods 347,292 421,664
Inventory reserve (229,972) (229,972)
------------ -------------
Total, net $ 333,023 $ 328,740
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5. PROPERTIES AND EQUIPMENT
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Property and equipment consisted of the following:
06/30/09 12/31/08
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Furniture and office equipment $ 78,694 $ 78,694
Tools and shop equipment 54,183 54,183
Vehicles 105,871 105,871
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238,748 238,748
Less Accumulated depreciation (224,906) (214,993)
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Total, net $ 13,842 $ 23,755
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Depreciation expenses were $9,913 and $7,997 for the six months ended June 30, 2009 and 2008, respectively.
6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
06/30/09 12/31/08
------------ -------------
Accrued payroll taxes $ 169,540 $ 30,352
Other accrued expenses 41,344 16,501
Accrued legal fees 431,040 416,620
Accrued ongoing litigation 1,793,665 1,807,165
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Total $ 2,435,588 $2,270,638
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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 $104,000. 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 is currently being negotiated. However, as it appears likely that additional payments will be required, the Company has accrued $169,540 for payroll taxes, interest, and penalty charges until such time as full settlement is reached with the Internal Revenue Service.
IMAGING3, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
7. STOCKHOLDERS' EQUITY
COMMON STOCK
During the six month period ended June 30, 2009, the Company issued 12,750,000 shares of common stock for cash proceeds of $495,500 net of offering costs of $20,500 as part of its private placement.
During the six month period ended June 30, 2009, the Company issued 687,500 shares of common stock for consulting services. The Company recorded $34,375 as consulting fees expense to settle the payment as agreed on the date of invoice at the fair market value.
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The Company prepares its statements of cash flows using the indirect method as defined under Statement of Financial Accounting Standards No. 95.
The Company paid income taxes of $0 and interest of $1,052 during the six month period ended June 30, 2009. The Company paid income taxes of $0 and interest of $2,641 during the six month period ended June 30, 2008.
9. GOING CONCERN
The Company's financial statements are prepared using the generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. In the three month periods ended June 30, 2009 and 2008, the Company incurred losses of $506,794 and $301,162, respectively. The Company has an accumulated deficit of $11,520,345 as of June 30, 2009. 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 sheets is dependent upon continued operations of the Company, which in turn is dependent upon the Company's ability to raise additional capital, obtain financing and to succeed in its future operations. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Management has taken the following steps to revise its operating and financial requirements, which it believes are sufficient to provide the Company with the ability to continue as a going concern. Management devoted considerable effort during the three month period ended June 30, 2009, towards (i) obtaining additional equity financing, and in that regard, in 2009 the Company was in the process of offering to sell more shares at $0.04 per share in a private placement to accredited investors, (ii) controlling of salaries and general and administrative expenses, (iii) management of accounts payable, (iv) evaluation of its distribution and marketing methods, and (v) increasing marketing and sales. In order to control general and administrative expenses, the Company has established internal financial controls in all areas, specifically in hiring and overhead cost. The Company has also established a hiring policy under which the Company will refrain from hiring additional employees unless approved by the CEO
IMAGING3, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
and CFO. Accounts payable are reviewed and approved or challenged on a daily basis and the sales staff is questioned as to the validity of any expense on a monthly basis. Senior management reviews the annual budget to ascertain and question any variance from plan, on a quarterly basis, and to anticipate and make adjustments as may be feasible.
10. RELATED PARTY TRANSACTION
The Company has a consulting agreement with the Chief Executive Officer of the Company for compensation of $12,000 per month. The CEO provides services to the Company for management, administrative, marketing, and financial matters pursuant to the consulting agreement terminable on 30 days notice by either party. The consulting agreement commenced on January 1, 2002, and will continue until such time as the Company withdraws the agreement or the CEO resigns. The accrued compensation has been included in amounts due to officer and is payable by the Company on demand.
During the normal course of business, the Chief Executive Officer advances funds to the Company and in turn the Company will reimburse him. These transactions are recorded as due to officer.
The balance of due to officer amounts to $854,409 as of June 30, 2009 and $784,210 as of December 31, 2008, payable on demand except for $375,000 which is payable in full on Decmeber 31, 2012. The outstanding balance does not bear interest. As a portion of this balance is related to services performed by the Chief Executive Officer and as payments are routinely made to the Chief Executive Officer for funds advanced, no interest has been imputed on the balance due.
During the second quarter ended June, 2009, the Chief Executive Officer was paid $1,110 of the amount that was owed to him.
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:
o 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
o 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;
(j) failure of Imaging3 to obtain approval of its proprietary medical imaging technology and device from the United States 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, and other risks inherent in Imaging3's 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.
CURRENT OVERVIEW
Though our efforts have been to market our refurbished equipment, the sales and revenues from service and parts are increasing 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. We recognize revenue in accordance with the Securities and Exchange Commission's ("SEC") Staff Accounting Bulletin No. 104, "Revenue Recognition in Financial Statements" ("SAB 104"). We recognize revenue upon shipment, provided that evidence of an arrangement exists, title and risk of loss have passed to the customer, fees are fixed or determinable, and collection of the related receivable is reasonably assured. We record revenue net of estimated product returns, which is based upon our return policy, sales
agreements, management estimates of potential future product returns related to current period revenue, current economic trends, changes in customer composition and historical experience. We accrue for warranty costs, sales returns, and other allowances based on our experience. Generally, we extend credit to our customers and do not require collateral. We perform ongoing credit evaluations of our customers and historic credit losses have been within our expectations. We do not ship a product until we have either a purchase agreement or rental agreement signed by the customer with a payment arrangement. This is a critical policy, because we want our accounting to show only sales which are "final" with a payment arrangement. We do not make consignment sales, nor inventory sales subject to a "buy back" or return arrangement from customers.
PROVISION FOR SALES RETURNS, ALLOWANCES AND BAD DEBTS. The Company maintains a provision for sales allowances, returns and bad debts. Sales returns and allowances result from equipment damaged in delivery or customer dissatisfaction, as provided by agreement. The provision is provided for by reducing gross revenue by a portion of the amount invoiced during the relevant period. The amount of the reduction is estimated based on historical experience.
RESERVE FOR OBSOLETE/EXCESS INVENTORY. Inventories are stated at the lower of cost or market. We regularly review our inventories and, when required, will record a provision for excess and obsolete inventory based on factors that may impact the realizable value of our inventory including, but not limited to, technological changes, market demand, regulatory requirements and significant changes in our cost structure. If ultimate usage varies significantly from expected usage, or other factors arise that are significantly different than those anticipated by management, inventory write-downs or increases in reserves may be required.
A fire in 2002 incinerated our inventory, so we have not had to deal with significant amounts of obsolete inventory since that time. Our procedure is now to maintain only limited inventory, based on our experience in service and repair, necessary for current service and repair contracts or orders anticipated within the following 60 days. We have supply relationships with long term suppliers to provide additional parts on an as needed, prompt basis for the vast majority of repair and service parts, so obsolescence is no longer a factor in our business. We have not recorded any material amounts as charges to obsolescence since the fire in 2002 destroyed our warehouse.
RENTAL INCOME. Rental income is recognized when earned and expenses are recognized when incurred. The rental periods vary based on customer's needs ranging from 5 days to 6 months. An operating lease agreement is utilized. The rental revenues were insignificant in the three and six month periods ended June 30, 2009 and 2008. Written rental agreements are used in all instances.
OTHER ACCOUNTING FACTORS
The effects of inflation have not had a material impact on our operation, nor are they expected to in the immediate future.
Although we are unaware of any major seasonal aspect that would have a material effect on the financial condition or results of operation, the first quarter of each fiscal year is always a financial concern due to slow collections after the holidays.
The deposits that are shown in the financials are for pending sales of existing products and not any new patented product. These are deposits received from our customers for sales of equipment and services and are only removed as deposits upon completion of the sale. If for whatever reason a customer order is cancelled the deposit would be returned as stated in the terms of sale, minus a restocking fee.
No depositor is a related party of any officer or employee of Imaging3, Inc.
Our terms of deposit typically are 50% down with the balance of the sale price due upon delivery.
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2009 COMPARED TO THE SIX MONTHS ENDED JUNE 30, 2008
We had revenues in the first six months of 2009 of $574,496 compared to $902,062 for the same period in 2008, which represents a 36% decrease. The decrease in revenue is due in part to the Company's focus on obtaining approval for its new proprietary medical device but the Company intends to focus on the marketing, sale and provision of its historic products and services as well. Our equipment sales were $289,981 in the first six months of 2009, compared to $665,618 in 2008, representing a decrease in equipment sales of $375,637 in 2009 or 56%. Our service and parts sales for the first six months of 2009 were $181,960 compared to $128,094 in 2008. The Company will continue to focus on increasing its revenue in this area as well.
Our cost of revenue was $257,368 in the first six months of 2009 compared to $294,225 in the first six months of 2008, which represents a decrease of $36,857 or 13%. This is due in large part to the decrease in revenue. We had a decrease in gross profit margin in 2009 of $317,128 versus $607,837 in the first six months of 2008, again due to decreased revenues. Our operating expenses decreased slightly from $1,139,407 in the first six months of 2008 to $1,120,320 in the first six months of 2009, a 2% decrease. Our loss on operations increased to $803,192 in the first six months of 2009 compared to $531,570 in the first six months of 2008, a 33% increase. This increase is attributed to the overall decrease in revenue for this same period. Our net loss was $833,239 in the first six months of 2009 compared to $567,062 in the first six months of 2008, a 31% increase, again as a result of a decreased revenue stream and the recognition of a payroll tax liability with the Internal Revenue Service for $169,540 for the year ended 2003. The Company felt that this issue was resolved in an earlier period and is currently being negotiated.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2009 COMPARED TO THE THREE MONTHS ENDED JUNE 30, 2008
We had revenues in the first three months of 2009 of $260,127 compared to $462,775 for the same period in 2008, which represents a 43% decrease. The decrease in revenue is due in part to the Company's focus on obtaining approval for its new proprietary medical device but the Company intends to focus on the marketing, sale and provision of its historic products and services as well. Our equipment sales were $141,290 in the first three months of 2009, compared to $308,043 in 2008, representing a decrease in equipment sales of $166,753 in 2009 or 54%. Our service and parts sales for the first three months of 2009 were $75,502 compared to $89,185 in 2008. The Company will continue to focus on increasing its revenue in this area as well.
Our cost of revenue was $131,375 in the first three months of 2009 compared to $218,259 in the first three months of 2008, which represents a decrease of $86,884 or 39%. This is due in large part to the decrease in revenue. We had a decrease in gross profit margin in 2009 of $128,752 versus $244,516 in the first three months of 2008, again due to decreased revenues. Our operating expenses increased from $528,564 in the first three months of 2008 to $621,080 in the first three months of 2009, a 15% increase. Our loss on operations increased to $492,328 in the first three months of 2009 compared to $284,048 in the first three months of 2008, a 40% increase. This increase is attributed to the overall decrease in revenue for this same period. Our net loss was $506,794 in the first three months of 2009 compared to $301,162 in the first three months of 2008, a 31% increase, again as a result of a decreased revenue stream and the recognition of a payroll tax liability with the Internal Revenue
Service for $169,540 for the year ended 2003. The Company felt that this issue was resolved in an earlier period and is currently being negotiated.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position was $58,820 at June 30, 2009, compared to $73,447 at December 31, 2008.
As of June 30, 2009, the Company has current assets of $482,724, non-current assets of $44,866, and current liabilities of $3,754,288.
Net cash used for operating activities amounted to $580,327 for the six month period ended June 30, 2009, as compared to $743,185 for the six month period ended June 30, 2008. The decrease in 2009 as compared to 2008 resulted from increased net loss.
Net cash provided by financing activities amounted to $1,069,860 and $565,700 for the six month periods ended June 30, 2008 and 2009, respectively. The decrease in 2009 as compared to 2008 resulted from a smaller private placement of stock during the six month period ended June 30, 2009 as well as decreased equipment sales.
The Company does not have sufficient capital to meet our 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 to $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 financing to enable it to obtain approval of its prototype from the United States Food and Drug Administration and to sustain monthly operations. 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.
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 year ended December 31, 2008. 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 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, 2009, the disclosure controls and procedures of our Company were 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.
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, 2009, 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company may be involved in legal actions and claims arising in the ordinary course of business from time to time, none of which at this time is considered to be material to the Company's business or financial condition.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
During the three month period ended June 30, 2009, the Company sold shares of its common stock for net cash proceeds of $156,700 in one private placement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
EXHIBIT NO. DESCRIPTION
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3.1 Articles of Incorporation (1)
3.2 Articles of Amendment dated October 25, 2001, June 24, 2002, and August 13, 2002(1)
3.3 Bylaws (1)
3.4 Certificate of Amendment dated September 30, 2003(2)
3.5 Certificate of Amendment dated October 25, 2001(3)
3.6 Certificate of Amendment June 24, 2002(3)
3.7 Certificate of Amendment August 13, 2002(3)
10.1 Patent #6,754,297(3)
10.2 Consulting Agreement(3)
10.3 Assignment(3)
10.6 Commercial Promissory Note dated August 4, 2004(4)
10.7 Security Agreement(4)
10.8 Commercial Promissory Note dated April 24, 2005(5)
10.9 Lease entered into May 24, 2001 by and between Dean M. Janes and Imaging Services, Inc.(6)
10.10 IR Commercial Real Estate Association Standard Industrial/Commercial Single-Tenant Lease -
Net, dated June 21, 2004 by and between Four T's, Bryan Tashjan, Ed Jr. Tashjan, Bruce
Tashjan, Greg Tashjan and Dean Janes DBA Imaging Services, Inc.(6)
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
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(1) Incorporated by reference to the Form 10-SB/A Registration Statement filed with the Securities and Exchange Commissioner on December 9, 2002.
(2) Incorporated by reference to Amendment #2 to Form SB-2 Registration Statement filed with the Securities and Exchange Commission on October 6, 2004.
(3) Incorporated by reference to Amendment #3 to Form SB-2 Registration Statement filed with the Securities and Exchange Commission on October 21, 2004.
(4) Incorporated by reference to Amendment #5 to Form SB-2 Registration Statement filed with the Securities and Exchange Commission on April 18, 2005.
(5) Incorporated by reference to Amendment #6 to Form SB-2 Registration Statement filed with the Securities and Exchange Commission on July 7, 2005.
(6) Incorporated by reference to Amendment #8 to Form SB-2 Registration Statement filed with the Securities and Exchange Commission on September 9, 2005.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Dated: August 3, 2009 IMAGING3, INC.
By: /s/ Dean Janes
--------------------------------------------
Dean Janes, Chief Executive Officer
and Chairman (Principal Executive Officer)
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
By: /s/Dean Janes Dated: August 3, 2009
----------------------------------------------
Dean Janes, Chief Executive Officer
and Chairman (Principal Executive Officer)
By: /s/Christopher Sohn Dated: August 3, 2009
----------------------------------------------
Christopher Sohn, Director, President
and Chief Operating Officer
By: /s/Xavier Aguilera Dated: August 3, 2009
----------------------------------------------
Xavier Aguilera, Chief Financial Officer,
Secretary, and Executive Vice President
(Principal Financial/Accounting Officer)
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EXHIBIT 31.1
CERTIFICATION
I, Dean Janes, certify that:
1. I have reviewed this report on Form 10-Q of Imaging3, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (of persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: August 3, 2009
/s/Dean Janes
-----------------------------------
Dean Janes, Chief Executive Officer
(Principal Executive Officer)
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EXHIBIT 31.2
CERTIFICATION
I, Xavier Aguilera, certify that:
1. I have reviewed this report on Form 10-Q of Imaging3, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting.
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (of persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting.
Date: August 3, 2009
/s/Xavier Aguilera
----------------------------------------
Xavier Aguilera, Chief Financial Officer
(Principal Financial/Accounting Officer)
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Exhibit 32.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Imaging3, Inc. (the
"Company") on Form 10-Q for the period ending June 30, 2009 (the "Report") I,
Dean Janes, Chief Executive Officer of the Company, certify, pursuant to 18 USC
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to the best of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/Dean Janes Date: August 3, 2009 ----------------------------------- Dean Janes, Chief Executive Officer (Principal Executive Officer) |
This certification accompanies the Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by
the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.
Exhibit 32.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Imaging3, Inc. (the "Company") on Form 10-Q for the period ending June 30, 2009 (the "Report") I, Xavier Aguilera, Chief Financial Officer (Principal Financial/Accounting Officer) of the Company, certify, pursuant to 18 USC Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to the best of my knowledge and belief:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/Xavier Aguilera Date: August 3, 2009 ----------------------------------------------------- Xavier Aguilera, Chief Financial Officer (Principal Financial/Accounting Officer) |
This certification accompanies the Report pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by
the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of
Section 18 of the Securities Exchange Act of 1934, as amended.