Attached files
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 September 30, 2009
or
[ ] 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 (I.R.S. Employer Identification No.)
incorporation or organization)
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 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 November 1, 2009, the number of shares outstanding of the registrant's
class of common stock was 375,709,898.
TABLE OF CONTENTS
PAGE
PART I. FINANCIAL INFORMATION...........................................................................1
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)................................................................1
BALANCE SHEETS AT SEPTEMBER 30, 2009 (UNAUDITED) AND DECEMBER 31, 2008..........................2
STATEMENTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009 AND
SEPTEMBER 30, 2008 (UNAUDITED)..................................................................3
STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2009 AND SEPTEMBER
30, 2008 (UNAUDITED)............................................................................4
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........12
ITEM 4. CONTROLS AND PROCEDURES........................................................................16
PART II. OTHER INFORMATION.......................................................................................18
ITEM 1. LEGAL PROCEEDINGS..............................................................................18
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS....................................18
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................................18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...........................................18
ITEM 5. OTHER INFORMATION..............................................................................18
ITEM 6. EXHIBITS.......................................................................................19
SIGNATURES.......................................................................................................20
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
-1-
IMAGING3, INC.
BALANCE SHEETS
AT SEPTEMBER 30, 2009 (UNAUDITED) AND DECEMBER 31, 2008
ASSETS
9/30/2009 12/31/2008
---------------- ---------------
(UNAUDITED)
CURRENT ASSETS:
Cash and cash equivalents $ 154,412 $ 73,447
Accounts receivable, net 55,267 64,149
Other receivables-related party 1,088,934 -
Inventory, net 332,014 328,740
Prepaid expenses 31,240 21,148
---------------- ---------------
Total current assets 1,661,867 487,484
PROPERTY AND EQUIPMENT, NET 17,244 23,755
OTHER ASSETS 31,024 31,024
---------------- ---------------
Total assets $ 1,710,135 $ 542,263
================ ===============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 131,140 $ 175,329
Accrued expenses 2,307,091 2,270,638
Deferred revenue 195,846 119,052
Equipment deposits 223,360 116,368
Due to an officer - 784,210
---------------- ---------------
Total current liabilities 2,857,437 3,465,597
STOCKHOLDERS' DEFICIT:
Common stock, no par value; authorized shares 500,000,000;
375,709,898 and 249,924,052 issued and outstanding
at September 30, 2009 and December 31, 2008, respectively 10,988,572 7,763,772
Accumulated deficit (12,135,874) (10,687,106)
---------------- ---------------
Total stockholders' deficit (1,147,302) (2,923,334)
---------------- ---------------
Total liabilities and stockholders' deficit $ 1,710,135 $ 542,263
================ ===============
The accompanying notes form an integral part of
these unaudited financial statements
-2-
IMAGING3, INC.
STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three month periods For the nine month periods
ended September 30, ended September 30,
2009 2008 2009 2008
-------------- --------------- --------------- ----------------
NET REVENUES $ 224,747 $ 505,361 $ 799,243 $ 1,407,424
COST OF GOODS SOLD 80,115 264,101 337,483 558,327
-------------- --------------- --------------- ----------------
GROSS PROFIT 144,632 241,260 461,760 849,097
OPERATING EXPENSES:
General and administrative expenses 509,226 505,431 1,629,546 1,644,838
-------------- --------------- --------------- ----------------
Total operating expenses 509,226 505,431 1,629,546 1,644,838
-------------- --------------- --------------- ----------------
LOSS FROM OPERATIONS (364,594) (264,171) (1,167,786) (795,741)
OTHER INCOME (EXPENSE):
Interest expense (11,746) 631 (41,021) (36,038)
Gain on litigation settlement 39,000 155,000 39,000 156,977
Other expense (282,871) - (282,871) -
Other income 4,682 170,372 4,710 170,372
-------------- --------------- --------------- ----------------
Total other income (expense) (250,935) 326,003 (280,182) 291,311
-------------- --------------- --------------- ----------------
INCOME (LOSS) BEFORE INCOME TAX (615,529) 61,832 (1,447,968) (504,430)
PROVISION FOR INCOME TAXES - - 800 800
-------------- --------------- --------------- ----------------
NET INCOME (LOSS) $ (615,529) $ 61,832 $ (1,448,768) $ (505,230)
============== =============== =============== ================
BASIC AND DILUTED NET LOSS PER SHARE $ (0.00) $ 0.00 $ (0.01) $ (0.00)
============== =============== =============== ================
WEIGHTED AVERAGE COMMON STOCK OUTSTANDING 285,397,317 248,452,240 267,148,101 240,389,513
============== =============== =============== ================
The accompanying notes form an integral part of
these unaudited financial statements
-3-
IMAGING3, INC.
STATEMENTS OF CASH FLOWS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2009 AND SEPTEMBER 30, 2008 (UNAUDITED)
2009 2008
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (1,448,768) $ (505,230)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 6,511 12,953
Common stock issued for services and R&D 34,375 73,133
Gain on settlement of debt (39,000) (156,977)
Loss on conversion of debt 6,571 -
(Increase) / decrease in current assets:
Accounts receivable 8,882 (53,151)
Inventory (3,274) (159,434)
Prepaid expenses and other assets (10,092) (28,255)
Increase / (decrease) in current liabilities:
Accounts payable (44,191) (97,180)
Accrued expenses 75,455 (307,381)
Deferred revenue 76,794 (4,250)
Equipment deposits 106,992 (85,404)
---------------- ----------------
Net cash used for operating activities (1,229,745) (1,311,176)
---------------- ----------------
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:
Receipts from / (payments to) officer, net (1,773,144) 74,666
Proceeds from issuance of common stock, net 3,083,854 1,259,072
---------------- ----------------
Net cash provided by financing activities 1,310,710 1,333,738
---------------- ----------------
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS 80,965 (429)
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 73,447 2,293
---------------- ----------------
CASH & CASH EQUIVALENTS, ENDING BALANCE $ 154,412 $ 1,864
================ ================
The accompanying notes form an integral part of
these unaudited financial statements
-4-
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 September 30, 2009 and December 31, 2008, the Company had a balance
due to the Chief Executive Officer of the Company amounting to $-0- and
$784,210, respectively, for amounts borrowed by the company. Final payment was
effected during the third quarter of 2009.
EQUIPMENT DEPOSITS
Equipment deposits represent amounts received from customers against
future sales of goods since the Company recognizes revenue upon shipment of
goods. These deposits are applied to the invoices when the equipment is shipped
to the customers. The balance at September 30, 2009 and December 31, 2008, was
$223,360 and $116,368, respectively.
-5-
IMAGING3, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
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.
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
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
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. No adjustment has been made for any common stock equivalents
outstanding because their effects would be anti-dilutive.
SUBSEQUENT EVENTS
The management of the Company has evaluated the period after the
balance sheet date up through October 26, 2009, which is the date that the
financial statements were issued, and determined that there were no subsequent
events or transactions that required recognition or disclosure in the financial
statements.
NEW ACCOUNTING STANDARDS
On January 1, 2009, the Company adopted a new accounting standard
issued by the FASB related to accounting for business combinations using the
acquisition method of accounting (previously referred to as the purchase
method). Among the significant changes, this standard requires a redefining of
the measurement date of a business combination, expensing direct transaction
costs as incurred, capitalizing in-process research and development costs as an
intangible asset and recording a liability for contingent consideration at the
measurement date with subsequent re-measurements recorded in the results of
operations. This standard also requires costs for business restructuring and
exit activities related to the acquired company to be included in the
-6-
IMAGING3, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
post-combination financial results of operations and also provides new guidance
for the recognition and measurement of contingent assets and liabilities in a
business combination. In addition, this standard requires several new
disclosures, including the reasons for the business combination, the factors
that contribute to the recognition of goodwill, the amount of acquisition
related third-party expenses incurred, the nature and amount of contingent
consideration, and a discussion of pre-existing relationships between the
parties.
The application of this standard is likely to have a significant impact
on how the Company allocates the purchase price of prospective business
combinations, including the recognition and measurement of assets acquired and
liabilities assumed and the expensing of direct transaction costs and costs to
integrate the acquired business.
On January 1, 2009, the Company adopted a new accounting standard
issued by the FASB that establishes accounting and reporting standards for
noncontrolling interests in a subsidiary in consolidated financial statements,
including deconsolidation of a subsidiary. This standard requires entities to
record the acquisition of noncontrolling interests in subsidiaries initially at
fair value. The adoption of this standard did not impact earnings per share
attributable to Imaging3, Inc.'s common stockholders. There were no changes in
the Company's ownership interests for the three or nine months ended September
30, 2009.
On January 1, 2009, the Company adopted a new accounting standard
issued by the FASB related to the disclosure of derivative instruments and
hedging activities. This standard expanded the disclosure requirements about an
entity's derivative financial instruments and hedging activities, including
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair value amounts of and gains and losses on
derivative instruments, and disclosures about credit-risk-related contingent
features in derivative instruments.
Effective June 30, 2009, the Company adopted a new accounting standard
issued by the FASB related to the disclosure requirements of the fair value of
financial instruments. This standard expands the disclosure requirements of fair
value (including the methods and significant assumptions used to estimate fair
value) of certain financial instruments to interim period financial statements
that were previously only required to be disclosed in financial statements for
annual periods. In accordance with this standard, the disclosure requirements
have been applied on a prospective basis and did not have a material impact on
the Company's financial statements.
Effective June 30, 2009, the Company adopted a newly issued accounting
standard related to accounting for and disclosure of subsequent events in its
financial statements. This standard provides the authoritative guidance for
subsequent events that was previously addressed only in United States auditing
standards. This standard establishes general accounting for and disclosure of
events that occur after the balance sheet date but before financial statements
are issued or are available to be issued and requires the Company to disclose
the date through which it has evaluated subsequent events and whether that was
the date the financial statements were issued or available to be issued. This
standard does not apply to subsequent events or transactions that were within
the scope of other applicable GAAP that provide different guidance on the
accounting treatment for subsequent events or transactions. The adoption of this
standard did not have a material impact on the Company's financial statements.
In June 2009, the FASB issued an amendment to the accounting standards
related to the consolidation of variable interest entities ("VIE"). This
standard provides a new approach for determining which entity should consolidate
a VIE, how and when to reconsider the consolidation or deconsolidation of a VIE
and requires disclosures about an entity's significant judgments and assumptions
used in its decision to consolidate or not consolidate a VIE. Under this
-7-
IMAGING3, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
standard, the new consolidation model is a more qualitative assessment of power
and economics that considers which entity has the power to direct the activities
that "most significantly impact" the VIE's economic performance and has the
obligation to absorb losses or the right to receive benefits that could be
potentially significant to the VIE. This standard is effective for the Company
as of January 1, 2010 and the Company does not expect the impact of its adoption
to be material to its financial statements.
In August 2009, the FASB issued an amendment to the accounting
standards related to the measurement of liabilities that are recognized or
disclosed at fair value on a recurring basis. This standard clarifies how a
company should measure the fair value of liabilities and provides that
restrictions preventing the transfer of a liability should not be considered as
a factor in the measurement of liabilities within the scope of this standard.
This standard is effective for the Company on October 1, 2009. The Company does
not expect the impact of its adoption to be material to its financial
statements.
In October 2009, the FASB issued an amendment to the accounting
standards related to the accounting for revenue in arrangements with multiple
deliverables including how the arrangement consideration is allocated among
delivered and undelivered items of the arrangement. Among the amendments, this
standard eliminates the use of the residual method for allocating arrangement
consideration and requires an entity to allocate the overall consideration to
each deliverable based on an estimated selling price of each individual
deliverable in the arrangement in the absence of having vendor-specific
objective evidence or other third party evidence of fair value of the
undelivered items. This standard also provides further guidance on how to
determine a separate unit of accounting in a multiple-deliverable revenue
arrangement and expands the disclosure requirements about the judgments made in
applying the estimated selling price method and how those judgments affect the
timing or amount of revenue recognition. This standard, for which the Company is
currently assessing the impact, will become effective for the Company on January
1, 2011.
In October 2009, the FASB issued an amendment to the accounting
standards related to certain revenue arrangements that include software
elements. This standard clarifies the existing accounting guidance such that
tangible products that contain both software and non-software components that
function together to deliver the product's essential functionality, shall be
excluded from the scope of the software revenue recognition accounting
standards. Accordingly, sales of these products may fall within the scope of
other revenue recognition accounting standards or may now be within the scope of
this standard and may require an allocation of the arrangement consideration for
each element of the arrangement. This standard, for which the Company is
currently assessing the impact, will become effective for the Company on January
1, 2011.
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 September
30, 2009 was $55,267 as compared to $64,149 as of December 31, 2008. The reserve
amount for uncollectible accounts was $1,375 as of both September 30, 2009 and
December 31, 2008.
-8-
IMAGING3, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
4. INVENTORIES
Inventory consisted of the following:
09/30/09 12/31/08
------------ -------------
Parts inventory $ 214,747 $ 137,048
Finished goods 347,239 421,664
Inventory reserve (229,972) (229,972)
------------ -------------
Total, net $ 332,014 $ 328,740
============ =============
5. PROPERTIES AND EQUIPMENT
Property and equipment consisted of the following:
09/30/09 12/31/08
-------------- -------------
Furniture and office equipment $ 78,694 $ 78,694
Tools and shop equipment 54,183 54,183
Vehicles 105,871 105,871
-------------- -------------
238,748 238,748
Less Accumulated depreciation (221,504) (214,993)
-------------- -------------
Total, net $ 17,244 $ 23,755
============== =============
Depreciation expenses were $6,511 and $12,953 for the nine months ended
September 30, 2009 and 2008, respectively.
6. ACCRUED EXPENSES
Accrued expenses consisted of the following:
09/30/09 12/31/08
-------------- -------------
Accrued payroll taxes $ 163,540 $ 30,352
Other accrued expenses 26,485 16,501
Accrued legal fees 436,015 416,620
Accrued ongoing litigation 1,681,051 1,807,165
-------------- -------------
Total $2,307,091 $2,270,638
============== =============
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 was reached and the Company is currently paying $2,000 per
month with a potential balloon payment in one year subject to re-negotiation
after one year with the IRS. During this period, the Company also entered into
-9-
IMAGING3, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
an arrangement to pay one of its litigated settlements of $78,000 for $39,000,
thereby allowing a gain of $39,000 on this transaction.
7. STOCKHOLDERS' EQUITY
COMMON STOCK
During the nine month period ended September 30, 2009, the Company
issued 119,934,027 shares of common stock for cash proceeds of $3,083,854 net of
offering costs of $113,622 as part of its private placement.
During the nine month period ended September 30, 2009, the Company
issued 5,164,319 shares of common stock for the conversation of $100,000 in debt
owed. Per the terms of the conversion feature of the note, the principal balance
was convertible into 5,000,000 shares. The excess of the shares issued was
recorded as a loss on conversion of debt of $6,571.
During the nine month period ended September 30, 2009, the Company
issued 687,500 shares of common stock for services rendered for a total of
$34,375.
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
The Company paid income taxes of $800 and interest of $7,573 during the
nine month period ended September 30, 2009. The Company paid income taxes of
$800 and interest of $9,883 during the nine month period ended September 30,
2008.
9. GOING CONCERN
The Company's nine month 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 September 30, 2009
and 2008, the Company incurred losses of $615,529 and revenue of $61,832,
respectively. Revenue in the third quarter of 2008 occurred as a result of
strong sales. The Company has an accumulated deficit of $12,135,874 as of
September 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 nine month period ended September 30, 2009, towards (i)
obtaining additional equity capital, and in that regard, in 2009 the Company was
in the process of offering to sell shares at $0.025 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
-10-
IMAGING3, INC.
NOTES TO FINANCIAL STATEMENTS - UNAUDITED
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
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 $-0- as of September 30, 2009
and $784,210 as of December 31, 2008.
During the nine months ended September 30, 2009, the Chief Executive
Officer was paid $1,773,144 of the amount that was owed to him. This amount
included adjustments for funds not recorded in 2004 and 2005.
11. OTHER RECEIVABLES - RELATED PARTY
During the quarter ended September 30, 2009, the Company remitted
$1,088,934 to its Chief Executive Officer as over funding of previous borrowings
made by the Company from him. The amount remitted was inadvertently calculated
to be in excess of the amount actually owed by the Company to its CEO.
Accordingly, upon realizing the miscalculations, the Company CEO immediately
transferred the net receivable balance back to the Company subsequent to
September 30, 2009.
12. SUBSEQUENT EVENTS
Subsequent to September 30, 2009, the Company's CEO transferred the net
receivable balance recorded as "Other receivables-related party" back to the
Company.
There are no additional significant subsequent events to report through
November 12, 2009, the date the financial statements were issued.
-11-
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, and inability to raise additional capital
or financing to implement its business plans;
(e) failure to commercialize Imaging3's technology or to
make sales;
(f) reductions 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
-12-
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 efforts 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 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 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,
-13-
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 nine month periods ended
September 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.
-14-
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 NINE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO
THE NINE MONTHS ENDED SEPTEMBER 30, 2008
We had revenues in the first nine months of 2009 of $799,243 compared
to $1,407,424 for the same period in 2008, which represents a 56% 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 refocus on the
marketing, sale and provision of its historic products and services as well. Our
equipment sales were $375,264 in the first nine months of 2009, compared to
$1,058,768 during the same period in 2008, representing a decrease in equipment
sales of $1,023,504 in 2009. Our service and parts sales for the first nine
months of 2009 were $250,750 compared to $211,407 during the same period in
2008. The Company will continue to focus on increasing its revenue in this area
as well.
Our cost of revenue was $337,483 in the first nine months of 2009
compared to $558,327 in the first nine months of 2008, which represents a
decrease of $220,844 or 39%. This is due in large part to the larger sales
revenue in 2008. We had a decrease in gross profit margin in 2009 of $461,760
versus $849,097 in the first nine months of 2008, again due to decreased sales
in 2009. Our operating expenses decreased slightly from $1,644,838 in the first
nine months of 2008 to $1,629,546 in the first nine months of 2009, a 1%
decrease. Our loss on operations increased to $1,167,786 in the first nine
months of 2009 compared to $795,741 in the first nine months of 2008, a 68%
increase. This increase is attributed to the overall decrease in revenue for
this same period. Our net loss was $1,448,768 in the first nine months of 2009
compared to $505,230 in the first nine months of 2008, a 34% increase, again as
a result of a decreased revenue 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 now
settled.
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2009 COMPARED TO
THE THREE MONTHS ENDED SEPTEMBER 30, 2008
We had revenues in the three months ended September 30, 2009 of
$224,747 compared to $505,361 for the same period in 2008, which represents a
44% 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 refocus on the marketing, sale and provision of its historic products
and services as well. Our equipment sales were $85,284 in the three months ended
September 30, 2009, compared to $393,150 in 2008, representing a decrease in
equipment sales of $307,866 in 2009 . Our service and parts sales for the three
months ended September 30, 2009 were $33,665 compared to $47,962 in 2008. The
Company will continue to focus on increasing its revenue in this area as well.
Our cost of revenue was $80,115 in the three months ended September 30,
2009 compared to $264,101 in the three months ended September 30, 2008, which
represents a decrease of $183,986. This is due in large part to the decrease in
revenue. We had a decrease in gross profit margin in the three months ended
September 30, 2009 of $144,632 versus $241,260 for the same period of 2008,
again due to decreased revenues. Our operating expenses increased from $505,431
in the three months ending September 30, 2008 to $509,226 for the same period in
2009, a 1% increase. Our loss on operations increased to $364,594 in the three
months ended September 30, 2009 compared to $264,171 for the same period in
2008, a 38% increase. This increase is attributed to the overall decrease in
revenue for this same period. Our net loss was $615,529 in the three months
ending September 30, 2009 compared to a profit of $61,832 for the same period in
2008, again as a result of a decreased revenue.
-15-
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position was $154,412 at September 30, 2009,
compared to $73,447 at December 31, 2008.
As of September 30, 2009, the Company has current assets of $1,661,867,
non-current assets of $48,268, and current liabilities of $2,857,437.
Net cash used for operating activities amounted to $1,229,745 for the
nine month period ended September 30, 2009, as compared to $1,311,177 for the
nine month period ended September 30, 2008. The decrease in 2009 as compared to
2008 resulted from increased net loss.
Net cash provided by financing activities amounted to $1,333,738 and
$1,310,710 for the nine month periods ended September 30, 2008 and 2009,
respectively. The decrease in 2009 as compared to 2008 resulted from the
retirement of debt owed during the nine month period ended September 30, 2009.
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 September 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.
-16-
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in internal controls over financial reporting
that occurred during the quarter ended September 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.
-17-
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 September 30, 2009, the Company
sold 107,184,027 shares of its common stock for net cash proceeds of $2,588,353
in five private placements.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
-18-
ITEM 6. EXHIBITS
EXHIBIT NO. DESCRIPTION
----------------- -------------------------------------------------------------------------------------------
3.1 Articles of Incorporation(1)
3.2 Articles of Amendment dated October 25, 2001, June 24, 2002, and August 13, 2002(1)
3.3 Bylaws (1)
3.4 Certificate of Amendment dated September 30, 2003(2)
3.5 Certificate of Amendment dated October 25, 2001(3)
3.6 Certificate of Amendment June 24, 2002(3)
3.7 Certificate of Amendment August 13, 2002(3)
10.1 Patent #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
-----------------
(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.
-19-
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: November 13, 2009 IMAGING3, INC.
By: /s/ Dean Janes
----------------------------------------
Dean Janes, 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.
By: /s/ Dean Janes Dated: November 13, 2009
------------------------------------------------
Dean Janes, Chief Executive Officer
and Chairman (Principal Executive Officer)
By: /s/ Christopher Sohn Dated: November 13, 2009
------------------------------------------------
Christopher Sohn, President
and Chief Operating Officer
By: /s/ Xavier Aguilera Dated: November 13, 2009
------------------------------------------------
Xavier Aguilera, Director and Chief Financial
Officer, Secretary, and Executive Vice President
(Principal Financial/Accounting Officer)
-20
