Attached files
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
Amendment No. 1
(Mark One)
[ X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
For Quarterly Period Ended March 31, 2011
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
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IMAGING3, INC.
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(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4451059
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
3200 WEST VALHALLA DRIVE, BURBANK, CALIFORNIA 91505
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(Address of principal executive offices) (Zip Code)
(818) 260-0930
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Registrant's telephone number, including area code
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(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[_X_] No[___]
Indicate by check mark whether the registrant has submitted electronically and
posted on its corporate Web site, if any, every Interactive Data File required
to be submitted and posted pursuant to Rule 405 of Regulation S-T (ss.232.405 of
this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
Yes[__] 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 [_X_]
Non-accelerated filer [___] Smaller reporting company [___]
(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 May 6, 2011, the number of shares outstanding of the registrant's class of
common stock was 380,420,723.
TABLE OF CONTENTS
PAGE
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PART I. FINANCIAL INFORMATION...........................................................................1
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)................................................................1
BALANCE SHEETS AT MARCH 31, 2011 (UNAUDITED) AND
DECEMBER 31, 2010......................................................................2
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2011 AND MARCH 31, 2010 (UNAUDITED)..........................................3
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 2011 AND MARCH 31, 2010 (UNAUDITED)..........................................4
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)..............................................5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS..........10
ITEM 4T. CONTROLS AND PROCEDURES........................................................................14
PART II. OTHER INFORMATION............................................................................. 16
ITEM 1. LEGAL PROCEEDINGS..............................................................................16
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS....................................16
ITEM 3. DEFAULTS UPON SENIOR SECURITIES................................................................16
ITEM 4. REMOVED AND RESERVED...........................................................................16
ITEM 5. OTHER INFORMATION..............................................................................16
ITEM 6. EXHIBITS.......................................................................................16
SIGNATURES.....................................................................................17
EXPLANATORY NOTE
Imaging3, Inc., (the "Company"), is filing this amendment to its quarterly
report on Form 10-Q for the period ended March 31, 2011 filed with the
Securities and Exchange Commission on May 9, 2011, for the sole purpose of
amending the cover sheet to indicate that all reports required to be filed by
Section 13 or 15(d) have been filed.
This amendment does not reflect events occurring after the original filing.
Except for the foregoing amended information, this Form 10-Q/A continues to
speak as of the date of the original filing and the Company has not otherwise
updated disclosures contained therein or herein to reflect events that occurred
at a later date.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------
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IMAGING3, INC.
BALANCE SHEETS
AT MARCH 31, 2011 (UNAUDITED) AND DECEMBER 31, 2010
3/31/2011 12/31/2010
---------------- ----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 9,563 $ 367,578
Accounts receivable, net 36,608 26,937
Inventory, net 234,575 127,947
Prepaid expenses 9,663 20,625
---------------- ----------------
Total current assets 290,409 543,087
PROPERTY AND EQUIPMENT, NET 17,879 19,029
OTHER ASSETS 31,024 31,024
---------------- ----------------
Total assets $ 339,312 $ 593,140
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LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 226,379 $ 249,641
Accrued expenses 2,244,928 2,191,643
Deferred revenue 143,205 135,530
Equipment deposits 111,250 62,250
Due to an officer 612,071 520,328
Derivative liability 2,027,598 2,243,466
---------------- ----------------
Total current liabilities 5,365,431 5,402,858
STOCKHOLDERS' DEFICIT:
Common stock, no par value; authorized shares 750,000,000;
380,420,723 issued and outstanding
at March 31, 2011 and December 31, 2010 11,990,073 11,990,073
Accumulated deficit (17,016,192) (16,799,791)
---------------- ----------------
Total stockholders' deficit (5,026,119) (4,809,718)
---------------- ----------------
Total liabilities and stockholders' deficit $ 339,312 $ 593,140
================ ================
The accompanying notes form an integral part of these
unaudited financial statements
-2-
IMAGING3, INC.
STATEMENTS OF OPERATIONS FOR THE THREE MONTHS ENDED
MARCH 31, 2011 AND MARCH 31, 2010 (UNAUDITED)
2011 2010
---------------- ----------------
NET REVENUES $ 266,762 $ 265,586
COST OF GOODS SOLD 128,984 142,233
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GROSS PROFIT 137,778 123,353
OPERATING EXPENSES
General and administrative expenses 558,680 547,853
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Total operating expense 558,680 547,853
---------------- ----------------
LOSS FROM OPERATIONS (420,902) (424,500)
OTHER INCOME (EXPENSE):
Interest expense (10,567) (13,974)
Other income - 5,788
Gain on change in derivative liability 215,868 -
---------------- ----------------
Total other income (expense) 205,301 (8,186)
---------------- ----------------
LOSS BEFORE INCOME TAX (215,601) (432,686)
PROVISION FOR INCOME TAXES 800 -
---------------- ----------------
NET LOSS $ (216,401) $ (432,686)
================ ================
BASIC AND DILUTED NET LOSS PER SHARE $ - $ -
================ ================
BASIC AND DILUTED WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 380,420,723 375,709,898
================ ================
The accompanying notes form an integral part of these
unaudited financial statements
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IMAGING3, INC.
STATEMENTS OF CASH FLOWS FOR THE THREE MONTHS ENDED
MARCH 31, 2011 AND MARCH 31, 2010 (UNAUDITED)
2011 2010
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (216,401) $ (432,686)
Adjustments to reconcile net loss to net cash used for
operating activities:
Depreciation and amortization 1,150 1,149
Gain on change in derivative liability (215,868)
(Increase) / decrease in current assets:
Accounts receivable (9,671) 163,022
Inventory (106,627) 11,071
Prepaid expenses and other assets 10,960 2,803
Increase / (decrease) in current liabilities:
Accounts payable (18,397) 16,750
Accrued expenses 48,421 (43,630)
Deferred revenue 7,675 2,507
Equipment deposits 49,000 (20,212)
---------------- ----------------
Net cash used for operating activities (449,758) (299,226)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Receipts from / (payments to) officer, net 91,743 36,000
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Net cash provided by financing activities 91,743 36,000
---------------- ----------------
NET DECREASE IN CASH & CASH EQUIVALENTS (358,015) (263,226)
CASH & CASH EQUIVALENTS, BEGINNING BALANCE 367,578 633,443
---------------- ----------------
CASH & CASH EQUIVALENTS, ENDING BALANCE $ 9,563 $ 370,217
================ ================
The accompanying notes form an integral part of these
unaudited financial statements
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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, used c-arm and surgical tables. Sales of parts
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 fiscal year ended December 31,
2010. 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 March 31, 2011 and December 31, 2010, the Company had a balance due
to the Chief Executive Officer of the Company amounting to $612,071 and
$520,328, respectively, for accrued consulting fees and amounts borrowed. The
amount is due on demand, is interest free and secured by the assets of the
Company.
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 March 31, 2011 and December 31, 2010, was
$111,250 and $62,250, respectively.
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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 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. The Company had no common stock equivalents or other potentially
dilutive securities outstanding at March 31, 2011 or December 31, 2010, other
than 4,587,157 outstanding series A Warrants, 4,587,157 Series B Warrants and
4,587,157 Series C Warrants.
RECENT PRONOUNCEMENTS
In December 2010, the FASB issued ASU 2010-29, "Business Combinations
(Topic 805): Disclosure of supplementary pro forma information for business
combinations." This update changes the disclosure of pro forma information for
business combinations. These changes clarify that if a public entity presents
comparative financial statements, the entity should disclose revenue and
earnings of the combined entity as though the business combination that occurred
during the current year had occurred as of the beginning of the comparable prior
annual reporting period only. Also, the existing supplemental pro forma
disclosures were expanded to include a description of the nature and amount of
material, nonrecurring pro forma adjustments directly attributable to the
-6-
IMAGING3, INC.
Notes to Financial Statements
(Unaudited)
business combination included in the reported pro forma revenue and earnings.
These changes become effective for the Company beginning January 1, 2011. The
Company's adoption of this update did not have an impact on the Company's
financial condition or results of operations.
In December 2010, the FASB issued ASU 2010-28, "Intangible -Goodwill
and Other (Topic 350): When to perform Step 2 of the goodwill impairment test
for reporting units with zero or negative carrying amounts." This update
requires an entity to perform all steps in the test for a reporting unit whose
carrying value is zero or negative if it is more likely than not (more than 50%)
that a goodwill impairment exists based on qualitative factors, resulting in the
elimination of an entity's ability to assert that such a reporting unit's
goodwill is not impaired and additional testing is not necessary despite the
existence of qualitative factors that indicate otherwise. These changes become
effective for the Company beginning January 1, 2011. The adoption of this ASU
did not have a material impact on our financial statements.
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 March 31,
2011 was $36,608 as compared to $26,937 as of December 31, 2010. The reserve
amount for uncollectible accounts was $675 as of March 31, 2011 and December 31,
2010.
4. INVENTORIES
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Inventory consisted of the following:
03/31/11 12/31/10
------------ -------------
Parts inventory $ 186,297 $ 134,401
Finished goods 278,250 223,518
Inventory reserve (229,972) (229,972)
Total, net $ 234,575 $ 127,947
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5. PROPERTIES AND EQUIPMENT
---------------------------
Property and equipment consisted of the following:
03/31/11 12/31/10
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Furniture and office equipment $ 78,695 $ 78,695
Tools and shop equipment 54,183 54,183
Vehicles 105,871 105,871
-------------- -------------
238,749 238,749
Less Accumulated depreciation (220,870) (219,720)
-------------- -------------
Total, net $ 17,879 $ 19,029
============== =============
Depreciation expenses were $1,150 and $1,149 for the three months ended
March 31, 2011 and 2010, respectively.
-7-
IMAGING3, INC.
Notes to Financial Statements
(Unaudited)
6. ACCRUED EXPENSES
-------------------
Accrued expenses consisted of the following:
03/31/11 12/31/010
-------------- -------------
Accrued payroll taxes $ 137,719 $ 143,718
Other accrued expenses 68,702 9,418
Accrued legal fees 401,401 396,536
Accrued ongoing litigation 1,637,106 1,641,971
-------------- -------------
Total $ 2,244,928 $ 2,191,643
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7. STOCKHOLDERS' EQUITY
-----------------------
COMMON STOCK
During the three month period ended March 31, 2011, the Company had not
issued common stock for either cash or consulting services.
During the three month period ended March 31, 2010, the Company had not
issued common stock for either cash or consulting services.
8. SUPPLEMENTAL DISCLOSURE OF CASH FLOWS
----------------------------------------
The Company paid income taxes of $800 and interest of $298 during the
period ended March 31, 2011. The Company paid income taxes of $0 and interest of
$2,641 during the period ended March 31, 2010.
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 March 31, 2011 and 2010, the Company
incurred losses of $216,401 and $432,686, respectively. The Company has an
accumulated deficit of $17,016,192 and $16,799,791 as of March 31, 2011 and
December 31, 2010, respectively. 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 meet 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 March 31, 2011, towards (i) obtaining
approval from the Food and Drug Administration for its proprietary medical
imaging device so that the Company can commence marketing and selling it, (ii)
controlling salaries and general and administrative expenses, (iii) management
of accounts payable, (iv) evaluation of its distribution and marketing methods
in order to increase sales of existing products and services, and (v) increasing
marketing and sales of its products and services. 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
-8-
IMAGING3, INC.
Notes to Financial Statements
(Unaudited)
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 from time to time, the Chief
Executive Officer advances funds to the Company or defers the payment of his
consulting fees from the Company. These transactions are recorded as due to
officer.
The balance of due to officer amounts to $612,071 as of March 31, 2011
and $520,328 as of December 31, 2010, payable on demand. The outstanding balance
does not bear interest.
11. CONCENTRATIONS
------------------
No customers represented more than 10% of the Company's accounts
receivable, respectively, as of March 31, 2011.
Three customers represent 20%, 19%, and 11%, respectively, of accounts
receivable as of December 31, 2010.
Three customers represent 37%, 35%, and 19%, respectively of revenue
for the three months ended March 31, 2011.
Two customers represent 24% and 21%, respectively of revenue for the
three months ended March 31, 2010.
12. SUBSEQUENT EVENTS
---------------------
There have been no significant subsequent events through the date the
financial statements were issued.
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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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,
resulting in persistent losses; and
(j) failure of Imaging3 to obtain approval of its
proprietary medical imaging technology and device
from the Federal Food and Drug Administration.
There is no assurance that Imaging3 will be profitable. Imaging3 may
not be able to successfully develop, manage or market its products and services.
Imaging3 may not be able to attract or retain qualified executives and
technology personnel. Imaging3 may not be able to obtain customers for its
products or services. Imaging3's products and services may become obsolete.
Government regulation may hinder Imaging3's business. Imaging3 may not be able
to obtain the required approvals from the United States Food and Drug
-10-
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.
Imaging3 is exposed to other risks inherent in its businesses.
Because the statements are subject to risks and uncertainties, actual
results may differ materially from those expressed or implied by the
forward-looking statements. Imaging3 cautions you not to place undue reliance on
the statements, which speak only as of the date of this Form 10-Q. The
cautionary statements contained or referred to in this section should be
considered in connection with any subsequent written or oral forward-looking
statements that Imaging3 or persons acting on its behalf may issue. Imaging3
does not undertake any obligation to review or confirm analysts' expectations or
estimates or to release publicly any revisions to any forward-looking statements
to reflect events or circumstances after the date of this Form 10-Q, or to
reflect the occurrence of unanticipated events.
CURRENT OVERVIEW
Though our efforts have been to market our refurbished equipment, a
significant portion of our sales and revenues derive from services and the sale
of parts, either from extended warranty purchases at the time of purchase of the
refurbished equipment, or service contracts and time and material revenue
realized upon warranty expiration, the majority of which is realized one year
from equipment purchase as warranties expire.
Our sales effort through direct mail, broadcast facsimile and broadcast
email to thousands of potential customers throughout the United States generates
leads of potential customers desiring to purchase equipment either immediately
or in the course of one year. This lead generation through direct mail,
broadcast facsimile and email will continue on a quarterly basis with the goal
of increasing the total number of our leads for our sales staff. Management
expects that the marketing program will also eventually help stabilize the
amount of refurbished equipment sold on a monthly basis, since the carry-over of
leads not looking for immediate purchase will overlap with the immediate sales
leads. The greater the number of leads generated, whether immediate or long
term, the greater the opportunity to eventually create a consistent number of
sales.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of
operations are based upon our financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States of
America. The preparation of these financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We monitor our estimates on an on-going basis for changes in facts
and circumstances, and material changes in these estimates could occur in the
future. Changes in estimates are recorded in the period in which they become
known. We base our estimates on historical experience and other assumptions that
we believe to be reasonable under the circumstances. Actual results may differ
from our estimates if past experience or other assumptions do not turn out to be
substantially accurate.
We have identified the policies below as critical to our business
operations and the understanding of our results of operations.
REVENUE RECOGNITION. 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
-11-
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 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 month periods ended March 31, 2010 and 2009.
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 operations, 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.
-12-
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 THREE MONTHS ENDED MARCH 31, 2011 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2010
We had revenues in the first quarter of 2011 of $266,762 compared to
$265,586 in 2010, which represents an 0.4% increase. Sales for the period
remained basically the same due to the cyclical nature of sales annually. Our
equipment sales were $161,742 in the first three months of 2011, compared to
$139,125 in the first three months of 2010, representing an increase in
equipment sales of $22,617 in 2011 or 16%. Our service and parts sales for the
first quarter of 2010 were $45,615 compared to $24,555 in the first three months
of 2011. The Company will continue to focus on increasing its revenue in this
area as well.
Our cost of revenue was $128,984 in the first quarter of 2011 compared
to $142,233 in the first quarter of 2010, which represents a decrease of $13,249
or 9%. This is due in large part to the decrease in cost of parts and service
parts. We had an increase in gross profit margin in the first quarter of 2011 of
$137,778 compared to $123,353 in the first quarter of 2010. Our operating
expenses increased from $547,853 in the first quarter of 2010 to $558,680 in the
first quarter of 2011, a 2% increase mostly due to the increased price of
equipment. Our loss on operations increased to $424,500 in the first quarter of
2010 compared to $420,902 in the first quarter of 2011, a 1% decrease. This
decrease is attributed to the overall increase in revenue for this same period.
Our net loss was $432,686 in the first quarter of 2010 compared to $216,401 in
the first quarter of 2011, a 50% decrease, as a result of a gain on change in
derivative liability.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash position was $9,563 at March 31, 2011, compared to
$367,578 at December 31, 2010. The reason for the decrease in cash at the end of
the first quarter of 2011 as compared to December 31, 2010 is primarily due to
repayment of indebtedness, stable revenue for the period and increased expenses.
As of March 31, 2011, the Company has current assets of $290,409,
non-current assets of $48,921, and current liabilities of $5,365, 431, and as of
December 31, 2010, current assets of $543,087, non-current assets of $50,053 and
current liabilities of $5,402,858. The reason for the decrease in current assets
at the end of the first quarter of 2011 as compared to December 31, 2010 is
primarily due to the decrease in the Company's cash position.
Net cash used in operating activities amounted to $299,226 for the
three month period ended March 31, 2010, as compared to net cash used in
operating activities of $449,758 for the three month period ended March 31,
2011. The decrease in 2011 as compared to 2010 resulted from increased gain on
change in derivative liability.
Net cash provided by financing activities amounted to $36,000 and
$91,743 for the three month periods ended March 31, 2010 and 2011, respectively.
The increase in 2011 as compared to 2010 resulted from the non-payment of money
owed to the chief executive officer as opposed to payment extended in 2010.
-13-
The Company does not have sufficient capital to meet its current cash
needs, which include the costs of compliance with the continuing reporting
requirements of the Securities Exchange Act of 1934, as amended. The Company
intends to seek additional capital and long term debt financing to attempt to
overcome its working capital deficit. The Company will need between $50,000 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
sufficient financing to enable it to obtain approval of its prototype from the
Federal Food and Drug Administration and to sustain monthly operations. In order
to address its working capital deficit, the Company also intends to endeavor to
(i) reduce operating costs, (ii) reduce general, administrative and selling
costs, (iii) increase sales of its existing products and services, and (iv)
obtain the approval of the United States Food and Drug Administration to the
Company's proprietary medical imaging device so that the Company can commence
marketing and selling it. There may not be sufficient funds available to the
Company to enable it to remain in business and the Company's needs for
additional financing are likely to persist.
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, 2010. 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 4T. 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 March 31, 2011, the disclosure controls
and procedures of our Company were not effective to ensure that the information
required to be disclosed in our Exchange Act reports was recorded, processed,
summarized and reported on a timely basis.
-14-
Imaging 3 is undertaking to improve its internal control over financial
reporting and improve its disclosure controls and procedures. As of December 31,
2010, we had identified the following material weaknesses which still exist as
of March 31, 2011 and through the date of this report:
1. As of December 31, 2010 and as of the date of this report, we did
not maintain effective controls over the control environment. Specifically, the
Board of Directors does not currently have any independent members and no
director qualifies as an audit committee financial expert as defined in Item
407(d)(5)(ii) of Regulation S-B. Since these entity level programs have a
pervasive effect across the organization, management has determined that these
circumstances constitute a material weakness.
2. As of December 31, 2010 and as of the date of this report, we did
not maintain effective controls over financial statement disclosure.
Specifically, controls were not designed and in place to ensure that all
disclosures required were originally addressed in our financial statements.
Accordingly, management has determined that this control deficiency constitutes
a material weakness.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There were no changes in internal controls over financial reporting
that occurred during the quarter ended March 31, 2011, 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.
-15-
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 March 31, 2011, the Company had not
issued common stock for either cash or consulting services.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
---------------------------------------
None.
ITEM 4. REMOVED AND RESERVED
----------------------------
None.
ITEM 5. OTHER INFORMATION
-------------------------
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
-----------------------------------------
(a) Exhibits
EXHIBIT NO. DESCRIPTION
--------------- ----------------------------------------------------
31.1 Section 302 Certification of Chief Executive Officer
31.2 Section 302 Certification of Chief Financial Officer
32.1 Section 906 Certification
32.2 Section 906 Certification
(b) The following is a list of Current Reports on Form 8-K filed by the Company
during and subsequent to the quarter for which this report is filed.
None.
-16-
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: July 15, 2011 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: July 15, 2011
-----------------------------------------------
Dean Janes, Chief Executive Officer
and Chairman (Principal Executive Officer)
By: /s/Christopher Sohn Dated: July 15, 2011
-----------------------------------------------
Christopher Sohn, Director, President
and Chief Operating Officer
By: /s/Xavier Aguilera Dated: July 15, 2011
-----------------------------------------------
Xavier Aguilera, Chief Financial Officer,
Secretary, and Executive Vice President
(Principal Financial/Accounting Officer)
-17