IMAGENETIX INC /NV/ - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - IMAGENETIX INC /NV/	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - IMAGENETIX INC /NV/	v230008_ex32-1.htm
EX-32.2 - EXHIBIT 32.2 - IMAGENETIX INC /NV/	v230008_ex32-2.htm
EX-31.2 - EXHIBIT 31.2 - IMAGENETIX INC /NV/	v230008_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - IMAGENETIX INC /NV/	v230008_ex31-1.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

x Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

For quarterly period ended June 30, 2011

¨ Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

For the transition period from _____ to _____

COMMISSION FILE NUMBER 033-24138-D

IMAGENETIX, INC.

(Exact name of registrant as specified in its charter)

NEVADA		87-0463772
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

10845 Rancho Bernardo Road, Suite 105

San Diego, California 92127

(Address of principal executive offices)

Registrant’s telephone number (including area code) (858) 674-8455

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

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 (§ 229.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.


Large accelerated filer o		Accelerated filer o		Non-accelerated filer o		Smaller reporting company x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practicable date:

Common Stock, $.001 par value		11,811,288

(Class)		Outstanding at August 15, 2011

Imagenetix, Inc.

INDEX

			Page

PART I.	FINANCIAL INFORMATION

	Item 1.	Financial Statements:

		Condensed Consolidated Balance Sheets as of June 30, 2011 (unaudited) and March 31, 2011	3

		Condensed Consolidated Statements of Operations for the three months ended June 30, 2011 and 2010 (unaudited)	4

		Condensed Consolidated Statements of Cash Flows for the three months ended June 30, 2011 and 2010 (unaudited)	5

		Notes to Unaudited Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	12

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	*

	Item 4T.	Controls and Procedures	18

PART II.	OTHER INFORMATION

	Item 1.	Legal Proceedings	18
	Item 1A.	Risk Factors	18
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	*
	Item 3.	Defaults Upon Senior Securities	*
	Item 4.	Reserved	*
	Item 5.	Other Information	*
	Item 6.	Exhibits	21

SIGNATURES			22

No information provided due to inapplicability of the item.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Imagenetix, Inc.

Condensed Consolidated Balance Sheets

	June 30,			March 31,
	2011			2011
	(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	642,642		$	398,997
Accounts receivable, net		519,173			669,976
Receivable from sale of licenses and intellectual property		500,000			1,250,000
Inventories, net		819,839			993,393
Prepaid expenses and other current assets		71,919			131,932
Deferred tax assets		122,300			127,800
Total current assets		2,675,873			3,572,098

Property and equipment, net		50,852			58,498
Long-term prepaid expenses		3,000			6,000
Other assets		73,805			80,240
Long-term deferred tax assets		2,511,700			2,203,000
Total Assets	$	5,315,230		$	5,919,836

LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
Secured note payable to a bank	$	-		$	839,000
Secured note payable		700,000			-
Convertible notes		75,000			300,000
Accounts payable		904,244			820,509
Accrued liabilities		61,019			71,857
Customer deposits		84,664			15,077
Current deferred revenue		1,750,000			1,750,000
Contract payable		20,132			42,347
Total current liabilities		3,595,059			3,838,790

Stockholders' equity
Preferred stock, $.001 par value; 5,000,000 shares authorized: none outstanding		-			-
Common stock, $.001 par value; 50,000,000 shares authorized: 11,811,288 issued and outstanding at June 30, 2011 and March 31, 2011, respectively		11,810			11,810
Capital in excess of par value		13,589,421			13,543,753
Accumulated deficit		(11,881,060	)		(11,474,517	)
Total stockholders' equity		1,720,171			2,081,046
Total Liabilities and Stockholders' Equity	$	5,315,230		$	5,919,836

See accompanying notes to unaudited condensed consolidated financial statements.

Imagenetix, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended
	June 30,			June 30,
	2011			2010

Net sales	$	545,132		$	1,084,964

Cost of sales		328,648			749,634

Gross profit		216,484			335,330

Operating expenses:
General and administrative		306,095			595,779
Payroll expense		147,180			242,530
Consulting expense		385,840			410,034
Operating expenses		839,115			1,248,343
Operating loss		(622,631	)		(913,013	)
Other income (expense):
Other income		86			817
Interest expense		(87,198	)		(89,084	)
Other expense		(87,112	)		(88,267	)
Loss before income taxes		(709,743	)		(1,001,280	)

Income tax benefit		(303,200	)		(397,700	)

Net loss	$	(406,543	)	$	(603,580	)

Basic and diluted net loss per share	$	(0.03	)	$	(0.05	)

Basic and diluted weighted average common shares outstanding		11,811,288			11,309,689

See accompanying notes to unaudited condensed consolidated financial statements.

Imagenetix, Inc.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended
	June 30, 2011			June 30, 2010
Operating activities:
Net loss	$	(406,543	)	$	(603,580	)
Adjustments to reconcile net loss to cash provided by (used in) operating activities:
Amortization and depreciation		14,083			12,954
Provision for inventory obsolescence		(12,322	)		(5,917	)
Non cash expense related to issuance of warrants and granting of stock options		45,668			72,410
Changes in assets and liabilities:
(Increase) decrease in accounts receivable		150,803			134,390
(Increase) decrease in receivable from sale of licenses and intellectual property		750,000			-
(Increase) decrease in inventories		185,876			59,166
(Increase) decrease in other assets		63,011			(34,081	)
(Increase) decrease in deferred taxes		(303,200	)		(397,700	)
Increase (decrease) in accounts payable		83,735			(471,848	)
Increase (decrease) in accrued liabilities		(10,838	)		(4,174	)
Increase (decrease) in customer deposits		69,587			(6,112	)
Net cash (used in) provided by operating activities		629,860			(1,244,492	)
Investing activities		-			-
Financing activities:
Payments on contracts payable		(22,215	)		(43,305	)
Proceeds from secured note payable		700,000			-
Proceeds from bridge loans and bank financings		-			910,000
Payments on bridge loans		(225,000	)		(410,000	)
Payment on bank financing		(839,000	)		-
Proceeds from sale of common stock		-			400,000
Net cash (used in) provided by financing activities		(386,215	)		856,695
Net increase (decrease) in cash and cash equivalents		243,645			(387,797	)
Cash and cash equivalents, beginning of period		398,997			981,510
Cash and cash equivalents, end of period	$	642,642		$	593,713

Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest	$	42,343		$	31,531
Income taxes	$	-		$	-

See accompanying notes to unaudited condensed consolidated financial statements.

IMAGENETIX, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

1.	BASIS OF PRESENTATION

The consolidated financial statements of Imagenetix, Inc. ("Imagenetix") presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in Form 10-K for the year ended March 31, 2011.

In the opinion of management, the interim consolidated financial statements reflect all adjustments of a normal recurring nature necessary for a fair statement of the results for interim periods. Operating results for the three month periods are not necessarily indicative of the results that may be expected for the year.

Earnings Per Share

We follow the Financial Accounting Standards Board Accounting Standards Codification ("ASC") No. 260. Under ASC No. 260, basic earnings per share is calculated as earnings available to common stockholders divided by the weighted average number of common shares outstanding. Diluted earnings per share is calculated as net income divided by the diluted weighted average number of common shares. The diluted weighted average number of common shares is calculated using the treasury stock method for common stock issuable pursuant to outstanding stock options and common stock warrants. See Note 7 for a discussion of commitments to issue additional shares of common stock and warrants.

Stock Based Compensation

We account for stock based compensation under ASC Nos. 718 and 505. ASC Nos. 718 and 505 require all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values.

We have selected the Black-Scholes method of valuation for share-based compensation. The charge is recognized in non-cash compensation, which is included in stock-based compensation expense, on a straight-line basis over the remaining service period based on the options’ original estimate of fair value.

We apply ASC Nos. 718 and 505 in valuing options granted to consultants and estimate the fair value of such options using the Black-Scholes option-pricing model. The fair value is recorded as consulting expense as services are provided. Options granted to consultants for which vesting is contingent based on future performance are measured at their then current fair value at each period end, until vested.

Research and Development

We incur expenses to further develop our products and formulas, commission entities to perform clinical trials and evaluate potential products to expand our portfolio. In addition, we have received a patent for a drug candidate which, if successful, will address periodontal diseases. We have started the initial new drug process and have completed several animal studies. During the three months ended June 30, 2011, we incurred research and development expenses, which are included in general and administrative expenses in the statement of operations, of $0 compared to $19,491 for the corresponding period of the previous fiscal year.

IMAGENETIX, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

2.	NEW ACCOUNTING STANDARDS

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-04, Fair Value Measurement (Accounting Standards Codification (“ASC”) Topic 820) — Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this ASU result in common fair value measurement and disclosure requirements in U.S. GAAP and international financial reporting standards (“IFRS”). Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. To improve consistency in application across jurisdictions some changes in wording are necessary to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way. The ASU also provides for certain changes in current GAAP disclosure requirements, for example with respect to the measurement of level 3 assets and for measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity. The amendments in this ASU are to be applied prospectively, and are effective during interim and annual periods beginning after December 15, 2011. The adoption of this guidance is not anticipated to have a material impact on our consolidated financial position, results of operations or cash flows.

In May 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (ASC Topic 220) — Presentation of Comprehensive Income. The amendments from this update will result in more converged guidance on how comprehensive income is presented under both U.S. GAAP and IFRS. With this update to ASC 220, an entity has the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required to present each component of net income along with total net income, each component of other comprehensive income along with a total for other comprehensive income, and a total amount for comprehensive income. The amendments in this update do not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income, nor does it affect how earnings per share is calculated or presented. Current U.S. GAAP allows reporting entities three alternatives for presenting other comprehensive income and its components in financial statements. One of those presentation options is to present the components of other comprehensive income as part of the statement of changes in stockholders’ equity. This update eliminates that option. The amendments in this ASU should be applied retrospectively, and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. The adoption of this guidance is not anticipated to have a material impact on our consolidated financial position, results of operations or cash flows.

A variety of proposed or otherwise potential accounting standards are currently under study by standard-setting organizations and various regulatory agencies. Because of the tentative and preliminary nature of these proposed standards, management has not determined whether implementation of such proposed standards would be material to the Company’s consolidated financial statements.

3.	ACCOUNTS RECEIVABLE

Accounts receivable are carried at the expected realizable value. Accounts receivable consisted of the following:

IMAGENETIX, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

	June 30,			March 31,
	2011			2011

Accounts receivable - trade	$	662,173		$	812,976
Allowance for doubtful accounts		(25,000	)		(25,000	)
Allowance for returns and discounts		(118,000	)		(118,000	)

Accounts receivable, net	$	519,173		$	669,976

At June 30, 2011, we had two customers which accounted for 51% and 22%, respectfully, of our accounts receivable balances. At March 31, 2011, we had two customers which accounted for 44%, and 37%, respectfully, of our accounts receivable balances.

For the three months ended June 30, 2011, we had three significant customers which accounted for 47%, 15% and 13%, respectfully, of sales. For the three months ended June 30, 2010, we had three significant customers which accounted for 32%, 20% and 16%, respectfully, of sales.

4.	INVENTORIES

Inventories consist of the following:

	June 30,			March 31,
	2011			2011

Raw materials	$	407,416		$	517,600
Finished products		307,369			375,227
Boxes, labels, tubes & bottles		249,732			257,566
		964,517			1,150,393
Reserve for obsolescence		(144,678	)		(157,000	)
	$	819,839		$	993,393

5.	OTHER ASSETS

The following is a summary of intangible assets which are included in “Other Assets” on the face of the balance sheet:

	June 30,		March 31,
	2011		2011

Trademarks	$	13,032	$	13,032
Patent		172,965		172,965
		185,997		185,997

Less accumulated amortization		112,192		105,757

	$	73,805	$	80,240

IMAGENETIX, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

6.	SECURED NOTES PAYABLE

In June 2010, we entered into an asset based line of credit with a bank. The terms of the agreement enabled us to borrow up to 65% of our accounts receivables and up to $300,000 of our inventory subject to certain limitations. The maximum amount we could borrow was $1,500,000. As of June 30, 2011, the line of credit was paid off. The interest rate on the outstanding balance was the greater of the prime rate plus 1.75% or 5% (10% in the case of a default) plus a maintenance fee of 0.25% and an annual facility fee of 1% of the maximum borrowing amount. On the payoff of the line of credit, the bank withdrew a secured position it had on the assets of the company.

In May 2011, we entered into a $700,000 secured note payable with the parent company of one of our customers. The terms of the note include quarterly interest payments at a rate of 7.5% for 18 months at the end of which time the entire note is due. The note is secured by the Celadrin trademark and everything proprietary to Celadrin including all patents. In addition, we agreed to provide a $7 per KG discount on all purchases made by the customer during the 18 month term with a guaranteed minimum discount of $70,000. Since the $7 per KG discount is tied to the financing agreement, we are recognizing this amount as an increase to interest expense.

7.	EQUITY TRANSACTIONS

In May 2010, we issued 800,000 shares of restricted common stock to two institutional investors for an aggregated amount of $400,000, or $0.50 per share.

During the quarters ended June 30, 2011 and 2010, we recorded non-cash compensation of $26,895 and $5,705, respectively, and non-cash general and administrative expense of $9,152 and $9,152, respectively, for stock options and warrants issued to employees and consultants. For the quarters ended June 30, 2011 and 2010, we recorded non-cash interest of $9,621 and $57,553, respectively, as a result of bridge loans.

The significant assumptions used in the Black Sholes model to estimate the expenses for the issuance of stock options and warrants are as follows:

	Three months ended June 30,
	2011	2010
Expected term of options and warrants	None	5 years
Expected volatility	None	79%
Expected dividends	None	None
Risk-free interest rate	None	1.79 to 2.01%
Forfeitures	None	0%

IMAGENETIX, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

A summary of the options outstanding follows:

	For the Three Months Ended
	June 30, 2011
			Weighted
			Average
			Exercise
Options	Shares		Price
Outstanding at beginning of year		1,890,000	$	0.60
Granted		-		-
Cancelled		-		-
Exercised		-		-
Outstanding at end of the period		1,890,000	$	0.60

Exercisable at end of the the period		1,442,500	$	0.67

Weighted average fair value of options granted during the period		-	$	-

As of June 30, 2011, the unamortized portion of stock compensation expense on all existing stock options was $17,930.

A summary of other warrants outstanding follows:

	For the Three Months Ended
	June 30, 2011
			Weighted
			Average
			Exercise
Warrants	Shares		Price
Outstanding at beginning of year		1,301,341	$	0.72
Granted		-		-
Cancelled		-		-
Exercised		-		-
Outstanding at end of the period		1,301,341	$	0.72

Exercisable at end of the the period		1,301,341	$	0.72

Weighted average fair value of warrants granted during the period		-	$	-

8.	INCOME TAXES

We have adopted ASC 740 which prescribes a comprehensive model of how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. ASC 740 states that a tax benefit from an uncertain position may be recognized if it is "more likely than not" that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information.

IMAGENETIX, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

Upon adoption of ASC 740, there was no impact to our consolidated financial statements. We estimate that the unrecognized tax benefit will not change significantly within the next twelve months. We will continue to classify income tax penalties and interest as part of general and administrative expense in our statements of operations. Accrued interest on uncertain tax positions is not significant. There are no penalties accrued as of June 30, 2011. The following table summarizes the open tax years for each major jurisdiction:

Jurisdiction		Open Tax Years
Federal		2008 – 2010
California		2008 – 2010

As we have had significant net operating loss carry forwards, even if certain of our tax positions were disallowed, it is not foreseen that we would have to pay any taxes in the near future. Consequently, we do not calculate the impact of interest or penalties on amounts that might be disallowed.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO OUR FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "RISK FACTORS." SEE ALSO OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED MARCH 31, 2011.

Overview

We develop, formulate and market over-the-counter, natural-based nutritional supplements and skin care products. Our products are proprietary, often supported by scientific studies which we request and are offered through multiple channels of distribution, including direct marketing companies, also known as network marketing or multi-level marketing companies, and chain store retailers. Our primary product is Celadrin® a product formulation which we sell to the mass market through retailers and on a private label basis to wholesale customers. We also license our intellectual property to third parties.

A key part of our marketing strategy is to provide to our wholesale customers a "turnkey" approach to the marketing and distribution of our products. This turnkey approach provides these customers with all the services necessary to market our products, including developing specific product formulations, providing supporting scientific studies regarding the effectiveness of the product and arranging for the manufacture and marketing of the product.

Historically, we have sold our own branded product, Celadrin®, directly to the mass markets through retail sellers. We currently plan to expand our activities in developing, licensing and selling products and formulations to businesses and organizations that in-turn market our products through multiple channels of distribution, including direct marketing companies, mass marketing companies, medical, health and nutritional professionals, medical newsletters and direct response radio and television. We also offer Celadrin® products through wholesale customers that in turn offer their products containing Celadrin® to mass market retailers.

Management's discussion and analysis of results of operations and financial condition are based upon the Company's financial statements. These statements have been prepared in accordance with accounting principles generally accepted in the United States of America. These principles require management to make certain estimates, judgments and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates based on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Critical Accounting Policies and Estimates

We have identified nine accounting principles that we believe are key to an understanding of our financial statements. These important accounting policies require management's most difficult, subjective judgments.

1. Cash and Cash Equivalents.

For purposes of the financial statements, we consider all highly liquid debt investments purchased with a maturity of three months or less to be cash equivalents.

2. Accounts receivable.

Accounts receivable are carried at the expected net realizable value. The allowance for doubtful accounts is based on management’s assessment of the collectability of specific customer accounts and the aging of the accounts receivable. If there were a deterioration of a major customer’s creditworthiness, or actual defaults were higher than historical experience, our estimates of the recoverability of amounts due to us could be overstated, which could have a negative impact on operations.

3. Inventory

Inventory is carried at the lower of cost or market. Cost is determined by the first-in first-out method. Indirect overhead costs are allocated to inventory.

4. Property and Equipment

Property and equipment are stated at cost. Expenditures for major renewals and betterments that extend the useful lives of property and equipment are capitalized, upon being placed in service. Expenditures for maintenance and repairs are charged to expense as incurred. Depreciation is computed over the estimated useful life of three to seven years, except leasehold improvements which are depreciated over the lesser of the remaining lease life or the life of the asset, using the straight-line method. We follow the provisions of the Financial Accounting Standards Board Accounting Standards Codification ("ASC") No. 360. Under ASC No. 360, long-lived assets and certain identifiable intangibles to be held and used by us are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. We continuously evaluate the recoverability of our long-lived assets based on estimated future cash flows and the estimated fair value of such long-lived assets, and provide for impairment if such undiscounted cash flows are insufficient to recover the carrying amount of the long-lived asset.

5. Trademarks and Patents

Patents and trademarks are carried at cost less accumulated amortization and are amortized over their estimated useful lives of from 8 to 17 years for patents and 17 years for trademarks. The carrying value of patents and trademarks is periodically reviewed and impairments, if any, are recognized when the expected future benefit to be derived from individual intangible assets is less than its carrying value determined based on the provisions of ASC No. 360 as discussed above.

6. Stock Based Compensation

We adopted ASC Nos.718 and 505, which require that share-based payments be reflected as an expense based upon the grant-date fair value of those awards. The expense is recognized over the remaining vesting periods of the awards. The Company estimates the fair value of these awards, including stock options and warrants, using the Black-Scholes model. This model requires management to make certain estimates in the assumptions used in this model, including the expected term the award will be held, volatility of the underlying common stock, discount rate and forfeiture rate. We develop our assumptions based on our past historical trends as well as consider changes for future expectations.

7. Revenue Recognition

We recognize revenue in accordance with the SEC’s Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (SAB104) and ASC No. 605. SAB 104 requires that four basic criteria be met before revenue can be recognized: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and 4) collectability is reasonably assured. ASC No. 605 states that revenue from sales transactions where the buyer has the right to return the product shall be recognized at the time of sale only if (1) the seller’s price to the buyer is substantially fixed or determinable at the date of sale; (2) the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on resale of the product; (3) the buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product; (4) the buyer acquiring the product for resale has economic substance apart from that provided by the seller; (5) the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer; and (6) the amount of future returns can be reasonably estimated. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon delivery is deferred until the shipment has been delivered.

We account for payments made to customers in accordance with ASC No. 605, which states that cash consideration (including a sales incentive) given by a vendor to a customer is presumed to be a reduction of the selling prices of the vendor’s products or services and, therefore, should be characterized as a reduction of revenue when recognized in the vendor’s income statement, rather than a sales and marketing expense. We have various agreements with customers that provide for discounts and rebates. These agreements are classified as a reduction of revenue. Certain other costs associated with customers that meet the requirements of ASC No. 605 are recorded as sales and marketing expense. Vendor considerations recorded as a reduction of sales were $979,000 and $1,185,000 for the years ended March 31, 2011 and 2010.

We guarantee customer satisfaction. Our policy requires the customer to return the unused product to the retailer from whom they originally purchased it. We pay the retailer for the returned product plus a handling cost. We review gross revenue for estimated returns of private label contract manufacturing products and direct-to-consumer products. The estimated returns are based upon the trailing six months of private label contract manufacturing gross sales and our historical experience for both private label contract manufacturing and direct-to-consumer product returns. However, the estimate for product returns does not reflect the impact of a large product recall resulting from product nonconformance or other factors as such events are not predictable nor is the related economic impact estimable. We periodically assess the adequacy of this policy and record a liability as necessary. For the years ended March 31, 2011 and 2010, we recorded reserves of $118,000 and $86,000 for potential returns, allowances and product buy backs.

As part of the services we provide to our private label contract manufacturing customers, we may perform, but are not required to perform, certain research and development activities related to the development or improvement of their products. While our customers typically do not pay directly for this service, the cost of this service is included as a component of the price we charge to manufacture and deliver their products.

Royalties- we recognize revenue from royalties based on reports provided by our customers (typically 30 days after the end of the quarter on which the royalty payment is based.)

Licensing- we also derive license revenue from fees for the transfer of proven and reusable intellectual property components. Generally, these payments will include a nonrefundable technology license fee, which will be payable upon the transfer of intellectual property. License fees will be recognized upon the execution of the license agreement and transfer of intellectual property provided no further significant performance obligations exist and collectability is deemed probable. If additional performance obligations are present, we defer revenue recognition until such time as the performance obligation is satisfied.

8. Income Taxes

We account for income taxes in accordance with ASC No. 740. This statement requires an asset and liability approach for accounting for income taxes and prescribes a comprehensive model of how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take on a tax return. ASC No. 740 states that a tax benefit from an uncertain position may be recognized if it is "more likely than not" that the position is sustainable, based upon its technical merits. The tax benefit of a qualifying position is the largest amount of tax benefit that is greater than 50 percent likely of being realized upon ultimate settlement with a taxing authority having full knowledge of all relevant information.

9. Research and Development

We incur expenses to further develop our products and formulas, commission entities to perform clinical trials and evaluate potential products to expand our portfolio. In addition, we recently received a new patent for a drug candidate which, if successful, will address periodontal diseases. We have started the initial new drug process and have completed several animal studies. During the quarters ended June 30, 2011 and 2010 we incurred research and development expenses of $0 and $19,491, respectively.

Selected Financial Information

Results of Operations

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

	Three Months Ended
							Increase
	6/30/11			6/30/10			(Decrease)			%

Statements of Operations:
Net sales	$	545,132		$	1,084,964		$	(539,832	)		-49.8	%
Cost of goods sold		328,648			749,634			(420,986	)		-56.2	%
% of net sales		60	%		69	%		-9	%		-12.7	%
Gross profit		216,484			335,330			(118,846	)		-35.4	%
% of net sales		40	%		31	%		9	%		28.5	%
Operating expenses
General and administrative		306,095			595,779			(289,684	)		-48.6	%
Payroll expense		147,180			242,530			(95,350	)		-39.3	%
Consulting expense		385,840			410,034			(24,194	)		-5.9	%
Total operating expenses		839,115			1,248,343			(409,228	)		-32.8	%
Interest expense		(87,198	)		(89,084	)		1,886			2.1	%
Other income		86			817			(731	)		-89.5	%
Benefit from taxes		(303,200	)		(397,700	)		(94,500	)		23.8	%
Net loss		(406,543	)		(603,580	)		(197,037	)		-32.6	%
Net loss per share basic and diluted		(0.03	)		(0.05	)		0.02			-40.0	%

Net Sales

Net sales for the quarter ended June 30, 2011 decreased $539,832, a 49.8% decrease, to $545,132 compared to $1,084,964 for the quarter ended June 30, 2010. The primary reason for the sales decrease is a transition from mass market and wholesale sales to distribution and licensing sales. Mass market sales reflect mark down allowances on existing store inventories.

Breakdown of net sales

	Three Months Ended June 30,
	2011						2010					Increase
	$			%			$		%			(Decrease)

Wholesale	$	121,740			22	%	$	512,973		47	%	$	(391,233	)
Mass market		(141,306	)		-26	%		341,678		31	%		(482,984	)
Distibutors		564,698			104	%		230,313		21	%		334,385
	$	545,132			100	%	$	1,084,964		100	%	$	(539,832	)

We anticipate mass market sales to be substantially eliminated over the upcoming quarters as part of the transition to distribution and licensing sales.

Cost of Goods Sold

Cost of goods sold as a percentage of net sales decreased to 60% for the quarter ended June 30, 2011 compared to 69% for the quarter ended June 30, 2010. This decrease was the result of the product mix, reduced gross revenue and larger advertising allowances on our mass market sales during the previous fiscal year period. We anticipate this percentage to decrease as we transition to distribution and licensing sales.

General and Administrative

General and administrative expenses decreased $289,684, a 48.6% decrease, to $306,095 for the quarter ended June 30, 2011 compared to $595,779 for the quarter ended June 30, 2010. This decrease was primarily due to a reduction in advertising expenses of approximately $177,000, a decrease in travel related costs of approximately $22,000 and a reduction in research and development expenses of approximately $19,000. We anticipate future decreases in general and administrative expenses as we transition to distributor and licensing sales.

Payroll Expense

Payroll expense decreased to $147,180 for the quarter ended June 30, 2011, a decrease of 39.3% or $95,350 compared to $242,530 for the quarter ended June 30, 2010. This decrease was a result of a reduction in work force as we transition to distributor and licensing sales coupled with a reduction in non-cash compensation expense related to employee stock options for the current fiscal period compared to the previous year fiscal period.

Consulting Expenses

Consulting expenses decreased to $385,840 for the quarter ended June 30, 2011, a decrease of 5.9% or $24,194 compared to $410,034 for the quarter ended June 30, 2010. This decrease was a result of a reduction of expenses related to the mass market segment of approximately $191,000 partially offset by an increase in legal expenses of approximately $161,000 related to two active proceedings.

Interest Expense

Interest expense of $87,198 was recognized during the quarter ended June 30, 2011 compared to $89,084 for the quarter ended June 30, 2010. This decrease was the result of previous fiscal year period non-cash interest of $58,000 coupled with cash payments of $31,000 related to the issuance of bridge loans in anticipation of an asset based line of credit with a bank compared to current year interest payments of $44,000 on bridge loans and secured notes and non-cash interest of $43,000 related to purchase discount financing. The bridge loans were issued and paid off during the previous fiscal year period but the investors received warrants and a cash premium on the extinguishment of the debt.

Provision for Income Taxes

An income tax benefit of $303,200 was recognized during the current quarter compared to $397,700 recognized during the quarter ended June 30, 2010.

Capital Resources

Working Capital (Deficit)

								Increase
		6/30/11			3/31/11			(Decrease)

Current assets		$	2,675,873		$	3,572,098		$	(896,225	)
Current liabilities			3,595,059			3,838,790			(243,731	)
Working capital (deficit)		$	(919,186	)	$	(266,692	)	$	(652,494	)

Long-term debt		$	-		$	-		$	-

Stockholders' equity		$	1,720,171		$	2,081,046		$	(360,875	)

Statements of Cash Flows Select Information
	Three Months Ended							Increase
		6/30/11			6/30/10			(Decrease)
Net cash provided by (used in):
Operating activities		$	629,860		$	(1,244,492	)	$	1,874,352
Investing activities		$	-		$	-		$	-
Financing activities		$	(386,215	)	$	856,695		$	(1,242,910	)

Balance Sheet Select Information
								Increase
		6/30/11			3/31/11			(Decrease)

Cash and cash equivalients		$	642,642		$	398,997		$	243,645

Accounts receivable, net		$	519,173		$	669,976		$	(150,803	)

Inventories, net		$	819,839		$	993,393		$	(173,554	)

Secured note payable		$	700,000		$	-		$	700,000

Accounts payable and accrued expenses		$	965,263		$	892,366		$	72,897

Liquidity

We have historically financed our operations internally and through debt and equity financings. At June 30, 2011, we had cash holdings of $642,642, an increase of $243,645 compared to March 31, 2011. Our net working capital deficit at June 30, 2011, was $919,186 compared to a deficit of $266,692 as of March 31, 2011. The continuing decrease is primarily the result of operating losses incurred during the quarter. During the first fiscal quarter of 2012, we received $750,000 in cash from the deferred sale of our intellectual property and $700,000 from an investor. The proceeds were used to pay off and close the asset based line of credit as we reposition ourselves away from the mass market in favor of intellectual property licensing and royalty sales to compliment distributor revenue. Although our cash requirements for marketing and advertising will be eliminated with this new business model, we have no history concerning licensing and royalty revenue. However, we believe that our cash position is sufficient to fund our operating activities for at least the next 12 months.

New Accounting Standards

See Note 2- Recent Accounting Pronouncements- to our condensed consolidated financial statements included in Item 1 of this Form 10-Q for discussion of recent accounting pronouncements.

ITEM 4T. CONTROLS AND PROCEDURES.

Our chief executive officer and our chief financial officer conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Securities Exchange Act Rules 13a-15(e) and 15d-15(e)) as of June 30, 2011. Based on their evaluation, they concluded that our disclosure controls and procedures were effective and designed to give reasonable assurance that the information required to be disclosed by us in reports that we file or submit under the Exchange Act was made known to them by others and was recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. There was no change in our internal controls that occurred during the period covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

TriPharma Suit

On April 30, 2010, TriPharma, Inc., a customer of Imagenetix, filed a legal action in the United States Southern District Court of California, case number 10CV0933IEG, related to an Exclusive Marketing and Supply Agreement, as amended on June 19, 2008. TriPharma asserts that Imagenetix breached the terms of the Agreement and seeks injunctive relief and unspecified damages. The Company denies the allegations and believes the claims to be frivolous and totally devoid of merit. The arbitration hearing which was started in July 2011 has been extended into August 2011. Subsequent to the hearing, it is anticipated that the arbitrator will issue his decision in approximately 30 days. Despite the inherent uncertainties of litigation, the Company at this time does not believe that TriPharma's claim will have a material adverse impact on its financial condition, results of operations, or cash flows.

Nikken Suit

On April 29, 2011, Imagenetix filed a legal action in the United States Central District of California, case number CV11-3727GHK (VBKx), against Nikken Inc., Et. Al. Imagenetix claims that the defendants infringed on its U.S. Patent No. 5,596,676 entitled “Method for the Treatment of Osteoarthritis” and entered into unfair competition under the Lanham Act. Imagenetix seeks damages of approximately $31,000,000 and injunctive relief. The parties are currently filing motions related to this case and a reexamination of the patent has been ordered and

will be undertaken by the U.S. Patent and Trademark Office.

ITEM 1A. RISK FACTORS.

Risk Factors

You should consider the following discussion of risks as well as other information regarding our common stock. The risks and uncertainties described below are not the only ones. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our business operations. If any of the following risks actually occur, our business could be harmed.

There Is Only One Supplier for Celadrin®. If We Are Unable to Purchase Celadrin® from This Supplier, Our Business Would Be Harmed.

There is only one supplier for Celadrin®, which we use in approximately 69% of our products and which represented approximately 69% of our sales for the year ended March 31, 2011. We will rely upon Celadrin® to expand our product lines and revenue in the future. If our Celadrin® supplier goes out of business or elects for any reason not to supply us with Celadrin®, we would have to find another Celadrin® supplier or suffer a significant reduction in our revenue.

We Rely upon a Limited Number of Customers the Loss of Which Would Reduce Our Revenue and Any Earnings.

Our largest customers accounted for 47%, 15% and 13% of our net sales for the three months ended June 30, 2011 and 54% and 14% for the year ended March 31, 2011. If not replaced by other large customers, the loss of any significantly large customer could reduce our revenue and adversely affect our cash flow and earnings, if any.

We Have Recently Changed to a Licensing Model to Generate Revenue Which Could Impact Our Revenue and Profitability.

Our business model has changed from exclusively selling products directly to wholesalers, retailers, and customers to additionally licensing the sale of our products to third parties. This business model requires the third parties to commit to such an agreement and to successfully sell products with our technologies. We have not achieved similar significant revenue producing license deals in the past. If we are not successful at implementing a licensing model, our revenues, cash flow and earnings, if any, could be adversely affected.

We Rely upon Other Outside Suppliers to Produce Our Products Which Could Delay Our Product Deliveries.

All of our products are produced by outside manufacturers who process ingredients provided to them by our suppliers and with whom we have contracts. Our profit margins and our ability to deliver products on a timely basis are dependent upon these manufacturers and suppliers. Should any of these manufacturers or suppliers fail to provide us with product, we would be required to obtain new manufacturers and suppliers, which would be costly and time consuming and could delay our product deliveries.

Product Liability Claims Against Us Could Be Costly.

Some of our nutritional supplements contain newly-introduced ingredients or combinations of ingredients, and we have little long-term health information about individuals consuming those ingredients. If any of these products were thought or proved to be harmful, we could be subject to litigation. Although we carry product liability insurance in the face amount of $1,000,000 per occurrence and $2,000,000 in the aggregate and require our suppliers and manufacturers to include us as insured parties on their product liability insurance policies, our coverage may not be adequate to protect us from potential product liability claims and costs of defense.

We Are Subject to Intense Competition from Other Nutritional Supplement Marketers Which Could Reduce Our Revenue and Profit Margins.

Competition in the nutritional supplement market is intense. We compete with numerous companies that have longer operating histories, more products and greater name recognition and financial resources than we do. In order to compete, we could be forced to lower our product prices, which would reduce our revenue and profit margins.

We Are Highly Regulated, Which Increases Our Costs of Doing Business.

We are subject to laws and regulations which cover:

•

the formulation, manufacturing, packaging, labeling, distribution, importation, sale and storage of our products;

•

the health and safety of food and drugs;

•

trade practice and direct selling laws; and

•

product claims and advertising by us; or for which we may be held responsible.

Compliance with these laws and regulations is time consuming and expensive. Moreover, new regulations could be adopted that would severely restrict the products we sell or our ability to continue our business. We are unable to predict the nature of any future laws, regulations, interpretations or applications, nor can we predict what effect additional governmental regulations or administrative orders, when and if promulgated, would have on our business in the future. These future changes could, however, require the reformulation or elimination of certain products; imposition of additional record keeping and documentation requirements; imposition of new federal reporting and application requirements; modified methods of importing, manufacturing, storing or distributing certain products; and expanded or different labeling and substantiation requirements for certain products and ingredients. Any or all of these requirements could harm our business.

There Are Limitations on the Liability of Our Officers and Directors Which May Restrict Our Stockholders from Bringing Claims.

Our Bylaws substantially limit the liability of our officers and directors to us and our stockholders for negligence and breach of fiduciary or other duties to us. This limitation may prevent stockholders from bringing claims against our officers and directors in the future.

Shares of Our Common Stock Which Are Eligible for Sale by Our Stockholders May Decrease the Price of Our Common Stock.

We have 11,811,288 common shares outstanding which are freely tradable or saleable under Rule 144. We also have outstanding common stock warrants and stock options exercisable into up to 3,191,341 shares of common stock which could become free trading if exercised. If our stockholders sell substantial amounts of our common stock, the market price of our common stock could decrease.

There is a Limited but Potentially Volatile Trading Market in Our Common Stock, Which May Adversely Affect Our Stock Price.

Our common stock trades on the Electronic Bulletin Board. The Bulletin Board tends to be highly illiquid, in part because there is no national quotation system by which potential investors can track the market price of shares except through information received or generated by a limited number of broker-dealers that make a market in particular stocks. There is a greater chance of market volatility for securities that trade on the Bulletin Board as opposed to a national exchange or quotation system. This volatility may be caused by a variety of factors, including:

•

The lack of readily available price quotations;

•

The absence of consistent administrative supervision of "bid" and "ask" quotations;

•

Lower trading volume; and

•

Market conditions.

There could be wide fluctuations in the market price of our common stock. These fluctuations may have an extremely negative effect on the market price of our securities and may prevent an investor from obtaining a market price equal to his purchase price when he attempts to sell our securities in the open market. In these situations, the investor may be required to either sell our securities at a market price which is lower than his purchase price, or to hold our securities for a longer period of time than he planned.

Because Our Common Stock May Be Classified as "Penny Stock," Trading in it Could Be Limited, and Our Stock Price Could Decline.

In the future, our common stock may fall under the definition of "penny stock" if our net tangible assets decline below $2,500,000. In such event, trading in our common stock would be limited because broker-dealers will be required to provide their customers with disclosure documents prior to allowing them to participate in transactions involving our common stock. These disclosure requirements are burdensome to broker-dealers and may discourage them from allowing their customers to participate in transactions involving our common stock.

"Penny stocks" are equity securities with a market price below $5.00 per share, other than a security that is registered on a national exchange or included for quotation on the Nasdaq system, unless, as in our case, the issuer has net tangible assets of more than $2,000,000 and has been in continuous operation for greater than three years. Issuers who have been in operation for less than three years must have net tangible assets of at least $5,000,000.

Rules promulgated by the Securities and Exchange Commission under Section 15(g) of the Exchange Act require broker-dealers engaging in transactions in penny stocks, to first provide to their customers a series of disclosures and documents, including:

•

A standardized risk disclosure document identifying the risks inherent in investment in penny stocks;

•

All compensation received by the broker-dealer in connection with the transaction;

•

Current quotation prices and other relevant market data; and

•

Monthly account statements reflecting the fair market value of the securities. In addition, these rules require that a broker-dealer obtain financial and other information from a customer, determine that transactions in penny stocks are suitable for such customer and deliver a written statement to such customer setting forth the basis for this determination.

ITEM 6. EXHIBITS.

Exhibit No.		Title

31.1		302 Certification of William P. Spencer, Chief Executive Officer

31.2		302 Certification of Lowell W. Giffhorn, Chief Financial Officer

32.1		906 Certification of William P. Spencer, Chief Executive Officer

32.2		906 Certification of Lowell W. Giffhorn, Chief Financial Officer

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	IMAGENETIX, INC.
	a Nevada corporation

Date: August 15, 2011		By:	/s/ WILLIAM P. SPENCER
			William P. Spencer
			Chief Executive Officer

			(Principal Executive Officer and duly authorized
			to sign on behalf of the Registrant)

IMAGENETIX INC /NV/ - FORM 10-Q - August 15, 2011

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IMAGENETIX INC /NV/ Reports