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EX-31.01 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF ZYTO CORP, PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. - ZYTO CORPex31-1.htm
EX-32.01 - CERTIFICATION OF CHIEF EXECUTIVE OFFICER OF ZYTO CORP, PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. - ZYTO CORPex32-1.htm
EX-31.02 - CERTIFICATION OF CHIEF FINANCIAL OFFICER OF ZYTO CORP, PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002. - ZYTO CORPex31-2.htm
EXCEL - IDEA: XBRL DOCUMENT - ZYTO CORPFinancial_Report.xls
EX-32.02 - CERTIFICATION OF CHIEF FINANCIAL OFFICER OF ZYTO CORP, PURSUANT TO 18 U.S.C SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002. - ZYTO CORPex32-2.htm


 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington D.C. 20549

FORM 10-Q
 
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934.
 
For the quarterly period ended September 30, 2011
 
OR
 
¨
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 000-54170
ZYTO CORP
(Exact name of registrant as specified in its charter)
 
 
   
Delaware
 
20-5534033
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification Number)

387 South 520 West, Suite 200
Lindon, UT
(Address of principal executive offices)
 
84042
(Zip Code)
 
Registrant’s telephone number, including area code: (801) 224-7199
 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 website every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T (§232.405 of this chapter) during the preceding 12 months (or for 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. See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer
 
¨
  
Accelerated filer
 
¨
       
Non-accelerated filer
 
¨  (Do not check if a smaller reporting company)
  
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
 
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 34,857,543 shares of common stock, par value $0.0001 per share, as of November 14, 2011.

 
 

 
 
TABLE OF CONTENTS

 
PART I – FINANCIAL INFORMATION

Page
Item 1.
Financial Statements:
1
 
Condensed Consolidated Balance Sheets as of September 30, 2011 and December 31, 2010 (Unaudited)
1
 
Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2011 and 2010 (Unaudited)
2
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2011 and 2010 (Unaudited)
3
 
Notes to Condensed Consolidated Financial Statements (Unaudited)
4
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
11
Item 3.
Quantitative and Qualitative Disclosures about Market Risk
18
Item 4.
Controls and Procedures
18
     
PART II – OTHER INFORMATION
 
Item 1.
Legal Proceedings
19
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
20
Item 5.
Other Information
20
Item 6.
Exhibits
20

 
 

 
 
PART I – FINANCIAL INFORMATION
 
Item 1.           Financial Statements
 
ZYTO CORP AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
             
   
September 30,
   
December 31,
 
   
2011
   
2010
 
ASSETS
           
Current Assets:
           
Cash and cash equivalents
  $ 53,780     $ 39,360  
Accounts receivable, net of allowance for doubtful accounts
               
   of $90,079 and $56,228, respectively
    295,652       307,480  
Prepaid expenses
    20,554       24,873  
Inventories
    42,691       55,837  
Other current assets
    9,263       7,500  
Total current assets
    421,940       435,050  
                 
Property and Equipment, net of accumulated depreciation
               
of $242,446 and $186,376, respectively
    148,861       182,526  
Technology, net of accumulated amortization
               
of $75,558 and $0, respectively
    296,321       227,306  
Total assets
  $ 867,122     $ 844,882  
                 
LIABILITIES AND STOCKHOLDERS' DEFICIT
               
Current Liabilities:
               
Accounts payable
  $ 545,775     $ 474,100  
Accrued expenses
    164,517       99,604  
Accrued interest related party
    370,888       288,413  
Line of credit
    100,000       100,000  
Short-term related party note payable
    96,942       46,942  
Deferred revenue
    82,617       53,816  
Current portion of capital leases
    3,915       3,214  
Total current liabilities
    1,364,654       1,066,089  
                 
Warranty Reserve
    8,476       8,476  
                 
Related Party Notes Payable
    2,339,051       2,242,482  
                 
Capital leases, less current portion
    11,049       13,695  
                 
Total liabilities
    3,723,230       3,330,742  
                 
STOCKHOLDERS' DEFICIT
               
Common stock, par value $.0001 per share,
               
80,000,000 shares authorized and 34,857,543 and 34,932,543
               
shares issued and 34,857,543 and 34,332,543 outstanding
               
at September 30, 2011 and December 31, 2010, respectively
    3,486       3,433  
Additional paid-in capital
    5,254,478       5,198,992  
Subscriptions receivable
    (2,000 )     (2,000 )
Accumulated deficit
    (8,112,072 )     (7,686,285 )
                 
Total stockholders' deficit
    (2,856,108 )     (2,485,860 )
                 
Total liabilities and stockholders' deficit
  $ 867,122     $ 844,882  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.
 
 
1

 

ZYTO CORP AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
   
Three Months Ended
   
Nine Months Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
                         
Revenues, net
  $ 993,411     $ 1,052.266     $ 2,976,701     $ 2,963,098  
Cost of Sales
    53,326       93,546       177,176       232,192  
                                 
Gross Profit
    940,085       958,720       2,799,525       2,730,906  
                                 
Operating Expenses:
                               
Selling and marketing expenses
    380,927       551,609       1,468,257       1,385,017  
General and administrative expenses
    451,768       375,389       1,373,296       1,123,027  
Research and development expenses
    40,749       19,262       120,727       95,844  
                                 
Total operating expenses
    873,444       946,260       2,962,280       2,603,888  
                                 
Income (Loss) from operations
    66,641       12,460       (162,755 )     127,018  
                                 
Other Income (Expense):
                               
Other income
    4,623       -       4,623       -  
Contingency loss
    (10,000 )     -       (10,000 )     -  
Interest expense
    (89,661 )     (88,809 )     (257,655 )     (246,774 )
                                 
Total other income (expense)
    (95,038 )     (88,809 )     (263,032 )     (246,774 )
                                 
Net Loss
  $ (28,397 )   $ (76,349 )   $ (425,787 )   $ (119,756 )
                                 
                                 
Basic and Diluted Loss Per Share
  $ (0.00 )   $ (0.00 )   $ (0.01 )   $ (0.00 )
                                 
Basic and Diluted Weighted Average Shares Outstanding
    34,857,543       34,932,543       34,742,433       33,669,933  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
2

 

ZYTO CORP AND SUBSIDIARY
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
             
   
Nine Months Ended September 30,
 
   
2011
   
2010
 
Cash Flows from Operating Activities:
           
Net Loss
  $ (425,787 )   $ (119,756 )
Adjustments to reconcile net income (loss) to net
               
cash provided by operating activities:
               
Depreciation and amortization
    131,628       41,148  
Amortization of debt discount
    96,570       -  
Contingency loss
    10,000       -  
Provision for bad debt
    33,851       -  
Stock based compensation
    55,540       149,055  
Changes in operating assets and liabilities:
               
Accounts receivable
    (22,023 )     (71,017 )
Inventories
    13,146       92,778  
Prepaid expenses
    4,319       (9,467 )
Other current assets
    (1,763 )     1,843  
Accounts payable
    72,102       69,803  
Accounts payable related party
    (428 )     3,486  
Accrued expenses
    54,913       47,654  
Accrued interest related party
    82,474       69,778  
Deferred revenue
    28,801       (10,080 )
                 
Net cash provided by operating activities
    133,343       265,225  
                 
Cash Flows from Investing Activities:
               
Purchase of equipment
    (22,405 )     (98,000 )
Capitalization of software development costs
    (144,573 )     (101,517 )
Long term investment
    -       (11,301 )
Proceeds from related party notes receivable
    -       800  
Net cash used in investing activities
    (166,978 )     (210,018 )
                 
Cash Flows from Financing Activities:
               
Principal payments on related party notes
    -       (42,671 )
Proceeds from related party notes payable
    50,000       -  
Principal payments on notes payable
    (1,945 )     (35,791 )
Proceeds from line of credit
    -       50,000  
Principal payments on line of credit
    -       (50,000 )
                 
Net cash provided by (used in) financing activities
    48,055       (78,462 )
                 
Net Increase (Decrease) in Cash and Cash Equivalents
    14,420       (23,255 )
                 
Cash and Cash Equivalents, Beginning of Period
    39,360       50,289  
                 
Cash and Cash Equivalents, End of Period
  $ 53,780     $ 27,034  
                 
Supplemental Disclosure of Cash Flow Information
               
            Cash paid for interest
  $ 172,551     $ 91,157  
            Conversion of accrued interest for exercise of warrants
    -       70,000  
            Conversion of debt to common stock
    -       69,934  
 
The accompanying notes are an integral part of these condensed consolidated financial statements.

 
3

 
ZYTO CORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 1.
Organization and Business Activity

Basis of Presentation - The accompanying unaudited condensed consolidated financial statements of ZYTO Corp and subsidiary (the Company) have been prepared in conformity with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and notes required by generally accepted accounting principles. These accompanying unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Operating results for the three and nine months ended September 30, 2011, are not necessarily indicative of the results that may be expected for the entire year ending December 31, 2011, or any portion thereof.

Unless the context otherwise requires, all references to “we,” “us,” “our,” the “Company” and “ZYTO” are to ZYTO Corp and subsidiary.

Organization – Our Company consists of ZYTO Corp (a Delaware corporation, formerly known as Quiver Corporation (“Quiver”)) and its wholly owned subsidiary, ZYTO Technologies, Inc. (a Nevada corporation.)

On September 12, 2005, Xito Corp (which was incorporated in Nevada on December 30, 2004) changed its name to ZYTO Corp.

On September 7, 2006, the founder of ZYTO Corp (a Nevada corporation) (“ZYTO NV”) entered into a share exchange agreement with Quiver. At the date of the share exchange agreement, Quiver had no assets or liabilities and had 12,774,748 shares issued and outstanding. Per the share exchange agreement, ZYTO NV exchanged 10,469,500 shares (which represented 100% of the shares issued and outstanding of ZYTO NV) for 5,234,750 shares of Quiver on a 2-for-1 exchange basis. As part of the same transaction, the majority Owner of ZYTO NV also exchanged 300,000 shares of an unrelated entity for 8,020,000 shares of Quiver. As a result, the shares issued to ZYTO NV and its majority owner represented a controlling interest, and the transaction has been accounted for as a reverse merger, with ZYTO NV being considered the acquiror for accounting purposes. Accordingly, the historical consolidated financial statements include the results of operations and cash flows of ZYTO NV, and the consolidated operations and cash flows of Quiver subsequent to September 7, 2006.

 
4

 
ZYTO CORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Also, on September 7, 2006, Quiver changed its name to ZYTO Corp (a Delaware corporation.)

On April 20, 2007, ZYTO NV changed its name to ZYTO Technologies, Inc.

Business Activity – Our Company’s operations consist of the manufacturing and distribution of bio-communication devices and software designed to facilitate communication between computers and the human body.

Business Condition – As of September 30, 2011, and December 31, 2010, we had an accumulated deficit of $8,112,072 and $7,686,285, respectively.

During the three months ended September 30, 2011 and 2010, we recognized a net loss of $28,397 and $76,349, respectively. For the nine months ended September 30, 2011 and 2010, we recognized a net loss of $425,787 and $119,756, respectively.

As of September 30, 2011, and December 31, 2010, our current liabilities exceeded our current assets by $942,714 and $631,039, respectively.
      
These factors raise substantial doubt about our ability to continue as a going concern.  The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainty.  To increase revenue, we intend to focus on customer retention and expanding our customer base.

Note 2.  Summary of Significant Accounting Policies

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s condensed consolidated financial statements.  The condensed consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity.  These accounting policies conform to accounting principles generally accepted in the United States of America and have been consistently applied in the preparation of the financial statements.

Principles of Consolidation – The accompanying unaudited condensed consolidated financial statements include the accounts of the Company, and its subsidiary in which the Company has a controlling financial interest. The accompanying unaudited condensed consolidated financial statements of the Company and its subsidiary at September 30, 2011, and for the three and nine months ended September 30, 2011 and 2010, reflect all adjustments (consisting only of normal recurring adjustments) that, in the opinion of management, are necessary to present fairly the consolidated financial position and results of operations for the periods presented. All significant intercompany transactions and accounts are eliminated in consolidation.

 
5

 
ZYTO CORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Use of Estimates – In preparing our unaudited condensed consolidated financial statements in accordance with accounting principles generally accepted in the United States of America, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reported periods.  Actual results could differ from those estimates.

Revenue Recognition – We recognize revenue from customers upon the delivery of the system hardware.  At the time payment is received, the system hardware is shipped and the customer receives an e-mail which includes a link to download the software.  Upon shipment, the customer has no right of return and the transaction is final.  Thirty days from the date of purchase, the customer is required to pay a monthly subscription fee in order for the software to remain active.  Subscription revenue is recognized upon the performance of services.  In the event the customer cancels his or her monthly subscription or the monthly subscription fee is not received, the software automatically deactivates and the equipment is no longer functional.
 
We recognize revenue when persuasive evidence of an arrangement exits, delivery has occurred, the customer no longer has the right of return, the fee is fixed or determinable and collection has been made or is reasonably assured.
 
Revenues are shown net of any related sales or use taxes for sales transactions where applicable.

Accounts Receivable – Accounts receivable represent monies due to us for products sold and services rendered. We periodically review accounts receivable for amounts considered uncollectible. Accounts receivable are shown net of an allowance for doubtful accounts of $90,079 and $56,228 at September 30, 2011, and December 31, 2010, respectively.

Recent Accounting Pronouncements - In September 2011, the FASB issued ASU 2011-08, “Intangibles—Goodwill and Other (Topic 350)”. The amendments in this Update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The adoption of ASU 2011-08 did not have a material effect on the financial position, results of operations or cash flows of the Company.
 
 
6

 
ZYTO CORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Note 3. Inventory
 
Inventory consisted of the following as of September 30, 2011, and December 31, 2010:
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
Raw Materials
  $ 30,871     $ 36,192  
Finished Goods
    11,820       19,645  
    $ 42,691     $ 55,837  
 
Note 4. Property and Equipment

Property and equipment consisted of the following as of September 30, 2011, and December 31, 2010:
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
Computer equipment
  $ 182,092     $ 173,952  
Furniture and fixtures
    98,966       93,164  
Production equipment
    62,681       61,185  
Software
    47,568       40,601  
      391,307       368,902  
Accumulated depreciation
    (242,446 )     (186,376 )
    $ 148,861     $ 182,526  

Depreciation expense for the three months ended September 30, 2011 and 2010 was $18,121 and $14,420, and was $56,070 and $41,148 for the nine months ended September 30, 2011 and 2010, respectively.

Note 5. Technology

At September 30, 2011, and December 31, 2010, intangible assets consisted of the capitalization of significant enhancements and upgrades to our proprietary software. Amortization expense related to these costs of $29,021 and $0 for the three months ended September 30, 2011 and 2010, respectively, are reported as a component of operating expenses. During the nine months ended September 30, 2011 and 2010, amortization expenses related to these costs were $75,558 and $0, respectively.

 
7

 
ZYTO CORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Amortization expense for the remaining lives of the intangible assets is estimated to be as follows:
 
For the three months ending December 31, 2011
  $ 30,989  
For the year ending December 31, 2012
    123,960  
For the year ending December 31, 2013
    123,960  
For the year ending December 31, 2014
    17,412  
    $ 296,321  

Note 6. Line of Credit

On December 14, 2010, we renegotiated and amended our existing line of credit with a financial institution. Under this revolving line of credit, as amended, we have $100,000 of available borrowings with a maturity date of December 5, 2011. As of September 30, 2011 and December 31, 2010, the amount drawn on the line totaled $100,000.  The interest rate to be applied to the unpaid principal balance during the term is 5.25% per annum.  Borrowings under the line were collateralized by a security interest in all of our assets. The line of credit is personally guaranteed by one of our principal officers.

Note 7. Related Party Notes Payable

On January 1, 2005, we issued a note payable to an officer for intellectual property and other related technologies.  Per the terms of the agreement, interest began to accrue at an effective interest rate of 5 percent as of January 1, 2007 and the note was scheduled to mature on December 31, 2009.  On January 1, 2010, we executed an amended and restated promissory note with the officer, extending the maturity date to December 31, 2012, and increasing the interest rate from 5 percent to 7 percent per annum.  In exchange for the amended and restated terms, we issued the officer a warrant for 1,750,000 shares of our common stock at an exercise price of $0.04 per share.  We recognized interest expense from the warrant of $44,110 and $44,108 for the three months ended September 30, 2011 and 2010, respectively. During the nine months ended September 30, 2011 and 2010 we recognized interest expense from the warrant of $130,892 and $130,411, respectively.

On January 28, 2011, we received $50,000 in exchange for a promissory note.  The 18-month note expires on June 28, 2012, bearing interest at 10% per annum. As part of the agreement we issued the lender 25,000 shares of common stock (see Note 9.) We will make interest-only payments until the maturity date, at which time the full principal amount is payable.
 
 
8

 
ZYTO CORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Related party notes payable consisted of the following as of September 30, 2011, and December 31, 2010:
 
   
September 30,
   
December 31,
 
   
2011
   
2010
 
             
Unsecured note payable to shareholder, interest at 5%,
           
  principal and interest originally due December 31, 2009,
       
 
 
  extended to December 31, 2012 with interest at 7%,
           
  net of discount of $160,949 and $257,518, respectively
  $ 2,339,051     $ 2,242,482  
                 
Unsecured note payable to InteMedica, LLC,
               
  interest at 12%, monthly payments of $8,000 until paid
    46,942       46,942  
                 
Unsecured note payable to shareholder, interest at 10%  interest payments due monthly, principal due June, 28, 2012
    50,000       -  
                 
Total related party notes payable
    2,435,993       2,289,424  
                 
Less current portion
    (96,942 )     (46,942 )
                 
Long term portion
  $ 2,339,051     $ 2,242,482  
Note 8. Commitments and Contingencies

Operating Leases – The Company is obligated under certain non-cancelable operating leases for the rental of office space.  Total lease expense for the three months ended September 30, 2011 and 2010, was $45,578 and $31,429, respectively. Total lease expense for the nine months ended September 30, 2011 and 2010 was $127,301 and $84,591, respectively.

Effective February 2, 2011, we amended our lease agreement for office space. The amended agreement includes an additional 3,783 square feet of net rentable area, resulting in a total rentable area of 11,178 square feet. The lease expires February 28, 2014, with the amended rent commencing on March 1, 2011.
 
 
9

 
ZYTO CORP AND SUBSIDIARY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


Future minimum lease payments under non-cancelable operating leases are as follows:
 
2011
  $ 45,579  
2012
    186,871  
2013
    192,477  
2014
    32,236  
Total minimum payments
  $ 457,163  

Note 9. Equity

On June 15, 2010, we entered into an agreement with a public relations firm retained in 2009 and 2010 to provide public and financial communication services.  The agreement was for a period of twelve and one half months.  As compensation for services, we agreed to issue 1,200,000 shares of restricted common stock to the public relations firm. As of September 30, 2011, we had issued 1,100,000 shares of the 1,200,000 shares due under the contract, and mutually agreed to terminate the remainder of the contract.  The shares are valued based on the fair value of the shares on the date they were released from escrow. The total value of shares issued for the three months ended September 30, 2011 and 2010 was $0 and $55,540, of which the entire amount was expensed. The total value of the shares issues for the nine months ended September 30, 2011 and 2010 was $55,540 and $149,055, respectively.

As discussed in Note 7, we received $50,000 from a related party in exchange for a promissory note.  The 18-month note expires on June 28, 2012, bearing interest at 10% per annum. As part of the agreement we issued the lender 25,000 shares of common stock. The shares were valued at a grant date fair value of $0.09 per share. The total value of the shares issued was $2,251, which was determined by multiplying the number of shares granted by the closing market price of our common stock on the grant date.

Note 10. Subsequent Event

Lawsuits - The Company was involved in four lawsuits in Orange County Superior Court for the State of California: (1) Orange County Superior Court Case No. 30-2010-00368271 (2) Orange County Superior Court Case No. 30-2010-00344946 (3) Orange County Superior Court Case 30-2009-00323131 and (4) Orange County Superior Court Case 30-2009-00329075.

In November 2011, the Company reached settlements in all four cases to resolve all matters related to the lawsuits against the Company. Under the terms of the settlement, without admitting fault or liability of any kind, the Company has agreed to pay a total of $10,000 to the plaintiffs. These individuals dismissed the lawsuits with no ability to reassert its claims against the Company. As a result, $10,000 for the settlements has been accrued by the Company as of September 30, 2011.

 
10

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

Forward-looking Statements
 
This Form 10-Q contains forward-looking statements.  All statements other than statements of historical facts are forward-looking statements, including any projections of milestones, royalties or other financial items, any statements of the plans and objectives of management for the future operations, any statements concerning research and development, proposed new products of licensing or collaborative arrangements, any statements regarding future economic conditions or performance, and any statement of assumptions underlying any of the foregoing.  In some cases, forward looking statements can be identified by the use of terminology such as “believes,” “might,” “will,” “expects,” “plans,” “anticipates,” “forecasts,” “estimates,” “potential,” or “continue,” or the negative thereof, or other comparable terminology.  Although we believe that the expectations reflected in the forward-looking statements are reasonable, there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual results could differ materially from those projected or assumed in the forward-looking statements.  Our future financial condition and results of operations, as well as any forward-looking statements, are subject to inherent risks and uncertainties. We expressly disclaim any obligation to update any forward-looking statements, whether as a result of new information, future events or otherwise.

About ZYTO Corp

This Quarterly Report sets forth certain financial and business information of ZYTO Corp and its wholly owned subsidiary, ZYTO Technologies, Inc. (collectively, “ZYTO,” “we,” “our,” or “us”).

Our operations consist of the manufacturing and distribution of “biocommunication” devices and software designed to facilitate communication between computers and the human body. Biocommunication is accomplished by providing a direct connection between a computer and a living organism (i.e., humans or animals), which facilitates in determining biological preference and perception reframing.  Biological preference is a physical preference to certain clinical or wellness options, like vitamins, minerals, and other nutritional supplements.  Perception reframing is a technique that opens a person to a different way of seeing a circumstance, an opportunity, a problem, or a relationship.  Both of these applications involve concepts that are natural outgrowths of the field of complementary and alternative medicine. Complementary and Alternative Medicine (“CAM”) consists of a diverse group of medical and health care systems, practices, and products that are not generally associated with medicine and medical practices common to western hospitals.  These include, but are not limited to, acupuncture, homeopathy, chiropractic, massage, naturopathic medicine, and the use of herbs and nutritional supplements.  With many CAM modalities becoming more accepted in allopathic medicine (acupuncture, for example), the line between CAM and “mainstream” medicine has increasingly become thin.
 
Recent Corporate Developments
 
On July 8, 2011, our Board of Directors adopted our 2011 Stock Incentive Plan (the "2011 Plan"). The purpose of the 2011 Plan is to enhance our long-term stockholder value by offering opportunities to our directors, officers, employees and eligible consultants to acquire and maintain stock ownership in order to give these persons the opportunity to participate in our growth and success, and to encourage them to remain in our service. A total of 5,000,000 shares of common stock are available for issuance under the 2011 Plan. We intend to seek stockholder approval of the 2011 Plan at our annual shareholders’ meeting to be held on December 6, 2011.
 
Additionally, on July 8, 2011 the Board of Directors adopted and approved a corporate Code of Business Conduct and Ethics (the “Code of Ethics”) and the ZYTO Corp Policy on Insider Trading and Compliance (the “Insider Trading Policy”).
 
The Code of Ethics was adopted to codify and reduce to writing the Company’s commitment to the highest ethical standards and integrity in its business activities.  The Company expects this commitment to extend to its employees, officers, and directors at all levels, including its subsidiary.
 
The Company adopted the Insider Trading Policy to provide additional instruction to officers, directors, and employees of ZYTO with respect to their responsibilities as part of a publicly trading company.  The Insider Trading Policy instructs on reasons for maintaining confidentiality, defines material information, describes prohibited trading practices, provides information for executive officers and directors about compliance with Section 16 of the Securities Exchange Act of 1934, as amended (the “1934 Act”), and provides certain pre-trading compliance requirements.
 
 
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Copies of the Company’s 2011 Plan, the Code of Ethics, and the Insider Trading Policy were filed previously as exhibits to the Quarterly Report for the quarter ended June 30, 2011.
 
On August 30, 2011, the Company received notice from the US Food and Drug Administration (the “FDA”) that our Premarket Notification (the “Notification”), submitted pursuant to Section 510(k) of the U.S. Food, Drug and Cosmetic Act (the “Act”) for the ZYTO Hand Cradle, had been approved.  
 
Our Business Strategy
 
Our primary financial objective is to market our technology to both healthcare professionals and retail consumers.  We consider retail consumers to be non-healthcare professionals, including clients or patients who purchase and use our technology under the direction of their healthcare provider.  Financial objectives include collecting initial setup fees, and maintaining and collecting ongoing monthly subscription payments from those with whom we place our products.  Because these payments are nominal, our goal is to place a large number of software installations and to provide service and value that motivates our customers to continue making monthly subscription payments.  All of our products are internet-centric, meaning that our products are deployed over the internet, updated through the internet, and each month the user’s software license is renewed over the internet by syncing the products that they purchase from us with our secured server.  Software development and improvement is ongoing, and one of our most important functions.  As more powerful development tools are made available and as the internet becomes a more powerful vehicle for our products, we intend to capitalize on these improvements by improving our products with increased speed and power. 
 
 Marketed Products
 
Our technology is designed to be used in a “fee for services” environment.  All of our products are designed to facilitate the sale of health products, whether the healthcare professional charges the client for the service or not.  In every instance, a significant measure of our customers’ success is the financial benefit our technology provides them.  Proper use by the healthcare professionals will include an ability to explain the technology to the client, proper placement, operation, and billing practices.
 
Marketing and sales are segregated into two distinct areas:  The Compass, and Healthcare Professional.
 
Compass
 
 The Compass is sold to distributors of health products who sell through direct sales or network marketing channels.  Before we create a Compass with a library of products (Virtual Stress Items or “VSIs”) for any direct sales or network marketing company, that company must meet two requirements: at least twenty products in their product offering, and at least 5,000 distributors.  Once an eligible company has been identified, we will obtain a sample of each of their products.  VSIs for each of these products are then created and organized into a library of biosurveys.  The Compass is then offered for sale for that company.  
 
The Compass uses the biosurvey process in the same way as the professional only line of products but the final report provides much less detail.  The Compass is sold to a broader market having little or no medical background or licensure.  For this reason, the Compass report does not identify detail such as specific biomarkers or deviation ratio (“dR”) numbers.  It is also limited in its flexibility.  Compass operators are only allowed to alter the program by filtering its product library according to their physical product inventory.  If the inventory filter is used, the Compass biosurvey will only use the VSIs for products the operator indicates are part of their product inventory.
 
The Compass biosurvey first records the body’s response to a number of VSIs referred to as biomarkers.  These VSIs are representative of 75 anatomical components of the body.  The results of this part of the biosurvey are displayed graphically in what is called a “Stress Profile.”  VSIs that generated the most aggressive responses are plotted outside a range circle and are considered “out of range.”  Next, VSIs for a number of products are used to determine and rank their effect on coherence.   The product with the highest positive dR is then used as the stimulating VSI as each of the out-of-range biomarkers are rescanned.  The stress profile will indicate which biomarkers move into range.  If all biomarkers do not move into range, the VSI for the product with the next highest positive dR is used along with the first as the stimulating signal as the biomarkers are again rescanned.  This process is repeated, adding a new product each time, until the stress profile is resolved, i.e., until all biomarkers have moved into range.
 
The exercises involved with all of our products do not imply that “all your health issues will go away if you take these products.” However, management believes that these exercises provide information that is helpful when choosing what supplements to buy.
 
 
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Elite
 
The Elite (an upgrade to the Limbic Stress Assessment (“LSA”) Pro) is sold only to healthcare professionals.  This product is the most versatile and capable product in the ZYTO lineup.  It gives the operator an extensive library of VSIs and the ability to add new VSIs to their library.  This proprietary process is the same as that of the Compass: the Elite creates a unique code, converts it to a frequency and that frequency is then linked to the physical item.  The software used in the linking process indicates when the link is complete.  The VSI is then available for the use in the biosurvey sequence.  The Elite also offers the ability to author  biosurveys and deploy them to other ZYTO systems, specifically the Select.  Additionally, the Elite is able to scan remotely over the internet.  Remote biosurveys are conducted over the internet with a client having a Hand Cradle connecting to a healthcare professional with ZYTO software in a remote location.  The connection is made over the internet.
 
Select; Balance

These products are designed to run a limited number of biosurveys.  These two products are similar to the Compass in this regard, but because they are sold only to healthcare professionals, their final reports are much more detailed and in-depth than those of the Compass.  These products can also scan remotely over the internet.
 
One of the biosurveys built into the Balance scans a number of VSIs relating to vertebrae, teeth, and acupuncture meridians, and the Balance draws the body’s response to these items in a graph called a Stress Profile.  The Balance then measures the body’s responses to the VSIs representative of various products.  VSIs for products that create the most positive shift in coherence are then used in a rescan of the stress profile.  As these product VSIs are introduced throughout the rescan process, the stress profile changes.  The change anticipates the physical benefit the client will receive when the supplements are taken, making the process a ‘simulation’ of actually taking the supplements.  The presentation of the data in the final report is both educational and motivating to the client.  The education comes in the form of describing the products whose VSIs created the most positive shift, and the motivation because the descriptions will often match what they know about their own health conditions or concerns.  The structure of the report is also motivating, making it simple for the client to understand the benefit that can be expected from the products shown.  
 
The Select is the upgrade and replacement for the prior version of the Balance and was released in May 2011.  The Select comes with all the features of the Balance, and as of the date of this report, also included full access to products from more than 136 nutritional supplement suppliers, an expanded range of biosurveys, and self-directed scanning options.

EVOX
 
The EVOX is a perception reframing tool.  It comes with a Hand Cradle for the purpose of running biosurveys and is used with a headset that plugs into the computer. The EVOX measures the frequencies (energy) in the voice and uses that information to facilitate what is called perception reframing.                                                                               .

Information carried in the voice exceeds the words spoken.  For example, with a phone call from a stranger, in very few seconds you will likely know the caller’s gender, race, approximate age, general health, and what part of the world they lived in when they were young (by their accent).  All this non-articulated information is carried in the voice.  Non-articulated information varies with each topic.  In addition to age, gender, and the other items listed above, voice carries attitudes, memories, and beliefs. In short, voice reflects perception.
 
Perception is important because in many instances it creates reality.  Thus, to the extent perception is inadequate, reality can be dysfunctional.  An example of an inadequate perception would be the person who believes all dogs are mean.  While it is true that some dogs are mean, all are not, and a person with this perception will live a dysfunctional “dog” reality.
 
Another interesting characteristic of perception is that it is almost entirely subconscious, resulting in behaviors that are “driven” by reasons we may not understand or even be aware of.  This subconscious nature makes perceptions almost impossible to alter, so they remain static and we live our lives as a recurrent expression of the same dysfunctions.
 
 
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The EVOX process begins with a short recording, with the client speaking about a specific topic for about ten to fifteen seconds.  EVOX uses the microphone and the computer’s sound card to record the frequencies in the voice, referred to as voice energy.  Those frequencies are plotted into a graph called a Perception Index.  The Perception Index is then analyzed by the computer and ‘holes or gaps’ (frequencies that are absent) in the frequency pattern are used to determine various frequency VSIs that could be used in the reframe process.  The computer-determined VSIs are then placed into a biosurvey which runs while the client’s hand is on the Hand Cradle.  VSIs that generate a negative dR are deleted; those creating a positive dR are saved and are then output to the Hand Cradle sequentially over a period lasting thirty seconds to ten minutes, depending on operator preference.  During the output period EVOX plays easy-to-listen-to music into headphones worn by the client and the client is instructed to close his eyes and think about the topic of which he is speaking.  At the end of the output phase the computer resets for the next recording.  This cycle is called a round.  One client stated, “Over the course of a session (usually consisting of three to ten rounds) the customer will usually experience a shift in perception relative to the topic.”  This is Perception Reframing.  Perception Reframing can result in an improved golf game, a better relationship with a spouse or child, or the elimination of some self-sabotaging behavior.  This shift is not the result of “treating a condition.” Rather, it is simply expanding or reframing the way the topic is perceived by the customer.  Expanded perception creates an ability to exercise more choice.
 
The objective of EVOX and perception reframing is to identify the position of the Perception Index and then use VSIs for frequencies to facilitate a reframe or shift in perception.  This can be significant to the extent a person’s reality is created by his perception.  Filling in the biosurvey involves the process of stimulus (with the VSI) and response (expressed as a dR).  The EVOX expands that process by using the voice as a feedback loop in the process.  With EVOX, the Hand Cradle is used in the same way, but voice becomes the primary indicator of perception and the achievement of a subsequent shift or reframe of perception. 
 
ZYTO.com
 
We have recently consolidated all web activity into our website www.ZYTO.com.  This was done in order to maximize traffic and increase search engine effectiveness.  ZYTO.com is now the nexus for all ZYTO healthcare professionals and for those professionals and their clients for remote biosurvey scans.  Remote use of our technology over the internet has been available for the last several years under the name of “Virtual Clinic.”  (Information contained on, or available through, our website is not a part of, and is not incorporated by reference into, this Quarterly Report.)

In addition to being the nexus between healthcare professionals and their clients as it relates to remote scans, ZYTO.com will have a “library” where healthcare professionals can share biosurveys and clinical applications using ZYTO technology.  A healthcare professional owning the Elite will be able to author a biosurvey and post that biosurvey for sale at ZYTO.com and other healthcare professionals will be able to benefit from their experience and knowledge.  The net effect is expected to be a more robust sharing of intellectual power and experience.
 
Results of Operations
 
Three Months Ended September 30, 2011, compared to Three Months Ended September, 2010
 
   
For the Three Months Ended
 
   
September 30, 2011
(Unaudited)
   
September 30, 2010
(Unaudited)
 
Statement of Operations Data:
           
Revenues, net
 
$
993,411
   
$
1,052,266
 
Cost of sales
   
53,326
     
93,546
 
Gross profit
   
940,085
     
958,720
 
Total operating expenses
   
873,444
     
946,260
 
Other expense
   
(95,038
)
   
(88,809)
 
Net loss
   
(28,397)
     
(76,349)
 
Net loss per share
   
(0.00)
     
0.00
 
 
Revenues
 
Total revenues for the three months ended September 30, 2011, were $993,411, compared to $1,052,266 for the three months ended September 30, 2010, reflecting a decrease of $58,855, or 5.6 percent.  
 
 
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Healthcare Professional Product Line
 
Revenues generated through our Healthcare Professional product line for the three months ended September 30, 2011 were $524,922 compared to $671,571 for the three months ended September 30, 2010, reflecting a decrease of $146,649 or 21.8 percent.  The primary factors contributing to the difference are a decrease in revenues of our Elite product of $267,925. In January 2011, we replaced the Pro 4.0, which had sales during the three months ended September 30, 2010, of $527,350, with the Elite. We also had an increase in sales of our EVOX, Select, and Virtual Clinic products of $16,989 and $46,050, and $29,460, respectively.
 
Compass Product Line
 
Revenues generated through our Compass product line for the three months ended September 30, 2011, were $403,050 compared to $355,978 for the three months ended September 30, 2010, reflecting an increase of $47,072 or 13.2 percent.   The increase in revenues generated through our Compass product line is attributable to a volume increase in our Compass sales of $4,788, and by an increase in our monthly subscription fees of $41,296.   
 
Cost of Sales

Cost of sales for the three months ended September 30, 2011, were $53,326, compared to $93,546 for the three months ended September 30, 2010, reflecting a decrease of $40,220, or 43.0 percent. This was primarily due to moving our inventory function in-house and cancelling our outside fulfillment center contract.

Selling and Marketing Expenses
 
Selling and marketing expenses for the three months ended September 30, 2011, were $380,927 compared to $551,609 for the three months ended September 30, 2010, reflecting a decrease of $170,682 or 30.9 percent.    This decrease was primarily attributable to a decrease in outside consulting costs, travel expenses, and commissions.

General and Administrative Expenses
   
General and administrative expenses for the three months ended September 30, 2011, were $451,768 compared to $375,389 for the three months ended September 30, 2010, reflecting an increase of $76,379 or 20.3 percent.   Factors relating to the increase included expanding our office space in 2011, which resulted in recognizing an additional $14,150 in office rent expense for the three months ended September 30, 2011, compared to the three months ended September 30, 2010.  During the three months ended September 30, 2011, we amortized our proprietary software asset resulting in $29,021 of amortization expense. Also, we had significantly lower professional fees compared to September 30, 2010. This is primarily due to the additional professional fees we incurred during the three months ended September 30, 2010, related to the filing of our Form 10.

Net Income/Loss
 
Our net loss for the three months ended September 30, 2011, was $28,397 compared to a loss of $76,349 for the three months ended September 30, 2010.  The net loss for the three months ended September 30, 2011, is a direct result of the reduction of the aforementioned expenses.
 
Nine Months Ended September 30, 2011 compared to Nine Months Ended September 30, 2010

   
For the Nine Months Ended
 
   
September 30, 2011
(Unaudited)
   
September 30, 2010
(Unaudited)
 
Statement of Operations Data:
           
Revenues, net
 
$
2,976,701
   
$
2,963,098
 
Cost of sales
   
177,176
     
232,192
 
Gross profit
   
2,799,525
     
2,730,906
 
Total operating expenses
   
2,962,280
     
2,603,888
 
Other expense
   
(263,032
)
   
(246,774)
 
Net loss
   
(425,787)
     
(119,756)
 
Net loss per share
   
(0.01)
     
0.00
 
 
 
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Revenues
 
Total revenues for the nine months ended September 30, 2011, were $2,976,701, compared to $2,963,098 for the nine months ended September 30, 2010, reflecting an increase of $13,603, or 0.5 percent.  
 
Healthcare Professional Product Line
 
Revenues generated through our Healthcare Professional product line for the nine months ended September 30, 2011, were $1,545,012 compared to $1,564,067 for the nine months ended September 30, 2010, reflecting a decrease of $19,055 or 1.2 percent.  The primary factors contributing to the decrease are a transition from our Pro 4.0 product to our Elite product in January 2011, which resulted in a decrease in revenues of $379,803.  Also, we had an increase in our EVOX and Select sales of $230,874 and $80,575, respectively.
 
Compass Product Line
 
Revenues generated through our Compass product line for the nine months ended September 30, 2011, were $1,249,197 compared to $1,124,373 for the nine months ended September 30, 2010, reflecting an increase of $124,824 or 11.1 percent.   The increase in revenues generated through our Compass product line is primarily attributable to an increase in our Compass subscription revenues of $135,942, offset partially by a volume decrease in product sales.
 
Selling and Marketing Expenses
 
Selling and marketing expenses for the nine months ended September 30, 2011, were $1,468,257, compared to $1,385,017 for the nine months ended September 30, 2010, reflecting an increase of $83,240 or 6.0 percent.   This increase was primarily due to an increase of sales representatives and account managers. Our account managers focus solely on post sale follow-up and successful software implementation.  They work directly with our customers to ensure they have implemented our technology and received adequate training.

General and Administrative
 
General and administrative expenses for the nine months ended September 30, 2011, were $1,373,296, compared to $1,123,027 for the nine months ended September 30, 2010, reflecting an increase of $250,269, or 22.3 percent.  Factors relating to the increase included expanding our office space in 2011, which resulted in recognizing an additional $42,711 in office rent expense.  Also, during the nine months ended September 30, 2011, we amortized our proprietary software asset resulting in $75,558 of amortization expense. During the nine months ended September 30, 2011, we wrote off an additional $31,253 compared to 2010.  In addition, we had an increase in our payroll expense compared to the same period in the prior year due to payroll increases and the addition of accounting and inventory personnel.

Other

Other expense for the nine months ended September 30, 2011, was $263,032, compared to $246,774 for the nine months ended September 30, 2010, reflecting an increase of $16,258 or 6.6 percent. This increase resulted from our executing an amended promissory note with Vaughn R Cook, our Chairman and CEO, on January 1, 2010, extending the maturity date on his original promissory note of $2,500,000 to December 31, 2012.  In exchange for the amended and restated terms, we increased the interest rate from 5 percent to 7 percent per annum and issued a warrant to purchase 1,750,000 shares of common stock at an exercise price of $0.04 per share.  The warrant was exercised on February 3, 2010, and valued at $375,547 using the Black-Scholes pricing model with the following assumptions:  risk free interest rate of 0.30 percent, dividend yield of 0.0 percent, volatility of 199 percent and an expected life of 1 year.  The warrant value of $375,547 is being recognized over the length of the amended promissory note.  Accordingly, we did not recognize interest expense associated with this warrant transaction in January 2010.

 Net Income/Loss
 
Our net loss for the nine months ended September 30, 2011, was $425,787, compared to a loss of $119,756 for the nine months ended September 30, 2010.  The net loss for the nine months ended September 30, 2011, is a direct result of the reduction of the aforementioned expenses.
 
 
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Liquidity and Capital Resources
 
Our sources of liquidity have historically been cash from operations, a working capital line of credit, and debt and equity financing. 
 
As of September 30, 2011, we had cash and cash equivalents of $53,780, current liabilities of $1,364,654, and total current assets of $421,940, with our current liabilities exceeding current assets by $942,714.
 
Cash Flow

   
For the Nine Months Ended September 30,
 
Net cash provided by (used in):
 
2011
   
2010
 
  Operating activities
  $ 133,343     $ 265,225  
  Investing activities
    (166,978 )     (210,018 )
  Financing activities
    48,055       (78,462 )
Net increase (decrease) in cash
    14,420       (23,255 )

Operating activities:

Cash provided by operating activities was $133,343 during the nine months ended September 30, 2011.  Cash provided by operating activities was $265,225 during the nine months ended September 30, 2010. The primary factor relating to the decrease in net cash provided by operating activities was a decrease in net income of $306,031 during the nine months ended September 30, 2011. This was partially offset by increases in depreciation and amortization expenses of $90,480, amortization of debt discount of $96,570, and provision for bad debt of $33,851. We also had a decrease in the cash provided by inventory of $79,632.

Investing activities:

Cash used in investing activities was $166,978 during the nine months ended September 30, 2011, which included $22,405 for property, plant, and equipment purchases, and $144,573 for capitalizing costs relating to significant enhancements and upgrades to our proprietary software.

Cash used in investing activities was $210,018 during the nine months ended September 30, 2010, which included $98,000 for property, plant, and equipment purchases, $101,517 for capitalizing costs relating to significant enhancements and upgrades to our proprietary software and $11,301 for our long term investment.

Financing activities:

Cash provided by financing activities was $48,055 during the nine months ended September 30, 2011, which included proceeds from related party notes payable of $50,000, and principal payments on notes payable of $1,945.

Cash used in financing activities was $78,462 during the nine months ended September 30, 2010, which included principal payments on related party notes of $42,671, and principal payments on notes payable of $35,791.

Contractual Obligations
 
As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide this information.
 
Off-Balance sheet arrangements
 
We do not have any off-balance sheet arrangements, investments in special purpose entities or undisclosed borrowings or debt. 
 
 
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Critical Accounting Policies
 
Management’s Discussion and Analysis of Financial Condition and Results of Operations discusses our consolidated 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 management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  On an on-going basis, management evaluates estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts, other intangible assets and going concern.

Revenue recognition
 
We recognize revenue from customers upon the delivery of the system hardware.  At the time payment is received, the system hardware is shipped and the customer receives an e-mail which includes a link to download the software.  Upon shipment, the customer has no right of return and the transaction is final.  Thirty days from the date of purchase, the customer is required to pay a monthly subscription fee in order for the software to remain active.  Subscription revenue is recognized upon the performance of services.  In the event the customer cancels his or her monthly subscription or the monthly subscription fee is not received, the software automatically deactivates and the equipment is no longer functional.
 
We recognize revenue when persuasive evidence of an arrangement exits, delivery has occurred, the customer no longer has the right of return, the fee is fixed or determinable and collection has been made or is reasonably assured.
 
Revenues are shown net of any related sales or use taxes for sales transactions where applicable.

Allowance for doubtful accounts
 
We maintain an allowance for doubtful accounts from estimated losses resulting from the potential inability of certain customers to make required future payments on amounts due.  We determine the adequacy of this allowance by periodically evaluating the aging and past due nature of the individual customer accounts receivable balances and considering the customer’s current financial situation as well as the existing industry economic conditions and other relevant factors that would be useful towards assessing the risk of collectability.  If the future financial condition of our customers were to deteriorate, resulting in their inability to make specific required payments, additions to the allowance for doubtful accounts may be required.  In addition, if the financial condition of our customers improves and collections of amounts outstanding commence or are reasonably assured, then we may reverse previously established allowances for doubtful accounts. 
 
Going concern
 
As of September 30, 2011 and December 31, 2010, we had an accumulated deficit of $8,112,072 and $7,686,285, respectively.

During the three months ended September 30, 2011 and 2010, we recognized a net loss of $28,397 and $76,349, respectively. For the nine months ended September 30, 2011 and 2010 we recognized a net loss of $425,787 and $119,756, respectively.

As of September 30, 2011 and December 31, 2010 our current liabilities exceeded our current assets by $942,714 and $631,039, respectively.
      
These factors raise substantial doubt about our ability to continue as a going concern.  The accompanying unaudited condensed consolidated financial statements do not include any adjustments that might result from the outcome of the uncertainty.  To increase revenue, we intend to focus on customer retention and expanding our customer base.

Recent Accounting Pronouncements

In September 2011, the FASB issued ASU 2011-08, “Intangibles—Goodwill and Other (Topic 350)”. The amendments in this Update will allow an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment test. Under these amendments, an entity would not be required to calculate the fair value of a reporting unit unless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying amount. The amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The adoption of ASU 2011-08 did not have a material effect on the financial position, results of operations or cash flows of the Company.

 
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Technology
 
The 5.0 platform is the 2010-2011 update to ZYTO Technology.  It was released in phases.  The first product to be updated/released was EVOX 5.0.  The next product was a new version of the Balance called Balance 5.0.  This product was first shipped mid-July, 2010.  The Elite 5.0 is the upgrade and replacement for the LSA Pro 4.0 and was released in January 2011.  The Select 5.0 is the upgrade and replacement for the Balance 3.0 and was released in May 2011.  A new website, ZYTOLife.com was also released in May 2011.  ZYTOLife.com was first announced in 2008.  The 5.0 platform has taken over two years to develop, and many of the concepts included in it were formulated in 2008.

We have recently consolidated all web activity into our website www.ZYTO.com.  This was done in order to maximize traffic and increase search engine effectiveness.  ZYTO.com is now the nexus for all ZYTO healthcare professionals and for those professionals and their clients for remote biosurvey scans.  Remote use of our technology over the internet has been available for the last several years under the name of “Virtual Clinic.”  (Information contained on, or available through, our website is not a part of, and is not incorporated by reference into, this Quarterly Report.)

In addition to being the nexus between healthcare professionals and their clients as it relates to remote scans, ZYTO.com will have a “library” where healthcare professionals can share biosurveys and clinical applications using ZYTO technology.  A healthcare professional owning the Elite will be able to author a biosurvey and post that biosurvey for sale at ZYTO.com, and other healthcare professionals will be able to benefit from their experience and knowledge.  The net effect is expected to be a more robust sharing of intellectual power and experience
 
We capitalize all salaries and associated expenses relating to significant enhancements and upgrades to our proprietary software.  As of September 30, 2011, the total capitalized amount was $296,321, net of amortization. Accordingly, this amount is classified as Technology on our balance sheet and considered a critical accounting estimate due to the fact that certain updates relating to the 5.0 platform are still in the development phase.  Specifically, we have completed the entire planning stage of the 5.0 platform, and the Select 5.0 and have determined that the 5.0 platform and, most recently, the Select 5.0 have achieved technological feasibility.   We have only capitalized costs for those components that have achieved technological feasibility.   

Item 3.   Quantitative and Qualitative Disclosures about Market Risk
 
 As a “smaller reporting company” as defined by Item 10 of Regulation S-K, we are not required to provide this information.

Item 4.   Controls and Procedures

Evaluation of Disclosure Controls and Procedures

This interim report does not include either management’s assessment on our internal control over financial reporting or an attestation report of our registered public accounting firm due to a transition period established by rules of the Securities and Exchange Commission for newly public companies.

Changes in Internal Control Over Financial Reporting

During the quarter ended September 30, 2011, there were no changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. 


PART II – OTHER INFORMATION

Item 1.
Legal Proceedings

From time to time, we may become involved in various lawsuits and legal proceedings, which arise, in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these, or other matters, may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have a material adverse affect on our business, financial condition or operating results.
 
 
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Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds

On January 28, 2011, we received $50,000 in exchange for a promissory note.  As part of the agreement, we issued the lender 25,000 shares of common stock. The shares were valued at a grant date fair value of $0.09 per share. The total value of the shares issued was $2,251, which was determined by multiplying the number of shares granted by the closing market price of our common stock on the grant date.

On September 15, 2010, we entered into an agreement with a public relations firm retained in 2009 and 2010 to provide public and financial communication services.  The agreement was for a period of twelve and one half months.  As compensation for services, we agreed to issue 1,200,000 shares of restricted common stock to the public relations firm. As of September 30, 2011, we had issued 1,100,000 shares of the 1,200,000 shares due under the contract, and mutually agreed to terminate the remainder of the contract

In each of the transactions listed above, the shares of common stock were issued in private transactions without registration under the Securities Act in reliance on Section 4(2) of the Securities Act and the rules and regulations promulgated thereunder.
 
Item 5.  Other Information

As noted above, on July 8, 2011, the Board of Directors approved and adopted:
 
 
-
The 2011 Stock Incentive Plan;
 
 
-
A corporate Code of Business Conduct and Ethics; and
 
 
-
The ZYTO Corp Policy on Insider Trading and Compliance.
 
The 2011 Stock Incentive Plan, the Code of Ethics, and the Insider Trading Policy are discussed above on page 11, and copies of the Company’s 2011 Plan, the Code of Ethics, and the Insider Trading Policy were filed previously as exhibits to the Quarterly Report for the quarter ended June 30, 2011.

Item 6.
Exhibits
   
31.01
Certification of Chief Executive Officer of ZYTO Corp, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
31.02
Certification of Chief Financial Officer of ZYTO Corp, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
   
32.01
Certification of Chief Executive Officer of ZYTO Corp, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
   
32.02
Certification of Chief Financial Officer of ZYTO Corp, pursuant to 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
101.Ins
XBRL Instance
101.Sch
XBRL Schema
101 Cal
XBRL Calculation
101.Def
XBRL Definition
101.Lab
XBRL Label
101.Pre
XBRL Presentation
 
 
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SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


   
ZYTO CORP
   
(Registrant)
     
 
By 
/s/        Vaughn R Cook
   
Chief Executive Officer
   
(Principal Executive Officer)
     
 
By 
/s/        Brian E. Halladay
   
Chief Financial Officer
(Principal Financial Officer)
     
Date:  November 14, 2011
 
 
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