DR. Tattoff 10-Q 2012 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended: June 30, 2012

or

o 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 000-52836

DR. TATTOFF, INC.

(Exact name of registrant as specified in its charter)

Florida	20-0594204
(State or Other Jurisdiction	(I.R.S. Employer
of Incorporation or Organization)	Identification No.)

8500 Wilshire Blvd, Suite 105

Beverly Hill, California 90211

(Address of principal executive office)

(310) 659-5101

(Registrant’s telephone number, including area code)

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 o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer o	Accelerated filer o	Non-accelerated filer o	Smaller reporting company x
		(Do not check if a smaller reporting company)

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

The number of shares of the registrant’s common stock, $0.0001 par value, outstanding as of July 31, 2012 was 16,935,995.

DR. TATTOFF, INC.

Quarterly Report on Form 10-Q

June 30, 2012

Table of Contents

Part I.	FINANCIAL INFORMATION	Page
ITEM 1.	CONSOLIDATED FINANCIAL STATEMENTS (unaudited)	1
ITEM 2.	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	14
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 1A.	RISK FACTORS	19
ITEM 2.	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	19
ITEM 3.	DEFAULTS UPON SENIOR SECURITIES	19
ITEM 4.	MINE SAFETY DISCLOSURES	19
ITEM 5.	OTHER INFORMATION	19
ITEM 6.	EXHIBITS	20
SIGNATURES
Index to Exhibits

PART I.  FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

DR. TATTOFF, INC.

 CONSOLIDATED BALANCE SHEETS

	June 30, 2012 (Unaudited)			December 31, 2011 (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	32,311		$	110,787
Management fee due from related party		266,962			283,923
Prepaid expenses and other current assets		64,462			45,680
Total current assets		363,735			440,390
Property and equipment, net		1,074,320			928,904
Other assets		92,970			69,850
Total assets	$	1,531,025		$	1,439,144
LIABILITIES AND SHAREHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable	$	678,950		$	439,298
Accrued expenses and other liabilities		369,296			224,238
Warrant liability		9,900			12,065
Related party payable		-			20,095
Deferred revenue		374,377			184,967
Accrued compensation		189,228			130,711
Notes payable, current portion		206,767			99,371
Capital lease obligations, current portion (related party)		64,900			68,333
Total current liabilities		1,893,418			1,179,078
LONG-TERM LIABILITIES
Capital lease obligations, net of current portion (related party)		140,030			167,805
Notes payable, net of current portion		294,148			154,681
Deferred rent		41,663			38,361
Total liabilities		2,369,259			1,539,925
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ DEFICIT
Preferred stock, 2,857,143 shares authorized, none issued or outstanding at June 30, 2012 and December 31, 2011		-			-
Common stock, $.0001 par value, 75,000,000 authorized, 15,355,382 and 14,727,344 issued and outstanding at June 30, 2012 and December 31, 2011, respectively		1,536			1,473
Additional paid-in capital		4,868,667			4,465,307
Accumulated deficit		(5,708,437	)		(4,567,561	)
Total shareholders’ deficit		(838,234	)		(100,781	)
Total liabilities and shareholders’ deficit	$	1,531,025		$	1,439,144

The accompanying notes are an integral part of these consolidated financial statements.

- 1 -

DR. TATTOFF, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Revenues from related party	$	713,030		$	733,477		$	1,434,007		$	1,371,277
Owned clinic revenues		77,045			7,385			120,572			7,385
		790,075			740,862			1,554,579			1,378,662
Operating costs and expenses
Clinic operating expenses		561,620			405,618			1,082,281			722,514
General and administrative expenses		535,060			792,928			1,183,985			1,494,607
Marketing and advertising		132,922			125,638			258,670			278,524
Depreciation and amortization		66,706			55,936			133,699			94,740
Loss from operations		(506,233	)		(639,258	)		(1,104,056	)		(1,211,723	)
Interest expense, net		15,926			17,991			37,225			29,493
Other income		-			9			1,205			684
Loss from operations before provisions for income taxes		(522,159	)		(657,240	)		(1,140,076	)		(1,240,532	)
Provision for income taxes		800			800			800			800
Net loss	$	(522,959	)	$	(658,040	)	$	(1,140,876	)	$	(1,241,332	)
Basic and diluted net loss per share applicable to common shareholders	$	(.03	)	$	(.05	)	$	(.08	)	$	(.10	)
Weighted average common shares outstanding – basic and diluted		15,341,854			12,944,697			15,001,848			12,778,279

The accompanying notes are an integral part of these consolidated financial statements.

- 2 -

DR. TATTOFF, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

	Common Stock				Additional					Total
	Shares		Par Value		Paid-in Capital		Accumulated Deficit			Shareholders’ Deficit
BALANCE - December 31, 2011		14,727,344	$	1,473	$	4,465,307	$	(4,567,561	)	$	(100,781	)
Sale of common stock		606,610		60		297,180		-			297,240
Exercise of common stock options		21,428		3		7,897		-			7,900
Stock compensation expense		-		-		28,183		-			28,183
Beneficial conversion feature on convertible notes		-		-		10,000		-			10,000
Warrants issued with convertible notes		-		-		60,100		-			60,100
Net loss		-		-		-		(1,140,876	)		(1,140,876	)
BALANCE – June 30, 2012 (unaudited)		15,355,382	$	1,536	$	4,868,667	$	(5,708,437	)	$	(838,234	)

The accompanying notes are an integral part of these consolidated financial statements.

- 3 -

DR. TATTOFF, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(1,140,876	)	$	(1,241,332	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		133,699			94,740
Amortization of debt discount to interest		2,921			-
Stock compensation expense		28,183			192,703
Consulting services paid for in stock and warrants		-			38,575
Change in fair value of warrant liabilities		(2,165	)		(684	)
Changes in operating assets and liabilities:
Management fee due from related party		16,961			(66,331	)
Prepaid expenses and other current assets		40,983			(10,603	)
Other assets		(27,080	)		(20,272	)
Accounts payable		239,652			265,513
Accrued expenses and other liabilities		145,058			(22,771	)
Deferred revenue		189,410			40,873
Related party payable		(20,095	)		(8,669	)
Accrued compensation		58,517			35,333
Deferred rent		3,302			(1,179	)
Net cash used in operating activities		(331,530	)		(704,104	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(177,365	)		(540,560	)
Net cash used in investing activities		(177,365	)		(540,560	)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease obligations		(31,208	)		(25,432	)
Principal payments on notes payable		(43,513	)		(15,399	)
Proceeds from sale of common stock		297,240			-
Proceeds from issuance of convertible notes		200,000			-
Proceeds from exercise of stock options		7,900			89,746
Cash received from stock subscription receivable		-			61,000
Net cash provided by financing activities		430,419			109,915
Net decrease in cash and cash equivalents		(78,476	)		(1,134,750	)
Cash and cash equivalents – beginning of period		110,787			1,856,671
Cash and cash equivalents  – end of period	$	32,311		$	721,922
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	$	28,857		$	3,890
Taxes		800			800
SUPPLEMENTAL DISCLOSURE OF NONCASH  INVESTING AND FINANCING ACTIVITIES
Acquisition of property and equipment through issuance of notes payable	$	97,790		$	118,495
Financing of insurance premiums	$	59,765		$	56,296

The accompanying notes are an integral part of these consolidated financial statements.

- 4 -

DR. TATTOFF, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1.          ORGANIZATION AND NATURE OF OPERATIONS

Organization

Dr. Tattoff, Inc., a Florida corporation formed in 2004, directly, and through its wholly owned subsidiary, DRTHC I, LLC, a Delaware limited liability company (collectively with Dr. Tattoff, Inc., the “Company”), operates clinics and provides marketing and practice management services to licensed physicians who primarily perform laser tattoo removal services.  The Company currently operates clinics in Dallas and Houston, Texas and provides services under a management services agreement with a contracting physician at four Southern California locations whereby the Company provides management, administrative, marketing and support services, insurance, and equipment at the clinical site.  The contracting physician’s medical personnel provide laser tattoo and hair removal services.

In February 2008, the Company completed a reverse merger with Lifesciences, Inc., a “public shell” company, and became a Securities and Exchange Commission (“SEC”) registrant (the “Merger”).  The Company filed Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008, but failed to file any Forms 10-Q or 10-K subsequently.  On March 16, 2010, the Company filed a Form 15 with the SEC to terminate its registration under Section 12(g) of the Exchange Act.  Upon the filing of the Form 15, the Company’s obligation to file periodic and other reports with the SEC was immediately suspended. On December 7, 2011 the Company filed a registration statement on Form 10 with the SEC to register its common stock pursuant to Section 12(g) of the Securities Exchange Act of 1934, as amended, or the Exchange Act, which became effective on February 6, 2012.

Increase in Authorized Shares and Reverse Stock Split

In February 2011, the Company amended its Articles of Incorporation to increase the number of authorized shares to 28,571,429 consisting of 25,714,286 shares of common stock, par value $.0001 per share and 2,857,143 shares of preferred stock.  Series of preferred stock may be created and issued from time to time, with such designations, preferences, rights and restrictions as shall be stated in resolutions adopted by the Board of Directors.  In June 2012, the Company amended its Articles of Incorporation to increase the number of authorized shares to 77,857,143 consisting of 75,000,000 shares of common stock, par value $.0001 per share and 2,857,143 shares of preferred stock.

In February 2012, the Company amended its Articles of Incorporation to effect a 1-for-7 reverse stock split. Earnings per share amounts, weighted average common shares outstanding, shares issued and outstanding, exercise prices, and fair value per share amounts for all periods have been adjusted to reflect the Company’s 1-for-7 reverse stock split.  Par value per share was unchanged with the difference between the originally calculated par value of issued and outstanding shares and the adjusted amounts reclassified to additional paid-in capital for all periods.

Going Concern

The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which assumes the realization of assets and the satisfaction of liabilities in the ordinary course of business.  At June 30, 2012, the Company has accumulated losses approximating $5,708,000, and has not yet produced operating income or positive cash flows from operations.  The Company’s ability to continue as a going concern is predicated on its ability to raise additional capital, increase sales and margins, and ultimately achieve sustained profitable operations.  The uncertainty related to these conditions raises substantial doubt about the Company’s ability to continue as a going concern.  The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Management believes that the Company will need to continue to raise additional outside capital to expand the number of clinics in operation and reduce the level of professional fees it incurs to address its losses and ability to continue to operate.  The Company intends to raise additional capital and continue opening additional clinics to achieve this goal.

In addition, the Company expanded its Board of Directors in 2010 to include individuals with substantial experience in raising capital and numerous relationships that may assist the Company in achieving its goals.  In the event that the Company is unsuccessful in raising adequate equity capital, management will attempt to reduce losses and preserve as much liquidity as possible. Steps management would likely take would include limiting capital expenditures, reducing expenses and leveraging the relatively few assets that it owns without encumbrance.  A reduction in expenses would likely include personnel costs, professional fees, and marketing expenses.  While management would attempt to achieve break-even or profitable operations through these steps, there can be no assurance that it will be successful.

Consolidation Policy

The Company has various contractual relationships with William Kirby D.O., Inc. including a management services agreement, medical director’s agreement, equipment subleases, and guarantees.  The Company evaluated the various relationships between the parties to determine if it should consolidate William Kirby, D.O., Inc. as a variable interest entity pursuant to Accounting Standards Codification (“ASC”) 810, Consolidation.  The Company determined that it was not the primary beneficiary of the interest due to the following: William Kirby, D.O., Inc. has the ability to control the activities that have the most significant impact on its economic performance; the Company does not have an obligation to absorb losses of William Kirby, D.O., Inc.; the Company is not guaranteed a return; and there are no interests that are subordinate to the equity interest at risk.  The Company conclusion followed an analysis of both the contractual arrangements and California state law restrictions on relationships between licensed professionals and businesses.  Among the restrictions of California law the Company considered most relevant in its analysis were those that prohibit a lay corporation from providing medical services, including laser tattoo and laser hair removal, employing medical personnel, and making key decisions about equipment and marketing initiatives.  Therefore the results of William Kirby D.O., Inc. are not consolidated into the results of the Company

The carrying amount and classification of assets and liabilities in the accompanying balance sheets relating to the Company’s relationship with William Kirby, D.O., Inc. are summarized as follows:

	June 30, 2012 (Unaudited)		December 31, 2011 (Audited)
Current Assets
Management fee due from related party	$	266,962	$	283,923
Non-Current Assets
Assets under capital lease, net		51,504		74,844
Current Liabilities
Related party payable		-		20,095
Capital lease obligations, current portion		64,900		68,333
Long-Term Liabilities
Capital lease obligations, net of current portion		140,030		167,805

- 5 -

The Company may be exposed to losses under its relationship with William Kirby, D.O., Inc. The Company’s most significant exposure to loss in the relationship is under the management services agreement.  Losses could occur if the management fees are inadequate to cover the Company’s costs of providing the management services. The Company is unable to estimate its maximum exposure to such losses.

The Company’s relationship and agreements with William Kirby, D.O., Inc. and Dr. William Kirby (the sole shareholder of William Kirby, D.O., Inc.) are further described in Note 5, “Capital Lease Obligations”; Note 6, “Related Party Transactions” and Note 8, “Commitments and Contingencies.”

Dr. Tattoff, Inc. formed a wholly owned subsidiary, DRTHC I, LLC in April 2012 that will be responsible for the operations of some of the new clinics that the Company has and will establish.  Our consolidated financial statements include the accounts of DRTHC I, LLC.

NOTE 2.          SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited condensed, consolidated financial statements of Dr. Tattoff, Inc. and subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X.  Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States for complete financial statements.  The accompanying unaudited consolidated financial statements reflect all adjustments that, in the opinion of the management of the Company, are considered necessary for a fair presentation of the financial position, results of operations and cash flows for the periods presented.  The results of operations for such periods are not necessarily indicative of the results expected for the full fiscal year or for any future period.  The accompanying consolidated financial statements should be read in conjunction with the audited financial statements of the Company included in the Company’s Form 10-K for the year ended December 31, 2011.  The balance sheet as of December 31, 2011 has been derived from the audited financial statements as of that date but omits certain information and footnotes required for complete financial statements.

Reverse Merger Accounting

Since former Company security holders owned, after the Merger, approximately 76% of the combined company’s shares of Common Stock, and as a result of certain other factors, including that all members of the executive management of the combined company are from the Company, the Company is deemed to be the accounting acquirer for financial accounting reporting purposes and the transaction was accounted for as a public shell reverse merger and a recapitalization of the Company in accordance with GAAP.  These financial statements reflect the historical results of the Company prior to the Merger and that of the combined company following the Merger, and do not include the historical financial results of Lifesciences prior to the completion of the Merger.  Membership Units and the corresponding capital amounts of the Company pre-Merger have been retroactively restated as capital stock shares reflecting the exchange ratio in the Merger.

Cash and Cash Equivalents

The Company considers all highly liquid short-term investments with original maturity of three months or less to be cash equivalents.

Fair Value of Financial Instruments

The Company adopted the fair value measurement and disclosure requirements of ASC 820, Fair Value Measurements and Disclosure for financial assets and liabilities measured on a recurring basis. ASC 820 defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements.  This standard applies in situations where other accounting pronouncements either permit or require fair value measurements.  ASC 820 does not require any new fair value measurements.

Fair value is defined in ASC 820 as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices in active markets for identical or similar assets and liabilities.

Level 2: Quoted prices for identical or similar assets and liabilities in markets that are not active or observable inputs other than quoted prices in active markets for identical or similarassets and liabilities.

Level 3:  Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s financial instruments include cash and cash equivalents, management fee due from related party, prepaid expenses and other current assets, security deposits, accounts payable, accrued expenses and other liabilities, deferred revenue, accrued compensation, capital lease obligations and notes payable.  Management believes that the fair value of these financial instruments approximates their carrying amounts based on current market indicators, such as prevailing interest rates and the short-term maturities of such financial instruments.

The fair values of other financial instruments, which consist primarily of the Company’s derivative liabilities, were estimated utilizing a Black-Scholes option-pricing model, a level 3 measurement, as further described in Note 7, “Equity.”

Management believes it is not practical to estimate the fair value of related party financial instruments (payables and receivables) because the transactions cannot be assumed to have been consummated at arm’s length, there are no quoted market values available for such instruments, and an independent valuation would not be practicable due to the lack of data regarding similar instruments (if any) and the associated potential cost.

Long-lived Assets

Long-lived assets are reviewed for impairment in accordance with ASC No. 360 “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires impairment losses to be recorded on long-lived assets when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.  For purposes of the impairment review, assets are reviewed on an asset-by-asset basis.  Recoverability of assets to be held and used is measured by a comparison of the carrying amount of each asset to future net cash flows on an undiscounted basis expected to be generated by such asset.  If such assets are considered to be impaired, the impairment to be recognized is measured by the amount which the carrying amount of the assets on an undiscounted basis exceeds the fair value of the assets.

The major long-lived assets of the Company are the lasers and Intense Pulse Light, or IPL, devices. While the Company has sustained losses, the clinics where the lasers and IPL devices are located are profitable.  As a result, recoverability of assets to be held and used is measured by a comparison of the carrying amount of each asset to future net cash flows on an undiscounted basis expected to be generated by such asset in each clinic.  There were no impairments of long-lived assets at June 30, 2012 and December 31, 2011.

- 6 -

Property and Equipment

Property and equipment is recorded at cost, less accumulated depreciation.  Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets. The Company uses the following estimated useful lives for computing depreciation expense: furniture and fixtures, 7 years; medical equipment, 7 years; other equipment, 3 to 5 years. Amortization of leasehold improvements is recorded using the straight-line method based on the lesser of the useful life of the improvement or the lease term, which is typically five years or less.

Debt and Other Financial Instruments

Debt/Equity Instruments Issued with Warrants

The Company estimates the relative fair values of the debt and warrants, and allocates the proceeds pro-rata based on these values.  The allocation of proceeds to the warrants results in the debt instrument being recorded at a discount from the face amount of the debt and the value allocated to the warrant is recorded to additional paid-in capital.

The Company reviews the terms of convertible financial instruments it issues to determine whether there are embedded derivative instruments, including the conversion option that may be required to be bifurcated and accounted for separately as a derivative financial instrument.  In circumstances where the convertible instrument contains more than one embedded derivative, including the conversion option that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds from the convertible host instruments are first allocated to the bifurcated derivative instruments.  The remaining proceeds, if any, are then allocated to the convertible instruments themselves, resulting in those instruments being recorded at a discount from their face value.

Derivative Financial Instruments

Derivative instruments are initially recorded at estimated fair value and are then revalued at each reporting date with changes in the estimated fair value reported as charges or credits to income.

Revenue Recognition

Currently, the majority of the Company’s revenues are derived from management services provided to William Kirby D.O., Inc., a related party, for our non-owned clinics.  The Company provides nonmedical services and facilities based on contractual prices established in advance that extend continuously over a set time for a fixed percentage of the contracting physician’s gross revenues (as defined in the management services agreement with William Kirby, D.O., Inc. - See Note 6, “Related Party Transactions”) with no upfront fees paid by William Kirby D.O., Inc.  The management services agreement with William Kirby D.O., Inc. covers all of the Company’s California locations.

Under the management service agreement with William Kirby D.O., Inc., there is no right to refund or rejection of services.  The Company recognizes revenue when the following criteria of revenue recognition are met: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.  Management services fees are paid by the contracting physician to the Company on a bi-weekly basis as earned, which is when the Company has substantially performed management services pursuant to the terms of the management services agreement with William Kirby D.O., Inc.

The Company owns and operates the Dallas and Houston locations directly, not pursuant to a management services agreement with a physician.  Accordingly, patients contract with the Company and pay for the services they receive directly to the Company.  The Company recognizes revenue when the following criteria of revenue recognition are met: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured.  The Company requires payment at the time of the patient visit or in advance of the visit by those patients purchasing packages of treatments.  Payments by patients made in advance of service delivery are recorded as “deferred revenue” on the accompanying balance sheets and amounted to approximately $374,000 at June 30, 2012 and $185,000 at December 31, 2011.

Patients who purchase tattoo removal services at clinics the Company operates directly are eligible to participate in the Company’s tattoo removal guarantee program.  Pursuant to the guarantee program, if the tattoo is not fully removed within the recommended number of treatments, the Company will continue to provide additional treatments, consistent with the Company’s medical protocols, for a period of up to one year following the date of the last paid treatment.  The Company estimates the cost of the guarantee program based on historical usage and the average cost of treatments.  The cost of the program is accrued on a per visit basis as visits occur and is included in clinic operating expense on the accompanying statements of operations.  The Company recognized accrued expense of approximately $16,000 and $7,000 as of June 30, 2012 and December 31, 2011, respectively, related to the guarantee program, and this is included in the accrued expenses and other liabilities in the accompanying balance sheets.  Patients who purchase a package of services and experience complete removal prior to completion of the package are eligible for a refund for the unused portion of the package.  The Company recognizes refunds, which have been immaterial in amount, as a reduction in revenue as incurred.  Patients who receive services in clinics operated under the management services agreement with William Kirby, D.O., Inc. are eligible for similar programs, which may reduce the management fee that the Company receives.

Advertising Costs

Advertising costs are expensed as incurred.  For the six month periods ended June 30, 2012 and 2011, advertising expense was approximately $130,000 and $202,000, respectively.

Income Taxes

The Company accounts for income taxes in accordance with the Financial Accounting Standards Board (“FASB”) ASC Topic 740 “Income taxes.”  Under ASC 740, deferred income taxes are recognized to reflect the tax consequences in future years for the differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax reporting purposes using enacted tax rates in effect for the year in which the differences are expected to reverse.  A valuation allowance is provided to reduce net deferred tax assets to amounts that are more likely than not to be realized.

The Company has incurred tax net operating losses since inception and, accordingly, has a deferred tax asset related to such tax net operating loss carryforwards.  The Company has provided a 100% valuation allowance on such deferred tax asset at June 30, 2012 and December 31, 2011.

The Company accounts for uncertainty in income taxes in accordance with ASC 740-10, which prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.  ASC 740-10 also provides guidance on the measurement, derecognition, classification and disclosure of tax positions, as well as the accounting for related interest and penalties.  The Company’s policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense.  The Company has recognized no tax related interest or penalties since the adoption of ASC 740-10.  As of June 30, 2012, the open tax years of the Company were 2007 to 2011.

Earnings Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted earnings per share reflects the potential dilution, using the treasury stock method, that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.  In computing diluted earnings per share, the treasury stock method assumes that outstanding options are exercised and the proceeds are used to purchase common stock at the average market price during the period.  Options will have a dilutive effect under the treasury stock method only when the Company reports net income and the average market price of the common stock during the period exceeds the exercise price of the options.  Options, warrants and conversions of convertible debt instruments were not included in computing diluted earnings per share for the three and six months ended June 30, 2012 and 2011, respectively because their effects were antidilutive.

- 7 -

The following table illustrates the computation of basic and diluted earnings per share:
 

	Three Months Ended June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
Net loss available to common stockholders (numerator)	$	(522,959	)	$	(658,040	)	$	(1,140,876	)	$	(1,241,332	)
Weighted average shares outstanding (denominator)		15,341,854			12, 944,697			15,001,848			12,778,279
Basic and diluted EPS	$	(.03	)	$	(.05	)	$	(.08	)	$	(.10	)

Basic and diluted EPS are the same for all periods presented as the impact of all potentially dilutive securities were anti-dilutive.

The following potentially dilutive securities were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the periods presented.

	June 30,
	2012		2011
Common stock options		950,490		909,418
Warrants		811,080		215,987
		1,761,570		1,125,405

Accounting for Common Stock Options

The Company measures stock-based compensation expense at the grant date, based on the fair value of the award, and recognizes the expense over the employee’s requisite service (vesting) period using the straight-line method.  The measurement of stock-based compensation expense is based on several criteria including, but not limited to, the valuation model used and associated input factors, such as expected term of the award, stock price volatility, risk free interest rate and forfeiture rate.  Certain of these inputs are subjective to some degree and are determined based in part on management’s judgment.  The Company recognizes the compensation expense on a straight-line basis for its graded vesting awards. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates.  However, the cumulative compensation expense recognized at any point in time must at least equal the portion of the grant-date fair value of the award that is vested at that date.  As used in this context, the term “forfeitures” is distinct from “cancellations” or “expirations”, and refers only to the unvested portion of the surrendered equity awards.

Deferred Rent

The Company currently leases all of its locations under leases classified as operating leases.  Minimum base rent for these operating leases, which generally have escalating rentals over the term of the lease is recorded on a straight-line basis over the lease term.  As such, an equal amount of rent expense is attributed to each period during the term of the lease regardless of when actual payments occur.  Lease terms begin on the inception date and include option periods only where such renewals are imminent and assured.  The difference between rent expense and actual cash payments is classified as “deferred rent” in the accompanying balance sheets and approximated $42,000 at June 30, 2012 and $38,000 at December 31, 2011.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.  Actual results could differ from those estimates.  Significant estimates include those related to the realization of long-lived assets, deferred income tax asset valuation allowances, and the valuation of equity instruments issued.

Concentrations

Financial instruments that subject the Company to credit risk consist primarily of cash and revenues.  The Company’s cash is maintained at financial institutions in the United States.  These accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”).  At times, such balances may be in excess of the amounts insured by the FDIC.  The Company has not experienced any losses on such accounts and believes it is not exposed to any significant credit risks on cash.

Substantially all of the Company’s revenues for the six months ended June 30, 2012 and 2011 were derived from a management services agreement with William Kirby, D.O., Inc. relating to the Company’s California clinics.  If the Company’s management services agreement is terminated for any reason or William Kirby, D.O., Inc. defaults on its obligations thereunder, the Company’s operating results, cash flows and financial performance may be adversely affected and the Company may need to negotiate and enter into a new agreement with a qualified physician.  Although the Company’s management services agreement provides the Company with the right to approve a replacement contracting physician upon termination or default, the Company can give no assurance that it will be able to expeditiously identify and contract with a qualified replacement physician on commercially reasonable terms or at all.  The termination of the Company’s management services agreement could have a material adverse effect on the Company’s financial condition, cash flows and results of operations.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS.  The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between GAAP and International Financial Reporting Standards.  The Company has implemented this guidance and its adoption has not had an impact on the Company’s financial statements or related disclosures.

- 8 -

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants (“AICPA”), and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

Reclassifications

Certain amounts from the prior year financial statements have been reclassified to conform to the current year presentation.

NOTE 3.          PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

	June 30, 2012 (Unaudited)			December 31, 2011 (Audited)
Equipment	$	1,220,680		$	1,095,657
Furniture and fixtures		79,196			74,070
Leasehold improvements		597,120			452,114
		1,896,996			1,621,841
Less accumulated depreciation and amortization		(822,676	)		(692,937	)
	$	1,074,320		$	928,904

Depreciation and amortization expense was approximately $67,000 and $56,000 for the three months ended June 30, 2012 and 2011 respectively and $134,000 and $95,000 for the six months ended June 30, 2012 and 2011, respectively.

Assets under capital leases (gross) were approximately $511,000 at June 30, 2012 and December 31, 2011, respectively.  Amortization expense recorded for the assets under capital leases amounted to approximately  $10,000 and $12,000 for the three months ended June 30, 2012 and 2011 respectively and $23,000 and $29,000 for the six months ended June 30, 2012 and 2011, respectively.  Accumulated amortization of assets under capital leases was approximately $459,000 and $436,000 at June 30, 2012 and December 31, 2011, respectively.

NOTE 4.                 NOTES PAYABLE

Notes payable consist of the following:

	June 30, 2012 (Unaudited)			December 31, 2011 (Audited)
Financed insurance premiums	$	39,051		$	3,460
Equipment promissory notes		329,043			250,592
Secured senior subordinated convertible promissory notes		200,000			-
		568,094			254,052
Less unamortized discount		(67,179	)		-
Less current portion		(206,767	)		(99,371	)
	$	294,148		$	154,681

Financed Insurance Premiums

In January 2012, the Company entered into a financing agreement with an unrelated third party to finance the Company’s medical malpractice insurance for a period of 12 months.  The note, in the principal amount of $15,565, bears interest at approximately 8.50% per annum, and is repayable in 10 monthly installments of $1,618.  The note matures in November 2012.  The balance outstanding on the note was $7,919 and $0 at June 30, 2012 and December 31, 2011, respectively.

In March 2012, the Company entered into a financing agreement with an unrelated third party to finance the Company’s directors and officer liability insurance for a period of 12 months.  The note, in the principal amount of $44,200, bears interest at approximately 4.87% per annum, and is repayable in 10 monthly installments of $4,519.  The note matures in January 2013.  The balance outstanding on the note was $31,132 and $0 at June 30, 2012 and December 31, 2011, respectively.

Equipment Promissory Notes

In November 2010, the Company entered into a financing agreement with an unrelated third party to finance computer and telephone equipment to upgrade existing systems and equip its clinic location in Montclair, California.  The note, in the principal amount of $64,157, bears interest at approximately 6% per annum, and is repayable in 60 monthly payments of $1,241. The note matures in October 2015 and is secured by a first priority purchase money security interest in the equipment.  The Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon.  The balance outstanding on the note was $46,890 and $52,819 at June 30, 2012 and December 31, 2011, respectively.

In February 2011, the Company entered into a financing agreement with an unrelated third party manufacturer to finance the purchase of a laser for the location in Montclair, California.  The note, in the principal amount of $118,495, bears interest at approximately 7% per annum, and is repayable in 36 monthly installments of $3,700.  The note matures in January 2014 and is secured by a first priority purchase money security interest in the equipment.  The Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon. The balance outstanding on the note was $76,964 and $83,442 at June 30, 2012 and December 31, 2011, respectively.

In May 2011, the Company entered into a financing agreement with an unrelated third party to finance computer and telephone equipment for its Dallas, Texas clinic and its call center in Irvine, California.  The note, in the principal amount of $17,515, bears interest at approximately 7% per annum, and is repayable in 36 monthly payments of $600.  The note matures in June 2014 and is secured by a first priority purchase money security interest in the equipment.  The Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon.  The balance outstanding on the note was $12,066 and $14,837 at June 30, 2012 and December 31, 2011, respectively.

In June 2011, the Company entered into a financing agreement with an unrelated third party manufacturer finance the purchase of a laser for the location in Dallas, Texas.  The note, in the principal amount of $118,495, bears interest at approximately 7% per annum, and is repayable in 36 monthly installments of $3,700.  The note matures in June 2014 and is secured by a first priority purchase money security interest in the equipment.  The Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon.  The balance outstanding on the note was $96,299 and $99,494 at June 30, 2012 and December 31, 2011, respectively.

In June 2012, the Company entered into a financing agreement with an unrelated third party to finance computer and telephone equipment for its Houston, Texas clinic and its clinic planned for Phoenix, Arizona.  The note, in the principal amount of $37,870, bears interest at approximately 6% per annum, and is repayable in 36 monthly payments of $1,148.  The note matures in May 2015 and is secured by a first priority purchase money security interest in the equipment.  The Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon.  The balance outstanding on the note was $36,904 and $0 at June 30, 2012 and December 31, 2011, respectively.

- 9 -

In June 2012, DRTHC I, LLC, a wholly-owned subsidiary of the Company, entered into a financing agreement with an unrelated third party manufacturer to finance the purchase of a laser for the location in Houston, Texas. The note, in the principal amount of $59,920, bears interest at approximately 7% per annum, and is repayable in 24 monthly installments of $2,683. The note matures in June 2014 and is secured by a first priority purchase money security interest in the equipment.  The Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon.  The balance outstanding on the note was $59,920 and $0 at June 30, 2012 and December 31, 2011, respectively.

Secured Senior Subordinated Convertible Promissory Notes

In May 2012, the Company issued $200,000 of secured senior convertible promissory notes.  The notes are convertible at the option of the holder at any time during the term of the note into Common Stock of the Company at an initial conversion price of $.60 per share, subject to adjustment for stock splits or subdivisions. The notes bears interest at 12% per annum, payable quarterly, and are due at maturity. The notes mature in May 2014 and are secured by a first priority lien on the ownership interest of the Company in its wholly owned subsidiary DRTHC I, LLC.  The balance outstanding on the notes was $200,000 and $0 at June 30, 2012 and December 31, 2011, respectively. As additional consideration for the investors purchasing the notes, the Company issued the note holders five-year warrants to purchase an aggregate of 250,000 shares of the Company’s Common Stock at an exercise price of $.75 per share. The relative fair values of the warrants at the time of issuance, determined by management to be $60,700 in the aggregate, were recorded as a debt discount and will be amortized to interest expense over the term of the notes. The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, strike price $.75, expected life of five years; risk free interest rate of .72%; volatility of 72% and expected dividend yield of zero. The notes also contained a beneficial conversion feature determined by management to be $10,000 in the aggregate which was recorded as a debt discount and will be amortized to interest expense over the term of the notes. Amortization of the debt discount was $2,921 for the six months ended June 30, 2012.

The following table sets forth the future maturities of the Company’s outstanding notes payable:

	June 30, 2012 (Unaudited)		December 31, 2011 (Audited)
2012	$	132,181	$	99,371
2013		146,299		99,536
2014		269,539		40,727
2015		20,075		14,418
Total	$	568,094	$	254,052

NOTE 5.          CAPITAL LEASE OBLIGATIONS

Capital lease obligations consist of the following:

	June 30, 2012 (Unaudited)			December 31, 2011 (Audited)
$199,610 capital lease obligation on equipment.  The lease bears interest at 9.65% per annum, is payable monthly in principal and interest installments of $2,704 and matures in May 2018	$	145,803		$	154,735
$69,200 capital lease obligation on equipment.  The lease bears interest at 14.95% per annum, is payable monthly in principal and interest installments of $1,644 and matures in May 2013		16,804			25,051
$57,750 capital lease obligation on equipment.  The lease bears interest at 9.15% per annum, is payable monthly in principal and interest installments of $1,203 and matures in May 2013		12,647			19,113
$72,375 capital lease obligation on equipment.  The lease bears interest at 9.11% per annum, is payable monthly in principal and interest installments of $2,123 and matures in April 2014		29,676			37,239
Total minimum lease payments		204,930			236,138
Less current maturities		(64,900	)		(68,333	)
Long-term portion	$	140,030		$	167,805

The future minimum capital lease payments are as follows:

	June 30, 2012 (Unaudited)			December 31, 2011 (Audited)
2012	$	46,043		$	92,087
2013		72,149			72,149
2014		40,934			40,934
2015		32,443			32,443
2016		32,443			32,443
Thereafter		45,954			45,954
Total minimum lease payments		269,966			316,010
Unamortized discount		(9,141	)		(11,216	)
Less amount representing interest		(55,895	)		(68,656	)
Present value of minimum lease payments		204,930			236,138
Less current maturities		(64,900	)		(68,333	)
Long-term portion	$	140,030		$	167,805

- 10 -

NOTE 6.          RELATED PARTY TRANSACTIONS

Management Services Agreement

The Company and William Kirby D.O., Inc. operate under a management services agreement entered into effective January 1, 2010, whereby the Company provides technical, management, administrative, marketing, support services and equipment to the sites where William Kirby D.O., Inc. provides or supervises tattoo and hair removal services.  The agreement covers four laser centers in southern California operated by the Company.  The Company had a $266,962 and $283,923 receivable due from William Kirby D.O., Inc. at June 30, 2012 and December 31, 2011, respectively.

Pursuant to the management services agreement, the Company provides certain non-medical management, administrative, marketing and support services to the practice sites where William Kirby, D.O., Inc. provides or supervises laser tattoo and hair removal services, which such services include employment of all non-licensed administrative personnel including an on-site manager and receptionist for each site and all support personnel such as accounting, information technology, human resources, purchasing and maintenance.  The Company also provides certain supplies, furniture and equipment used at the practice sites.  The Company is also responsible for identifying and leasing the practice site locations and paying all rent, utilities and maintenance costs related thereto. Under the management services agreement, the Company also arranges third party marketing and advertising for the practice sites.

Medical Director Agreement

Effective January 1, 2010, the Company entered into a medical director agreement with William Kirby, D.O., Inc. and Dr. Kirby, under which the Company receives administrative, consultative and strategic services from William Kirby, D.O., Inc.  The initial term of the agreement is for five years, to be followed by automatic renewal terms of five years each.  The agreement provides for an annual payment of $250,000 to William Kirby, D.O., Inc. for these services.

Lease Guarantees

William Kirby, D.O., Inc. is the named lessee under the leases for the clinics located in Beverly Hills and Encino, California.  Dr. Kirby personally guaranteed the lessee’s obligations under these leases.  On July 21, 2011, the Company transferred its operations from a clinic located in Irvine, California to a clinic located in Santa Ana, California.  William Kirby, D.O., Inc. was the named lessee under the lease for the clinic located in Irvine, California, and Dr. Kirby personally guaranteed the lessee’s obligations under such lease.  The Company is the named lessee under the lease for the clinics located in Montclair and Santa Ana, California and the lease for the clinics in Dallas and Houston, Texas.

Dr. Kirby also guaranteed certain of the Company’s equipment leases until they were refinanced in June 2008.  The lasers and IPL devices currently used in three of the Company’s clinics are owned or leased by William Kirby, D.O., Inc. pursuant to various capitalized lease and/finance agreements with third party financing sources.  In addition, under the management services agreement, the Company has the right, at any time, to purchase the equipment from William Kirby, D.O., Inc. at a purchase price of the amount outstanding, if any, under the applicable financing agreement.  The Company has accounted for these leases as capital leases based on the agreement terms.

Shareholders Agreement:

Effective January 1, 2010, the Company entered into a Shareholders Agreement with William Kirby, D.O., Inc. and Dr. Kirby, pursuant to which, upon the occurrence of certain triggering events described below, Dr. Kirby is required to transfer his interest in William Kirby, D.O., Inc. to another licensed person or entity approved by the Company.  Such triggering events include but are not limited to (i) the death or incapacity of Dr. Kirby, (ii) the loss of Dr. Kirby’s medical license, (iii) a breach of the obligations of William Kirby, D.O., Inc. and/or Dr. Kirby under the management services agreement or the medical director agreement, (iv) the voluntary or involuntary transfer of Dr. Kirby’s interest in William Kirby, D.O., Inc., or (v) termination of the management services agreement in certain circumstances.

Related Party Payable

Related party payable consists of amounts due to William Kirby, D.O., Inc. under the medical directors agreement and management services agreement. The balance outstanding at June 30, 2012 included $0 due on the medical directors agreement and $0 due on the management services agreement.  The balance outstanding at December 31, 2011 included $20,095 due on the medical directors agreement and $0 due on the management services agreement.

NOTE 7.          EQUITY

Common Stock

In March 2012, the Company sold 606,610 shares of common stock in a private placement for aggregate gross proceeds of $297,240.  Of the shares sold, 337,428 were sold to members of the Company’s management or board of directors and other Company affiliates, representing gross proceeds of $165,340.

Stock Options

The following table summarizes the Company’s stock option activity for the six months ended June 30, 2012:

	Number of Options			Weighted Average Exercise Price per Share		Weighted Average Grant-Date Fair Value per Share
Outstanding at December 31, 2012 (audited)		909,418		$	.3687	$	.3687
Granted (unaudited)		62,500			.49		.49
Exercised (unaudited)		(21,428	)		.3687		.3687
Forfeited or Expired (unaudited)		–			–		–
Outstanding at June 30, 2012 (unaudited)		950,490		$	.3767	$	.3767
Exercisable at June 30, 2012 (unaudited)		269,765		$	.3757	$	.3757
Vested and expected to vest at June 30, 2012 (unaudited)		950,490		$	.3787	$	.3767

The aggregate intrinsic value of options exercised during the six months ended June 30, 2012 was $0.

- 11 -

Warrants

In connection with the sale of common stock in a private placement in March 2012 (described above), the Company issued fully vested warrants to purchase 303,305 shares of the Company’s common stock at a purchase price of $.595 per share.  The warrants expire on April 2, 2017. Warrants to purchase 168,714 shares were issued to members of management or board of directors and their affiliates in connection with their participation in the private placement.  The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, expected life of five years; risk free interest rate of 1.03%; volatility of 70% and expected dividend yield of zero.  The net proceeds on the sale of common stock were allocated between the estimated fair value of the warrants at issuance of $79,500 and the common stock sold in the offering. Accordingly, the estimated fair value of the warrants was recognized as “additional paid-in capital” on the accompanying balance sheets.

In connection with issuance of the secured senior subordinated convertible notes in a private placement in May 2012 (described above), the Company issued fully vested warrants to purchase 250,000  shares of the Company’s common stock at a purchase price of $.75 per share.  The warrants expire on May 31, 2017.  Warrants to purchase 250,000 shares were issued to members of management or board of directors and their affiliates in connection with their participation in the private placement.  The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, strike price $.75, expected life of five years; risk free interest rate of .72%; volatility of 72% and expected dividend yield of zero.  The net proceeds on the issuance of the convertible notes were allocated between the estimated fair value of the warrants at issuance of $60,700 and the convertible notes issues in the offering.  Accordingly, the estimated fair value of the warrants was recognized as “additional paid-in capital” on the accompanying balance sheets.

The following table summarizes the Company’s warrant activity for the six months ended June 30, 2012:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)
Outstanding at December 31, 2011 (audited)		269,558		$	1.28		2.9
Granted (unaudited)		553,305			.67		4.8
Exercised (unaudited)		-			-		-
Expired or cancelled (unaudited)		(11,783	)		8.75		-
Exercisable at June 30, 2012 (unaudited)		811,080		$	.66		4.1

Warrants Outstanding and Exercisable
Number of Shares Under Warrants	Range of Exercise Prices		Expiration Date	Weighted Average Exercise Price
56,974	$	.37-8.75	2012	$	.77
18,390		.37-5.60	2013		2.40
128,840		.37	2015		.37
53,571		.59	2016		.59
553,305		.59-.75	2017		.67
811,080	$	.37-8.75		$	.66

NOTE 8.          COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leases its Beverly Hills and Encino, California clinics and the Irvine, California office from William Kirby, D.O., Inc, a related party.  William Kirby D.O is the named lessee under these leases that expire through 2013 and Dr. William Kirby personally guaranteed the lessee’s obligations under these leases.  The Company leased its clinics located in Santa Ana and Montclair, California, and Dallas and Houston, Texas from unrelated third parties, which expire through 2017.  In June 2012, the Company entered into a lease with an unrelated third party for a clinic in Phoenix, Arizona, which expires in 2017 and is presently in development.  Lease agreements, in addition to base rentals, generally are subject to annual escalation provisions that range from 3% to 4% and options to renew ranging from 3 years to 5 years.

The aggregate minimum future payments required on the operating leases are as follows at June 30, 2012:

2012 (six months)	$	194,933
2013		340,212
2014		286,877
2015		297,468
2016		197,189
Thereafter		73,295
	$	1,389,974

Rent expense relating to related party leases for the three months ended June 30, 2012 and June 30, 2011 approximated $53,000 and $50,000, respectively and $95,000 and $96,000 for the six months ended June 30, 2012 and 2011 respectively.  Rent expense related to third party leases for the three months ended June 30, 2012 and June 30, 2011 approximated $52,000 and $4,000, respectively and $93,000 and $6,000 for the six months ended June 30, 2012 and 2011 respectively.

- 12 -

NOTE 9.         SUBSEQUENT EVENTS

Subsequent events have been evaluated through the date on which these consolidated financial statements have been issued.

In July 2012, the Company sold 1,580,613 shares of common stock in a private placement for aggregate gross proceeds of $774,500.  In connection with the financing, the investors received five-year warrants exercisable for 790,306 shares of common stock at a price of $0.595 per share, subject to adjustment.

- 13 -

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

Forward-looking and Cautionary Statements

This report contains forward-looking statements within the meaning of the Federal securities laws.  Forward-looking statements express our expectations or predictions of future events or results.  The statements are not guarantees and are subject to risk and uncertainty.  Except as required by applicable law, including Federal securities laws, we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

In light of the significant uncertainties inherent in the forward-looking statements made in this report, the inclusion of such statements should not be regarded as a representation by us or any other person that our objectives, future results, levels of activity, performance or plans will be achieved.  We caution that these statements are further qualified by important factors that could cause actual results to materially differ from those contemplated in the forward-looking statements, including, without limitation, the following:

● those items discussed under “Risk Factors” in Item 1A to our annual report on Form 10-K for the year ended December 31, 2011, as amended;

● our failure to generate significant revenues from operations;

● the availability and cost of capital required to fund our current and future operations;

● Federal, state and local law and regulation, including regulation of the services provided at our clinics;

● our failure to execute our business plan;

● our failure to effectively execute our marketing strategies;

● our failure to identify or negotiate new real property leases on reasonable terms as part of our expansion plans;

● our ability to renew existing leases on reasonable terms;

 ● the effect of competition in our industry;

● our ability to protect our intellectual property;

 ● our exposure to litigation;

● our dependence on key management and other personnel, including the physicians providing services at our clinics;

 ● a decline in the demand for services provided at our clinics;

● the ability of holders of our securities to effect resales of our securities; and

 ● the effect of adverse economic conditions generally, and on discretionary consumer spending and the availability of credit.

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” or words of similar meaning.  They may also use words such as “would,” “should,” “could” or “may.”

Introduction

Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of the Company’s financial condition, cash flows and results of operations. MD&A is organized as follows:

Overview.  This section provides a brief description of the Company’s business and operating plans.

Results of Operations.  This section provides an analysis of the Company’s results of operations for the three and six-month periods ending June 30, 2012 and 2011.

Liquidity and Capital Resources.  This section provides an analysis of the Company’s cash flows for the six months ending June 30, 2012 and 2011, as well as a discussion of the Company’s outstanding commitments as of June 30, 2012.  Included in the analysis is a discussion of the amount of financial capacity available to fund the Company’s future commitments, as well as a discussion of other financing arrangements.

Off-Balance Sheet Arrangements.  This section discloses any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition.

Critical Accounting Estimates.  This section identifies those accounting estimates that are considered important to the Company’s results of operations and financial condition, require significant judgment and require estimates on the part of management in application.

Significant Accounting Policies.  This section identifies those accounting policies that are considered important to the Company’s results of operations and financial condition, require significant judgment and require estimates on the part of management in application.  All of the Company’s significant accounting policies, including those considered to be critical accounting policies, are summarized in Note 2 to the consolidated financial statements included in Part I of this report.

Overview

Our clinics provide safe, minimally invasive and affordable laser tattoo and hair removal services in a relaxed environment.  The services offered at our clinics are administered by licensed medical professionals in accordance with applicable state and Federal law.  We currently manage four clinics located in southern California pursuant to a management services agreement with a contracting physician.  This arrangement is structured to comply with a California state limitation on the corporate practice of medicine.  In addition, we own and operate two clinics, one located in Dallas, Texas and the other in Houston, Texas.  We have executed a lease agreement and expect to have commenced tenant improvements for an additional clinic we will own and operate in Phoenix, Arizona.  We expect to commence operations at the Phoenix clinic in later half of 2012.  We are in negotiations with prospective landlords for additional clinic locations which we intend to open as soon as practicable, subject to the availability of financial resources to do so.  As we expand into other states, applicable state law will govern how we structure the provision of services in our new clinics.  Within this framework, we are seeking to become the first nationally branded laser tattoo and hair removal business.

Throughout this report, the terms our clinics and our facilities refer to the laser tattoo and hair removal clinics we currently manage or operate, or will manage or operate in the future, in accordance with applicable state and Federal law; and the terms “the business” and “our business” refer to the business of owning, operating and/or managing our clinics.

We have supported the provision of over 139,000 procedures to more than 18,000 patients during our operating history.  Our first clinic opened in Beverly Hills, California in July 2004. We opened our fourth clinic in southern California in February 2011, our fifth clinic in Dallas, Texas in June 2011 and our sixth clinic in Houston, Texas in June 2012.

- 14 -

Our source of revenues through June 30, 2012, consisted primarily of a management fee paid under a management services agreement with William Kirby, D.O., Inc. related to clinics operated by that entity.  Pursuant to the management services agreement, we provide certain non-medical management, administrative, marketing and support services and equipment as an independent contractor to the practice sites where William Kirby, D.O., Inc. provides or supervises laser tattoo and hair removal services.  The Company has responsibility for most of the operations of the business conducted at the clinics, except for the dispensing of patient care services, in accordance with California state law.  As we expand into states outside of California, applicable state law will govern how we structure the provision of services in our new clinics.  Effective January 1, 2010, we entered into an amended and restated management services agreement with William Kirby, D.O., Inc.  Dr. William Kirby, a member of our board of directors, is the sole shareholder of William Kirby, D.O., Inc.  Pursuant to the management services agreement, the percentage management fee that we receive is subject to annual adjustment and was decreased from 73.5% to 70.3%, effective January 1, 2012.  Under the agreement we absorb the cost of advertising while William Kirby, D.O., Inc. absorbs the cost of credit card fees and discounts which were approximately 4.5% for the six months ended June 30, 2012.  Advertising costs were approximately 7.0% of our revenue in the six months ended June 30, 2012.

Because the source of the majority of our revenue is through our management services agreement with William Kirby, D.O., Inc., our financial performance could be negatively impacted by unfavorable developments in that business.  Fee for service receipts of William Kirby D.O., Inc., less refunds, have increased by approximately $223,000 for the six months ended June 30, 2012 when compared to the same period of the prior year.  Of this increase, approximately $174,000 is a result of opening of a new clinic in February 2011.  Our management fees, which are a percentage of the fee for service receipts of William Kirby, D.O., Inc., also increased.  The cost of employee compensation (including Dr. Kirby’s compensation) decreased by approximately $11,000 for the six months ended June 30, 2012 when compared to the same period of the prior year. The increase in service fees was the primary factor in an improvement in the financial performance of William Kirby, D.O., Inc. in the first six months of 2012 when compared to the comparable period of the prior year and has resulted in a cash basis profit for William Kirby D.O., Inc. in the first half of 2012. In the event that William Kirby D.O., Inc. incurs losses, then it may not have adequate cash to meet its obligations to us and it may seek changes in the management services agreement that would unfavorably impact our financial results.  The financial information related to William Kirby, D.O., Inc. included herein is on a cash and not accrual basis, and has not been prepared on a GAAP basis consistently applied.  As a result, the foregoing financial information related to William Kirby, D.O., Inc. is not directly comparable to the financial information prepared on a GAAP basis regarding the Company that is included in this report.

Funds from operations from the Dallas clinic we opened in June 2011 and the Houston clinic we opened in June 2012 serve as an additional source of revenue.  In connection with our Dallas and Houston clinics, we entered into a consulting physician agreement with Pandora Laser Services, PLLC, pursuant to which Dr. Alpesh Desai, the sole member of Pandora Laser Services, or other physicians engaged by Pandora Laser Services provide to our Dallas and Houston clinics (i) medical director services, (ii) assistance with the creation of clinic protocols and (iii) supervisory and consulting services regarding equipment procurement and operation, in each case consistent with applicable state and Federal laws and regulations.

We differentiate the services offered at our clinics from those of competitors by:

●      focusing solely on tattoo and hair removal;

●      providing services in a relaxed environment;

●      optimizing the location of our clinics; and

●      catering to our target demographic.

Our initial expansion focus is on large metropolitan markets that can support multiple clinic locations with favorable demographics, regulatory environments and competitive landscapes.  We are currently evaluating potential clinic sites in Texas, Georgia and Arizona, and have identified over 40 other viable markets in the United States for expansion.  We estimate our cash requirements for each new clinic to be approximately $250,000, to be applied toward various start-up costs, including leasehold improvements, marketing expenses, equipment acquisition, supplies and personnel.

Our laser tattoo services are performed by licensed medical professionals using Q-switched lasers and our hair removal services are similarly performed by licensed medical professionals using laser and/or Intense Pulse Light, or IPL, devices, in each case, with physician oversight in compliance with applicable state law.  From time to time, William Kirby, D.O., Inc. and Pandora Laser Services evaluate the lasers used to perform procedures at the applicable clinic(s) and may recommend the use of new or additional technology.

With respect to our clinics, the amount of revenue generated by a clinic, whether for the Company directly (with respect to our Texas locations) or for William Kirby, D.O., Inc. (with respect to our California locations) is primarily a function of the size and characteristics of the tattoo and the area of the body to be treated for hair reduction, less any refunds and credit card fees.  Under our management services agreement with William Kirby, D.O., Inc., our management services fee is based on a percentage of the contracting physician’s gross revenues.  The costs of operating our California clinics are predominantly fixed or have a relatively small variable component, principally supplies.  As a result, the contracting physician’s procedure volume can have a significant impact on our level of profitability since we operate under a fixed percentage of gross revenues arrangement.  With respect to the clinics we operate directly (currently just in Texas), the costs of operating our clinics, not only include those that are fixed or have a relatively small variable component, principally supplies, but also include the expenses related to the personnel to staff the clinics.  Here too, the procedure volume can have a significant impact on our level of profitability since many of the costs are relatively fixed.

Management measures volume in “encounters,” which includes a visit to the clinic whether or not a purchase is made, and telephone sales.  Management believes this measurement best represents the variable resource requirements, primarily staff time, and because other measures would be difficult and expensive to implement with little added benefit.

Our management service fees are affected by a number of factors, including but not limited to, our ability to assist the contracting physician to generate patients, placement for the physician through our consumer advertising and word of mouth referrals, the availability of patient financing and the effect of competition and discounting practices in the laser tattoo and hair removal industry.  The majority of patients, approximately 85%, pay for services using a debit or credit card or outside financing agencies whose services our contracting physician offers. Historically, the outside financing agencies our contracting physician uses offer non-recourse programs.  If the agency is unable to collect from the patient, it bears the cost thereof except in rare cases where there is a chargeback.  In our role as manager, we evaluate alternative patient financing programs from time-to-time and may recommend other programs to our contracting physician.  Our contracting physician offers a refund if a tattoo is fully removed in a lesser number of treatments than the patient has purchased, and occasionally in other circumstances.  Refunds were less than 0.5% of our contracting physician’s gross revenue in the six months ended June 30, 2012.  Refunds and chargebacks result in a reduction of our management fee.  Deterioration in the availability of consumer credit is likely to impact our contracting physician’s revenue and ultimately, our management service fees.

William Kirby, D.O., Inc. does not provide patient financing but offers a program whereby patients can pay monthly via automatic charge.  Currently, patients may cease participation in the program at any time and no interest is charged.  The program was developed to meet the needs of patients who are unable to finance a purchase using a credit card or outside financing agencies.  Less than 4% of William Kirby, D.O., Inc.’s patients pay in this manner.

Effective marketing is an integral factor in our ability to generate patients and service fees for William Kirby, D.O., Inc. and ultimately our management service fees and revenue from our owned clinics.  Our marketing efforts have traditionally focused on our website and its placement on search engines, email campaigns directed towards existing patients, and word of mouth referral.  The purpose of our marketing is to educate prospective patients about the advantages of laser tattoo and laser/IPL hair removal compared to alternatives and to attract them to our clinics.

Gift certificate sales represented approximately 0.3% of William Kirby, D.O., Inc.’s gross revenue in the six months ended June 30, 2012.  The sale of gift certificates is included in William Kirby, D.O., Inc.’s gross revenue for purposes of calculating our management fee. We also offer gift certificates at our owned clinics. Sales of gift certificates at our owned clinics has not been significant to date.

The fees generated by William Kirby, D.O., Inc., and therefore our management services fees, have historically been weak in the fourth quarter.  We believe that patients are less inclined to purchase discretionary services in the months of November and December as they have atypical demands on both their time and financial resources.

Our revenues have continued to increase despite relatively unfavorable economic conditions.  However, we do not have sufficient history to predict what may occur if economic conditions in the United States further deteriorate.  We believe that the typical customer of the services offered at our clinics is young, educated and affluent with adequate disposable income to afford the services.  However, tattoo and hair removal is discretionary for most individuals and they may delay or forego removal if faced with a reduction in income or increase in non-discretionary expenses.  We also believe that poor economic conditions have resulted in increased pressure on pricing and an expectation of greater value for the money by patients.  Management believes that such pricing pressure is a result of a decrease in consumer confidence in economic conditions and their employment prospects together with the increased availability of competitive pricing information on the Internet.  In addition, we believe that a portion of our core demographic is attracted to coupon programs such as those offered by Groupon and Living Social, particularly with respect to hair removal where we face a larger number of competitors.

- 15 -

Our operating costs and expenses include:

 ● clinic operating expenses, including rent, utilities, parking and related costs to operate the clinics, laser equipment, maintenance costs, supplies, non-medical staff expenses for managed clinics and all staff expenses for owned locations and insurance;

 ● marketing and advertising costs including marketing staff expense and the cost of outside advertising;

 ● general and administrative costs, including corporate staff expense and other overhead costs; and

 ● depreciation and amortization of equipment and leasehold improvements.

We currently anticipate opening at least one additional clinic in Phoenix, Arizona in later half of 2012, and may open additional clinics in Texas, Georgia and Arizona in the fourth quarter of 2012 and during 2013 assuming that the availability of growth capital exists, we can maintain a highly skilled management team, and our business model is shown to be successful in varying markets.  To our knowledge, there is currently no nationally branded provider of laser tattoo and hair removal services and the opportunity to gain first mover advantage is the motivation behind our aggressive expansion plan.  To be successful, we believe that our new locations must be in areas attractive to our demographic, that our clinic staff must be adequately trained and motivated, and that our marketing programs must be effective.

We require substantial capital to fund our growth and will continue to seek substantial amounts of capital to effectuate our business plan.  We have experienced significant negative cash flow from operations to date, and we expect to continue to experience significant negative cash flow in the future.  Our inability to generate sufficient funds from operations and external sources will have a material adverse effect on our business, results of operations and financial condition.  If we are not able to raise additional funds, we will be forced to significantly curtail or cease our operations.  See “Liquidity and Capital Resources” below for additional information.

Results of Operations

Comparison of the Three Months Ended June 30, 2012 and the Three Months Ended June 30, 2011

The following table sets forth, for the periods indicated, selected items from our statements of operations, expressed as a percentage of revenues.

	Three Months Ended
	June 30, 2012	June 30, 2011
Revenues	100 %	100 %
Clinic operating expenses	71 %	55 %
General & administrative expenses	68 %	107 %
Marketing and advertising	17 %	17 %
Depreciation & amortization	8 %	8 %
Loss from operations	(64 )%	(86 )%
Interest expense and other	(2 )%	(2 )%
Net loss	(66 )%	(88 )%

Revenues. Revenues increased by approximately $49,000, or 7%, to approximately $790,000 for the three months ended June 30, 2012 compared to approximately $741,000 for the three months ended June 30, 2011.  Encounters increased by 2,492 from 8,198 to 10,690 or 30%.  New clinics accounted for 1,875 encounters, or approximately 75% of the increase.  The average fee per encounter paid by patients decreased approximately 12% in the quarter ended June 30, 2012 when compared to the quarter ended June 30, 2011.

Clinic Operating Expenses.  Clinic operating expenses consist primarily of salaries, wages and benefits for the employees who work at our owned clinics and salaries, wages and benefits for the non-medical employees who work at our managed clinics, rent and utilities for all clinic premises, and supplies.  We expect these expenses to increase as a percentage of revenue during periods when new clinics open as we expect revenue in the new clinics to build over time to mature levels.  Clinic operating expenses increased by 39% in the aggregate and increased to 71% as a percentage of revenues to approximately $562,000 for the three months ended June 30, 2012 versus approximately $406,000 for the three months ended June 30, 2011.  Expenses of two new clinics opened in 2011 accounted for an increase of approximately $167,000, offset by a small decrease in other expenses resulting in a net change of approximately $156,000.  

Marketing and Advertising Expenses.  Marketing and advertising expenses consist primarily of salaries, wages and benefits and the cost of outside advertising.  Historically, we have relied principally on Internet advertising.  During 2010, we began advertising using outdoor billboards in addition to our Internet advertising and we explore other advertising opportunities from time to time, such as radio and other forms of outreach.  We also vary our marketing and advertising expenditures to respond to competitive activities as well as changes in our financial resources. We typically provide additional advertising support in a market when a new clinic is opening.  Marketing and advertising expenses were approximately $133,000 for the three months ended June 30, 2012, compared to approximately $126,000 for the three months ended June 30, 2011, an increase of approximately $7,000.

General and Administrative Expenses.  General and administrative expenses include the salaries, wages and benefits for the employees who support the clinics including operational, legal and medical-professional oversight, finance and accounting, payroll and personnel, information technology, and risk management.  Also included in our general and administrative expenses are professional fees paid to our attorneys, accountants, medical director and other advisors.  General and administrative expenses also include insurance, travel, supplies and other costs associated with our corporate functions.  General and administrative expenses decreased by approximately $258,000 to approximately $535,000 for the three months ended June 30, 2012 when compared to $793,000 in the comparable period of the prior year.  Of this decrease, compensation expense accounted for approximately $176,000. In June 2011, we recognized $192,000 in stock compensation expense related to stock and stock option grants to management and members of our Board of Directors. Stock compensation expense in the three months ended June 30, 2012 was $16,000. Professional fees decreased by $49,000 mainly due to a decrease in legal fees associated with our public filings.

Depreciation and Amortization Expenses.  Depreciation and amortization consist of depreciation and amortization of leasehold improvements, lasers and other equipment owned or held under capital leases, and the furniture, computers, telephone systems and other equipment used in our operations.  Depreciation and amortization expenses increased by 19% in the aggregate to approximately $67,000 for the three months ended June 30, 2012 versus approximately $56,000 for the three months ended June 30, 2011.  The depreciation and amortization increase was primarily related to the opening of two new clinics and the relocation of a clinic in 2011.

Interest Expense.  Interest expense for the three months June 30, 2012 decreased by 11% in the aggregate and 2% as a percentage of revenue to approximately $16,000 compared to approximately $18,000 for the three months ended June 30, 2011.  

Comparison of the Six Months Ended June 30, 2012 and the Six Months Ended June 30, 2011

The following table sets forth, for the periods indicated, selected items from our statements of operations, expressed as a percentage of revenues.

	Six Months Ended
	June 30, 2012	June 30, 2011
Revenues	100%	100%
Clinic operating expenses	70%	52%
General & administrative expenses	76%	108%
Marketing and advertising	17%	20%
Depreciation & amortization	9%	6%
Loss from operations	(71)%	(88)%
Interest expense and other	(2)%	(2)%
Net loss	(73)%	(90)%

- 16 -

Revenues. Revenues increased by approximately $176,000, or 13%, to approximately $1,555,000 for the six months ended June 30, 2012 compared to approximately $1,379,000 for the six months ended June 30, 2011.  Encounters increased by 5,258 from 15,679 to 20,937 or 34%.  New clinics accounted for 3,950 encounters, or approximately 75% of the increase.  The average fee per encounter paid by patients decreased approximately 9% in the six months ended June 30, 2012 when compared to the six months ended June 30, 2011.

Clinic Operating Expenses.  Clinic operating expenses consist primarily of salaries, wages and benefits for the employees who work at our owned clinics and salaries, wages and benefits for the non-medical employees who work at our managed clinics, rent and utilities for all clinic premises, and supplies.  We expect these expenses to increase as a percentage of revenue during periods when new clinics open as we expect revenue in the new clinics to build over time to mature levels.  Clinic operating services expenses increased by 50% in the aggregate and increased to 70% as a percentage of revenues to approximately $1,082,000 for the six months ended June 30, 2012 versus approximately $723,000 for the six months ended June 30, 2011.  Of this increase of approximately $359,000, approximately 82% or $295,000 was related to two clinics which were opened during the first half of 2011 and were in operation for the full six months of 2012.  Labor and labor related costs increased by approximately $107,000, accounting for 30% of the total increase in clinic operating expenses.  Rent, utilities and parking increased by approximately $74,000 accounting for approximately 21% of the increase in total clinic operating expense.  This increase is principally related to the opening of two new locations in 2011 and the relocation of our Orange County, California location.

Marketing and Advertising Expenses.  Marketing and advertising expenses consist primarily of salaries, wages and benefits and the cost of outside advertising.  Historically, we have relied principally on Internet advertising.  During 2010, we began advertising using outdoor billboards in addition to our Internet advertising and we explore other advertising opportunities from time to time, such as radio and other forms of outreach.  We also vary our marketing and advertising expenditures to respond to competitive activities as well as changes in our financial resources. We typically provide additional advertising support in a market when a new clinic is opening.  Marketing and advertising expenses were approximately $259,000 for the six months ended June 30, 2012, compared to approximately $279,000 for the six months ended June 30, 2011, a decrease of approximately $20,000.

General and Administrative Expenses.  General and administrative expenses include the salaries, wages and benefits for the employees who support the clinics including operational, legal and medical-professional oversight, finance and accounting, payroll and personnel, information technology, and risk management.  Also included in our general and administrative expenses are professional fees paid to our attorneys, accountants, medical director and other advisors.  General and administrative expenses also include insurance, travel, supplies and other costs associated with our corporate functions.  General and administrative expenses decreased by approximately $311,000 to approximately $1,184,000 for the six months ended June 30, 2012 when compared to $1,495,000 in the comparable period of the prior year. Of this decrease, compensation expense accounted for approximately $164,000. In June 2011, we recognized $192,000 in stock compensation expense related to stock and stock option grants to management and members of our Board of Directors Stock compensation expense in the six months ended June 30, 2012 was $28,000. Professional fees decreased by $233,000 mainly due to a decrease in legal fees associated with our public filings. The Company incurred additional expense relating to fundraising efforts of $37,000,  director’s fees increased by $25,000, and supplies and rent expense accounted for  the majority of the difference.

Depreciation and Amortization Expenses.  Depreciation and amortization consist of depreciation and amortization of leasehold improvements, lasers and other equipment owned or held under capital leases, and the furniture, computers, telephone systems and other equipment used in our operations.  Depreciation and amortization expenses increased by 41% in the aggregate to approximately $134,000 for the six months ended June 30, 2012 versus approximately $95,000 for the six months ended June 30, 2011.  The depreciation and amortization increase was primarily related to the opening of two new clinics and the relocation of a clinic during the first half of 2011.  A new laser acquired in the third quarter of 2011 and an expansion of our telephone system installed in the fourth quarter of 2011 also contributed to the increase in depreciation and amortization.

Interest Expense.  Interest expense for the six months June 30, 2012 increased by 26% in the aggregate and 2% as a percentage of revenue to approximately $37,000 compared to approximately $29,000 for the six months ended June 30, 2011.  In February 2011, we financed a laser for our Montclair, California clinic and in May 2011, we financed a laser for our Dallas, Texas clinic.  The interest expense on these two notes accounted for the increase in interest expense in the first half of 2012 when compared to the comparable period of the prior year.

Liquidity and Capital Resources

Cash and cash equivalents decreased by approximately $78,000 at June 30, 2012 when compared to December 31, 2011. Cash used in operations was approximately $332,000, cash using in investing activities was approximately $177,000, and cash provided by financing activities as approximately $430,000.

Cash from operations, which includes the management fees we receive from William Kirby, D.O., Inc. and service fees earned directly from patient services in our owned clinics represent our primary recurring source of funds, and less expenses, reflects the net loss from operations excluding non-cash charges, and changes in operating capital.  The six months ended June 30, 2012 and 2011 reflected net cash used in operating activities of $332,000 and $704,000, respectively.  While our clinics (both managed and owned) were able to generate positive cash flow from operations during the six months ended June 30, 2012 and 2011, they were unable to generate enough positive cash flow to cover our overhead expenses, including the substantial professional fees we have incurred to become a public reporting company and file reports required of such companies.

Net cash used in investing activities for the six months ended June 30, 2012 and 2011, respectively, was $177,000 and $540,000, reflecting purchases of property and equipment.  Our purchases of property and equipment in the first half of 2012 are principally related to the clinic we have opened in June 2012 in Houston, Texas.  Our purchases in 2011 were principally related to the development of our clinics in Montclair, California and Dallas, Texas.

Net cash from financing activities for the six months ended June 30, 2012 was approximately $430,000 primarily consisting of the proceeds of the sale of equity securities in private placements in March 2012 of $297,000 and cash received from the issuance of secured senior convertible debt in a private placement of $200,000 in May 2012, reduced by principal payments made on capital lease obligations and notes payable.

The Company intends to use its available resources to open additional clinics.  We have historically experienced significant negative cash flow from operations and we expect to continue to experience significant negative cash flow from operations in the near future as we open new clinics.  Accordingly, we expect to raise additional capital to fund our current operations and future expansion through the sale of equity securities and/or the issuance of debt.  We have been successful in raising small amounts of debt for equipment financing, but our financial condition and history of losses limits our ability to issue debt.  If we are unable to raise additional equity capital, then we will not be able to grow our revenue and eliminate our operating losses.  If that were to occur, management would attempt to reduce its professional fees, salaries, advertising and other costs and reduce operating cash requirements.  The Company currently intends to raise additional capital and continue opening additional clinics but there can be no assurance that it will be successful.  We do not have any bank or other credit facilities.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings or other relationships with entities or other persons, also known as “special purpose entities.”

Critical Accounting Estimates

The preparation of our financial statements in conformity with GAAP requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.  As such, in accordance with the use of GAAP, our actual realized results may differ from management’s initial estimates as reported and such differences may be significant.  Our most significant accounting estimates are those related to our consolidation policy, valuation of common stock, fair value measurements, uncertainty in income taxes and valuation allowance for deferred tax assets as set forth below.

Consolidation Policy.  The Company has various contractual relationships with William Kirby D.O., Inc. including a management services agreement, medical director’s agreement, equipment subleases and guarantees.  The Company evaluated the various relationships between the parties to determine whether to consolidate William Kirby, D.O., Inc. as a variable interest entity pursuant to ASC 810, Consolidation.  The Company determined that it was not the primary beneficiary of the interest and that it should not consolidate William Kirby, D.O., Inc.  The Company’s conclusion was based upon an analysis of the various relationships and California state law restrictions on relationships between licensed professionals and businesses.  To complete its analysis, management made assumptions regarding the relevance of certain factors, including state law requirements, which were given significant weight.  In the event that state law should change, there should be material changes in the relationships or management’s judgment as to the relevance of various factors should change, the Company might determine that consolidation would be appropriate.

- 17 -

Valuation of Common Stock.  There is presently no trading market for common stock or other equity instruments of the Company. Management’s estimates of stock compensation expense and derivative liability are dependent upon an estimated fair value of a share of Company common stock.  ASC 820, “Fair Value Measurement,” establishes a hierarchy for measurement of fair value and requires the Company to maximize the use of observable inputs in measuring fair value and minimize the use of unobservable inputs.  Management estimates the fair value of a share of common stock primarily based upon the most recent actual purchases of common stock by unrelated third parties because it represents observable inputs, and management believes it is the most reliable estimate available.  Management may adjust the value per share as the time period between when actual purchases have been made and the measurement date increases or if it determines that events subsequent to the last actual sale transaction materially impact the value of a share of common stock.  Such changes in estimated value may have a material impact on stock compensation expense and derivative liabilities.

Fair Value Measurements.  The Company estimates its derivative liabilities using a Black-Scholes option pricing model using such inputs as management deems appropriate.  The Black­Scholes option pricing model requires the use of input assumptions, including expected volatility, expected life, expected dividend rate and expected risk-free rate of return.  The assumptions for expected volatility and expected life are the two assumptions that significantly affect the fair value.  Changes in the expected dividend rate and expected risk-free rate of return do not significantly impact the calculation of fair value, and determining these inputs is not highly subjective.  Because there is no trading market for the Company’s common stock or any of its warrants or other derivative liabilities, the Company cannot calculate actual volatility.  Management has estimated volatility by selecting a group of companies, deemed by management to be similar.  Changes in fair value estimates may have a material impact on the measurement of derivative liabilities.

Uncertainty in Income Taxes.  We adopted the provisions of ASC 740-10 (formerly FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,” effective January 1, 2010.  This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10 also provides guidance on de-recognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition.  ASC 740 requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position.  Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate.

Valuation Allowance for Deferred Tax Assets.  Deferred tax assets arise when we recognize charges or expenses in our financial statements that will not be allowed as income tax deductions until future periods.  The term deferred tax asset also includes unused tax net operating losses and tax credits that we are allowed to carry forward to future years.  Accounting rules permit us to carry deferred tax assets on the balance sheet at full value as long as it is “more likely than not” that the deductions, losses or credits will be used in the future.  A valuation allowance must be recorded against a deferred tax asset if this test cannot be met.  The accounting rules state that a company with a recent history of losses would have a difficult, perhaps impossible, time supporting a position that utilization of its deferred tax assets was more likely than not to occur.

We believe that the operating loss incurred by the Company in the current year, and the cumulative losses incurred in prior years, represent sufficient negative evidence to determine that the establishment of a valuation allowance against deferred tax assets is appropriate.  Until an appropriate level of profitability is attained, we expect to continue to maintain a valuation allowance on our net deferred tax assets.

The estimates, judgments and assumptions used by us under “Capitalization Policy,” “Valuation of Common Stock,” “Fair Value Measures,” “Uncertainty in Income Taxes” and “Valuation Allowance for Deferred Tax Assets” are, we believe, reasonable, but involve inherent uncertainties as described above, which may or may not be controllable by management.  As a result, the accounting for such items could result in different amounts if management used different assumptions or if different conditions occur in future periods.

Significant Accounting Policies

The Company has defined a significant accounting policy as one that is both important to the portrayal of the Company’s financial condition and results of operations and requires management of the Company to make difficult, subjective or complex judgments. Estimates and assumptions about future events and their effects cannot be predicted with certainty.  The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments.  These estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.

We have identified the policies set forth in Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements as significant to our business operations and the understanding of our results of operations.  The impact and any associated risks related to these policies on our business operations are discussed throughout MD&A, where such policies affect our reported and expected financial results.  In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions.  We believe that the discussion set forth in Note 2, “Summary of Significant Accounting Policies” to our consolidated financial statements addresses our most significant accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

ITEM 3.         QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4.        CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our chief executive officer (principal executive officer) and chief financial officer (principal financial officer) as appropriate, to allow timely decisions regarding required disclosure.  Our chief executive officer and principal financial officer, after evaluating the scope and effectiveness of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the Exchange Act, as of the end of the period covered by this Quarterly Report on Form 10-Q have concluded that, based on such evaluation, our disclosure controls and procedures were ineffective as of June 30, 2012 because of the Company’s limited resources and limited number of employees.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting, identified in connection with the evaluation of such internal control that occurred during the most recent quarter of the Company that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

- 18 -

PART II.   OTHER INFORMATION

ITEM 1.          LEGAL PROCEEDINGS

We are not a party to any material pending legal proceedings.  We may, however, become involved in litigation from time to time relating to claims arising in the ordinary course of our business.  We do not believe that the ultimate resolution of such claims would have a material effect on our business, results of operations, financial condition or cash flows.  However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material effect on our business, results of operations, financial condition, cash flows and prospects.

ITEM 1A.       RISK FACTORS

We filed our Annual Report on Form 10-K for the year ended December 31, 2011, with the Securities and Exchange Commission on March 30, 2012, which sets forth our risk factors in Item 1A therein. 

ITEM 2.         UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The following summarizes all sales of our unregistered securities during the six months ended June 30, 2012.  The securities in the below-referenced transactions were (i) issued without registration and (ii) were subject to restrictions under the Securities Act of 1933, as amended, or the Securities Act, and the securities laws of certain states, in reliance on the private offering exemptions contained in Sections 4(2), 4(5) and/or 3(b) of the Securities Act and on Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state laws as a transaction not involving a public offering.  Unless stated otherwise, no placement or underwriting fees were paid in connection with these transactions.  Proceeds from the sales of these securities were used for general working capital purposes, including the repayment of indebtedness.  The securities are deemed restricted securities for purposes of the Securities Act.

In March 2012, the Company sold 606,610 shares of common stock in a private placement for aggregate gross proceeds of $297,240.  Of the shares sold, 337,428 were sold to members of the Company’s management or board of directors and other Company affiliates, representing gross proceeds of $165,340.  In connection with the financing, the investors received five-year warrants exercisable for 303,305 shares of common stock at a price of $0.595 per share, subject to adjustment.

ITEM 3.         DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4.         MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5.         OTHER INFORMATION

None.

- 19 -

ITEM 6.         EXHIBITS

(a)  Exhibits:

Exhibit No.	Description of Exhibit
4.1*	Form of Secured Senior Convertible Promissory Note issued in a private placement in May 2012
4.2*	Pledge and Security Agreement among Dr. Tattoff, Inc., certain holders and U.S. Bank National Association dated May 31, 2012
4.3*	Collateral Agency Agreement among Dr. Tattoff, Inc., certain holders and U.S. Bank National Association dated May 31, 2012
4.4*	Form of Common Stock Purchase Warrant issued in connection with the issuance of secured senior convertible promissory notes in a private placement in May 2012.
31.1*	Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1*	Certification of Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2*	Certification of Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101*	Interactive Data Files regarding (a) our Balance Sheets as of June 30, 2012 and December 31, 2011, (b) our Statements of Operations for the Three and Six Months ended June 30, 2012 and 2011, (c) our Statements of Cash Flows for the Six Months ended June 30, 2012 and 2011, and (d) the Notes to such Financial Statements.***

*filed herewith.

***Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) 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.

DR. TATTOFF, INC.
By:	/s/ John P. Keefe
	John P. Keefe
	Chief Executive Officer

Date:  August 14, 2012

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities on the date indicated.

	Signatures		Title		Date
PRINCIPAL EXECUTIVE OFFICER
/s/ John P. Keefe		Chief Executive Officer		August 14, 2012
John P. Keefe
PRINCIPAL FINANCIAL OFFICER
/s/ Mark A. Edwards		Chief Financial Officer		August 14, 2012
Mark A. Edwards

20