DR. Tattoff 10Q 2013 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, 2013

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. Yesx Noo

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). Yesx Noo

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 filero	Accelerated filero	Non-accelerated filero	Smaller reporting companyx

		(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). Yeso Nox

The number of shares of the registrant’s common stock, $0.0001 par value, outstanding as of July 31, 2013 was 19,164,294.

DR. TATTOFF, INC.

Quarterly Report on Form 10-Q

June 30, 2013

Table of Contents

Index to Exhibits

PART I. FINANCIAL INFORMATION

ITEM1. CONSOLIDATED FINANCIAL STATEMENTS

DR. TATTOFF, INC.

CONSOLIDATED BALANCE SHEETS

	June 30, 2013 (Unaudited)			December 31, 2012 (Audited)
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	217,529		$	318,394
Management fee due from related party		233,636			189,484
Prepaid expenses and other current assets		269,672			138,927
Total current assets		720,837			646,805
Property and equipment, net		1,541,378			1,311,309
Other assets		263,158			230,517
Total assets	$	2,525,373		$	2,188,631

LIABILITIES AND SHAREHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable	$	682,345		$	504,074
Accrued expenses and other liabilities		585,900			502,052
Warrant liability		35,800			1,600
Deferred revenue		965,154			502,795
Accrued compensation		502,298			237,357
Proceeds of pending offering of convertible notes		-			200,000
Notes payable, current portion		511,771			195,819
Convertible promissory notes, current portion		503,587			-
Capital lease obligations, current portion (related party)		21,142			50,574
Total current liabilities		3,807,997			2,194,271
LONG-TERM LIABILITIES
Capital lease obligations, net of current portion (related party)		105,457			120,960
Notes payable, net of current portion		118,737			121,959
Convertible promissory notes, net of current portion		652,833			452,779
Deferred rent		244,327			104,740
Total liabilities		4,929,351			2,994,709
COMMITMENTS AND CONTINGENCIES
SHAREHOLDERS’ DEFICIT
Preferred stock, 2,857,143 shares authorized, none issued or outstanding at June 30, 2013 and December 31, 2012		-			-
Common stock, $.0001 par value, 75,000,000 authorized, 19,164,294 and 18,332,803 issued and outstanding at June 30, 2013 and December 31, 2012, respectively		1,917			1,833
Additional paid-in capital		7,280,401			6,599,446
Accumulated deficit		(9,686,296	)		(7,407,357	)
Total shareholders’ deficit		(2,403,978	)		(806,078	)
Total liabilities and shareholders’ deficit	$	2,525,373		$	2,188,631

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

DR. TATTOFF, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012

Revenues from related party	$	771,408		$	713,030		$	1,464,143		$	1,434,007
Owned clinic revenues		296,320			77,045			513,723			120,572
		1,067,728			790,075			1,977,866			1,554,579
Operating costs and expenses
Clinic operational expenses		874,025			561,620			1,683,754			1,082,281
General and administrative expenses		662,146			535,060			1,667,694			1,183,985
Marketing and advertising		340,282			132,922			520,036			258,670
Depreciation and amortization		96,193			66,706			183,802			133,699
Loss from operations		(904,918	)		(506,233	)		(2,077,420	)		(1,104,056	)

Interest expense		(116,388	)		(15,926	)		(198,019	)		(37,225	)
Other (expense) income		(4,300	)		-			(2,700	)		1,205

Loss from operations before provision for income taxes		(1,025,606	)		(522,159	)		(2,278,139	)		(1,140,076	)

Provision for income taxes		-			800			800			800

Net loss	$	(1,025,606	)	$	(522,959	)	$	(2,278,939	)	$	(1,140,876	)

Basic and diluted net loss per share applicable to common shareholders	$	(.05	)	$	(.03	)	$	(.12	)	$	(.08	)

Weighted average common shares outstanding – basic and diluted		19,020,058			15,341,854			18,643,537			15,001,848

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

DR. TATTOFF, INC.

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ DEFICIT


	Common Stock				Additional Paid-in Capital		AccumulatedDeficit			TotalShareholders’Equity (Deficit)
	Shares		Par Value		Additional Paid-in Capital		AccumulatedDeficit			TotalShareholders’Equity (Deficit)

BALANCE - December 31, 2012		18,332,803	$	1,833	$	6,599,446	$	(7,407,357	)	$	(806,078	)

Sale of common stock		227,275		23		124,978		-			125,001
Exercise of common stock options		35,700		4		17,489		-			17,493
Services paid in stock		568,516		57		278,516		-			278,573
Warrants issued for service		-		-		36,511		-			36,511
Stock compensation expense		-		-		91,007		-			91,007
Beneficial conversion feature on convertible notes		-		-		14,000		-			14,000
Warrants issued with convertible notes		-		-		118,454		-			118,454
Net loss		-		-		-		(2,278,939	)		(2,278,939	)
BALANCE – June 30, 2013 (unaudited)		19,164,294	$	1,917	$	7,280,401	$	(9,686,296	)	$	(2,403,978	)

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

DR. TATTOFF, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

	Six Months Ended June 30,
	2013			2012
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(2,278,939	)	$	(1,140,876	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		183,802			133,699
Stock compensation expense		91,007			28,183
Consulting services paid for in stock and warrants		315,084			-
Change in fair value of warrant liability		2,700			(2,165	)
Amortization of debt discount to interest		77,138			2,921
Changes in operating assets and liabilities:
Management fee due from related party		(44,152	)		16,961
Prepaid expenses and other current assets		1,113			40,983
Other assets		(36,630	)		(27,080	)
Accounts payable		178,271			239,652
Accrued expenses and other liabilities		85,071			145,058
Deferred revenue		462,359			189,410
Related party payable		-			(20,095	)
Accrued compensation		264,941			58,517
Deferred rent		(60,413	)		3,302
Net cash used in operating activities		(758,646	)		(331,530	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(264,660	)		(177,365	)
Net cash used in investing activities		(264,660	)		(177,365	)

CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease obligations		(44,934	)		(31,208	)
Principal payments on notes payable		(125,119	)		(43,513	)
Proceeds from sale of common stock		125,001			297,240
Proceeds from exercise of stock option		17,493			7,900
Proceeds from issuance of notes		950,000			200,000
Net cash provided by financing activities		922,441			430,419

Net decrease in cash and cash equivalents		(100,865	)		(78,476	)

Cash and cash equivalents – beginning of period		318,394			110,787

Cash and cash equivalents – end of period	$	217,529		$	32,311

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Interest paid	$	60,435		$	28,857
Taxes	$	800		$	800

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Acquisition of property and equipment through issuance of notes payable	$	145,222		$	97,790
Financing of insurance premiums	$	131,859		$	59,765

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

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 though its wholly-owned subsidiaries DRTHC I, LLC and DRTHC II, LLC, Delaware limited liability companies (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, Houston, and Sugar Land, Texas and Phoenix, Arizona 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 7-for-1 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 7-for-1 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, 2013, the Company has accumulated losses approximating $9,690,000, current liabilities that exceeded its current assets by approximately $3,090,000, shareholders’ deficit of approximately $2,400,000, 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 unsuccessfulin 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, 2013 (Unaudited)		December 31, 2012 (Audited)
Current Assets
Management fee due from related party	$	233,636	$	189,484
Non-Current Assets
Assets under capital lease, net		32,601		39,064
Current Liabilities
Capital lease obligations, current portion		21,142		50,574
Long-Term Liabilities
Capital lease obligations, net of current portion		105,457		120,960

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 describedin Note 6, “Capital Lease Obligations (Related Party)”; Note 7, “Related Party Transactions” and Note 9, “Commitments and Contingencies.”

Dr. Tattoff, Inc. formed two wholly owned subsidiary during 2012, DRTHC I, LLC and DRTHC II, LLC, that will be responsible for the operations of some of the new clinics that the Company has and will establish. The consolidated financial statements include the accounts of these two entities.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited 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 consolidated financial statements of the Company included in the Company’s Form 10-K for the year ended December 31, 2012. The balance sheet as of December 31, 2012 has been derived from the audited financial statements as of that date but omits certain information and footnotes required for complete financial statements.

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 Disclosurefor 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 similar assets 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, other assets, accounts payable, accrued expenses and other liabilities, deferred revenue, accrued compensation, capital lease obligations, convertible promissory notes and notes payable. The carrying amounts of management fee due from related party, prepaid expenses and other current assets, other assets, accounts payable, accrued expenses and other liabilities, deferred revenue and accrued compensation approximate their fair values due to the short maturity of these instruments. The carrying amounts of capital leases, convertible promissory notes and notes payable approximates their fair value as these instruments earn or are charged interest based on prevailing rates. The fair value of warrants are measured using level 3 inputs.

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 or are expected to be 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, 2013 or December 31, 2012.

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 the Company’s 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 7, “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, Houston, Sugar Land and Phoenix 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 consolidated balance sheets.

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 consolidated statements of operations. The Company recognized accrued expense of approximately $63,000 and $37,000 as of June 30, 2013 and December 31, 2012, respectively, related to the guarantee program, and this is included in the accrued expenses and other liabilities in the accompanying consolidated 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. Advertising expense was approximately $168,000 and $4,000 for the three months ended June 30, 2013 and 2012, respectively, and $348,000 and $130,000 for the six months ended June 30, 2013 and 2012, 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 assets at June 30, 2013 and December 31, 2012.

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, recognition, 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, 2013, the open tax years of the Company were 2008 to 2012.

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, 2013 and 2012, respectively, because their effects were antidilutive.

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

	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net loss available to common stockholders (numerator)	$	(1,025,606	)	$	(522,959	)	$	(2,278,939	)	$	(1,140,876	)
Weighted average shares outstanding (denominator)		19,020,058			15,341,854			18,643,537			15,001,848
Basic and diluted EPS	$	(.05	)	$	(.03	)	$	(.12	)	$	(.08	)

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,
	2013		2012
Common stock options		1,508,772		950,490
Warrants		4,241,810		811,080
Convertible promissory notes		2,179,808		-
		7,930,390		1,761,570

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 consolidated balance sheets andapproximated $244,000 atJune 30, 2013 and $105,000 at December 31, 2012.

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.

A substantial portion of the Company’s revenues for the six months ended June 30, 2013 and 2012 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 consolidated financial statements or related disclosures.

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.

NOTE 3. PROPERTY AND EQUIPMENT

Property and equipment consists of the following:

	June 30, 2013 (Unaudited)			December 31, 2012 (Audited)

Equipment	$	1,558,367		$	1,382,005
Furniture and fixtures		115,759			93,129
Leasehold improvements		1,014,225			803,335
		2,688,351			2,278,469
Less accumulated depreciation and amortization		(1,146,973	)		(967,160	)
	$	1,541,378		$	1,311,309

Depreciation and amortization expense was approximately $96,000 and $67,000 for the three months ended June 30, 2013 and 2012, respectively and $184,000 and $134,000 for the six months ended June 30, 2013 and 2012, respectively.

Assets under capital leases (gross) were approximately $343,000 and $511,000 at June 30, 2013 and December 31, 2012, respectively. Amortization expense recorded for the assets under capital leasesamounted toapproximately $2,000 and $6,000 for the three months ended June 30, 2013 and 2012, respectively, and $6,000 and $23,000 for the six months ended June 30, 2013 and 2012, respectively. Accumulated amortization of assets under capital leases wasapproximately $310,000 and$471,000 at June 30, 2013 and December 31, 2012, respectively. In April 2013, the Company purchased fully amortized assets that were previously under capital lease obligations with a gross value of approximately $168,000 from William Kirby, D.O., Inc. pursuant to the terms of the Management Services Agreement.

NOTE 4. NOTES PAYABLE

Notes payable consist of the following:

	June 30, 2013 (Unaudited)			December 31, 2012 (Audited)

Financed insurance premiums	$	65,452		$	4,510
Equipment promissory notes		381,541			313,268
Tenant improvement secured loan		200,000			-
		646,993			317,778
Less unamortized discount		(16,485	)		-
Less current portion		(511,771	)		(195,819	)
	$	118,737		$	121,959

Financed Insurance Premiums

In January 2013, the Company entered into a financing agreement with an unrelated third party to finance the Company’s medical malpractice, property, casualty and employment liability insurance for a period of 10 months. The note, in the principal amount of $81,859, bears interest at approximately 7.7% per annum, and is repayable in one installment of $3,948 and nine installments of $8,964. The note matures in October 2013. The balance outstanding on the note was $35,290 and $0 at June 30, 2013 and December 31, 2012, respectively.

In March 2013, 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 nine months. The note, in the principal amount of $44,876, bears interest at approximately 6.6% per annum, and is repayable in nine monthly installments of $5,124. The note matures in December 2013. The balance outstanding on the note was $30,162 and $0 at June 30, 2013 and December 31, 2012, 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 notewas $34,483 and $40,779 at June 30, 2013 and December 31, 2012, 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 notewas $50,650 and $54,030 at June 30, 2013 and December 31, 2012, respectively.

In May 2011, the Company entered into a financing agreement with an unrelated third party to finance computer and telephone equipment to 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 notewas $6,237 and $9,201 at June 30, 2013 and December 31, 2012, respectively.

In June 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 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 onthe note was $57,289 and $67,186 at June 30, 2013 and December 31, 2012, 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 $24,941 and $31,008 at June 30, 2013 and December 31, 2012, respectively.

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 $31,005 and $45,715 at June 30, 2013 and December 31, 2012, respectively.

In November 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 Phoenix, Arizona. The note, in the principal amount of $67,996, bears interest at approximately 7% per annum, and is repayable in 24 monthly installments of $3,044. The note matures in November 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 $49,134 and $65,349 at June 30, 2013 and December 31, 2012, respectively.

In March 2013, the Company entered into a financing agreement with an unrelated third party to finance telephone equipment for its Sugar Land, Texas clinic and clinics planned for Fort Worth, Texas and Atlanta, Georgia. The note, in the principal amount of $29,347, bears interest at approximately 9% per annum, and is repayable in 36 monthly payments of $1,037. The note matures in February 2016 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 $27,129 and $0 at June 30, 2013 and December 31, 2012, respectively.

In March 2013, the Company entered into a financing agreement with an unrelated third party to finance computer equipment for its Sugar Land, Texas clinic and clinics planned for Fort Worth, Texas and Atlanta, Georgia. The note, in the principal amount of $37,524, bears interest at approximately 11% per annum, and is repayable in 36 monthly payments of $1,199. The note matures in February 2016 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 $34,047 and $0 at June 30, 2013 and December 31, 2012, respectively.

In March 2013, 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 Sugar Land, Texas (a suburb of Houston). The note, in the principal amount of $75,920, bears interest at approximately 7% per annum, and is repayable in 24 monthly installments of $3,399. The note matures in March 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 $66,626 and $0 at June 30, 2013 and December 31, 2012, respectively.

Tenant Improvement Secured Loan

In February, 2013, the Company issued $200,000 in notes, secured by the reimbursements due from landlords with respect to tenant improvements made or to be made by the Company in connection with the development of clinics. The notes bear interest at 15% and are due on August 15, 2013. As additional consideration for the investors purchasing the notes, the Company issued the note holders fully vested five-year warrants to purchase an aggregate of 218,750 shares of the Company’s Common Stock at an exercise price of $.60 per share. The relative fair values of the warrants at the time of issuance, determined by management to be $49,454 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 $.60, expected life of five years; risk free interest rate of .08%; volatility of 72% and expected dividend yield of zero. Amortization of the debt discount was $32,969 for the six months ended June 30, 2013 and $0 for the year ended December 31, 2012.

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

Year ended December 31,	June 30, 2013 (Unaudited)		December 31, 2012 (Audited)
2013	$	425,421	$	195,819
2014		161,989		101,884
2015		54,143		20,075
2016		5,440		-
Total	$	646,993	$	317,778

NOTE 5. CONVERTIBLE PROMISSORY NOTES

Convertible promissory notes payable consist of the following:

	June 30, 2013 (Unaudited)			December 31, 2012 (Audited)
	$			$
Secured senior subordinated convertible promissory notes	$	892,500		$	592,500
Senior subordinated convertible promissory notes		450,000			-
		1,342,500			592,500
Less unamortized discount		(186,080	)		(139,721	)
Less current portion		(503,587	)		-
	$	652,833		$	452,779

Secured Senior Subordinated Convertible Promissory Notes

In May 2012, August 2012, September 2012, October 2012 and January 2013, the Company issued $200,000, $255,000, $50,000, $87,500 and $300,000 of secured senior subordinated convertible promissory notes, respectively. 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 bear interest at 12% per annum, are payable quarterly, and are due at maturity. The notes mature in May 2014 or December 2015 (with respect to the notes issued in January 2013) and are secured by a first priority lien on the ownership interest of the Company in its wholly-owned subsidiary DRTHC I, LLC or DRTHC II, LLC (with respect to the notes issued in January 2013). The balance outstanding on the notes was $892,500 and $592,500 at June 30, 2013 and December 31, 2012 respectively. As additional consideration for the investors purchasing the notes, the Company issued the note holders five-year warrants to purchase an aggregate of 1,115,625 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 $217,225 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 .52-.72%; volatility of 72% and expected dividend yield of zero. The notes also contained a beneficial conversion feature determined by management to be $45,066 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 $61,631 for the six months ended June 30, 2013 and $39,570 for the year ended December 31, 2012.

Senior Subordinated Convertible Promissory Notes

In May 2013 and June 2013, the Company issued $250,000 and $200,000 of senior subordinated 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 $.65 per share, subject to adjustment for stock splits or subdivisions. The notes are mandatorily convertible in the event of a Qualified Transaction (as defined in the notes) and the conversion price is adjustable to the lower of 75% of the price of a share of common stock sold in the Qualified Transaction or $.65. The notes bear interest at 7% per annum, payable upon conversion or at maturity. The notes mature on November 1, 2014 and are unsecured. As additional consideration for the investors purchasing the notes, the Company issued the note holders fully vested five-year warrants to purchase an aggregate of 173,076 shares of the Company’s Common Stock at an exercise price equal to the lower or 120% of the conversion price or $.78 per share. The balance outstanding on the notes was $450,000 at June 30, 2013.

The relative fair values of the warrants at the time of issuance, determined by management to be $31,500 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 $.78, expected life of five years; risk free interest rate of 1.07%; volatility of 64% and expected dividend yield of zero. Amortization of the debt discount was $3,500 for the three and six months ended June 30, 2013.

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

Year ended December 31,	June 30, 2013 (Unaudited)		December 31, 2012 (Audited)
2014	$	1,042,500	$	592,500
2015		300,000		-
Total	$	1,342,500	$	592,500

NOTE 6. CAPITAL LEASE OBLIGATIONS (RELATED PARTY)

Capital lease obligations (related party) consist of the following:

	June 30, 2013 (Unaudited)			December 31, 2012 (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.	$	126,599		$	134,827

$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 matured in May 2013. The Company purchased the assets from the related party lessor in April, 2013.		-			7,920

$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 matured in May 2013. The Company purchased the assets from the related party lessor in April, 2013.		-			7,029

$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.The Company purchased the assets from the related party lessor in April, 2013.		-			21,758

Total minimum lease payments		126,599			171,534
Less current maturities		(21,142	)		(50,574	)

Long-term portion	$	105,457		$	120,960

The future minimum capital lease payments are as follows:

	June 30, 2013 (Unaudited)			December 31, 2012 (Audited)
2013	$	16,222		$	70,649
2014		32,443			40,934
2015		32,443			32,443
2016		32,443			32,443
2017		32,443			32,443
Thereafter		13,511			13,511
Total minimum lease payments		159,505			222,423
Unamortized discount		-			(7,031	)
Less amount representing interest		(32,906	)		(43,858	)
Present value of minimum lease payments		126,599			171,534
Less current maturities		(21,142	)		(50,574	)
Long-term portion	$	105,457		$	120,960

NOTE 7. 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 removal services. The agreement covers four laser centers in southern California operated by the Company. The Company had a $233,636 and $189,484 receivabledue from William Kirby D.O., Inc. at June 30, 2013 and December 31, 2012, 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. As of June 30, 2013 and December 31, 2012 no amounts remain unpaid.

Lease Guarantees

William Kirby, D.O., Inc. was the named lessee under the lease for the clinic located in Encino, California. Dr. Kirby personally guaranteed the lessee’s obligations under the Beverly Hills, Encino and Irvine, California leases. The Company and landlord amended the Beverly Hills, California lease in February 2013. The amendment extended the term by five years and released Dr. Kirby’s guarantee obligations. The Encino lease was terminated as of February 28, 2013 and the operations moved to a new location. On July 21, 2011, the Company transferred its operations from the 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 continues to occupy the space in Irvine, where it operates a call center and maintains administrative offices. The Company (or one of its wholly-owned subsidiaries) is the named lessee under the lease for the clinics located in Beverly Hills, Montclair, Sherman Oaks and Santa Ana, California and the leases for the clinic in Dallas, Houston, and Sugar Land, Texas and Phoenix, Arizona.

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.

NOTE 8. EQUITY

Common Stock

In January 2013, the Company issued 35,700 shares of common stock to an employee pursuant to the exercise of a non-qualified stock option. The Company received gross proceeds of approximately $17,500 in connection with the option exercise. In March 2013, the Company sold 136,365 shares of common stock in a private placement for aggregate gross proceeds of approximately $75,000 and issued 423,061 shares of common stock valued at $.49 per share in exchange for services provided to the Company including an aggregate of 270,000 shares of common stock issued to the Company’s three independent directors as compensation for serving in such capacity and 153,061 shares issued to a consultant in connection with brand development.

In April 2013, the Company sold 90,910 shares of common stock in a private placement for aggregate gross proceeds of approximately $50,000. In May 2013, the Company issued 145,455 shares of common stock valued at $.49 per share in exchange for consulting services provided to the Company.

Stock Options

In January 2013, the Company granted 61,225 incentive stock options to an employee as part of his compensation package, vesting over twelve months with an exercise price of $.49. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock option approximated $17,300 on its issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.49; expected life of five years; risk-free interest rate of 0.67%; volatility of 73%; and expected dividend yield of zero.

In March 2013, the Company granted 24,041 incentive options to executive officers, 13,264 incentive options to other employees of the Company and 6,517 non-qualified options to employees of William Kirby, D.O., Inc., vesting immediately with an exercise price of $.49 as consideration for their agreement to defer compensation. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock options approximated $14,000 on their issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.49; expected life of five years; risk-free interest rate of 0.63%; volatility of 73%; and expected dividend yield of zero. Also in March 2013, the Company granted 20,000 non-qualified options to each of the three independent members of its Board of Directors, vesting immediately and 45,000 options to each of the three independent members of its Board of Directors vesting 50% immediately and 25% on each the first and second anniversary of the grant date, with an exercise price of $.49 per share as compensation for serving on the Company’s Board of Directors. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock options approximated $52,000 on their issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.49; expected life of five years; risk-free interest rate of 0.63%; volatility of 73%; and expected dividend yield of zero. Also in March 2013, the Company granted 10,000 non-qualified options to each of five members of its medical advisory board, with 25% vesting immediately and 25% vesting on each of the first, second and third anniversary of the grant date with an exercise price of $.49 per share. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock options approximated $13,400 on their issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.49; expected life of five years; risk-free interest rate of 0.63%; volatility of 73%; and expected dividend yield of zero. Also in March 2013, the Company granted 10,000 non-qualified options to each of five members of its medical advisory board, vesting 25% on each of the first through fourth anniversary of the grant date with an exercise price of $.55 per share. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock options approximated $13,400 on their issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.49; expected life of five years; risk-free interest rate of 0.63%; volatility of 73%; and expected dividend yield of zero.

In June 2013, the Company granted 212,413 incentive stock options to an employee as part of his compensation package, vesting over a four year period with an exercise price of $.55. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock option approximated $53,200 on its issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.55, expected life of five years; risk-free interest rate of 1.07%; volatility of 64%; and expected dividend yield of zero.

In June 2013, the Company granted 10,000 non-qualified options to a new member of its medical advisory board, vesting 25% on each of the first through fourth anniversary of the grant date with an exercise price of $.55 per share. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock options approximated $2,503 on their issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.55, expected life of five years; risk-free interest rate of 1.07%; volatility of 64%; and expected dividend yield of zero.

The following table summarizes the Company’s stock option activity for the six months ended June 30, 2013:

	Number of Options			Weighted Average Exercise Price per Share		Weighted Average Grant-Date Fair Value per Share
Outstanding at December 31, 2012 (audited)		1,048,351		$	.3873	$	.3873
Granted (unaudited)		622,190			.5162		.49
Exercised (unaudited)		(35,700	)		.49		.49
Forfeited or Expired (unaudited)		(126,069	)		.3831		.3783
Outstanding at June 30, 2013 (unaudited)		1,508,772		$	.4384	$	.4279


Exercisable at June 30, 2013 (unaudited)	751,510		.4213		.4179

Vested and expected to vest at June 30, 2013 (unaudited)	1,508,772	$	.4384	$	.4279

The aggregate intrinsic value of options exercised during the six months ended June 30, 2013 was $0. The aggregate intrinsic value of options outstanding at June 30, 2013 was approximately $77,853.

Warrants

In January 2013, the Company issued five year warrants to purchase 30,613 shares of the Company’s common stock at a purchase price of $.595 per share to an employee as part of his compensation package. The warrants vest on a monthly basis through January 1, 2014 at which time the warrant will be fully vested. 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 .62%; volatility of 72% and expected dividend yield of zero. The Company has analyzed these warrants and determined them to be equity instruments, accordingly the estimated fair value at issuance of $8,200 was recognized as “compensation expense” and is included within “general and administrative” expenses on the consolidated statements of operations and “additional paid-in capital” on the consolidated balance sheets.

In connection with issuance of the secured senior subordinated convertible notes in a private placement in January 2013, the Company issued fully vested five year warrants to purchase 375,000 shares of the Company’s common stock at a purchase price of $.75 per share as additional consideration to the investors, including 250,000 warrant shares to two members of the Company’s Board of Directors. 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 .088%; 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 $89,500 and the convertible notes issued in the offering. The Company has analyzed these warrants and determined them to be equity instruments. Accordingly, the estimated fair value of the warrants was recognized as “additional paid-in capital” on the consolidated balance sheets.

In connection with issuance of the tenant improvement secured loan in February 2013, the Company issued fully vested five year warrants to purchase 218,750 shares of the Company’s common stock at a purchase price of $.60 per share as additional consideration to the investors, including 62,500 warrant shares to members of the Company’s Board of Directors and management. 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 .08%; volatility of 72% and expected dividend yield of zero. The net proceeds on the issuance of thetenant improvement secured loan were allocated between the estimated fair value of the warrants at issuance of $65,700 and the notes issued in the offering. The Company has analyzed these warrants and determined them to be equity instruments. Accordingly, the estimated fair value of the warrants was recognized as “additional paid-in capital” on the consolidated balance sheets.

In March 2013, the Company issued fully vested five year warrants to purchase 76,530 shares of the Company’s common stock at a purchase price of $.595 per share to a service provider as additional consideration for services provided. The warrant expires on January 15, 2018. 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 .62%; volatility of 72% and expected dividend yield of zero. The Company has analyzed these warrants and determined them to be equity instruments. The estimated fair value at issuance of $20,500 was recognized as “consulting expense” and is included within “general and administrative” expenses on the consolidated statements of operations and “additional paid-in capital” on the consolidated balance sheets.

In connection with the sale of common stock in a private placement in March 2013, the Company issued fully vested warrants to purchase 102,274 shares of the Company’s common stock at a purchase price of $.65 per share as additional consideration to the investors. The warrants expire on March 12, 2018. 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 .088%; volatility of 72% 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 $26,000 and the common stock sold in the offering. The Company has analyzed these warrants and determined them to be equity instruments.Accordingly, the estimated fair value of the warrants was recognized as “additional paid-in capital” on the consolidated balance sheets.

In connection with the sale of common stock in a private placement in April 2013, the Company issued fully vested warrants to purchase 68,183 shares of the Company’s common stock at a purchase price of $.65 per share as additional consideration to the investors. The warrants expire on April 11, 2018. 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 .74%; volatility of 64% 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 $15,600 and the common stock sold in the offering. The Company has analyzed these warrants and determined them to be equity instruments.Accordingly, the estimated fair value of the warrants was recognized as “additional paid-in capital” on the consolidated balance sheets.

In May 2013, the Company issued five year warrants, vesting over one year, to purchase 34,090 shares of the Company’s common stock at a purchase price of $.65 per share to a service provider as additional consideration for services provided. The warrant expires on May 16, 2018. 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 .79%; volatility of 64% and expected dividend yield of zero. The Company has analyzed these warrants and determined them to be equity instruments. The estimated fair value at issuance of $7,811 is being recognized as “consulting expense” over the vesting period and is included within “general and administrative” expenses on the consolidated statements of operations and “additional paid-in capital” on the consolidated balance sheets.

In connection with issuance of the senior subordinated convertible notes in a private placement in May and June 2013, the Company issued fully vested five year warrants to purchase 173,076 shares of the Company’s common stock at a purchase price of $.78 per share as additional consideration to the investors. In the event that the convertible note is converted, the number of shares issuable under the warrant will be adjusted to 25% of the number of conversion shares and the strike price adjusted to 120% of the conversion price. 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 $.78, expected life of five years; risk free interest rate of 1.07%; volatility of 64% 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 $36,250 and the convertible notes issued in the offering. The Company has analyzed these warrants and determined them to be debt instruments. Accordingly, the estimated fair value of the warrants was recognized as “warrant liability” on the consolidated balance sheets. The Company determined the fair value of the warrant liability to be $35,800 at June 30, 2013.

The following table summarizes the Company’s warrant activity for the six months ended June 30, 2013:

	Shares			Weighted Average Exercise Price		Weighted Average Remaining Contractual Life (in years)
Outstanding at December 31, 2012 (audited)		3,150,434		$	.64		4.5
Granted (unaudited)		1,109,766			.69		4.7
Exercised (unaudited)		-			-		-
Expired or cancelled (unaudited)		(18,390	)		2.40		-
Exercisable at June 30, 2013 (unaudited)		4,241,810		$	.63		4.0

Warrants Outstanding and Exercisable

Number of Shares Under Warrants	Range of Exercise Prices		Expiration Date		Weighted Average Exercise Price
128,840	$	.37		2015	$	.37
53,571		.59		2016		.59
2,949,633		.49-.75		2017		.62
1,109,766		.60-.78		2018		.69
4,241,810	$	.37-.78			$	.63

NOTE 9. COMMITMENTS AND CONTINGENCIES

Operating Leases

The Company leased its Encino, California clinic and leases its 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, the sole shareholder of William Kirby D.O., personally guaranteed the lessee’s obligations under these leases. The lease for the Encino, California location was terminated in February 2013. The Company leased its clinics located in Beverly Hills, Santa Ana, Sherman Oaks and Montclair, California; Dallas, Houston, Ft. Worth, Frisco and Sugar Land, Texas; Phoenix, Arizona, and Atlanta, Georgia from unrelated third parties, which expire through 2020. In August 2012, the Company entered into a lease with an unrelated third party for a clinic in Sherman Oaks, California, which expires in 2017. The Company relocated the clinic in Encino, California to Sherman Oaks, California in February 2013. 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, 2013:

2013 (six months)	$	372,687
2014		757,760
2015		768,129
2016		697,249
2017		559,088
Thereafter		356,022
	$	3,510,935

Rent expense relating to related party leases for the three months ended June 30, 2013 and 2012 approximated $11,000 and $47,000, respectively. Rent expense for the six months ended June 30, 2013 and 2012 approximated $57,000and $95,000, respectively. Rent expense related to third party leases for the three months ended June 30, 2013 and 2012 approximated $213,000 and $38,000, respectively. Rent expense related to third party leases for the six months ended June 30, 2013 and 2012 approximated $327,000 and $93,000, respectively.

NOTE 10. SUBSEQUENT EVENTS

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

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, 2012, 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 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, 2013 and 2012.

Liquidity and Capital Resources. This section provides an analysis of the Company’s cash flows for the six months ending June 30, 2013 and 2012, as well as a discussion of the Company’s outstanding commitments as of June 30, 2013. 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 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 four clinics, in Dallas, Houston and Sugar Land, Texas, and in Phoenix, Arizona. The Sugar Land, Texas clinic opened in March 2013. We have signed leases for space for clinics in three additional locations, Ft. Worth, Texas, Frisco, Texas (a suburb of Dallas) and Atlanta, Georgia. These clinics are expected to open in the second half of 2013. 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 more than 200,000 procedures to more than 25,000 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, our sixth clinic in Houston, Texas in June 2012, our seventh clinic in Phoenix, Arizona in November 2012 and our eighth clinic in Sugar Land, Texas (a suburb of Houston) in March 2013.

Our source of revenues through June 30, 2013, 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 and fees for services provided in our owned clinics. 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 4.0% for the quarter ended June 30, 2013. Advertising costs provided under the management services agreement were approximately 9.3% of our management service revenue in the year ended December 31, 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, increease approximately $72,000 for the six months ended June 30, 2013 when compared to the prior year. Patient credit fees and discounts were approximately $21,000 higher in the six months ended June 30, 2013 when compared to the prior year. Accordingly, our management fees, which are a percentage of the fee for service receipts of William Kirby, D.O., Inc. increased by approximately $30,000. Dr. Kirby’s staff compensation expense decreased approximately 8% for the six months ended June 30, 2013 when compared to the prior year. The increase in service fees together with decreased staffing expense resulted in an improvement in the financial performance of William Kirby, D.O., Inc. for the six months ended June 30, 2013 when compared to the prior year. 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, the Houston clinic we opened in June 2012, the Phoenix clinic we opened in November 2012 and the second Houston clinic we opened in March 2013 serve as an additional source of revenue. In connection with our Dallas, Houston and Phoenix clinics, we entered into consulting physician agreements with licensed physicians, pursuant to which those physicians, or other physicians engaged by those physicians provide to our 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, Florida 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 $300,000, 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, our affiliated physicians and our Chief Medical Officer, William Kirby, D.O., 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 and Arizona 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, 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 1% of our contracting physician’s gross revenue in the year ended December 31, 2012 and the three and six months ended June 30, 2013. 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 less than 1% of William Kirby, D.O., Inc.’s gross revenue in the three and six months ended June 30, 2013. 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 have 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.

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 opened a location in Sugar Land, Texas in March 2013 and currently anticipate opening additional clinics in Ft. Worth, Texas, Frisco, Texas and Atlanta, Georgia in the second half of 2013, and may open additional clinics in Texas, Georgia, Florida and Arizona later in 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 negative cash flow in the near 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, 2013 and the Three Months Ended June 30, 2012

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, 2013		June 30, 2012

Revenues	100	%	100	%
Clinic operational expenses	82	%	71	%
General & administrative expenses	62	%	68	%
Marketing and advertising	32	%	17	%
Depreciation & amortization	9	%	8	%
Loss from operations	(85	%)	(64	%)

Interest expense and other	(11	%)	(2	%)
Net loss	(96	%)	(66	%)

Revenues.Revenues increased by approximately $278,000, or 35%, to approximately $1,068,000 for the three months ended June 30, 2013 compared to approximately $790,000 for the three months ended June 30, 2012. Encounters increased by 753 from 10,730 to 11,483 or 7%. New clinics accounted for 1,533 encounters, while encounters in other clinics decreased by 780 encounters. The average fee per encounter paid by patients increased approximately 28% in the quarter ended June 30, 2013 when compared to the quarter ended June 30, 2012.

Clinic Operational Expenses. Clinic operational 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 operational expenses increased by 56% in the aggregate and increased 11% as a percentage of revenues to approximately $874,000 for the three months ended June 30, 2013 versus approximately $561,000 for the three months ended June 30, 2012. Of this increase of approximately $312,000, approximately 84% or $262,000 was related to three new clinics (Houston, Phoenix and Sugar Land).

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 $340,000 for the three months ended June 30, 2013, compared to approximately $133,000 for the three months ended June 30, 2012, an increase of approximately $207,000. Marketing and advertising for the three months ended June 30, 2013 included a one time severance expense of approximately $91,000 due our Chief Marketing Officer who resigned in June 2013.

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 increased by approximately $127,000 to approximately $662,000 for the three months ended June 30, 2013 when compared to $535,000 in the comparable period of the prior year. Salaries and other compensation increased by $76,000 due to the hiring of our Executive Vice President and Chief Operating Officer. We also incurred $29,000 in financial advisory fees in the quarter ended June 30, 2013. We accrued approximately $25,000 in bonuses for the second quarter and professional fees decreased by approximately $75,000.

Depreciation and Amortization Expenses. Depreciation and amortization consist of depreciation and amortization of leasehold improvements, lasers and other equipment held under capital leases, and the furniture, computers, telephone systems and other equipment used in our operations. Depreciation and amortization expenses increased by 43% in the aggregate to approximately $96,000 for the three months ended June 30, 2013 versus approximately $67,000 for the three months ended June 30, 2012. The depreciation and amortization increase was primarily related to the opening of three new clinics and the relocation of a clinic.

Interest Expense. Interest expense for the three months June 30, 2013 increased by 631% in the aggregate and 9% as a percentage of revenue to approximately $116,000 compared to approximately $16,000 for the three months ended June 30, 2012. The increase in interest expense is primarily related to our convertible notes, tenant improvement notes, and equipment financing notes.

Comparison of the Six Months Ended June 30, 2013 and the Six Months Ended June 30, 2012

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, 2013		June 30, 2012

Revenues	100	%	100	%
Clinic operational expenses	85	%	70	%
General & administrative expenses	84	%	76	%
Marketing and advertising	26	%	17	%
Depreciation & amortization	9	%	9	%
Loss from operations	(105	%)	(71	%)

Interest expense and other	(10	%)	(2	%)
Net loss	(115	%)	(73	%)

Revenues.Revenues increased by approximately $423,000, or 27%, to approximately $1,978,000 for the six months ended June 30, 2013 compared to approximately $1,555,000 for the six months ended June 30, 2012. Encounters increased by 1,945 from 20,977 to 22,922 or 9%. New clinics accounted for 2,583 encounters. The average fee per encounter paid by patients increased approximately 18% in the six months ended June 30, 2013 when compared to the six months ended June 30, 2012.

Clinic Operational Expenses. Clinic operational 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 operational expenses increased by 56% in the aggregate and increased 15% as a percentage of revenues to approximately $1,684,000 for the six months ended June 30, 2013 versus approximately $1,082,000 for the six months ended June 30, 2012. Of this increase of approximately $602,000, approximately 91% or $548,000 was related to three new clinics.

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 $520,000 for the six months ended June 30, 2013, compared to approximately $259,000 for the six months ended June 30, 2012, an increase of approximately $261,000. Marketing and advertising for the six months ended June 30, 2013 included a one time severance expense of approximately $91,000 due our Chief Marketing Officer who resigned in June 2013.

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 increased by approximately $484,000 to approximately $1,668,000 for the six months ended June 30, 2013 when compared to $1,184,000 in the comparable period of the prior year. Salaries and other compensation increased by $151,000 due to the hiring of our Executive Vice President and Chief Operating Officer. We also recognized additional expense of approximately $132,000 related to stock grants to outside directors, approximately $100,000 in brand development expense, $116,000 in expense for accrued bonus, and $64,000 in additional stock compensation expense. Professional fees for legal and accounting services decreased by approximately $217,000.

Depreciation and Amortization Expenses. Depreciation and amortization consist of depreciation and amortization of leasehold improvements, lasers and other equipment held under capital leases, and the furniture, computers, telephone systems and other equipment used in our operations. Depreciation and amortization expenses increased by 37% in the aggregate to approximately $184,000 for the six months ended June 30, 2013 versus approximately $134,000 for the six months ended June 30, 2012. The depreciation and amortization increase was primarily related to the opening of three new clinics and the relocation of a clinic.

Interest Expense. Interest expense for the six months June 30, 2013 increased by 435% in the aggregate and 8% as a percentage of revenue to approximately $198,000 compared to approximately $37,000 for the six months ended June 30, 2012. The increase in interest expense is primarily related to our convertible notes and interest on our equipment financing notes, tenant improvement notes, and equipment financing notes.

Liquidity and Capital Resources

Cash and cash equivalents decreased by approximately $101,000 at June 30, 2013 as compared to December 31, 2012, principally due to cash used in operations of $759,000, acquisition of property and equipment of $265,000, partially offset by cash received from the sale of equity securities in private placements of $125,001 and cash received from the issuance of debt in private placements of $950,000.

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, 2013 and 2012 reflected net cash used in operating activities of $759,000 and $332,000, respectively. While our clinics (both managed and owned) were able to generate positive cash flow from operations during the six months ended June 30, 2013 and 2012, 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, 2013 and 2012, respectively was $265,000 and $177,000, reflecting purchases of property and equipment. Our purchases of property and equipment in the first half of 2013 are principally related to the clinic we opened in March 2013 in Sugar Land, Texas (a suburb of Houston) and the relocation of our San Fernando Valley, California clinic. Our purchases in 2012 were principally related to the development of our clinic in Houston, Texas.

Net cash from financing activities for the sixmonths ended June 30, 2013 and 2012, respectively was $922,000 and $430,000. During the six months ended June 30, 2013, we sold equity securities in a private placement of $125,000 and received cash from the issuance of debt in private placements of $950,000. During the six months ended June 30, 2012 we received cash from the issuance of debt in private placements of $200,000.

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. If we are unable to raise additional equity capital or issue debt, 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 current 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.

Going Concern Issues

At June 30, 2013, the Company has accumulated losses approximating $9,686,000, current liabilities that exceeded its current assets by approximately $3,087,000, shareholders’ deficit of approximately $2,404,000, and has not yet produced operating income or positive cash flows from operations. In the six months ended June 30, 2013, the Company had a net loss of approximately $2,279,000 and the Company has not yet produced positive cash flow 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.

In connection with the 2010 restructuring, the Company also expanded its board of directors 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.

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.

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 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” in the accompanying 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” in the accompanying 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 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 effective as of June 30, 2013.

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.

PART II. OTHER INFORMATION

ITEM1. 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, 2012, 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 three months ended June 30, 2013. 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 April 2013, the Company sold 90,910 shares of common stock in a private placement for aggregate gross proceeds of approximately $50,000. As additional consideration for the investor purchasing the common stock, the Company issued the investor fully vested five-year warrants to purchase an aggregate of 68,183 shares of the Company’s Common Stock at an exercise price of $.65 per share. Also, in May 2013, the Company issued 145,455 shares of common stock and five year warrants, vesting over one year, to purchase 34,090 shares of the Company’s common stock at an exercise price of $.65 per share in exchange for services provided to the Company.

In May and June 2013, the Company issued $450,000 of 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 $.65 per share, subject to adjustment for stock splits or subdivisions. The notes are mandatorily convertible in the event of a Qualified Transaction (as defined in the notes) and the conversion price is adjustable to the lower of 75% of the price of a share of common stock sold in the Qualified Transaction or $.65. The notes bear interest at 7% per annum, payable upon conversion or at maturity. The notes mature November 1, 2014 and are unsecured. As additional consideration for the investors purchasing the notes, the Company issued the note holders fully vested five-year warrants to purchase an aggregate of 173,076 shares of the Company’s Common Stock at an exercise price equal to the lower or 120% of the conversion price or $.78 per share.

ITEM3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

Our Chief Marketing Officer, Ian Kirby, resigned his position with the Company effective June 10, 2013.

ITEM 6. EXHIBITS

(a) Exhibits:

Exhibit No.		Description of Exhibit

4.8*		Form ofSenior Subordinated Convertible Promissory Note issued in a private placement in May and June 2013
4.9*		Form of Common Stock Purchase Warrant issued in connection with the issuance ofsenior subordinated convertible promissory notes in a private placement in May and June 2013.
10.16*		Employment Agreement, effective July 1, 2013 between Dr. Tattoff, Inc. and John P. Keefe.
10.17*		Employment Agreement, effective July 1, 2013 between Dr. Tattoff, Inc. and Mark A. Edwards
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, 2013 and December 31, 2012, (b) our Statements of Operations for the Three and Six Months ended June 30, 2013 and 2012, (c) our Statements of Cash Flows for the Six Months ended June 30, 2013 and 2012, 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 13, 2013

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 13, 2013
John P. Keefe

PRINCIPAL FINANCIAL OFFICER

/s/ Mark A. Edwards		Chief Financial Officer		August 13, 2013
Mark A. Edwards

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	8th grade Avg

DR. Tattoff Inactive 10-Q2013 Q2 Quarterly report

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