Edgar Filing: IMAGENETIX INC /NV/

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For quarterly period ended September 30, 2008

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

For the transition period from _____ to _____

COMMISSION FILE NUMBER 033-24138-D

IMAGENETIX, INC.

(Exact name of registrant as specified in its charter)

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

10845 Rancho Bernardo Road, Suite 105

San Diego, California 92127

(Address of principal executive offices)

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

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

Yes x No ¨

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


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

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

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

Common Stock, $.001 par value		11,010,788
(Class)		Outstanding at November 12, 2008

Imagenetix, Inc.

INDEX

			Page
PART I. FINANCIAL INFORMATION

	Item 1.	Financial Statements:

		Condensed Consolidated Balance Sheets as of September 30, 2008 (unaudited) and March 31, 2008	3

		Condensed Consolidated Statements of Operations for the three and six months ended September 30, 2008 and 2007 (unaudited)	4

		Condensed Consolidated Statements of Cash Flows for the six months ended September 30, 2008 and 2007 (unaudited)	5

		Notes to Unaudited Condensed Consolidated Financial Statements	6

	Item 2.	Management’s Discussion and Analysis or Plan of Operation	11

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	*

	Item 4T.	Controls and Procedures	17

PART II. OTHER INFORMATION

	Item 1.	Legal Proceedings	*
	Item 1A.	Risk Factors	18
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20
	Item 3.	Defaults Upon Senior Securities	*
	Item 4.	Submission of Matters to a Vote of Security Holders	*
	Item 5.	Other Information	*
	Item 6.	Exhibits	21

SIGNATURES

* No information provided due to inapplicability of the item.

PART I – FINANCIAL INFORMATION

Item 1. Financial Statements

Imagenetix, Inc.

Condensed Consolidated Balance Sheets

	September 30,			March 31,
	2008			2008
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	2,108,704		$	1,022,555
Accounts receivable, net		1,125,864			765,492
Inventories, net		1,566,364			1,109,845
Prepaid expenses and other current assets		191,103			252,138
Deferred tax asset		333,397			862,497
Total current assets		5,325,432			4,012,527

Property and equipment, net		132,092			112,190
Long-term prepaid expenses		36,000			42,000
Other assets		243,956			218,155
Total Assets	$	5,737,480		$	4,384,872

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,183,811		$	713,324
Accrued liabilities		81,595			72,301
Customer deposits		69,916			63,216
Contract payable		-			46,200
Short term license payable		20,451			34,259
Total current liabilities		1,355,773			929,300
Long term license payable		-			2,980
Total Liabilities		1,355,773			932,280

Stockholders' equity
Preferred stock, $.001 par value; 5,000,000 shares authorized: none outstanding		-			-
Common stock, $.001 par value; 50,000,000 shares authorized: 11,010,788 and 10,960,788 issued and outstanding at September 30, 2008 and March 31, 2008		11,010			10,960
Capital in excess of par value		12,624,655			12,481,407
Accumulated deficit		(8,253,958	)		(9,039,775	)
Total stockholders' equity		4,381,707			3,452,592
Total Liabilities and Stockholders' Equity	$	5,737,480		$	4,384,872

See accompanying notes to unaudited condensed consolidated financial statements.

Imagenetix, Inc.

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended						Six Months Ended
	September 30,			September 30,			September 30,			September 30,
	2008			2007			2008			2007

Net sales	$	2,656,378		$	1,828,811		$	4,050,736		$	2,955,802

Cost of sales		1,541,221			1,083,256			2,360,932			1,619,860

Gross profit		1,115,157			745,555			1,689,804			1,335,942

Operating expenses:
General and administrative		419,931			686,854			1,025,404			1,333,363
Payroll expense		220,755			215,836			592,945			572,333
Consulting expense		243,153			227,829			588,914			479,353
Operating expenses		883,839			1,130,519			2,207,263			2,385,049
Operating income (loss)		231,318			(384,964	)		(517,459	)		(1,049,107	)
Other income (expense):
Other income		9,746			14,842			17,488			21,786
Settlement income		-			-			1,785,000			-
Interest expense		(523	)		(1,172	)		(1,212	)		(2,499	)
Other income		9,223			13,670			1,801,276			19,287
Income (loss) before income taxes		240,541			(371,294	)		1,283,817			(1,029,820	)

Income tax expense		41,800			259,400			498,000			36,400

Income (loss)	$	198,741		$	(630,694	)	$	785,817		$	(1,066,220	)

Basic income (loss) per share	$	0.02		$	(0.06	)	$	0.07		$	(0.10	)

Diluted income (loss) per share	$	0.02		$	(0.06	)	$	0.07		$	(0.10	)

Basic weighted average common shares outstanding		10,983,614			10,953,283			10,972,263			10,912,565

Diluted weighted average common shares outstanding		11,012,379			10,953,283			11,006,768			10,912,565

See accompanying notes to unaudited condensed consolidated financial statements.

Imagenetix, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

		Six Months Ended September 30,
		2008			2007
Operating activities:
Net income (loss)	$	785,817		$	(1,066,220	)
Adjustments to reconcile net income (loss) to cash provided by (used in) operating activities:
Amortization and depreciation		20,376			24,352
Provision for doubtful accounts		-			15,000
Provision for inventory obsolescence		23,498			122,105
Non cash expense related to issuance of warrants
and granting of stock options		118,298			339,754
Changes in assets and liabilities:
(Increase) decrease in accounts receivable		(360,372	)		420,252
(Increase) decrease in employee receivable		2,409			1,548
(Increase) decrease in inventories		(480,017	)		(210,189	)
(Increase) decrease in other assets		89,625			141,708
(Increase) decrease in deferred taxes		498,000			36,400
Increase (decrease) in accounts payable		470,487			447,944
Increase (decrease) in accrued liabilities		9,294			3,972
Increase (decrease) in customer deposits		6,700			(97,770	)
Increase (decrease) in income taxes payable		-			21,366
Net cash provided by operating activities		1,184,115			200,222
Investing activities:
Purchases of property and equipment		(40,246	)		(19,015	)
Proceeds from disposal of property and equipment		5,268			-
Net cash used in investing activities		(34,978	)		(19,015	)
Financing activities:
Proceeds from exercise of warrants		-			90,742
Payments on contracts payable		(46,200	)		(49,970	)
Payments on patent license financed		(16,788	)		(15,501	)
Net cash (used in) provided by financing activities		(62,988	)		25,271
Net increase in cash and cash equivalents		1,086,149			206,478
Cash and cash equivalents, beginning of period		1,022,555			958,896
Cash and cash equivalents, end of period	$	2,108,704		$	1,165,374

Supplemental Disclosure of Cash Flow Information:
Cash paid during the period for:
Interest	$	690		$	2,499
Income taxes	$	-		$	-
Non Cash Investing and Financing Activities:
Common stock issued for services	$	25,000		$	-

See accompanying notes to unaudited condensed consolidated financial statements.

IMAGENETIX, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements

1.	BASIS OF PRESENTATION

The consolidated financial statements of Imagenetix, Inc. ("Imagenetix") presented herein have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with our audited consolidated financial statements and notes thereto included in Form 10-KSB for the year ended March 31, 2008.

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

Earnings Per Share

We follow Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." Under SFAS No. 128, basic earnings per share is calculated as earnings available to common stockholders divided by the weighted average number of common shares outstanding. Diluted earnings per share is calculated as net income divided by the diluted weighted average number of common shares. The diluted weighted average number of common shares is calculated using the treasury stock method for common stock issuable pursuant to outstanding stock options and common stock warrants. See Note 6 for discussion of commitments to issue additional shares of common stock and warrants.

Stock Based Compensation

We account for stock based compensation under the provisions of FASB Statement No. 123R, “Accounting for Stock-Based Compensation” (“SFAS 123R”). SFAS 123R requires all share-based payments to employees, including grants of employee stock options and restricted stock, to be recognized in the financial statements based on their fair values.

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

We apply SFAS No. 123 in valuing options granted to consultants and estimate the fair value of such options using the Black-Scholes option-pricing model. The fair value is recorded as consulting expense as services are provided. Options granted to consultants for which vesting is contingent based on future performance are measured at their then current fair value at each period end, until vested.

2. RECENT ACCOUNTING PRONOUNCEMENTS

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities” (SFAS No. 161”). SFAS No. 161 amends and expands the disclosure requirement for FASB Statement No. 133, “Derivative Instruments and Hedging Activities” (“SFAS No. 133”). It requires enhanced disclosure about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are accounted for under SFAS No. 133 and its related interpretations, and (iii) how derivative instruments and related hedge items affect an entity’s financial position, financial performance, and cash flows. SFAS No. 161 is effective for the Company as of April 1, 2009. The Company is currently assessing the impact of SFAS 161 on its consolidated financial position and results of operations.

IMAGENETIX, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The Board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. The adoption of FASB 162 is not expected to have a material impact on the Company’s consolidated financial position and results of operations.

In April 2008, the FASB issued FSP 142-3, “Determination of the Useful Life of Intangible Assets”, (FSP 142-3). FSP 142-3 amends the factors that should be considered in developing renewal or extension assumptions used to determine the useful life of a recognized intangible asset under SFAS No. 142, “Goodwill and Other Intangible Assets”. FSP 142-3 is effective for fiscal years beginning after December 15, 2008. The Company is currently assessing the impact of FSP 142-3 on its consolidated financial position and results of operations.

3. ACCOUNTS RECEIVABLE

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

	September 30,			March 31,
	2008			2008

Accounts receivable - trade	$	1,230,090		$	870,492
Allowance for doubtful accounts		(104,226	)		(105,000	)

Accounts receivable, net	$	1,125,864		$	765,492

At September 30, 2008, we had three customers which accounted for 26%, 24% and 13% of our accounts receivable balances. At March 31, 2008, we had two customers which accounted for 16% and 12% of our accounts receivable balances.

For the six months ended September 30, 2008, we had three significant customers which accounted for 22%, 21% and 17% of sales. For the six months ended September 30, 2007, we had four significant customers which accounted for 24%, 18%, 15% and 10% of sales.

IMAGENETIX, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

4. INVENTORIES

Inventories consist of the following:

	September 30,			March 31,
	2008			2008

Raw materials	$	1,273,120		$	824,807
Finished products		273,501			295,615
Boxes, labels, tubes & bottles		193,783			139,965
		1,740,404			1,260,387
Reserve for obsolescence		(174,040	)		(150,542	)
	$	1,566,364		$	1,109,845

5.	OTHER ASSETS

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

	September 30,		March 31,
	2008		2008

Trademarks	$	13,032	$	13,032
Patent		172,965		172,965
Deferred tax asset		118,800		87,700
		304,797		273,697

Less accumulated amortization		60,841		55,542

	$	243,956	$	218,155

6. EQUITY TRANSACTIONS

During the current quarter, we recorded $25,000 as non-cash general and administrative expenses as a result of issuing 50,000 restricted shares of common stock to an individual who had met certain sales levels under a marketing and sales agreement.

We recorded non-cash compensation expense for stock options and warrants issued to employees and consultants of $13,641 and $79,920 for the three and six months ended September 30, 2008 and $35,147 and $199,166 for the three and six months ended September 30, 2007. Also, we recorded non-cash general and administrative expense for warrants granted to individuals of $27,991 and $38,378 for the three and six months ended September 30, 2008 and none and $140,588 for the three and six months ended September 30, 2007.

The significant assumptions used in the Black-Scholes model to estimate the compensation and general and administrative expense for the issuance of stock options and warrants are as follows:

IMAGENETIX, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

	Three months ended September 30,				Six months ended September 30,
	2008		2007		2008		2007

Expected term of options and warrants		5 years		5 years		5 years		5 years
Expected volatility		56%		56%		61%		71%
Expeceted dividends		None		None		None		None
Risk-free interest rate		3.12% to 3.33%		4.55%		3.12% to 3.54%		4.55%
Forteitures		0%		0%		0%		0%

A summary of the options outstanding follows:

	For the Six Months Ended
	September 30, 2008
			Weighted
			Average
			Exercise
Options	Shares		Price
Outstanding at beginning of year	944,000	$	1.00
Granted	305,000		0.65
Cancelled	-		-
Exercised	-		-
Outstanding at end of the period	1,249,000		0.92

Exercisable at end of the the period	1,096,500	$	0.95

Weighted average fair value of options
granted during the period	305,000	$	0.36

As of September 30, 2008, the unamortized portion of stock compensation expense on all existing stock options was $40,921.

A summary of warrants outstanding follows:

	For the Six Months Ended
	September 30, 2008
			Weighted
			Average
			Exercise
Warrants		Shares		Price
Outstanding at beginning of year		3,902,957	$	1.18
Granted		175,000		1.04
Cancelled		-		-
Exercised		-		-
Outstanding at end of the period		4,077,957		1.17

Exercisable at end of the the period		4,077,957	$	1.17

Weighted average fair value of warrants
granted during the period		175,000	$	0.22

IMAGENETIX, INC.

Notes to the Unaudited Condensed Consolidated Financial Statements (Continued)

7. INCOME TAXES

We file income tax returns in the U.S. federal jurisdiction and the state of California. With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for years before 2004.

We adopted the provisions of FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes, on April 1, 2007. As a result of the implementation of Interpretation 48, we did not recognize an increase in the liability for unrecognized tax benefits. No unrecognized tax benefits are being reported for the three and six months ended September 30, 2008.

Included in the balance at September 30, 2008, were no tax positions for which the ultimate deductibility is highly certain but for which there is uncertainty about the timing of such deductibility. Because of the impact of deferred tax accounting, other than interest and penalties, the disallowance of the shorter deductibility period would not affect the annual effective tax rate but would accelerate the payment of cash to the taxing authority to an earlier period.

Our policy is to recognize interest accrued related to unrecognized tax benefits in interest expense and penalties in operating expenses.

8. LITIGATION SETTLEMENT

In May 2008, we received $2,100,000 ($1,750,000 after costs) as a result of entering into a settlement agreement with a company we alleged was infringing on the Celadrin trademark. In addition, we entered into a supply agreement with the same company whereby we provide Celadrin for use in their products.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.

THE FOLLOWING DISCUSSION INCLUDES FORWARD-LOOKING STATEMENTS WITH RESPECT TO OUR FUTURE FINANCIAL PERFORMANCE. ACTUAL RESULTS MAY DIFFER MATERIALLY FROM THOSE CURRENTLY ANTICIPATED AND FROM HISTORICAL RESULTS DEPENDING UPON A VARIETY OF FACTORS, INCLUDING THOSE DESCRIBED BELOW UNDER THE SUB-HEADING, "RISK FACTORS." SEE ALSO OUR ANNUAL REPORT ON FORM 10-KSB FOR THE YEAR ENDED MARCH 31, 2008.

Overview

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

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

We sell directly to the mass markets through retailers InflameAway, our own Celadrin® branded product. We also develop and sell products and formulations to businesses and organizations that market these products through multiple channels of distribution, including direct marketing companies, mass marketing companies, medical, health and nutritional professionals, medical newsletters and direct response radio and television. We also offer Celadrin® products through wholesale customers that in turn offer their products containing Celadrin® to mass market retailers.

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

Critical Accounting Policies and Estimates

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

1. Accounts receivable.

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

2. Inventories

Inventories are carried at the lower of cost or market. Cost is determined by the first-in first-out method. At each period end, management adjusts the inventory allowance based on estimates. These estimates take into account spoilage, yields, obsolescence and overstocked inventory amounts.

3. Revenue Recognition

We recognize revenue in accordance with the SEC’s Staff Accounting Bulletin No. 104, “Revenue Recognition in Financial Statements” (SAB104), Statement of Financial Accounting Standards No. 48, “Revenue Recognition When Right of Return Exists” (SFAS 48), and Emerging Issues Task Force Abstract (EITF) No. 01-9, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of the Vendor’s Products.” SAB 104 requires that four basic criteria be met before revenue can be recognized: 1) there is evidence that an arrangement exists; 2) delivery has occurred; 3) the fee is fixed or determinable; and 4) collectibility is reasonably assured. SFAS 48 states that revenue from sales transactions where the buyer has the right to return the product shall be recognized at the time of sale only if (1) the seller’s price to the buyer is substantially fixed or determinable at the date of sale; (2) the buyer has paid the seller, or the buyer is obligated to pay the seller and the obligation is not contingent on

resale of the product; (3) the buyer’s obligation to the seller would not be changed in the event of theft or physical destruction or damage of the product; (4) the buyer acquiring the product for resale has economic substance apart from that provided by the seller; (5) the seller does not have significant obligations for future performance to directly bring about resale of the product by the buyer; and (6) the amount of future returns can be reasonably estimated. We recognize revenue upon determination that all criteria for revenue recognition have been met. The criteria are usually met at the time title passes to the customer, which usually occurs upon shipment. Revenue from shipments where title passes upon delivery is deferred until the shipment has been delivered.

We account for payments made to customers in accordance with EITF 01-09, which states that cash consideration (including a sales incentive) given by a vendor to a customer is presumed to be a reduction of the selling prices of the vendor’s products or services and, therefore, should be characterized as a reduction of revenue when recognized in the vendor’s income statement, rather than a sales and marketing expense. We have various agreements with customers that provide for discounts and rebates. These agreements are classified as a reduction of revenue. Certain other costs associated with customers that meet the requirements of EITF 01-09 are recorded as sales and marketing expense.

We guarantee customer satisfaction. Our policy requires the customer to return the unused product to the retailer from whom they originally purchased it. We pay the retailer for the returned product plus a handling cost. We periodically assess the adequacy of this policy and will record a liability as necessary. For the three and six months ended September 30, 2008, there were no returns that would indicate a liability needed to be recorded.

We review gross revenue for estimated returns of private label contract manufacturing products and direct-to-consumer products. The estimated returns are based upon the trailing six months of private label contract manufacturing gross sales and our historical experience for both private label contract manufacturing and direct-to-consumer product returns. However, the estimate for product returns does not reflect the impact of a large product recall resulting from product nonconformance or other factors as such events are not predictable nor is the related economic impact estimable. For the three and six months ended September 30, 2008, there were no returns that would suggest a liability needed to be recorded.

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

4. Income Taxes

Deferred income taxes are provided using the liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carryforwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.

When tax returns are filed, it is highly certain that some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other portions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with the tax positions taken that exceed the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.

Selected Financial Information

Results of Operations

Three Months Ended September 30, 2008 Compared to Three Months Ended September 30, 2007

	Three Months Ended
							Increase
	9/30/08			9/30/07			(Decrease)			%

Statements of Operations:
Net sales	$	2,656,378		$	1,828,811		$	827,567			45.3	%
Cost of goods sold		1,541,221			1,083,256			457,965			42.3	%
% of net sales		58.0	%		59.2	%		-1.2	%		-2.0	%
Gross profit		1,115,157			745,555			369,602			49.6	%
% of net sales		42.0	%		40.8	%		1.2	%		3.0	%
Operating expenses
General and administrative		419,931			686,854			(266,923	)		-38.9	%
Payroll expense		220,755			215,836			4,919			2.3	%
Consulting expense		243,153			227,829			15,324			6.7	%
Total operating expenses		883,839			1,130,519			(246,680	)		-21.8	%
Interest expense		(523	)		(1,172	)		(649	)		-55.4	%
Other income		9,746			14,842			(5,096	)		-34.3	%
Provision for taxes		41,800			259,400			217,600			NM
Net income (loss)		198,741			(630,694	)		829,435			NM
Net income (loss) per share basic		0.02			(0.06	)		0.08			NM
Net income (loss) per share diluted		0.02			(0.06	)		0.08			NM

Net Sales

Net sales for the quarter ended September 30, 2008 increased $827,567, a 45.3% increase, to $2,656,378 compared to $1,828,811 for the quarter ended September 30, 2007. The primary reason for the sales increase was attributed to increased sales of our weight loss product. Sales of our own branded product, Inflame Away, that identifies Celadrinâ as its marquee ingredient, continued to increase but was offset by product rebates and giveaways in support of marketing InflameAway through retail distribution channels. We anticipate, the new marketing program coupled with additional distribution agreements to wholesale and multi-level marketing customers to result in improved sales during the balance of our current fiscal year.

Cost of Goods Sold

Cost of goods sold as a percentage of net sales remained stable at 58.0% for the quarter ended September 30, 2008 compared to 59.2% for the quarter ended September 30, 2007. A significant portion of cost of goods sold is related to the rebate and giveaway marketing strategy for the InflameAway product. Rebate and giveaway programs are customary in the mass market distribution channel. We anticipate levels of promotional activities used to launch the awareness of InflameAway will be reduced in the future resulting in lower cost of goods sold percentages.

General and Administrative

General and administrative expenses decreased by $266,923, a 38.9% decrease, to $419,931 for the quarter ended September 30, 2008 from $686,854 for the quarter ended September 30, 2007. The primary reasons for the decrease were an approximate $216,000 decrease in advertising expenses related to the launch of InflameAway coupled with a decrease in expenses related to clinical research studies and travel expenses. We anticipate increases in general and administrative expenses as a result of increasing our advertising campaign for our Inflame Away product and an increase in clinical research studies.

Payroll Expense

Payroll expense remained stable at $220,755 for the quarter ended September 30, 2008 compared to $215,836 for the quarter ended September 30, 2007. The increase was a result of normal salary increases.

Consulting Expenses

Consulting expenses increased to $243,153 for the quarter ended September 30, 2008, an increase of 6.7% or $15,324 compared to $227,829 for the quarter ended September 30, 2007. This increase was a result of increased litigation expenses from now settled litigation.

Provision for Income Taxes

As a result of income for the quarter ended September 30, 2008, an income tax expense of $41,800 was recognized during the current quarter compared to $259,400 of income tax expense being recognized during the quarter ended September 30, 2007. The recognition of income tax expense during the quarter ended September 30, 2007 was a result of eliminating certain tax timing differences related to stock options and warrants.

Six Months Ended September 30, 2008 Compared to Six Months Ended September 30, 2007

	Six Months Ended
							Increase
	9/30/08			9/30/07			(Decrease)			%

Statements of Operations:
Net sales	$	4,050,736		$	2,955,802		$	1,094,934			37.0	%
Cost of goods sold		2,360,932			1,619,860			741,072			45.7	%
% of net sales		58.3	%		54.8	%		3.5	%		6.4	%
Gross profit		1,689,804			1,335,942			353,862			26.5	%
% of net sales		41.7	%		45.2	%		-3.5	%		-7.7	%
Operating expenses
General and administrative		1,025,404			1,333,363			(307,959	)		-23.1	%
Payroll expense		592,945			572,333			20,612			3.6	%
Consulting expense		588,914			479,353			109,561			22.9	%
Total operating expenses		2,207,263			2,385,049			(177,786	)		-7.5	%
Interest expense		(1,212	)		(2,499	)		1,287			-51.5	%
Settlement income		1,785,000			-			1,785,000			NM
Other income		17,488			21,786			(4,298	)		-19.7	%
Provision for taxes		498,000			36,400			461,600			1268.1	%
Net income (loss)		785,817			(1,066,220	)		1,852,037			NM
Net income (loss) per share basic		0.07			(0.10	)		0.17			NM
Net income (loss) per share diluted		0.07			(0.10	)		0.17			NM

Net Sales

Net sales for the six months ended September 30, 2008 increased $1,094,934, a 37.0% increase, to $4,050,736 compared to $2,955,802 for the six months ended September 30, 2007. The primary reason for the sales increase was attributed to the initial sales to MonaVie under a supply agreement coupled with an increase in our weight loss product. Sales of our own branded product, Inflame Away, that identifies Celadrinâ as its marquee ingredient, continued to increase but was offset by product rebates and giveaways in support of marketing InflameAway through retail distribution channels. We anticipate, the new marketing program coupled with additional distribution agreements to wholesale and multi-level marketing customers to result in improved sales during the balance of our current fiscal year.

Cost of Goods Sold

Cost of goods sold as a percentage of net sales increased from 54.8% for the six months ended September 30, 2007 to 58.3% for the six months ended September 30, 2008. This increase was primarily due to the rebate and giveaway marketing strategy discussed above which resulted in InflameAway product being provided at no cost to the eventual customer. Rebate and giveaway programs are customary in the mass market distribution channel. We anticipate levels of promotional activities used to launch the awareness of InflameAway will be reduced in the future.

General and Administrative

General and administrative expenses decreased by $307,959, a 23.1% decrease, to $1,025,404 for the six months ended September 30, 2008 from $1,333,363 for the six months ended September 30, 2007. The primary reasons for the decrease were an approximate $289,000 decrease in advertising expenses related to the launch of InflameAway coupled with decreases in expenses related to clinical research studies and travel expenses. We anticipate increases in general and administrative expenses as a result of increasing our advertising campaign for our Inflame Away product and an increase in clinical research studies.

Payroll Expense

Payroll expense increased to $592,945 for the six months ended September 30, 2008, an increase of 3.6% or $20,612, compared to $572,333 for the six months ended September 30, 2007. This increase was a result of normal salary increases.

Consulting Expenses

Consulting expenses increased to $588,914 for the six months ended September 30, 2008, an increase of 22.9% or $109,561 compared to $479,353 for the six months ended September 30, 2007. This increase was a result of increased litigation expenses related to the settlement of a potential trademark infringement case coupled with increased audit fees related to requirements to include management’s assessment of internal controls in financial statements. We anticipate consulting fees to decrease since litigation has been successfully concluded.

Settlement Income

During the six months ended September 30, 2008, we received $2,100,000 ($1,785,000 after costs) as a result of entering into a settlement agreement with a company we alleged was infringing on the Celadrin trademark. In addition, we entered into a supply agreement with the same company whereby we provide Celadrin for use in their products.

Provision for Income Taxes

As a result of income for the six months ended September 30, 2008, an income tax expense of $498,000 was recognized during the current fiscal year compared to $36,400 of income tax expense being recognized during the six months ended September 30, 2007.

Capital Resources

Working Capital
					Increase
	9/30/08		3/31/08		(Decrease)

Current assets	$	5,325,432	$	4,012,527	$	1,312,905
Current liabilities		1,355,773		929,300		426,473
Working capital	$	3,969,659	$	3,083,227	$	886,432

Long-term debt	$	-	$	2,980	$	(2,980	)

Stockholders' equity	$	4,381,707	$	3,452,592	$	929,115

Statements of Cash Flows Select Information

	Six Months Ended						Increase
	9/30/08			9/30/07			(Decrease)
Net cash provided by (used in):
Operating activities	$	1,184,115		$	200,222		$	983,893
Investing activities	$	(34,978	)	$	(19,015	)	$	(15,963	)
Financing activities	$	(62,988	)	$	25,271		$	(88,259	)

Balance Sheet Select Information

					Increase
	9/30/08		3/31/08		(Decrease)

Cash and cash equivalients	$	2,108,704	$	1,022,555	$	1,086,149

Accounts receivable, net	$	1,125,864	$	765,492	$	360,372

Inventories, net	$	1,566,364	$	1,109,845	$	456,519

Accounts payable and accrued expenses	$	1,265,406	$	785,625	$	479,781

Liquidity

We have historically financed our operations internally and through debt and equity financings. At September 30, 2008, we had cash holdings of $2,108,704, an increase of $1,086,149 compared to March 31, 2008. Our net working capital position at September 30, 2008, was $3,969,659 compared to $3,083,227 as of March 31, 2008. We have initiated a direct mass market strategy with our own product, Inflame Away. Although, a significant portion of our working capital may be needed to implement this strategy, we believe that our cash position is sufficient to fund our operating activities for at least the next 12 months.

New Accounting Pronouncements

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

ITEM 4T. CONTROLS AND PROCEDURES.

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to provide reasonable assurance that information required to be disclosed in reports filed under the Securities Exchange Act of 1934 (“Exchange Act”) is recorded, processed, summarized, and reported within the specified time periods and accumulated and communicated to the Company’s management, including its Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

The Company’s management, under the supervision and with the participation of its Principal Executive Officer and its Principal Financial Officer, evaluated the effectiveness of its disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) promulgated under the Exchange Act) as of the end of the period covered by this report. Based on that evaluation, the Company’s Principal Executive Officer and Principal Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of September 30, 2008 to provide reasonable assurance in the Company’s financial reporting.

Remediation of Certain Weaknesses and Changes in Internal Controls

As discussed in the Company’s Annual Report on Form 10-KSB for the year ended March 31, 2008, filed with the SEC on June 25, 2008, during the financial reporting process for the fiscal year end March 31, 2008, the following weaknesses in the Company’s internal control over financial reporting were identified:

(1) Deficiencies in Segregation of Duties. The Chief Executive Officer and the Chief Financial Officer are actively involved in the preparation of the financial statements, and therefore cannot provide an independent review and quality assurance function within the accounting and financial reporting group. The limited number of qualified accounting personnel discussed above results in an inability to have independent review and approval of financial accounting entries. Furthermore, management and financial accounting personnel have wide-spread access to create and post entries in the Company’s financial accounting system. There is a risk that a material misstatement of the financial statements could be caused, or at least not be detected in a timely manner, due to insufficient segregation of duties, and

(2) Our financial statement closing process did not identify all the journal entries that needed to be recorded as part of the closing process for certain complex and non-routine transactions. As part of the audit, our independent registered public accounting firm proposed certain entries that should have been recorded as part of the normal closing process. Our internal control over financial reporting did not detect such matters and, therefore, was not effective in detecting misstatements in the financial statements.

To address the material weakness, during the six months ended September 30, 2008, we performed additional analysis and other post-closing procedures in an effort to ensure our consolidated financial statements included in this quarterly report have been prepared in accordance with generally accepted accounting principles. We continue to implement a plan whereby during fiscal year 2009 sufficient testing to satisfy COSO requirements will be performed. The absence of the ability to conclude as to the sufficiency of internal controls, is a material weakness.

Management believes that there are no material inaccuracies or omissions of material fact and, to the best of its knowledge, believes that the condensed consolidated financial statements for the three and six months ended September 30, 2008, fairly present in all material respects the financial condition and results of operations for the Company in conformity with accounting principles generally accepted in the United States of America.

Other than as described above, there have not been any other changes in the Company’s internal control over financial reporting during the quarter ended September 30, 2008, which have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

Limitations on the Effectiveness of Controls

A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The Company’s management, including its Principal Executive Officer and its Principal Financial Officer, do not expect that the Company’s disclosure controls will prevent or detect all errors and all fraud. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with associated policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

PART II. OTHER INFORMATION

ITEM 1A. RISK FACTORS.

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

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

There is only one supplier for Celadrin®, which we use in approximately 58% of our products and which represented approximately 74% of our sales for the year ended March 31, 2008. We will rely upon Celadrin® to expand our product lines and revenue in the future. If our Celadrin® supplier goes out of business or elects for any reason not to supply us with Celadrin®, we would have to find another Celadrin® supplier or suffer a significant reduction in our revenue.

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

Our largest customers accounted for 29% and 16% of our net sales for the year ended March 31, 2008 and 22%, 21% and 17% of our net sales for the six months ended September 30, 2008. The loss of these customers could significantly reduce our revenue and adversely affect our cash flow and earnings, if any.

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

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

Product Liability Claims Against Us Could Be Costly.

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

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

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

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

We are subject to laws and regulations which cover:

•

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

• the health and safety of food and drugs;

• trade practice and direct selling laws; and

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

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

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

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

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

We have 11,010,788 common shares outstanding of which 10,960,788 are freely tradeable or saleable under Rule 144. We also have outstanding common stock warrants and stock options exercisable into up to 5,326,957 shares of common stock which could become free trading if exercised. If our stockholders sell substantial amounts of our common stock, the market price of our common stock could decrease.

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

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

• The lack of readily available price quotations;

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

• Lower trading volume; and

• Market conditions.

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

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

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

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

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

•

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

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

• Current quotation prices and other relevant market data; and

•

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

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

During the quarter ended September 30, 2008, we issued common stock and common stock purchase warrants as follows:

Common Stock

Date Stock

Price per

Stockholder

Issued

Number of Shares

Dennis Beecher

8/19/2008

50,000

0.50

Services

Common Stock Purchase Warrants

Name

Date of Issuance

Number of Shares

Exercise Price

Expiraton Date

Frank Sajovic

7/14/2008

25,000

0.65

7/14/2013

Chris Lahiji

7/1/2008

25,000

0.65

7/1/2013

Joe Sutton

7/15/2008

100,000

1.20

7/15/2013

With respect to the above securities issuances, the Registrant relied on exemptions provided by Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”) and Rule 506 under the Securities Act. No advertising or general solicitation was employed in offering the securities. The securities were issued to a limited number of persons all of whom were accredited investors as that term is defined in Rule 501 of Regulation D under the Securities Act. All were capable of analyzing the merits and risks of their investment, acknowledged in writing that they were acquiring the securities for investment and not with a view toward distribution or resale, and understood the speculative nature of their investment. All securities issued contained a restrictive legend prohibiting transfer of the shares except in accordance with federal securities laws.

There were no proceeds received from the issuance of the above securities.

ITEM 6. EXHIBITS.

Exhibit No.		Title
31.1		302 Certification of William P. Spencer, Chief Executive Officer
31.2		302 Certification of Lowell W. Giffhorn, Chief Financial Officer
32.1		906 Certification of William P. Spencer, Chief Executive Officer
32.2		906 Certification of Lowell W. Giffhorn, Chief Financial Officer

SIGNATURES

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

IMAGENETIX, INC.
a Nevada corporation

Date: November 12, 2008	By:	/s/ WILLIAM P. SPENCER
	William P. Spencer
	Chief Executive Officer

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