##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 (Mark One)
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
 For the quarterly period endedMarch 31, 2008.
 OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934.
 For the transition period fromto.
 Commission File Number 0-52731
 
 NovaRay Medical, Inc.
  
 Delaware
    
    16-1778998(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)39655 Eureka Drive, Suite A,Newark, California
    
    94560(Address of principal executive offices)
    
    (zip code)
 
 (Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
 
 þ o
  Large Accelerated Filer o
    
    Accelerated Filer o
    
    Non-Accelerated Filer o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company þ
 o þ .




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##### 



NOVARAY MEDICAL, INC.
  
 Table of Contents
 PART I  FINANCIAL INFORMATION
    
    
    1Item 1. Financial Statements
    
    
    1CONDENSED CONSOLIDATED BALANCE SHEETS
    
    
    1CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
    
    
    2CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
    
    
    3NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    14Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    17Item 4T. Controls and Procedures
    
    
    18PART II  Other Information
    
    
    18Item 1. Legal Proceedings
    
    
    18Item 1A. Risk Factors
    
    
    18Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    18Item 3. Defaults Upon Senior Securities
    
    
    18Item 4. Submission of Matters to a Vote of Security Holders
    
    
    18Item 5. Other Information
    
    
    19Item 6. Exhibits
    
    
    19SIGNATURES
    
    
    20EXHIBIT 3.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Financial Statements
 NOVARAY MEDICAL, INC.
(A Development Stage Company)
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (Unaudited)
 March 31,
    
    
    December 31,2008
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    6,873,835
    
    
    $
    9,233,926Miscellaneous receivable
    
    
    22,992
    
    
    
    13,872Prepaid expenses
    
    
    225,172
    
    
    
    16,947Total current assets
    
    
    124,199
    
    
    
    9,264,745Property and equipment, net
    
    
    38,433
    
    
    
    42,455Other assets:Deferred interest
    
    
    1,469,955
    
    
    
    1,584,336Deferred consulting
    
    
    1,704,614
    
    
    
    1,926,531Deposits and restricted assets
    
    
    635,000
    
    
    
    Total other assets
    
    
    3,809,569
    
    
    
    3,510,867Total assets
    
    $
    10,972,201
    
    
    $
    12,818,066Liabilities and Stockholders DeficitCurrent liabilities:Accounts payable
    
    $
    772,707
    
    
    $
    566,146Accrued liabilities
    
    
    330,019
    
    
    
    205,503Notes payable
    
    
    95,312
    
    
    
    125,312Total current liabilities
    
    
    1,198,039
    
    
    
    896,961Total liabilities
    
    
    1,198,039
    
    
    
    896,961Stockholders equity (deficit):Series A convertible preferred stock, NovaRay
Medical, Inc., $0.0001 par value Authorized
shares 10,000,000; Issued 4,946,888 at March
31, 2008 and December 31, 2007 (Liquidation
preference -$0- at March 31, 2007)
    

    $
    495
    
    

    $
    495Common stock, NovaRay Medical, Inc., $0.0001
par value Authorized shares - 110,000,000;
Issued and outstanding shares - 9,767,853 at
March 31, 2008 and December 31, 2007
    
    
    1,269
    
    
    
    1,269Additional paid-in capital
    
    
    17,103,665
    
    
    
    17,103,668Deficit accumulated during the development stage
    
    
    (7,327,137
    )
    
    
    (5,180,194
    )Less: treasury stock, at cost, 1,239,999 shares
outstanding at March 31, 2008 and December 31,
2007,
    
    
    (4,130
    )
    
    
    (4,130
    )Total stockholders deficit
    
    
    9,774,162
    
    
    
    11,921,106Total liabilities and stockholders deficit
    
    $
    10,972,201
    
    
    $
    12,818,066
  1




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NOVARAY MEDICAL, INC.
(A Development Stage Company)
 
 CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
 (Unaudited)
 FromInceptionThree Months Ended March 31,
    
    
    (June 7, 2005)March 31,
    
    
    March 31,
    
    
    to March 31,2008
    
    
    2007
    
    
    2008Operating expenses:Research and development
    
    $
    1,275,593
    
    
    $
    48,975
    
    
    $
    1,623,286General and administrative
    
    
    773,183
    
    
    
    267,686
    
    
    
    5,495,022Total operating expenses
    
    
    2,048,777
    
    
    
    316,661
    
    
    
    7,118,308Operating loss
    
    
    (2,048,777
    )
    
    
    (316,661
    )
    
    
    (7,118,308
    )Miscellaneous income
    
    
    
    
    
    
    
    
    
    
    80,000Interest income
    
    
    19,209
    
    
    
    1,245
    
    
    
    25,321Gain on extinguishment of debt
    
    
    
    
    
    
    
    
    
    
    452,091Interest expense
    
    
    (117,376
    )
    
    
    (53,633
    )
    
    
    (764,241
    )Net loss
    
    $
    (2,146,943
    )
    
    $
    (369,049
    )
    
    $
    (7,325,137
    )Basic and diluted loss per share of common stock
    
    
    $(0.22
    )
    
    
    $(0.05
    )
    
    
    $(0.88
    )Weighted average number of common shares
outstanding used in basic and diluted loss per
share
    
    
    9,767,853
    
    
    
    6,931,713
    
    
    
    8,298,752
 2




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NOVARAY MEDICAL, INC.
(A Development Stage Company)
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three Months Ended March 31,Ended
    
    
    
    
    
    From InceptionMarch 31,
    
    Ended
    
    (June 7, 2005) to2008
    
    March 31, 2007
    
    March 31, 2008Operating activities:Net loss
    
    $
    (2,146,943
    )
    
    $
    (1,150,535
    )
    
    $
    (7,327,137
    )Adjustments to reconcile net loss to net cash used in
operating activities:Depreciation
    
    
    4,022
    
    
    
    14,044
    
    
    
    41,960Amortization of warrants in research and development
    
    
    221,917
    
    
    
    
    
    
    
    242,917Amortization of warrants included in interest expense
    
    
    114,381
    
    
    
    
    
    
    
    133,381Interest expense capitalized as long term debt
    
    
    
    
    
    
    104,605
    
    
    
    156,641Interest expense converted to preferred stock
    
    
    
    
    

    
    60,864
    
    
    
    60,864Changes in operating assets and liabilitiesMiscellaneous receivables
    
    
    (11,320
    )
    
    
    (10,772
    )
    
    
    (25,191
    )Prepaid expenses
    
    
    (208,225
    )
    
    
    (146,753
    )
    
    
    (225,172
    )Accounts payable
    
    
    206,561
    
    
    
    78,233
    
    
    
    772,707Accrued liabilities
    
    
    124,516
    
    
    
    164,852
    
    
    
    (340,200
    )Net cash used in operating activities
    
    
    (1,695,091
    )
    
    
    (885,462
    )
    
    
    (5,828,830
    )Investing activities:Property and equipment assigned by shareholders
    
    
    
    
    
    
    
    
    
    
    (75,754
    )Restricted cash for lease deposit
    
    
    (135,000
    )
    
    
    
    
    
    
    (135,000
    )Security deposit with related party
    
    
    (500,000
    )
    
    
    
    
    
    
    (500,000
    )Net cash used in investing activities
    
    
    (635,000
    )
    
    
    
    
    
    
    (710,754
    )Financing activities:Repayment of long-term debt
    
    
    
    
    
    
    
    
    
    
    Proceeds from subscriptions receivable
    
    
    
    
    
    
    
    
    
    
    100,472Proceeds from issuance of short term debt
    
    
    
    
    
    
    625,000
    
    
    
    1,742,805Long-term debt assumed at inception in connection with
the acquisition of intellectual property
    
    
    
    
    
    
    
    
    
    
    1,283,473Proceeds from sale of Series A convertible preferred
stock
    
    
    
    
    
    
    390,000
    
    
    
    10,429,820Repayment of notes payable
    
    
    (30,000
    )
    
    
    
    
    
    
    (30,000
    )Issuance costs incurred in sale of Series A convertible
preferred stock
    
    
    
    
    
    
    (24,910
    )
    
    
    (122,910
    )Proceeds from sale of common stock
    
    
    
    
    
    
    
    
    
    
    13,889Purchase of treasury stock
    
    
    
    
    
    
    (4,130
    )
    
    
    (4,130
    )Net cash
provided (used) by financing activities
    
    
    (30,000
    )
    
    
    985,960
    
    
    
    13,913,419Net increase (decrease) in cash and cash equivalents
    
    
    (2,360,091
    )
    
    
    100,498
    
    
    
    6,873,835Cash and cash equivalentsbeginning of period
    
    
    9,233,926
    
    
    
    40,827
    
    
    
    Cash and cash equivalentsend of period
    
    $
    6,878,235
    
    
    $
    141,325
    
    
    $
    6,873,835Supplemental Disclosures of Cash Flow Information:Cash paid for interest
    
    $
    
    
    
    $
    
    
    
    $
    26,696Cash paid for taxes
    
    $
    
    
    
    $
    
    
    
    $
    2,827Supplemental Disclosure of Non-Cash Financing ActivitiesConvertible preferred stock issued in exchange for
cancellation of debt
    
    $
    
    
    
    $
    
    
    
    $
    3,921,903Convertible preferred stock issued in exchange for
cancellation of accrued interest on debt
    
    $
    
    
    
    $
    60,864
    
    
    $
    233,182Interest expense capitalized as long term debt
    
    $
    
    
    
    $
    104,605
    
    
    $
    156,641
  3




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NOVARAY MEDICAL, INC.
(A Development Stage Company)
 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 March 31, 2008 and 2007

(Unaudited)
 1 Summary of Significant Accounting Policies
 Business description
  Uses of estimates in the preparation of financial statements
  Research and development
  Cash and cash equivalents
  Prepaid expenses
  4




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Deferred assets
  Accounting for Equity Instruments That Are Issued to
Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or
Services.
  Accrued liabilities
  Fair values of financial instruments
  Property and equipment
  March 31,
    
    
    December 31,2008
    
    
    2007Computer hardware, software, and equipment
    
    $
    80,439
    
    
    $
    80,439Less: accumulated depreciation
    
    
    (42,006
    )
    
    
    (37,985
    )Property and equipment, net
    
    $
    38,433
    
    
    $
    42,454
  Loss per share
   Period
ended March 31,2008
    
    
    2007Basic and
Diluted:Net loss
available to common shareholders
    
    $
    (2,146,943
    )
    
    $
    (369,049
    )Net loss per
share available to common shareholders
    
    $
    (0.22
    )
    
    $
    (0.05
    )Weighted
average common shares outstanding
    
    $
    9,767,853
    
    
    $
    6,931,713
  5




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Recent accounting pronouncements
 Share-Based Payment
  
 
  6




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2 Other Assets
 Deferred Assets
  Accounting
for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in
Conjunction with Selling, Goods or Services.
 
  March 31,
    
    
    December 31,2008
    
    
    2007Deferred interest for warrants issued
    
    $
    1,469,955
    
    
    $
    1,584,336Deferred consulting for warrants
issued to a related party
    
    
    1,704,614
    
    
    
    1,926,531Total deferred assets
    
    $
    3,174,569
    
    
    $
    3,510,867
  Deposits and restricted assets
  March 31,
    
    
    December 31,2008
    
    
    2007Deposits to a related party
    
    $
    500,000
    
    
    $
    Restricted cash for a lease
    
    
    135,000
    
    
    
    Total deferred assets
    
    $
    635,000
    
    
    $
    
 7




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3 Accounts payable and accrued liabilities
  March 31,
    
    December 31,2008
    
    2007Accounts Payable
    
    $
    772,707
    
    
    $
    566,146Accrued Liabilities
    
    $
    330,019
    
    
    $
    205,503
   4 Notes payable
    8




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5 Income taxes
   6. Stockholders equity (deficit)
  9




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Warrant
    
    Number of
    
    Exercise
    
    Expected
    
    Risk Free
    
    ValuationGroup
    
    Warrants
    
    Price
    
    Term in Years
    
    Rate
    
    ComputationSeries A
    
    
    1,648,960
    
    
    $
    4.25
    
    
    
    5
    
    
    
    3.63
    %
    
    $
    1,038,754Series J-A
    
    
    769,822
    
    
    $
    6.91
    
    
    
    1
    
    
    
    4.25
    %
    
    $
    3,249Series J
    
    
    2,309,468
    
    
    $
    4.33
    
    
    
    1
    
    
    
    4.25
    %
    
    $
    170,926Consultants
    
    
    600,000
    
    
    $
    4.25
    
    
    
    5
    
    
    
    3.63
    %
    
    $
    377,967Triple Ring
    
    
    1,320,000
    
    
    $
    1.33
    
    
    
    2
    
    
    
    3.98
    %
    
    $
    1,956,000
 Series A Convertible Preferred Stock NovaRay Medical Inc.
  March 31, 2008
    
    December 31 ,2007Liquidation
    
    
    
    
    
    
    
    
    
    LiquidationAuthorized
    
    Issued
    
    Preference
    
    Authorized
    
    Issued
    
    PreferenceSeries A (NovaRay
Medical, Inc.)
    
    
    10,000,000
    
    
    
    4,946,888
    
    
    $
    
    
    
    
    10,000,000
    
    
    
    4,946,888
    
    
    $
    
 10




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Common stock
  March 31, 2008
    
    December 31 ,2007Authorized
    
    Issued
    
    Authorized
    
    IssuedCommon Stock
(NovaRay Medical,
Inc.)
    
    
    110,000,000
    
    
    
    9,767,853
    
    
    
    110,000,000
    
    
    
    9,767,853
  Treasury stock
  7 Related party transactions
 Triple Ring Technologies, Inc.
  Date ofAcceptance ofthe
    
    Exercise PriceDeliverables
    
    per ShareOn or prior to March 30, 2009
    
    $
    0.06On or after March 31, 2009 but on or prior to July 30, 2009
    
    $
    0.15On or after July 30, 2009 but on or prior to December 30, 2009
    
    $
    1.33On or after December 30, 2009 but on or prior to February 28, 2010
    
    $
    2.67
  11




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NovaRayMedical
    
    Triple RingName
    
    Affiliation
    
    Ownership InterestMarc Whyte
    
    CFO, COO, Director, Stockholder
    
    
    21.15
    %Edward Solomon
    
    CTO, Director
    
    
    21.15
    %Joseph Heanue
    
    Stockholder
    
    
    21.15
    %Augustus Lowell
    
    Stockholder
    
    
    21.15
    %Brian Wilfey
    
    Stockholder
    
    
    15.40
    %
 Restricted Stock Purchase Agreement
  8 Commitments and contingencies
    12




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Monthly Rate
    
    MonthlyMonths of Term
    
    Per Square Foot
    
    Base RentMonth 1  Month 18
    
    $
    0.85
    
    
    $
    34,950.30Month 19  Month 30
    
    $
    0.88
    
    
    $
    36,183.84Month 31  Month 42
    
    $
    0.90
    
    
    $
    37,006.20Month 43  Month 54
    
    $
    0.93
    
    
    $
    38,239.74Month 55  Month 64
    
    $
    0.96
    
    
    $
    39,473.28
 9 Subsequent Events
  13




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
  Overview
   14




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Critical Accounting Policies and Estimates
  Deferred assets
  Accounting for Equity Instruments That Are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling, Goods or Services.
 
 Fair Values of Financial Instruments
  15




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Property and equipment
  Research and Development
  Stock-based compensation
 Share-Based Payment
 Results of Operations
 Research and Development
  General and Administrative
  16




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Interest Expense
  Liquidity and Capital Resources
     
 Item 3. Quantitative and Qualitative Disclosures About Market Risk.
  17




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Item 4T. Controls and Procedures.
 Evaluation of Disclosure Controls and Procedures.
 
   Changes in Internal Controls.
  
 PART II  Other Information
 
 Item 1. Legal Proceedings.
  
 Item 1A. Risk Factors.
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
  
 Item 3. Defaults Upon Senior Securities.
  
 Item 4. Submission of Matters to a Vote of Security Holders.
  18




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Item 5. Other Information.
  
 Item 6. Exhibits.
  2.1
    
    Agreement and Plan of Merger, dated December 26, 2007, by and among Vision Acquisition I,
Inc., NovaRay, Inc. and Vision Acquisition Subsidiary, Inc.(1)3.1
    
    Complete Copy of the Certificate of Incorporation, as amended.3.2
    
    Bylaws.(2)3.3
    
    Certificate of Designation of the Relative Rights and Preferences of the Series A Convertible
Preferred Stock of the NovaRay Medical, Inc.(3)10.1
    
    Lease Agreement by and between NovaRay, Inc. and BRCP Stevenson Point, LLC dated March 13,
2008.(4)31.1
    
    Certification of Jack E. Price, Chief Executive Officer, pursuant to Rules 13a-14(a) and
15d-14(a) of the Securities Exchange Act of 1934, as amended.31.2
    
    Certification of Marc C. Whyte, Chief Financial Officer, pursuant to Rules 13a-14(a) and
15d-14(a) of the Securities Exchange Act of 1934, as amended.32.1
    
    Certification of Jack E. Price, Chief Executive Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Marc C. Whyte, Chief Financial Officer, pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
 
 (1)
    
    Incorporated by reference to the Exhibit 2.1 to the Registrants Current Report on
Form 8-K filed with the SEC on December 28, 2007.(2)
    
    Incorporated by reference to Exhibit 3.2 to the Registrants Registration Statement
on Form 10-SB (No. 000-52731) filed with the SEC on July 20, 2007.(3)
    
    Incorporated by reference to Exhibit 3.4 to the Registrants Current Report on
Form 8-K filed with the SEC on December 28, 2007.(4)
    
    Incorporated by reference to Exhibit 10.1 to the Registrants Current Report on Form
8-K filed with the SEC on March 19, 2008. 19




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SIGNATURES
  NOVARAY MEDICAL, INC.By:
    /s/ Jack E. PriceJack E. PricePresident and Chief Executive OfficerBy:
    /s/ Marc C. WhyteMarc C. WhyteChief Financial Officer and Chief
Operating Officer 20