Our financial statements for the fiscal years ended December 31, 2016 and 2015 are attached hereto.
SPINE INJURY SOLUTIONS, INC.
CONSOLIDATED
BALANCE SHEETS
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December 31,
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December 31,
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2016
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2015
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ASSETS
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Current assets:
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Cash and Cash equivalents
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$
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256,263
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|
|
$
|
173,647
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|
Accounts receivable, net
|
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1,395,200
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|
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1,301,124
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Prepaid expenses
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9,250
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159,250
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Inventories
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183,898
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75,460
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|
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Total current assets
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1,844,611
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1,709,481
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Accounts receivable, net of allowance for doubtful accounts
of $958,185 and $503,477 at December 31, 2016 and December 31, 2015, respectively
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2,297,283
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3,399,896
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Property and equipment, net
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58,641
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78,937
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Intangible assets and goodwill
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170,200
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170,200
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Total assets
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$
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4,370,735
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$
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5,358,514
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Line of credit
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$
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1,275,000
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$
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-
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Notes payable
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300,000
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|
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500,000
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Accounts payable and accrued liabilities
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82,523
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100,457
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Due to related parties
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-
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29,400
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|
|
|
|
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Total current liabilities
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1,657,523
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629,857
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Line of credit
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-
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1,145,000
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Notes payable and long-term debt
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-
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50,000
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|
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Total liabilities
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1,657,523
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1,824,857
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Commitments and contingencies
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Stockholders’ equity:
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Common stock: $0.001 par value, 50,000,000 shares authorized,
20,135,882 and 19,780,882 shares issued and outstanding at
December 31, 2016 and December 31, 2015, respectively
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20,136
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19,781
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Additional paid-in capital
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19,843,716
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19,908,571
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Accumulated deficit
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(17,150,640
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)
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(16,394,695
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)
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Total stockholders’ equity
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2,713,212
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3,533,657
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Total liabilities and stockholders’ equity
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$
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4,370,735
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$
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5,358,514
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The accompanying notes are an integral part of the consolidated financial statements
SPINE INJURY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF
OPERATIONS
For the Years Ended December 31, 2016 and 2015
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2016
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2015
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Net revenue
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$
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2,117,078
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$
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2,192,181
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Cost of providing services, including amounts billed by a related
party of $544,159 and $612,337 during the years ended
December 31, 2016 and 2015, respectively
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689,101
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849,756
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Gross profit
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1,427,977
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1,342,425
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Research and Development
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45,661
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261,776
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Operating, general and administrative expenses
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2,087,266
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2,085,986
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Loss from operations
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(704,950
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)
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(1,005,337
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)
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Other income and (expense):
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Other income
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7,057
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10,234
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Interest expense
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(58,052
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)
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(62,501
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)
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Total other income and (expense)
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(50,995
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)
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(52,267
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)
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Net loss
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$
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(755,945
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)
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$
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(1,057,604
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)
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Net loss per common share:
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Basic/ diluted
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$
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(0.04
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)
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$
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(0.05
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)
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Weighted average shares used in loss per common share:
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Basic/ diluted
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20,127,246
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19,632,832
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The accompanying notes are an integral part of the consolidated financial statements.
SPINE INJURY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN
STOCKHOLDERS’ EQUITY
For the Years Ended December 31, 2016 and 2015
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Common Stock
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Additional
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Accumulated
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Total
Stockholders'
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Shares
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Amount
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Capital
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Deficit
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Equity
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|
Balances, December 31, 2014
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|
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19,340,882
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|
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$
|
19,341
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|
|
$
|
19,874,599
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$
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(15,337,091
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)
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|
$
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4,556,849
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Issuance of common stock options for compensation of officers
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-
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-
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12,012
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|
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|
-
|
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|
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12,012
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|
Issuance of common stock for debt restructuring with an officer
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300,000
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|
300
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(300
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)
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-
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-
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|
Issuance of common stock for consulting services
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115,000
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|
115
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10,285
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|
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|
-
|
|
|
|
10,400
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|
Issuance of common stock to directors
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25,000
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25
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|
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11,975
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|
|
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12,000
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Net loss
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|
-
|
|
|
|
-
|
|
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-
|
|
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(1,057,604
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)
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(1,057,604
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)
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Balances, December 31, 2015
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19,780,882
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19,781
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19,908,571
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(16,394,695
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)
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3,533,657
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Issuance of common stock options for compensation of employees
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|
-
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-
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6,200
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|
-
|
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6,200
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|
|
|
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Cancellation of common stock issued for prepaid services
|
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|
-
|
|
|
|
-
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|
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(90,000
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)
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|
|
-
|
|
|
|
(90,000
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)
|
Issuance of common stock for debt restructuring with an officer
|
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|
300,000
|
|
|
|
300
|
|
|
|
(300
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
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Issuance of common stock for consulting services
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55,000
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|
|
|
55
|
|
|
|
19,245
|
|
|
|
-
|
|
|
|
19,300
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(755,945
|
)
|
|
|
(755,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2016
|
|
|
20,135,882
|
|
|
$
|
20,136
|
|
|
$
|
19,843,716
|
|
|
$
|
(17,150,640
|
)
|
|
$
|
2,713,212
|
|
The accompanying notes are an integral part of the consolidated financial statements.
SPINE INJURY SOLUTIONS, INC.
CONSOLIDATED STATEMENTS OF
CASH FLOWS
For the Years Ended December 31, 2016 and 2015
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|
2016
|
|
|
2015
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(755,945
|
)
|
|
$
|
(1,057,604
|
)
|
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
|
|
|
|
|
|
|
|
|
Provision for bad debts
|
|
|
683,339
|
|
|
|
467,600
|
|
Issuance of common stocks for services
|
|
|
19,300
|
|
|
|
22,400
|
|
Issuance of stock options
|
|
|
6,200
|
|
|
|
12,012
|
|
Amortization of prepaid stock based compensation
|
|
|
60,000
|
|
|
|
155,833
|
|
Loss from disposal of property and equipment
|
|
|
1,108
|
|
|
|
-
|
|
Depreciation and amortization expense
|
|
|
19,188
|
|
|
|
24,115
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
325,198
|
|
|
|
(15,361
|
)
|
Prepaid expenses
|
|
|
-
|
|
|
|
21,913
|
|
Inventories
|
|
|
(108,438
|
)
|
|
|
(60,067
|
)
|
Due to related party
|
|
|
(29,400
|
)
|
|
|
29,400
|
|
Accounts payable and accrued liabilities
|
|
|
(17,934
|
)
|
|
|
(29,538
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating activities
|
|
|
202,616
|
|
|
|
(429,297
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchase of equipment
|
|
|
-
|
|
|
|
(50,108
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(50,108
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments on long-term debt
|
|
|
(250,000
|
)
|
|
|
(350,000
|
)
|
Net Proceeds from line of credit
|
|
|
130,000
|
|
|
|
645,000
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities
|
|
|
(120,000
|
)
|
|
|
295,000
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
82,616
|
|
|
|
(184,405
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
173,647
|
|
|
|
358,052
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
256,263
|
|
|
$
|
173,647
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
58,052
|
|
|
$
|
61,335
|
|
Taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Cancellation of common stock issued for prepaid services
|
|
$
|
90,000
|
|
|
$
|
-
|
|
The accompanying notes are an integral part of the consolidated financial statements.
NOTE 1. DESCRIPTION OF BUSINESS
Spine Injury Solutions Inc. (the “Company”, “we” or “us”) was incorporated under the laws of Delaware on March 4, 1998. We changed our name to Spine Injury Solutions Inc. on October 1, 2015. We have two wholly-owned subsidiaries, Quad Video Halo, Inc. which holds certain assets associated with our Quad Video Halo (“QVH”) business, and Gleric Holdings, LLC which holds certain intangible assets.
We are a technology, marketing, billing, and collection company facilitating diagnostic services for patients who have sustained spine injuries. In addition, we are developing QVH programs to assist surgeons and other healthcare providers with treatment documentation in specialized areas, such as spine injuries and regenerative medicine. We deliver turnkey solutions to spine surgeons, orthopedic surgeons and other healthcare providers who treat spine injuries. Our goal is to become a leader in providing technology and monetizing services to spine and orthopedic surgeons and other healthcare providers. By monetizing the providers’ accounts receivable, patients are not unnecessarily delayed or prevented from obtaining needed treatment. After a patient is billed for the procedures performed we oversee collection.
We currently are providing technology and/or collection services to three spine injury diagnostic centers in the United States, which are located in Houston, Texas; Odessa, Texas; and Tyler, Texas. We are seeking additional funding for expansion by way of reasonable debt financing to accelerate future development. In connection with this strategy, we plan to offer our technology to additional diagnostic centers in new market areas that are attractive under our business model, assuming adequate funds are available.
We own a patented device and process by which a video recording system is attached to a fluoroscopic x-ray machine, the “four camera technology,” which we believe can attract additional physicians and patients, and provide us with additional revenue streams with our new programs designed to assist in treatment documentation. We have refined the technology, through research and development, resulting in a fully commercialized Quad Video Halo System 3.0. Using this technology, diagnostic and treatment procedures are recorded from four separate video feeds that capture views from both inside and outside the body, and a video is made which is given to the patient’s representative to verify the treatment received. Additionally, we anticipate independent medical representatives will sell Quad Video Halo units to additional hospitals and clinics.
NOTE 2. GOING CONCERN CONSIDERATIONS
Since our inception in 1998, until commencement of our spine injury diagnostic operations in August, 2009, our expenses substantially exceeded our revenue, resulting in continuing losses and an accumulated deficit from operations of $15,004,698 as of December 31, 2009. Since that time, our accumulated deficit has increased $2,145,942 to $17,150,640 as of December 31, 2016. We plan to increase our operating expenses as we increase our service development, marketing efforts and brand building activities. We also plan to increase our general and administrative functions to support our growing operations. We will need to generate significant revenues to achieve our business plan. Our continued existence is dependent upon our ability to successfully execute our business plan, as well as our ability to increase revenue from services and obtain additional capital from borrowing and selling securities, as needed, to fund our operations. There is no assurance that additional capital can be obtained or that it can be obtained on terms that are favorable to us and our existing stockholders. Any expectation of future profitability is dependent upon our ability to expand and develop our healthcare services business, of which there can be no assurances.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of Spine Injury Solutions and its wholly owned subsidiaries, Quad Video Halo, Inc. and Gleric Holdings, LLC. All material intercompany transactions have been eliminated upon consolidation.
Accounting Method
Our consolidated financial statements are prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”).
Use of Estimates
The preparation of the consolidated financial statements in conformity with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities known to exist as of the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of our consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of our financial position and results of operations.
Revenue Recognition
Revenues are recognized in accordance with Securities and Exchange Commission’s (“SEC”) staff accounting bulletin, Topic 13, Revenue Recognition, which specifies that only when persuasive evidence for an arrangement exists; the fee is fixed or determinable; and collection is reasonably assured can revenue be recognized.
Persuasive evidence of an arrangement is obtained prior to services being rendered when the patient completes and signs the medical and financial paperwork. Delivery of services is considered to have occurred when medical diagnostic services are provided to the patient. The price and terms for the services are considered fixed and determinable at the time that the medical services are provided and are based upon the type and extent of the services rendered. Our credit policy has been established based upon extensive experience by management in the industry and has been determined to ensure that collectability is reasonably assured. Payment for services are primarily made to us by a third party and the credit policy includes terms of net 240 days for collections; however, collections occur upon settlement or judgment of cases (see Note 4).
Fair Value of Financial Instruments
Cash, accounts receivable, accounts payable, accrued liabilities, and notes payable as reflected in the consolidated financial statements, approximates fair value. Fair value estimates are made at a specific point in time, based on relevant market information and information about the financial instrument. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates.
Cash and Cash Equivalents
Cash and cash equivalents consist of liquid investments with original maturities of three months or less. Cash equivalents are stated at cost, which approximates fair value. We maintain cash and cash equivalents in banks which at times may exceed federally insured limits. We have not experienced any losses on these deposits.
Inventories
Inventories are stated at the lower of cost or market. Cost is determined by the first-in, first-out method, whereas market is based on the net realizable value. All inventories at December 31, 2016 and 2015 are classified as finished-goods and consist of our Quad Video Halo.
Property and Equipment
Property and equipment are carried at cost. When retired or otherwise disposed of, the related carrying cost and accumulated depreciation are removed from the respective accounts, and the net difference, less any amount realized from the disposition, is recorded in operations. Maintenance and repairs are charged to operating expenses as incurred. Costs of significant improvements and renewals are capitalized.
Property and equipment consists of computers and equipment and are depreciated over their estimated useful lives of three to five years, using the straight-line method.
Intangible Assets and Goodwill
Intangible assets acquired are initially recognized at cost. Intangible assets acquired in a business combination are recognized at their estimated fair value at the date of acquisition. Intangibles with a finite life are amortized, ratably, based on the contractual terms of the associated agreements.
Goodwill recognized in a business combination is subjective and represents the value of the excess amount given to the acquired company above the estimated fair market value of the identifiable net assets on the acquisition date. Each year, during the fourth quarter, the goodwill amount is reviewed to determine if any impairment has occurred. Impairment occurs when the original amount of goodwill exceeds the value of the expected future net cash flows from the business acquired. At December 31, 2016 and 2015, no impairment to the asset was determined to have occurred.
Research and Development
Research and development projects and costs are expensed as incurred. These costs consist of direct costs associated with the design of new products. Research and development expenses incurred during the years ended December 31, 2016 and 2015, were $45,661 and $261,776, respectively.
Long-Lived Assets
We periodically review and evaluate long-lived assets such as intangible assets, when events and circumstances indicate that the carrying amount of these assets may not be recoverable. In performing our review for recoverability, we estimate the future cash flows expected to result from the use of such assets and its eventual disposition. If the sum of the expected undiscounted future operating cash flows is less than the carrying amount of the related assets, an impairment loss is recognized in the consolidated statements of operations. Measurement of the impairment loss is based on the excess of the carrying amount of such assets over the fair value calculated using discounted expected future cash flows. At December 31, 2016 and 2015, no impairment of the long-lived assets was determined to have occurred.
Concentrations of Credit Risk
Assets that expose us to credit risk consist primarily of cash and accounts receivable. Our accounts receivable are from a diversified customer base and, therefore, we believe the concentration of credit risk is minimal. Our sales are within a certain region of the United States of America, specifically the state of Texas. Changes in legal or economic factors within Texas may affect the Company’s operating results. We evaluate the creditworthiness of customers before any services are provided. We record a discount based on the nature of our business, collection trends, and an assessment of our ability to fully realize amounts billed for services. Additionally, based on management’s estimates, we have established an allowance for doubtful accounts in the amount of $958,185 and $503,477, at December 31, 2016 and 2015, respectively.
Stock Based Compensation
We account for the measurement and recognition of compensation expense for all share-based payment awards made to employees and directors, including employee stock options, based on estimated fair values. Under authoritative guidance issued by the Financial Accounting Standards Board (“FASB”), companies are required to estimate the fair value or calculated value of share-based payment awards on the date of grant using an option-pricing model. The value of awards that are ultimately expected to vest is recognized as expense over the requisite service periods in our consolidated statements of operations. We use the Black-Scholes Option Pricing Model to determine the fair-value of stock-based awards. During the years ended December 31, 2016 and 2015, we recognized compensation expense related to our stock options of $6,200 and $12,012, respectively. We also recognized compensation expense for issuances of our common stock in exchange for services of $19,300 and $22,400 during the years ended December 31, 2016 and 2015, respectively. During the years ended December 31, 2016 and 2015, we amortized $60,000 and $155,833, respectively, in compensation expense for issuance of common stock out of prepaid expenses.
Income Taxes
We account for income taxes in accordance with the liability method. Under the liability method, deferred assets and liabilities are recognized based upon anticipated future tax consequences attributable to differences between financial statement carrying amounts of assets and liabilities and their respective tax basis. We establish a valuation allowance to the extent that it is more likely than not that deferred tax assets will not be utilized against future taxable income.
Uncertain Tax Positions
Accounting Standards Codification “ASC” Topic 740-10-25 defines the minimum threshold a tax position is required to meet before being recognized in the financial statements as “more likely than not” (i.e., a likelihood of occurrence greater than fifty percent). Under ASC Topic 740-10-25, the recognition threshold is met when an entity concludes that a tax position, based solely on its technical merits, is more likely than not to be sustained upon examination by the relevant taxing authority. Those tax positions failing to qualify for initial recognition are recognized in the first interim period in which they meet the more likely than not standard, or are resolved through negotiation or litigation with the taxing authority, or upon expiration of the statute of limitations. De-recognition of a tax position that was previously recognized occurs when an entity subsequently determines that a tax position no longer meets the more likely than not threshold of being sustained.
We are subject to ongoing tax exposures, examinations and assessments in various jurisdictions. Accordingly, we may incur additional tax expense based upon the outcomes of such matters. In addition, when applicable, we will adjust tax expense to reflect our ongoing assessments of such matters which require judgment and can materially increase or decrease our effective rate as well as impact operating results.
Under ASC Topic 740-10-25, only the portion of the liability that is expected to be paid within one year is classified as a current liability. As a result, liabilities expected to be resolved without the payment of cash (e.g. resolution due to the expiration of the statute of limitations) or are not expected to be paid within one year are not classified as current. We have recently adopted a policy of recording estimated interest and penalties as income tax expense and tax credits as a reduction in income tax expense. As of and for the years ended December 31, 2016 and 2015, we recognized no estimated interest or penalties as income tax expense.
Legal Costs and Contingencies
In the normal course of business, we incur costs to hire and retain external legal counsel to advise us on regulatory, litigation and other matters. We expense these costs as the related services are received.
If a loss is considered probable and the amount can be reasonably estimated, we recognize an expense for the estimated loss. If we have the potential to recover a portion of the estimated loss from a third party, we make a separate assessment of recoverability and reduce the estimated loss if recovery is also deemed probable.
Net Loss per Share
Basic and diluted net loss per common share is presented in accordance with ASC Topic 260, “Earnings per Share,” for all periods presented. During years ended December 31, 2016 and 2015, common stock equivalents from outstanding stock options, warrants and convertible debt have been excluded from the calculation of the diluted loss per share in the consolidated statements of operations, because all such securities were anti-dilutive. The net loss per share is calculated by dividing the net loss by the weighted average number of shares outstanding during the periods.
Recent Accounting Pronouncements
In January 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-01,
Income Statement – Extraordinary and Unusual Items (Subtopic 225-20): Simplified Income Statement Presentation by Eliminating the Concept of Extraordinary Items.
This ASU eliminates from U.S. GAAP the concept of extraordinary items.
Subtopic 225-20
,
Income statement – Extraordinary and Unusual Items,
requires that an entity separately classify, present and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. ASU No. 2015-01 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. The amendments of ASU No. 2015-01 can be applied prospectively or retrospectively to all prior periods presented in the financial statements. Early adoption is permitted. The adoption of ASU No. 2015-01 did not have a significant impact on the Company’s condensed consolidated financial position, results of operations or disclosures.
In February 2015, the FASB issued ASU No. 2015-02,
Consolidation (Topic 810): Amendments to the Consolidation Analysis,
which is intended to improve targeted areas of consolidation guidance for legal entities such as limited partnerships, limited liability corporations, and securitization structures. ASU No. 2015-02 focuses on the consolidation evaluation for reporting organizations that are required to evaluate whether they should consolidate certain legal entities. In addition to reducing the number of consolidation models from four to two, the new standard simplifies the FASB ASC and improves current GAAP by: (1) Placing more emphasis on risk of loss when determining a controlling financial interest. A reporting organization may no longer have to consolidate a legal entity in certain circumstances based solely on its fee arrangement, when certain criteria are met; (2) Reducing the frequency of the application of related-party guidance when determining a controlling financial interest in a variable interest entity; and (3) Changing consolidation conclusions for public and private companies in several industries that typically make use of limited partnerships or variable interest entities. ASU No. 2015-02 is effective for periods beginning after December 15, 2015. The adoption of ASU No. 2015-02 did not have a significant impact on the Company’s condensed consolidated financial position, results of operations and disclosures.
In April 2015, the FASB issued ASU No. 2015-03,
Interest – Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs.
The amendments in ASU 2015-03 are intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. ASU No. 2015-03 is effective for annual periods beginning after December 15, 2015, and interim periods within those fiscal years. The adoption of ASU 2015-03 did not have a significant impact on the Company’s condensed consolidated financial position, results of operations or disclosures.
In August 2014, the FASB issued ASU No. 2014-15, Presentation of Financial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern. ASU No. 2014-15 is intended to define management’s responsibility to evaluate whether there is substantial doubt an organization’s ability to continue as a going concern and to provide related footnote disclosures. Currently, GAAP lacks guidance about management’s responsibility to evaluate whether there is substantial doubt about the organization’s ability to continue as a going concern or to provide related footnotes. ASU No. 2014-15 provides guidance to an organization’s management, with principles and definitions that are intended to reduce diversity in the timing and content of disclosures that are commonly provided by organizations today in the financial statement footnotes. ASU No. 2015-15 is effective for annual periods ending after December 15, 2016 with early application permitted.
The adoption of ASU 2014-15 did not have a significant impact on the Company’s condensed consolidated financial position, results of operations or disclosures.
In February 2016, the FASB issued ASU No. 2016-02,
Leases
, which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability , which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under ASU No. 2016-02, lessor accounting is largely unchanged. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018 with early application permitted. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounted for leases expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. Management is currently evaluating the future impact of ASU No. 2016-02 on the Company’s consolidated financial position, results of operations and disclosures.
In May 2016, the FASB issued ASU No. 2016-12,
Revenue from Contracts with Customers
(Topic 606): Narrow-Scope Improvements and Practical Expedients. ASU No. 2016-12 provides narrow-scope improvements to the guidance on collectability, noncash consideration, and completed contracts at transition. The amendment also provides a practical expedient for contract modifications at transition and an accounting policy election related to the presentation of sales taxes and other similar taxes collected from customers and are expected to reduce the judgment necessary to comply with Topic 606. The effective date and transition requirements for ASU No. 2016-12 are the same as the effective date and transition requirements for ASU No. 2014-09. Management is currently evaluating the future impact of ASU No. 2016-12 on the Company’s consolidated financial position, results of operations and disclosures.
In August 2016, the FASB issued ASU No. 2016-15,
Statement of Cash Flows
(Topic 230): Classification of Certain Cash Receipts and Cash Payments. ASU No. 2016-15 addresses eight specific cash flow issues and is intended to reduce diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. ASU No. 2016-15 is effective for reporting periods beginning after December 15, 2017. Early adoption is permitted. Management is currently evaluating the future impact of ASU No. 2016-15 on the Company’s consolidated financial position, results of operations and disclosures.
In September 2016, the FASB issued ASU No. 2016-09,
Compensation—Stock Compensation
(Topic 718): Improvements to Employee Share-Based Payment Accounting. For public business entities, the amendments are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. For all other entities, the amendments are effective for annual periods beginning after December 15, 2017, and interim periods within annual periods beginning after December 15, 2018. Early adoption is permitted for any entity in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period.
Management is currently evaluating the future impact of ASU No. 2016-09 on the Company’s consolidated financial position, results of operations and disclosures.
In December 2016, the FASB issued ASU No. 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers
. ASU No. 2016-20 allows entities not to make quantitative disclosures about remaining performance obligations in certain cases and require entities that use any of the new or previously existing optional exemptions to expand their qualitative disclosures. The amendment also clarifies narrow aspects of ASC 606, including contract modifications, contract costs, and the balance sheet classification of items as contract assets versus receivables, or corrects unintended application of the guidance. The effective date and transition requirements for ASU No. 2016-20 are the same as the effective date and transition requirements for ASU No. 2014-09. Management is currently evaluating the future impact of ASU No. 2016-20 on the Company’s consolidated financial position, results of operations and disclosures.
In January 2017, the FASB issued ASU No. 2017-01,
Business Combinations
(Topic 805): Clarifying the Definition of a Business. ASU No. 2017-01 clarifies the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of a business or as acquisitions (or disposals) of assets. ASU No. 2017-01 is effective for annual periods beginning after December 15, 2018, with early adoption permitted under certain circumstances. The amendments of ASU No. 2017-01 should be applied prospectively as of the beginning of the period of adoption. Management is currently evaluating the future impact of ASU No. 2017-01 on the Company’s consolidated financial position, results of operations and disclosures.
NOTE 4. ACCOUNTS RECEIVABLE
We recognize revenue and accounts receivable in accordance with SEC staff accounting bulletin, Topic 13, “Revenue Recognition”, which requires persuasive evidence that a sales arrangement exists; the fee is fixed or determinable; and collection is reasonably assured before revenue is recognized. The patients are billed by the healthcare provider based on Current Procedural Terminology (“CPT”) codes for the medical procedure performed. CPT codes are numbers assigned to every task and service a medical practitioner may provide to a patient including medical, surgical and diagnostic services. CPT codes are developed, maintained and copyrighted by the American Medical Association. Patients are billed at the normal billing amount, based on national averages, for a particular CPT code procedure.
Revenue and corresponding accounts receivable are recognized by reference to “net revenue” and “accounts receivable, net” which is defined as gross amounts billed using CPT codes less account discounts that are expected to result when individual cases are ultimately settled. While we do collect 100% of the accounts on some patients, our historical collection rate is used to calculate the carrying balance of the accounts receivable and the estimated revenue to be recorded. A discount rate of 48%, based on payment history, was used to reduce revenue to 52% of CPT code billings (“gross revenue”) during the years ended December 31, 2016 and 2015.
The patients who receive medical services at the diagnostic centers are typically patients involved in auto accidents or work injuries. The patient completes and signs medical and financial paperwork, which includes an acknowledgement of the patient’s responsibility of payment for the services provided. Additionally, the paperwork should include an assignment of benefits. The timing of collection of receivables varies depending on patient sources of payment. Historical experience, through 2015, demonstrated that the collection period for individual cases may extend for two years or more. Accordingly, we have classified receivables as current or long term based on our experience, which indicates as of December 31, 2016 and 2015 that 30% and 25%, respectively, of cases will be collected within one year of a medical procedure.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2016 and 2015:
|
|
2016
|
|
|
2015
|
|
|
|
|
|
|
|
|
Computers and equipment
|
|
$
|
94,555
|
|
|
$
|
96,398
|
|
Less: accumulated depreciation
|
|
|
(35,914
|
)
|
|
|
(17,461
|
)
|
|
|
$
|
58,641
|
|
|
$
|
78,937
|
|
Depreciation expense totaling $19,188 and $15,115, respectively, was charged to operating, general and administrative expenses during the years ended December 31, 2016 and 2015.
During 2016 we incurred a loss from disposal on property and equipment totaling $1,108.
NOTE 6. INTANGIBLE ASSETS AND GOODWILL
Intangible assets consist of non-compete agreements with a cost of $54,000 that expired during the year ended December 31, 2015. During the years ended December 31, 2016 and 2015, we recorded amortization expense of $0 and $9,000, respectively, related to the non-compete agreements resulting in a remaining balance of $0. At December 31, 2016 and 2015, goodwill totaled $170,200.
NOTE 7. NOTES PAYABLE AND LONG TERM DEBT
Debentures and third party note payable
In June 2013, we renewed a $50,000, 10% debenture originally due June 30, 2013 to a maturity date of June 30, 2015 in exchange for warrants to purchase 50,000 shares at $0.45 per share. In June 2015, we repaid this debenture based on the stated contractual terms.
In June 2013, we extended the maturity date of a $50,000 third party note originally due March 9, 2015 to a maturity date of March 9, 2017 in exchange for warrants to purchase 50,000 shares at $0.45 per share. In March 2017 we repaid this third party note based on the stated contractual terms.
The weighted-average estimated fair value of the 100,000 warrants issued during June 2013 was $0.21 per share using the Black-Sholes pricing model with the following assumptions:
Expected volatility
|
|
|
89.5
|
%
|
Risk-free interest rate
|
|
|
0.31
|
%
|
Expected life
|
2 years
|
|
Dividend yield
|
|
|
0
|
%
|
Convertible and secured notes payable
On June 27, 2012, we issued a $500,000 convertible promissory note bearing interest at 12% per year which was to originally mature on March 27, 2014. This note was extended for one year on February 6, 2015 with the same provisions for quarterly interest payments with the principal due upon maturity as extended, March 27, 2015. As consideration for the extension, we issued an additional 69,445 warrants to purchase our common stock for $0.43 that expire on February 6, 2015. The holder of the note also has the right to convert into common stock, at $1.50 per share, up to 50% of the principal amount after twelve months and up to 100% of the principal amount for the twelve months following the extension date. In December 2014, we paid $200,000 principal on this note with the remaining $300,000 paid in March 2015. The warrants expired unexercised during 2015.
On August 29, 2012, we issued Peter Dalrymple, a director of the Company, a $1,000,000 three-year secured promissory note bearing interest at 12% per year, with thirty-five monthly payments of interest commencing on September 29, 2013, and continuing thereafter on the 29th day of each successive month throughout the term of the promissory note. Under the terms of the secured promissory note, the holder received a detachable warrant to purchase 333,333 shares of our common stock at the price of $1.60 per share that was to expire on August 29, 2015, however was extended as described below. This promissory note is secured by $3,000,000 in gross accounts receivable. On the maturity date, one balloon payment of the entire outstanding principal amount plus any accrued and unpaid interest is due.
On August 20, 2014, we entered into a Financing Agreement with Mr. Dalrymple whereby, he agreed to assist us in obtaining financing in the form of a $2,000,000 revolving line of credit (see Line of Credit below) from a commercial lender and provide a personal guaranty of the line of credit. Under the terms of the Financing Agreement, upon finalization of the line of credit with Wells Fargo Bank on September 8, 2014, we (i) extended the term of the $1,000,000 promissory note, discussed above, by one year to mature on August 29, 2016, (ii) reduced the interest rate on the promissory note to 6%, (iii) extended the expiration date on the warrants issued in connection with the promissory note by one year to an expiration date of August 29, 2016 and (iv) used $500,000 of advances under the line of credit as payment of principal and interest on the promissory note.
In August 2016, the note was amended to extend the maturity date to August 29, 2017. As of December 31, 2016 and 2015, the note had a principal balance of $250,000, and $500,000, respectively.
Line of Credit
On September 3, 2014, we entered into a $2,000,000 revolving line of credit agreement with Wells Fargo Bank, N.A. Outstanding principal on the line of credit bears interest at the 30 day London Interbank Offered Rate (“LIBOR”) plus 2%, resulting in an effective rate of 2.77% at December 31, 2016. The line of credit matures on August 31, 2017 and is personally guaranteed by Mr. Dalrymple. As of December 31, 2016 and 2015, outstanding borrowings under the line of credit totaled $1,275,000 and $1,145,000, respectively.
Under the terms of the financing agreement previously discussed, we also granted 800,000 unvested and restricted shares of common stock to Mr. Dalrymple with 100,000 shares vesting upon finalization of the line of credit agreement on September 8, 2014, and the remaining shares vesting, in 100,000 share increments, quarterly so long as the revolving credit remains in effect or its maturity date of August 31, 2017. During the years ended December 31, 2016 and 2015, we recorded $60,000 and $90,000, respectively, as compensation expense related to this stock issuance.
NOTE 8. STOCKHOLDERS’ EQUITY
Common Stock
During the years ended December 31, 2016 and 2015, we issued common stock to compensate officers, employees, directors and outside professionals. The stock issuances were valued based on the quoted market price of our common stock on the respective measurement dates. Following is an analysis of common stock issuances during the years ended December 31, 2016 and 2015:
On August 20, 2014, we entered into a Financing Agreement with Peter Dalrymple, our director, which provides for Mr. Dalrymple to assist us in obtaining financing in the form of a $2,000,000 revolving line of credit from a commercial lender, including providing a personal guaranty on the line of credit.
Under the terms of the financing agreement discussed in Note 7, we granted 800,000 unvested and restricted shares of common stock to Mr. Dalrymple. The stock vested as follows: (i) upon finalization of the line of credit with Wells Fargo on September 8, 2014, 100,000 shares vested, and (ii) thereafter, so long as the revolving line of credit remains in effect, 100,000 shares will vest at the end of each subsequent three-month period. Additionally, as consideration for agreeing to extend the promissory note and reduce the interest rate, we issued to Mr. Dalrymple 200,000 unvested and restricted shares of common stock, which stock also vested upon finalization of the line of credit with Wells Fargo on September 8, 2014. All shares are valued at $0.30 per share totaling $300,000.
All together, we granted Mr. Dalrymple 1,000,000 shares of stock. During the twelve months ended December 31, 2015, we issued an aggregate 300,000 shares of common stock, valued at $0.30 per share, in connection with the financing agreement with Mr. Dalrymple for his assistance in obtaining a line of credit. The 300,000 shares issued during the twelve months ended December 31, 2016, includes 100,000 shares that vested during the fourth quarter of 2015. Accordingly, the associated expense of $30,000 was expensed during 2015. During the years ended December 31, 2016 and 2015, we expensed $60,000 and $120,000 related to the financing agreement pursuant to the agreement’s vesting schedule, which is included in operating, general and administrative expenses in the accompanying condensed consolidated statements of operations. As of December 31, 2016, there was no unrecognized expense associated with the financing agreement.
In November 2015, we issued 25,000 restricted shares of common stock to a director, valued at $0.48 per share, totaling $12,000, which was recognized as compensation expense during 2016.
In September 2014, we entered into an agreement with a consultant to assist us with the development of our Quad Video Halo. We granted him 400,000 unvested shares valued at $0.30 per share, totaling $120,000, with the shares to be vested and issued quarterly with 25,000 shares the first four quarters, 50,000 shares the following four quarters, and 25,000 shares the final four quarters ended September 2017. During the years ended December 31, 2016 and 2015, we recognized compensation expense of $22,500 and $7,500 related to these share grants.
In December 2015, we issued an aggregate of 200,000 restricted shares of common stock, valued at $0.27 per share, totaling $53,000, which was recognized as compensation expense during 2015, in connection with an engagement of a business consultant.
During the twelve months ended December 31, 2016, we issued 350,000 shares of common stock, respectively, valued at $0.28 and $0.35 per share, respectively, in connection with employment agreements and consulting agreements. During the twelve months ended December 31, 2016, we expensed $13,100, respectively, in connection with these agreements which are included in operating, general and administrative expenses in the accompanying condensed consolidated statements of operations. As of December 31, 2016, there was no unrecognized expense associated with these agreements.
During the year ended December 31, 2016 the Company canceled certain consulting agreements based on performance resulting in a cancellation of prepaid share based compensation of $90,000.
Warrants
During 2012, we issued 333,333 warrants in conjunction with the secured note payable. The warrants have an exercise price of $1.60 per share and expire in August 2017.
During 2013, we issued 50,000 warrants in conjunction with a third party note payable. The warrants have an exercise price of $0.21 per share and expire in March 2017.
During 2015, we issued 50,000 warrants as a consideration for consulting performed for the Company. The warrants have an exercise price of $0.50 per share and expired in November 2016.
The weighted-average estimated fair value of the 50,000 warrants issued during 2015 was valued using the Black-Sholes pricing model with the following assumptions:
Expected volatility
|
|
|
137.8
|
%
|
Risk-free interest rate
|
|
|
0.50
|
%
|
Expected life
|
1 year
|
|
Dividend yield
|
|
|
0
|
%
|
A summary of the warrant activity for the years ended December 31, 2016 and 2015 follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
Weighted-
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Underlying
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value
|
|
Description
|
|
Warrants
|
|
|
Price
|
|
|
Term (in years)
|
|
|
(In-the-Money)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2014
|
|
|
752,778
|
|
|
$
|
1.85
|
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants expired (Series D)
|
|
|
(300,000
|
)
|
|
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants issued
|
|
|
50,000
|
|
|
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants expired (Convertible note warrants)
|
|
|
(69,445
|
)
|
|
|
0.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2015
|
|
|
433,333
|
|
|
|
1.80
|
|
|
|
0.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants expired
|
|
|
(50,000
|
)
|
|
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
383,333
|
|
|
$
|
1.60
|
|
|
|
0.6
|
|
|
|
|
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Stock Options
We recognize compensation expense related to stock options in accordance with the FASB standard regarding share-based payments, and as such, have measured the share-based compensation expense for stock options granted during the years ended December 31, 2016 and 2015 based upon the estimated fair value of the award on the date of grant and recognizes the compensation expense over the award’s requisite service period. The weighted average fair values were calculated using the Black Scholes option pricing model.
Details of stock option activity for the years ended December 31, 2016 and 2015 follows:
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Weighted-
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Average
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Aggregate
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Shares
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Weighted
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Remaining
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Intrinsic
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Underlying
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Average
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Contractual
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Value
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Description
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Options
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Exercise Price
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Term (Years)
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(In-the-Money)
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Outstanding at December 31, 2014
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1,300,000
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$
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0.71
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1.1
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-
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Options expired
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(150,000
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)
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Outstanding at December 31, 2015
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1,150,000
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0.65
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1.1
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-
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Options granted
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500,000
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0.40
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2.5
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Options expired
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(600,000
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)
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Outstanding at December 31, 2016
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1,050,000
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$
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.47
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1.8
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-
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The following summarizes outstanding stock options and their respective exercise prices at December 31, 2016:
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Shares
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Remaining
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Underlying
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Exercise
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Dates of
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Contractual
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Description
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Options
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Price
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Expiration
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Term (in years)
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Employee Options
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500,000
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$
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0.40
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Aug 2019
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2.5
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Officers Options
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550,000
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$
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0.54
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Dec 2017
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.9
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1,050,000
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The weighted-average estimated fair value of the 500,000 options issued during 2016 was valued using the Black-Sholes pricing model with the following assumptions:
Expected volatility
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194.60
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%
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Risk-free interest rate
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0.88
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%
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Expected life
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3 years
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Dividend yield
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0
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%
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For the year ended December 31, 2016, 500,000 employee options were issued and 600,000 officers’ options expired leaving 1,050,000 options that expire in December 2017 and August 2019. For the year ended December 31, 2015, 150,000 director options expired. We recorded $6,200 and $12,012 in compensation expense in operating, general and administrative expenses in the accompanying consolidated statements of operations for the years ended December 31, 2016 and 2015, respectively. As of December 31, 2016, all unrecognized compensation expense related to non-vested stock option awards has been recognized.
NOTE 9. RELATED PARTY TRANSACTIONS
We have an agreement with NSO, which is 100% owned by our Chief Executive Officer, William Donovan, M.D., to provide medical services as our independent contractor. As of December 31, 2016 and 2015, we had balances payable to NSO of $0 and $29,400, respectively. This outstanding payable is non-interest bearing, due on demand and does not follow any specific repayment schedule. We do not directly pay Dr. Donovan (in his individual capacity as a physician) any fees in connection with NSO. However, Dr. Donovan is the sole owner of NSO, and we pay NSO under the terms of our agreement.
As further described in Note 7, during 2012 we borrowed $1,000,000 from Peter Dalrymple, a director of the Company, under a secured promissory note. The outstanding balance of the note was $250,000 and $500,000 at December 31, 2016 and 2015, respectively.
NOTE 10. INCOME TAXES
We have not made provision for income taxes for the years ended December 31, 2016 or 2015, since we have net operating loss carryforwards to offset current taxable income.
Deferred tax assets consist of the following at December 31:
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2016
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2015
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Benefit from net operating loss carryforwards
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$
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2,922,300
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$
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2,819,965
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Allowance for doubtful accounts
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325,782
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168,598
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Less: valuation allowance
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(3,248,082
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(2,988,563
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)
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$
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-
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$
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-
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Due to uncertainties surrounding our ability to generate future taxable income to realize these assets, a full valuation has been established to offset the net deferred income tax asset. Based on management’s assessment, utilizing an effective combined tax rate for federal and state taxes of approximately 34%, we have determined that it is not currently more likely than not that we will realize our deferred income tax assets of approximately $3,248,082 and $2,988,563 attributable predominantly to the future utilization of the approximate $8,595,000 and $8,294,000 in eligible net operating loss carryforwards, and the allowance for
doubtful accounts, as of December 31, 2016 and December 31, 2015, respectively. We will continue to review this valuation allowance and make adjustments as appropriate. The net operating loss carryforwards will begin to expire in varying amounts from year 2018 to 2035.
Current income tax laws limit the amount of loss available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, amounts available to offset future taxable income may be limited under Section 382 of the Internal Revenue Code.
Following is a reconciliation of the (provision) benefit for federal income taxes as reported in the accompanying consolidated statements of operations, to the expected amount at the 34% federal statutory rate:
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2016
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2015
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Income tax benefit at the 34% statutory rate
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$
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257,021
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$
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359,585
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Effect of state income taxes
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22,678
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31,728
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Non-deductible wage expense
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(8,164
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Expiration and adjustment of net operating loss carryforwards available
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(9,855
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(14,523
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Non-deductible meals and entertainment
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(10,325
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(12,489
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Change in valuation allowance
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(259,519
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(356,137
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Income tax (provision) benefit
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$
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-
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$
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-
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NOTE 11. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office space under an operating lease expiring in January 2017 with minimum lease payments at December 31, 2016 totaling $6,000. The Company has not renewed its lease and is currently on a month to month basis.