Our financial statements for the fiscal years ended December 31, 2017 and 2016 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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2017
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2016
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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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77,843
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$
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256,263
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Accounts receivable, net
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1,078,184
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1,395,200
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Prepaid expenses
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9,250
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9,250
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Inventories
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200,825
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183,898
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Total current assets
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1,366,102
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1,844,611
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Accounts receivable, net of allowance for doubtful accounts
of $106,443 and $958,185 at December 31, 2017 and 2016, respectively
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2,405,837
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2,297,283
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Property and equipment, net
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43,164
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58,641
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Intangible assets and goodwill
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170,200
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170,200
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Total assets
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$
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3,985,303
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$
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4,370,735
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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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1,325,000
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$
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1,275,000
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Notes payable
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225,000
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300,000
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Accounts payable and accrued liabilities
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79,205
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82,523
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Due to related parties
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27,910
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-
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Total current liabilities
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1,657,115
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1,657,523
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Commitments and contingencies
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Stockholders’ equity:
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Common stock: $0.001 par value, 50,000,000 shares authorized,
20,215,882 and 20,135,882 shares issued and outstanding at
December 31, 2017 and 2016, respectively
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20,216
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20,136
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Additional paid-in capital
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19,864,536
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19,843,716
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Accumulated deficit
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(17,556,564
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)
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(17,150,640
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)
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Total stockholders’ equity
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2,328,188
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2,713,212
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Total liabilities and stockholders’ equity
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$
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3,985,303
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$
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4,370,735
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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, 2017 and 2016
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2017
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2016
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Net revenue
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$
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1,855,615
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$
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2,117,078
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Cost of providing services, including amounts billed by a related
party of $534,886 and $544,159 during the years ended
December 31, 2017 and 2016, respectively
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571,769
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689,101
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Gross profit
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1,283,846
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1,427,977
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Research and Development
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15,688
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45,661
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Operating, general and administrative expenses
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1,624,717
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2,087,266
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Loss from operations
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(356,559
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)
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(704,950
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)
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Other income and (expense):
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Other income
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6,357
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7,057
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Interest expense
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(55,722
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)
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(58,052
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)
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Total other income and (expense)
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(49,365
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)
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(50,995
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)
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Net loss
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$
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(405,924
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)
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$
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(755,945
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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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(0.02
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)
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$
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(0.04
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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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20,158,594
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20,127,246
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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, 2017 and 2016
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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, 2015
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19,780,882
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$
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19,781
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$
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19,908,571
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$
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(16,394,695
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)
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$
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3,533,657
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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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6,200
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-
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6,200
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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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55,000
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55
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19,245
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-
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19,300
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Cancellation of common stock issued for prepaid services
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(90,000
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)
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(90,000
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Net loss
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-
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-
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-
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(755,945
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)
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(755,945
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)
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Balances, December 31, 2016
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20,135,882
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20,136
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19,843,716
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(17,150,640
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)
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2,713,212
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Issuance of common stock for consulting services
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20,000
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20
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5,080
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-
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5,100
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Issuance of common stock for compensation of officers
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60,000
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60
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15,740
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-
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15,800
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Net loss
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-
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-
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-
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(405,924
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)
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(405,924
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)
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Balances, December 31, 2017
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20,215,882
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$
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20,216
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$
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19,864,536
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$
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(17,556,564
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)
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$
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2,328,188
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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, 2017 and 2016
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2017
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2016
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Cash flows from operating activities:
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Net loss
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$
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(405,924
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)
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$
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(755,945
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)
|
Adjustments to reconcile net loss to net cash
(used in) provided by operating activities:
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Provision for bad debts
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270,000
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683,339
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Issuance of common stocks for services
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5,100
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19,300
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Issuance of stock based compensation
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15,800
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6,200
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Amortization of prepaid stock based compensation
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-
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60,000
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Loss from disposal of property and equipment
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-
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1,108
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Depreciation and amortization expense
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19,091
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19,188
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Changes in operating assets and liabilities:
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Accounts receivable, net
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|
(61,538
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)
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|
325,198
|
|
Inventories
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|
(16,927
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)
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|
(108,438
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)
|
Accounts payable and accrued liabilities
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|
(3,318
|
)
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(17,934
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)
|
Due to related party
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27,910
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(29,400
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)
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|
|
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|
|
|
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Net cash (used in) provided by operating activities
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(149,806
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)
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202,616
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|
|
|
|
|
|
|
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Cash flows from investing activities:
|
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|
|
|
|
|
|
|
Purchase of equipment
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(3,614
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)
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|
|
-
|
|
|
|
|
|
|
|
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Net cash used in investing activities
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(3,614
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)
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|
-
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|
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|
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Cash flows from financing activities:
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|
|
|
|
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Repayments on notes payable
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(75,000
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)
|
|
|
(250,000
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)
|
Net Proceeds from line of credit
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50,000
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|
|
|
130,000
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|
|
|
|
|
|
|
|
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Net cash used in financing activities
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|
(25,000
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)
|
|
|
(120,000
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)
|
|
|
|
|
|
|
|
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|
(Decrease) increase in cash and cash equivalents
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|
|
(178,420
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)
|
|
|
82,616
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
256,263
|
|
|
|
173,647
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
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|
$
|
77,843
|
|
|
$
|
256,263
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure of cash flow information:
|
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|
|
|
|
|
|
|
Interest paid
|
|
$
|
54,661
|
|
|
$
|
58,052
|
|
Taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Cancellation of common stock issued for prepaid services
|
|
$
|
-
|
|
|
$
|
90,000
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|
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 four spine injury diagnostic centers in the United States, which are located in Houston, Texas; Odessa, Texas; Tyler, Texas; and Las Cruces, New Mexico (which affiliation was added in the fourth quarter 2017). 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 $2,551,866 to $17,556,564 as of December 31, 2017. 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, 2017 and 2016 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. As of December 31, 2017 and 2016 the Company’s balance of intangible assets consisted solely of goodwill totaling $170,200.
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, 2017 and 2016, 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, 2017 and 2016, were $15,688 and $45,661, 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, 2017 and 2016, 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 $106,443 and $958,185, at December 31, 2017 and 2016, 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, 2017 and 2016, we recognized compensation expense related to our stock based compensation of $15,800 and $6,200, respectively. We also recognized compensation expense for issuances of our common stock in exchange for services of $5,100 and $19,300 during the years ended December 31, 2017 and 2016, respectively. During the years ended December 31, 2017 and 2016, we amortized $0 and $60,000, 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. For the years ended December 31, 2017 and 2016, 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, 2017 and 2016, 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 May 2014, the FASB issued Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU is designed to create greater comparability for financial statement users across industries and jurisdictions. The provisions of ASU No. 2014-09 include a five-step process by which entities will recognize revenue to depict the transfer of good or services to customers in amounts that reflect the payment to which an entity expects to be entitled in exchange for those goods or services. The standard also will require enhanced disclosures, provide more comprehensive guidance for transactions such as service revenue and contract modifications, and enhance guidance for multiple-element arrangements. In July 2015, the FASB issued ASU No. 2015-14 which delayed the effective date of ASU No. 2014-09 by one year (effective for annual periods beginning after December 15, 2017). Early adoption is not permitted. We adopted the provisions of this ASU on January 1, 2018 and applied a modified retrospective approach which did not have a significant impact on the Company’s revenues or their timing.
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 has determined that based on current accounting and lease contract information the adoption of ASU No. 2016-02 is not expected to have a significant impact on the Company’s consolidated financial position, results of operations and disclosures. However, management is continually evaluating the future impact of ASU No. 2016-02 based on changes in the Company’s consolidated financial statements through the period of adoption.
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. We adopted the provisions of this ASU on January 1, 2018 and applied a modified retrospective approach which did not have a significant impact on the Company’s revenues or their timing.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU No. 2016-13 eliminates the probable initial recognition threshold in current US GAAP and, instead, requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. In addition, ASU No. 2016-13 amends the accounting for credit losses on available-for-sale debt securities and purchased financial assets with credit deterioration. ASU No. 2016-13 is effective for annual periods beginning after December 15, 2020, with early application permitted in annual periods beginning after December 15, 2018. The amendments of ASU No. 2016-13 should be applied through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. Management is currently evaluating the future impact of ASU No. 2016-13 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. 2016-09.
We adopted the provisions of this ASU on January 1, 2018 and applied a modified retrospective approach which did not have a significant impact on the Company’s revenues or their timing.
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.
In January 2017, the FASB issued ASU No. 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323): Amendments to SEC Paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings. The amendments in this update relate to disclosures of the impact of recently issued accounting standards. The SEC staff’s view that a registrant should evaluate ASC updates that have not yet been adopted to determine the appropriate financial disclosures about the potential material effects of the updates on the financial statements when adopted. If a registrant does not know or cannot reasonably estimate the impact of an update, then in addition to making a statement to that effect, the registrant should consider additional qualitative financial statement disclosures to assist the reader in assessing the significance of the impact. The staff expects the additional qualitative disclosures to include a description of the effect of the accounting policies expected to be applied compared to current accounting policies. Also, the registrant should describe the status of its process to implement the new standards and the significant implementation matters yet to be addressed. The amendments specifically addressed recent ASC amendments to ASU No. 2016-13, Financial Instruments – Credit Losses, ASU No. 2016-02, Leases, and ASU No. 2014-09, Revenue from Contracts with Customers, although, the amendments apply to any subsequent amendments to guidance in the ASC. ASU No. 2017-03 is effective upon issuance and did not have a significant impact on the Company’s consolidated financial position, results of operations and disclosures.
In January 2017, the FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The amendments in this update relate to the impairment test performed annually or interim. The annual, or interim, goodwill impairment test is performed by comparing the fair value of a reporting unit with its carrying amount. An impairment charge should be recognized for the amount by which the carrying amount exceeds the reporting unit’s fair value; however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. In addition, income tax effects from any tax deductible goodwill on the carrying amount of the reporting unit should be considered when measuring the goodwill impairment loss, if applicable. The amendments also eliminate the requirements for any reporting unit with a zero or negative carrying amount to perform a qualitative assessment and, if it fails that qualitative test, to perform Step 2 of the goodwill impairment test. An entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. ASU No. 2017-04 is effective for annual periods beginning after December 15, 2019, with early adoption permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. The amendments of ASU No. 2017-04 should be applied prospectively as of the beginning of the period of adoption. Management is currently evaluating the future impact of ASU No. 2017-04 on the Company’s consolidated financial position, results of operations and disclosures.
In May 2017, the FASB issued ASU No. 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. The amendments in this update provide guidance on determining which changes to the terms and conditions of share-based payment awards require an entity to apply modification accounting under Topic 718. ASU No. 2017-09 is effective for annual periods, including interim periods, beginning after December 15, 2017, with early adoption permitted for interim periods of public business entities within reporting periods for which financial statements have not yet been issued. The amendments of ASU No. 2017-09 should be applied prospectively as of the beginning of the period of adoption. Management is currently evaluating the future impact of ASU No. 2017-09 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, 2017 and 2016.
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 2017, 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, 2017 and 2016 that 30% 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, 2017 and 2016:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Computers and equipment
|
|
$
|
98,169
|
|
|
$
|
94,555
|
|
Less: accumulated depreciation
|
|
|
(55,005
|
)
|
|
|
(35,914
|
)
|
|
|
$
|
43,164
|
|
|
$
|
58,641
|
|
Depreciation expense totaling $19,091 and $19,118, respectively, was charged to operating, general and administrative expenses during the years ended December 31, 2017 and 2016.
During 2017 and 2016 we incurred a loss from disposal on property and equipment totaling $0 and $1,108, respectively.
NOTE 6. NOTES PAYABLE AND LONG TERM DEBT
Debentures and third party note payable
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 in full based on the stated contractual terms. Associated warrants have also expired and are no longer exercisable.
Convertible and secured notes payable
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 were originally to expire on August 29, 2015, however were 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, described 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, (iv) granted Mr. Dalrymple 200,000 restricted shares of common stock, and (v) 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 and associated warrants were amended to extend the maturity date to August 29, 2018. As of December 31, 2017 and 2016, the note had a principal balance of $225,000, and $250,000, respectively. During the years ended December 31, 2017 and 2016 the Company recorded $15,000 and $25,000 in interest expense related to this note.
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 3.57% at December 31, 2017.
On September 8, 2017 we entered into an Amended and Restated Revolving Line of Credit Note and an Amended and Restated Credit Agreement to extend our revolving line of credit facility with Wells Fargo Bank, whereby the outstanding principal is now due and payable in full on August 31, 2018 and the maximum amount we can borrow under the line of credit, as amended is $1,750,000. The line of credit remains guaranteed by Peter L. Dalrymple, a member of our Board of Directors, and is secured by a first lien interest in certain of his assets. As of December 31, 2017 and 2016, outstanding borrowings under the line of credit totaled $1,325,000 and $1,275,000, respectively. During the years ended December 31, 2017 and 2016 the Company recorded $39,736 and $28,052 in interest expense related to this note.
Under the terms of the Financing Agreement previously described, 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 quarterly in 100,000 share increments through the earlier of August 31, 2018 (the maturity date) or when cancellation or refinance of the debt by either the us or a financial institution (all of which shares are presently vested). During the years ended December 31, 2017 and 2016, we recorded $0 and $60,000, respectively, as compensation expense related to this stock issuance. As of December 31, 2017 and 2016, there was no unrecognized expense associated with the financing agreement.
NOTE 7. STOCKHOLDERS’ EQUITY
Common Stock
During the years ended December 31, 2017 and 2016, 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, 2017 and 2016:
During the year ended December 31, 2017 we issued 80,000 shares of common stock valued at $20,900 to two consultants and one officer. We issued 10,000 shares each to two consultants, for services, at $0.26 per share and 60,000 shares to Mr. Cronk, our new Chief Operating Officer, as a part of his compensation agreement, at a stock price of $0.26 per share. We recognized compensation expense of $20,900 during the year ended December 31, 2017.
During the year 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 2018.
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 expired 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.
A summary of the warrant activity for the years ended December 31, 2017 and 2016 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, 2015
|
|
|
433,333
|
|
|
$
|
1.80
|
|
|
|
0.6
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants expired (Series D)
|
|
|
(50,000
|
)
|
|
|
0.24
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2016
|
|
|
383,333
|
|
|
|
1.60
|
|
|
|
0.6
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants expired
|
|
|
(50,000
|
)
|
|
|
0.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2017
|
|
|
333,333
|
|
|
$
|
1.60
|
|
|
|
0.6
|
|
|
|
N/A
|
|
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, 2017 and 2016 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, 2017 and 2016 follows:
|
|
|
|
|
|
|
|
Weighted-
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
Shares
|
|
|
Weighted
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
Underlying
|
|
|
Average
|
|
|
Contractual
|
|
|
Value
|
|
Description
|
|
Options
|
|
|
Exercise Price
|
|
|
Term (Years)
|
|
|
(In-the-Money)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
1,150,000
|
|
|
$
|
0.65
|
|
|
|
1.1
|
|
|
|
-
|
|
Options granted in 2016
|
|
|
500,000
|
|
|
|
0.40
|
|
|
|
4.5
|
|
|
|
|
|
Options expired in 2016
|
|
|
(600,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
1,050,000
|
|
|
|
0.47
|
|
|
|
2.8
|
|
|
|
-
|
|
Options expired in 2017
|
|
|
(1,030,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
20,000
|
|
|
$
|
0.40
|
|
|
|
3.5
|
|
|
|
-
|
|
The following summarizes outstanding stock options and their respective exercise prices at December 31, 2017:
|
|
Shares
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
Underlying
|
|
|
Exercise
|
|
|
|
Dates of
|
|
|
Contractual
|
|
Description
|
|
Options
|
|
|
Price
|
|
|
|
Expiration
|
|
|
Term (in years)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee Options
|
|
|
20,000
|
|
|
$
|
0.40
|
|
|
|
Aug 2021
|
|
|
|
3.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
194.60
|
%
|
Risk-free interest rate
|
|
|
0.88
|
%
|
Expected life
|
3 years
|
|
Dividend yield
|
|
|
0
|
%
|
For the year ended December 31, 2017, no options were issued and 1,030,000 options expired leaving 20,000 options that expire in August 2021. For the year ended December 31, 2016, 500,000 options were granted and 600,000 options expired. We recorded $0 and $6,200 in compensation expense in operating, general and administrative expenses in the accompanying consolidated statements of operations for the years ended December 31, 2017 and 2016, respectively. As of December 31, 2017, all unrecognized compensation expense related to non-vested stock option awards has been recognized.
NOTE 8. RELATED PARTY TRANSACTIONS
We have an agreement with Northshore Orthopedics, Assoc. (“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, 2017 and 2016, we had balances payable to NSO of $27,910 and $0, 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 $225,000 and $250,000 at December 31, 2017 and 2016, respectively.
See also Item 13 “Certain Relationships and Related Transactions” in this Annual Report on Form 10-K.
NOTE 9. INCOME TAXES
We have not made provision for income taxes for the years ended December 31, 2017 or 2016, since we have net operating loss carryforwards to offset current taxable income.
On December 22, 2017, the Tax Reform Act was signed into law. The legislation significantly changes U.S. tax law by, among other things, lowering the U.S. corporate income tax rate from a maximum of 35% to a flat 21% rate, effective January 1, 2018. As a result of the decrease in the corporate income tax rate, we revalued our ending net deferred tax assets at December 31, 2017, but did not recognize any incremental income tax expense in 2017 due to the revaluation of the valuation allowance.
On December 22, 2017, the SEC staff issued Staff Accounting Bulletin No. 118 (“SAB 118”) to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Tax Reform Act. We have provisionally recognized the incremental tax impacts related to the revaluation of deferred tax assets and liabilities and our reassessment of uncertain tax positions and valuation allowances and included these amounts in our Consolidated Financial Statements for the year ended December 31, 2017. The ultimate impact may differ from these provisional amounts, possibly materially, due to, among other things, additional technical analysis including changes in interpretations and assumptions we have made with respect to the Tax Act. The accounting is expected to be complete by the fourth quarter of 2018.
Deferred tax assets consist of the following at December 31:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Benefit from net operating loss carryforwards
|
|
$
|
1,998,057
|
|
|
$
|
3,089,339
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
22,353
|
|
|
|
325,782
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
(2,020,410
|
)
|
|
|
(3,415,121
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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 $2,020,410 and $3,415,121 attributable predominantly to the future utilization of the approximate $9,621,000 and $9,486,000 in eligible net operating loss carryforwards, and the allowance for
doubtful accounts, as of December 31, 2017 and 2016, 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 2036.
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:
For the years ended December 31, 2017 and 2016, the reasons for the difference between the statutory federal rate of 34% and the effective tax rate were as follows:
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
of Pre-Tax
|
|
|
|
|
|
of Pre-Tax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for income tax
at federal statutory rate
|
|
$
|
138,014
|
|
|
|
34.0
|
%
|
|
$
|
257,021
|
|
|
|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for state
income tax
|
|
|
12,178
|
|
|
|
3.0
|
%
|
|
|
22,678
|
|
|
|
3.0
|
%
|
Non-deductible expenses
|
|
|
(11,170
|
)
|
|
|
(2.8
|
%)
|
|
|
(10,325
|
)
|
|
|
(1.4
|
%)
|
Effect of change in enacted tax rate
|
|
|
(1,250,730
|
)
|
|
|
(308.1
|
%)
|
|
|
-
|
|
|
|
-
|
|
Change in available NOLs
|
|
|
(283,003
|
)
|
|
|
(69.7
|
%)
|
|
|
-
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
1,394,711
|
|
|
|
343.6
|
%
|
|
|
(259,519
|
)
|
|
|
(34.3
|
%)
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
(9,855
|
)
|
|
|
(1.3
|
%
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
NOTE 10. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office space under an operating lease that expired in January 2017 with minimum lease payments at December 31, 2017 totaling $6,000. The Company has not renewed its lease and is currently on a month to month basis.