Notes to Consolidated Financial Statements
December 31, 2016
Note 1. Organization and Summary of Significant Accounting Policies
Organization and Basis of Presentation
Medical Imaging Corp., (“MIC” or the “Company”), a Nevada Corporation was incorporated in 2000. In 2005, the Company developed a business plan for private healthcare opportunities in Canada with the objective of owning and operating private diagnostic imaging clinics. In 2009, the Company purchased Canadian Teleradiology Services Inc., which operates as: Custom Teleradiology Services (“CTS”). CTS provides remote reading of medical diagnostic imaging scans for rural hospitals and clinics in Canada. In early 2010, the Company modified its business plan to grow its CTS subsidiary while commencing the acquisition of existing full service imaging clinics located in the United States and exploring the development of new diagnostic imaging technology. In 2012, the Company purchased Schuylkill Open MRI Inc., which operates as: Schuylkill Medical Imaging (“SMI”), an independent diagnostic imaging facility located in Pottsville, Pennsylvania. In 2014, the Company purchased Partners Imaging Center of Venice, LLC (“PIV”) located in Venice, Florida; Partners Imaging Center of Naples, LLC (“PIN”) located in Naples, Florida; and Partners Imaging Center of Charlotte, LLC (“PIC”) located in Port Charlotte, Florida.
Basis of Presentation
These consolidated financial statements and related notes are presented in accordance with accounting principles generally accepted in the United States, and are expressed in U.S. dollars. The Company’s fiscal year-end is December 31.
Principle of Consolidation
The consolidated financial statements include the accounts of Medical Imaging, Corp., and its wholly-owned subsidiaries, CTS, SMI, PIV, PIN, and PIC. Intercompany accounts and transactions have been eliminated in the consolidated financial statements. CTS’, SMI’s, PIV’s, PIN’s, and PIC’s accumulated earnings prior to their acquisitions are not included in the consolidated balance sheet.
Use of Estimates and Assumptions
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States (“GAAP”) requires management to make estimates and assumptions that affect (i) the reported amounts of assets and liabilities, (ii) the disclosure of contingent assets and liabilities known to exist as of the date the consolidated financial statements are published, and (iii) the reported amount of net sales, expenses and costs recognized during the periods presented. Adjustments made with respect to the use of estimates often relate to improved information not previously available. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of consolidated financial statements; accordingly, actual results could differ from these estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. At December 31, 2016, and 2015, cash includes cash on hand and cash in the bank.
Accounts Receivable Credit Risk
The allowance for doubtful accounts is maintained at a level sufficient to provide for estimated credit losses based on evaluating known and inherent risks in the receivables portfolio.
Management evaluates various factors including expected losses and economic conditions to predict the estimated realization on outstanding receivables.
In connection with the acquisition of the three facilities located in Venice, Port Charlotte and Naples, Florida, the Company, in October 2014, entered into professional services agreements whereby the seller of those three facilities continued to handle the billing and collection for the imaging centers (the “third party billing”). The seller must still provide a full set of verification data to the Company with respect to its account receivable processing and collections so that the Company can determine the extent to which accounts submitted by the seller in connection with the third party billing have been collected or denied. Final verification will only be able to be completed after the conclusion of the services performed pursuant to the third party billing contract, and review of account balances which is expected during the 2017 fiscal year.
As of December 31, 2016, and 2015, the allowance for doubtful accounts from direct billings was $200,982 and $56,475, respectively. The allowance for doubtful accounts from third party billings (Florida operations) was $275,000 in both years.
Although the gross receivable balance has increased significantly, management is actively pursuing collection efforts directly with patients and insurance payers and believes that the current allowance for doubtful accounts is sufficient to cover any expected losses.
F-6
Goodwill and Indefinite Intangible Assets
The Company follows the provisions of Financial Accounting Standard Accounting Standards Codification (“ASC”) 350,
Goodwill and Other Intangible Assets
. In accordance with ASC 350, goodwill, representing the excess of the purchase price and related costs over the value assigned to net tangible and identifiable intangible assets of businesses acquired and accounted for under the purchase method, acquired in business combinations is assigned to reporting units that are expected to benefit from the synergies of the combination as of the acquisitions date. Under this standard, goodwill and intangibles with indefinite useful lives are not amortized. The Company assesses goodwill and indefinite-lived intangible assets for impairment annually, or more frequently if events and circumstances indicate impairment may have occurred in accordance with ASC 350. If the carrying value of a reporting unit's goodwill exceeds its implied fair value, the Company records an impairment loss equal to the difference. ASC 350 also requires that the fair value of indefinite-lived purchased intangible assets be estimated and compared to the carrying value. The Company recognizes an impairment loss when the estimated fair value of the indefinite-lived purchased intangible assets is less than the carrying value. If the implied fair value of goodwill is lower than its carrying amount, goodwill impairment is indicated and goodwill is written down to its implied fair value. Subsequent increases in goodwill value are not recognized in the consolidated financial statements.
No goodwill impairment was recognized during 2016 or 2015.
Revenue Recognition
The Company holds contracts with several hospitals and groups of health care facilities to provide Teleradiology services for a specific period of time. The Company bills for services rendered on a monthly basis. For the year ended December 31, 2016, CTS held six contracts; four contracts that are renewable on a year-to-year basis and one contract that renewed in 2016 and one to be renewed in 2018. In accordance with the requirement of Staff Accounting Bulletin (“SAB”) 104, the Company recognizes revenue when: (1) persuasive evidence of an arrangement exists (contracts); (2) delivery has occurred (monthly); (3) the seller’s price is fixed or determinable (per the customer’s contract, and services performed); and (4) collectability is reasonably assured (based upon our credit policy).
Revenue is accounted for under the guidelines established by SAB 101,
Revenue Recognition in Financial Statements,
and ASC 605,
Revenue Recognition
. For CTS, the Company has the following indicators of gross revenue reporting: (1) CTS is the primary obligator in the provision of services to the Hospitals under contract, (2) CTS has latitude in establishing price, and negotiating contracts with each hospital, (3) CTS negotiates and determines the service specification to be provided to each hospital client, (4) CTS has complete discretion in supplier selection, and (5) CTS has the credit risk. Accordingly, the Company records CTS revenue at gross. For SMI, PIV, PIN, and PIC, revenue is recognized on the date of service and recorded on an aggregate monthly basis.
Cost of Sales
Cost of sales includes fees paid to radiologists for reading services, transcription fees, equipment repairs, system license and usage costs.
Impairment of Long-Lived Assets
In accordance with ASC 360,
Property, Plant and Equipment,
property, equipment, and purchased intangibles are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Goodwill and other intangible assets are tested for impairment at least annually.
Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Stock Based Compensation
The Company follows ASC 718,
Stock Compensation
; a fair value calculation is performed by the Company to establish the “grant date fair value” of each award which will also be the amount recorded by the Company as stock based compensation expense pursuant to the guidance set forth in ASC 718 to produce an estimated fair value.
The Company measures all share-based payments to employees (which includes non-employee Board of Directors), including employee stock options, warrants and restricted stock, at the fair value of the award and expenses it over the requisite service period (generally the vesting period). The fair value of common stock options or warrants granted to employees is estimated at the date of grant using the binomial option pricing model (“BOPM”). The calculation also takes into account the common stock fair market value at the grant date, the exercise price, the expected life of the common stock option or warrant, the dividend yield and the risk-free interest rate.
The Company from time to time may issue stock options, warrants and restricted stock to acquire goods or services from third parties. Restricted stock, options or warrants issued to other than employees or directors are recorded on the basis of their fair value. The options or warrants are valued using the BOPM on the basis of the market price of the underlying equity instrument on the “valuation date,” which for options and warrants related to contracts that have substantial disincentives to non-performance, is the date of the contract, and for all other contracts is the vesting date. Expenses related to the options and warrants are recognized on a straight-line basis over the period which services are to be received.
There was no stock-based compensation expense to non-employees for the year ended December 31, 2016.
For the year ended December 31, 2015, the Company recognized stock-based compensation expenses from stock granted to non-employees of $34,683 from stock options and $20,250 from stock issued. The options were valued using the BOPM and included in the legal and professional operating expenses in the consolidated statements of operations.
F-7
For the year ended December 31, 2016, the Company recognized stock granted to employees of $14,000.
For the year ended December 31, 2015, the Company recognized stock-based compensation expenses of $47,896 from stock options, and $45,215 from stock granted to employees. The options were valued using the BOPM and included in the labor and management fees operating expenses in the consolidated statements of operations for $34,683 and $13,213, respectively.
Fair Value of Financial Instruments
The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties other than in a forced sale or liquidation.
The carrying amounts of the Company’s financial instruments, including cash, accounts receivable, prepaid expenses, accounts payable, accrued liabilities and notes and loans payable approximate fair value due to their most maturities.
Fair Value Measurements
The Company follows ASC 820 for disclosures about fair value of its financial instruments and to measure the fair value of its financial instruments. ASC 820 establishes a framework for measuring fair value in U.S. GAAP, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, ASC 820 establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of fair value hierarchy defined by ASC 820 are described below:
Level 1 Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2 pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3 pricing inputs that are generally observable inputs and not corroborated by market data.
The carrying amounts of the Company’s financial assets and liabilities, such as cash and accounts payable approximate their fair values because of the short maturity of these instruments.
The Company does not have assets and liabilities that are carried at fair value on a recurring basis.
Foreign Currency Translation
The Company’s functional currency for its wholly-owned subsidiary, CTS, is the Canadian dollar, and their financial statements have been translated into U.S. dollars. The Canadian dollar based accounts of the Company’s foreign operations have been translated into United States dollars using the current rate method. Assets and liabilities of those operations are translated into U.S. dollars using exchange rates as of the balance sheet date; income and expenses are translated using the weighted average exchange rates for the reporting period. Translation adjustments are recorded as accumulated other comprehensive income (loss), a separate component of stockholders’ equity.
The Company recognized a foreign currency gain (loss) on transactions from operations of $62,196 for the year ended December 31, 2016 and $(34,826) for the year ended December 31, 2015.
The Company recognized other comprehensive income (loss) of $(2,525) for the year ended December 31, 2016 and $119,277 for the year ended December 31, 2015.
Income Taxes
The Company accounts for income taxes in accordance with ASC 740,
Income
Taxes
. This statement prescribes the use of the asset and liability method whereby deferred tax asset and liability account balances are determined based on differences between financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.
Net Income (Loss) Per Share
The Company follows the provisions of ASC 260,
Earnings
per
Share
. Basic net income (loss) per share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding during the period. Basic and diluted losses per share are the same as all potentially dilutive securities are anti-dilutive.
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution that could occur if stock options and other commitments to issue common stock were exercised or equity awards vest resulting in the issuance of common stock or conversion of notes into shares of the Company’s common stock that could increase the number of shares outstanding and lower the earnings per share of the Company’s common stock. This calculation is not done for periods in a loss position as this would be antidilutive.
Recent Accounting Updates
The Company does not expect the adoption of any recently issued accounting pronouncements to have a significant impact on its results of operations, financial position or cash flow.
F-8
Reclassification of Accounts
Certain prior period amounts have been reclassified to conform to December 31, 2016 presentation.
Note 2. Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the straight - line method over the estimated useful life of the assets. At December 31, 2016 and 2015, the major class of property and equipment were as follows:
|
|
|
|
|
|
|
|
|
December 31,
2016
|
|
December 31,
2015
|
|
Estimated useful lives
|
Computer/Office Equipment
|
$
|
474,887
|
|
$
|
454,117
|
|
3-7 years
|
Medical Equipment
|
|
2,329,872
|
|
|
2,156,820
|
|
3-7 years
|
Leasehold Improvements
|
|
857,770
|
|
|
843,781
|
|
5-39 years
|
Less: Accumulated Depreciation
|
|
(1,562,471)
|
|
|
(998,224)
|
|
|
Net Book Value
|
$
|
2,100,058
|
|
$
|
2,456,494
|
|
|
Depreciation expense was $561,077 and $546,338 for the year ended December 31, 2016 and 2015, respectively.
Note 3. Operating Lease Commitments
CTS has a lease commitment for its office space of approximately $2,450 minimum rental per month, not including utilities, realty taxes, and operating costs. The lease renewed in April 2013 for a period of five years and will expire in March 2018. CTS has sublet the space under the original lease to the end of its original term. In accordance with ASC 840,
Leases,
the Company has recognized approximately $8,000 in total sublease loss, as a result of total anticipated revenue on the operating lease being less than original lease obligations. The loss was recorded on sublease execution and amortized over its term.
CTS has a lease commitment for its new office space in Toronto, Canada of approximately $2,600 minimum rental per month, not including utilities, realty taxes, and operating costs. The lease will expire April 30, 2021.
SMI entered into a lease commitment for its office space in Pottsville, Pennsylvania. The lease will expire on July 30, 2021. Monthly rental amounts are $6,908 per month not including utilities, realty taxes, and operating costs.
SMI has a lease for its x-ray equipment space in Pottsville, Pennsylvania. The lease term is seven years from commitment date of October 2014. Monthly lease payments are $3,000.
SMI has a lease for use of x-ray equipment and space in Pottsville, Pennsylvania. The lease term is two years from commitment date of January 2016. Monthly lease payments are $2,000.
PIV has a lease for office space in Venice, Florida. The lease will expire September 30, 2021. Monthly rental amounts are $13,170 per month.
PIN has a lease for office space in Naples, Florida. The lease will expire January 1, 2020. Monthly rental amounts are $9,543 per month.
PIC has a lease for office space in Port Charlotte, Florida. The lease will expire June 20, 2021. Monthly rental amounts are $5,512 per month.
Expected future minimum lease commitments as of December 31, 2016:
|
|
|
|
Year
|
|
Total
|
2017
|
|
$
|
481,050
|
2018
|
|
|
432,048
|
2019
|
|
|
427,969
|
2020
|
|
|
352,483
|
2021
|
|
|
216,357
|
Thereafter
|
|
|
-
|
|
|
$
|
1,909,907
|
Note 4. Capital Lease Obligations
A detailed summary of the capital lease obligations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Description
|
|
Monthly
payments
|
|
Maturity
Date
|
|
APR
|
*
|
|
December 31, 2016
Balance
|
|
December 31, 2015
Balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SMI Two MRI Machines
|
|
$
|
11,013
|
|
8-Jul-16
|
|
10.52
|
%
|
|
$
|
-
|
|
$
|
113,910
|
SMI X-Ray Machine
|
|
|
1,495
|
|
15-Aug-19
|
|
6.32
|
|
|
|
43,930
|
|
|
58,591
|
SMI PACS/RIS System
|
|
|
3,115
|
|
1-Nov-19
|
|
5.69
|
|
|
|
100,240
|
|
|
130,962
|
SMI Copier
|
|
|
135
|
|
1-Aug-18
|
|
27.63
|
|
|
|
2,144
|
|
|
-
|
SMI Ascentrium
|
|
|
2,450
|
|
18-Nov-18
|
|
21.48
|
|
|
|
44,776
|
|
|
-
|
PIV,PIN,PIC PACS/RIS
|
|
|
3,094
|
|
1-Jan-20
|
|
4.22
|
|
|
|
107,170
|
|
|
139,045
|
PIV,PIN,PIC Computers
|
|
|
813
|
|
1-Nov-17
|
|
10.52
|
|
|
|
8,509
|
|
|
16,920
|
PIV,PIN,PIC Digital Printers
|
|
|
423
|
|
24-Feb-19
|
|
9.90
|
|
|
|
9,856
|
|
|
-
|
CTS Computers
|
|
|
554
|
|
2-Feb-18
|
|
2.25
|
%
|
|
|
7,649
|
|
|
13,458
|
Total
|
|
$
|
23,092
|
|
|
|
|
|
|
$
|
324,274
|
|
$
|
472,886
|
*Annual Percentage Rate (“APR”).
F-9
Minimum future lease payments under the capital leases as of December 31, 2016 are as follow:
|
|
|
Minimum Lease Payments
|
Total
|
2017
|
$
|
144,140
|
2018
|
|
125,031
|
2019
|
|
84,201
|
2020
|
|
3,094
|
|
|
|
Total minimum lease payments
|
|
356,466
|
Less amount representing interest
|
|
32,192
|
|
|
|
Present value of minimum lease payments
|
|
324,274
|
Less current portion of minimum lease payments
|
|
123,738
|
|
|
|
Long-term capital lease obligations at December 31, 2016
|
$
|
200,536
|
Note 5. Promissory Notes
A detailed summary of the promissory notes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
Maturity Date
|
|
APR
|
*
|
|
Payment
Amount
|
|
|
Payments
Frequency
|
|
December 31, 2016
Face Value Balance
|
|
|
December 31, 2015
Face Value Balance
|
|
21-Mar-11
|
|
18-Mar-16
|
|
6.00
|
%
|
|
$
|
1,295
|
|
|
Monthly
|
|
$
|
-
|
|
|
$
|
7,752
|
|
16-Jun-15
|
|
5-Jul-16
|
|
41.00
|
|
|
|
509
|
|
|
Daily
|
|
|
-
|
|
|
|
145,719
|
|
16-Jun-15
|
|
2-Mar-16
|
|
50.95
|
|
|
|
765
|
|
|
Daily
|
|
|
-
|
|
|
|
72,365
|
|
4-Aug-15
|
|
5-Jan-16
|
|
20.00
|
|
|
|
13,000
|
|
|
Weekly
|
|
|
-
|
|
|
|
13,000
|
|
22-Sep-15
|
|
29-Feb-16
|
|
20.00
|
|
|
|
13,000
|
|
|
Weekly
|
|
|
-
|
|
|
|
169,000
|
|
22-Dec-15
|
|
29-Feb-16
|
|
20.00
|
|
|
|
13,000
|
|
|
Weekly
|
|
|
-
|
|
|
|
130,000
|
|
16-Feb-16
|
|
23-Feb-17
|
|
12.00
|
|
|
|
1,000
|
|
|
Monthly
|
|
|
100,000
|
|
|
|
-
|
|
22-Feb-16
|
|
31-Aug-17
|
|
25.00
|
|
|
|
10,417
|
|
|
Monthly
|
|
|
500,000
|
|
|
|
-
|
|
22-Mar-16
|
|
22-Mar-17
|
|
12.00
|
|
|
|
700
|
|
|
Monthly
|
|
|
70,000
|
|
|
|
-
|
|
1-Jul-16
|
|
1-Aug-17
|
|
20.00
|
|
|
|
20,000
|
|
|
Monthly
|
|
|
400,000
|
|
|
|
-
|
|
3-Oct-16
|
|
27-Dec-17
|
|
42.09
|
%
|
|
$
|
2,255
|
|
|
Weekly
|
|
|
117,261
|
|
|
|
-
|
|
Total Face Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,187,261
|
|
|
|
537,836
|
|
Unamortized Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(143,419
|
)
|
|
|
(128,047
|
)
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,043,842
|
|
|
$
|
409,789
|
|
*Annual Percentage Rate (“APR”)
Note 6. Convertible Notes
On December 5, 2012 and March 27, 2013, the Company sold, through a private placement to accredited investors, three year 12% convertible notes (“Series B Notes”) in the aggregate principal amount of $1,865,000, and $365,000, respectively. The Notes pay interest at a rate of 12% per annum, payable to the holder at 1% per month, and are convertible into common shares of the Company at $0.10 per share. In addition, each purchaser of the Notes received shares dependent on the dollar amount of Notes purchased. The total number of shares of common stock issued was 5,315,000 shares.
On December 1, 2015, the holders of $1,840,000 Series B Notes have agreed to extend the maturity date of the debt outstanding to July 1, 2017 from its original maturity date of December 31, 2015. As part of the extension the Company issued warrants to entitle the holders to purchase up to 1,840,000 shares of common stock at an exercise price of $0.07 per share at any time from December 1, 2015 to July 1, 2018. The Company has valued the warrants at $0.0058 per issued share, and recorded a total discount of $10,672 to be amortized over the 18-month extension period.
On March 31, 2016, the holders of $50,000 Series B Notes have agreed to extend the maturity date of the debt outstanding to September 1, 2017 from its original maturity date of March 31, 2016. As part of the extension the Company issued warrants to entitle the holders to purchase up to 50,000 shares of common stock at an exercise price of $0.07 per share at any time from March 31, 2016 to September 30, 2018. The Company has valued the warrants at $0.00278 per issued share, and recorded a total discount of $139 to be amortized over the 18-month extension period.
On March 31, 2016, the holder of $25,000 Series B Notes has agreed to extend the maturity date of the debt outstanding to September 1, 2019 from its original maturity date of March 31, 2016. As part of the extension the Company issued warrants to entitle the holders to purchase up to 25,000 shares of common stock at an exercise price of $0.07 per share at any time from March 31, 2016 to September 30, 2019. The Company has valued the warrants at $0.00583 per issued share, and recorded a total discount of $146 to be amortized over the 30-month extension period.
On May 22, 2014, the Company sold, through private placement to accredited investors, three year 12% convertible notes (“Series C Notes”) in the aggregate principal amount of $95,000. The Notes bear interest at a rate of 12% per annum, payable to the holder at1% per month, with the principal amount due on May 31, 2017. The Notes are convertible into shares of the Company’s common stock at an initial conversion rate of $0.15 per share. In addition, each holder of Series C Notes received shares dependent on the dollar amount of Notes purchased. On August 25, 2014, October 31, 2014 and February 17, 2015, the Company sold an additional $75,000, $50,000 and $20,000, respectively of Series C Notes. The total number of shares of common stock issued was 240,000 shares.
On March 26, 2014, the Company issued a $300,000 convertible note to a non-affiliate. The note pays interest at a rate of 12% per annum, payable to the holder at 1% per month. In addition to interest payments, the Company is making monthly payments of $5,000 towards the principal balance beginning June 1, 2014 until the note due date of February 27, 2018. The note is convertible into common shares of the Company at $0.15 per share. In addition, the purchaser of the note received 300,000 shares as part of the note agreement. As of December 31, 2016, principal balance of the note was $145,000.
F-10
In accordance with ASC 470,
Debt with conversion and other options,
(“ASC 470”)
on issuance of the shares, the Company recognized additional paid-in capital and a discount against the notes for a total of $282,470. Amortization of the discount for the years ended December 31, 2016 and 2015 was $15,156 and $89,706, respectively.
In accordance with ASC 480,
Distinguishing Liabilities from Equity,
the Company determined that the warrants are a freestanding instrument based on the following:
Ÿ
The debt can be transferred without the transfer of the warrants.
Ÿ
The warrants can be transferred without the transfer of the debt.
Ÿ
The warrants can be exercised while debt still outstanding.
In accordance with ASC 470, if the warrants are classified as equity, then the proceeds should be allocated based on the relative fair values of the base instrument and the warrants were valued at $0.0058 per issued share, and recorded a total discount of $10,672 to be amortized over 18 months’ extension period.
A detailed summary of the convertible notes is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance Date
|
|
Maturity Date
|
|
APR
|
|
|
|
Conversion
Rate
|
|
|
Monthly
Payment
|
|
|
December 31, 2016
Face Value Balance
|
|
|
|
December 31, 2015
Face Value Balance
|
|
3-Dec-12
|
|
1-Jul-17
|
|
12.00
|
%
|
|
$
|
0.10
|
|
$
|
250
|
|
$
|
25,000
|
|
|
$
|
25,000
|
|
3-Dec-12
|
|
1-Jul-17
|
|
12.00
|
|
|
|
0.10
|
|
|
750
|
|
|
75,000
|
|
|
|
75,000
|
|
27-Mar-13
|
|
1-Jul-17
|
|
12.00
|
|
|
|
0.10
|
|
|
500
|
|
|
50,000
|
|
|
|
50,000
|
|
3-Dec-12
|
|
1-Jul-17
|
|
12.00
|
|
|
|
0.10
|
|
|
500
|
|
|
50,000
|
|
|
|
50,000
|
|
3-Dec-12
|
|
1-Jul-17
|
|
12.00
|
|
|
|
0.10
|
|
|
250
|
|
|
25,000
|
|
|
|
25,000
|
|
3-Dec-12
|
|
1-Jul-17
|
|
12.00
|
|
|
|
0.10
|
|
|
250
|
|
|
25,000
|
|
|
|
25,000
|
|
3-Dec-12
|
|
1-Jul-17
|
|
12.00
|
|
|
|
0.10
|
|
|
250
|
|
|
25,000
|
|
|
|
25,000
|
|
3-Dec-12
|
|
1-Jul-17
|
|
12.00
|
|
|
|
0.10
|
|
|
15,000
|
|
|
1,500,000
|
|
|
|
1,500,000
|
|
3-Dec-12
|
|
1-Jul-17
|
|
12.00
|
|
|
|
0.10
|
|
|
500
|
|
|
50,000
|
|
|
|
50,000
|
|
3-Dec-12
|
|
1-Jul-17
|
|
12.00
|
|
|
|
0.10
|
|
|
150
|
|
|
15,000
|
|
|
|
15,000
|
|
3-Dec-12
|
|
1-Jul-18
|
|
12.00
|
|
|
|
0.10
|
|
|
5,750
|
|
|
75,000
|
|
|
|
75,000
|
|
3-Dec-12
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|
31-Mar-16
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|
12.00
|
|
|
|
0.10
|
|
|
-
|
|
|
-
|
|
|
|
25,000
|
|
27-Mar-13
|
|
30-Sep-17
|
|
12.00
|
|
|
|
0.10
|
|
|
250
|
|
|
25,000
|
|
|
|
25,000
|
|
27-Mar-13
|
|
30-Sep-17
|
|
12.00
|
|
|
|
0.10
|
|
|
250
|
|
|
25,000
|
|
|
|
25,000
|
|
27-Mar-13
|
|
30-Sep-19
|
|
12.00
|
|
|
|
0.10
|
|
|
250
|
|
|
25,000
|
|
|
|
25,000
|
|
22-May-14
|
|
31-May-17
|
|
12.00
|
|
|
|
0.15
|
|
|
500
|
|
|
50,000
|
|
|
|
50,000
|
|
22-May-14
|
|
31-May-17
|
|
12.00
|
|
|
|
0.15
|
|
|
225
|
|
|
22,500
|
|
|
|
22,500
|
|
22-May-14
|
|
31-May-17
|
|
12.00
|
|
|
|
0.15
|
|
|
225
|
|
|
22,500
|
|
|
|
22,500
|
|
25-Aug-14
|
|
31-Jul-17
|
|
12.00
|
|
|
|
0.15
|
|
|
500
|
|
|
50,000
|
|
|
|
50,000
|
|
25-Aug-14
|
|
31-Jul-17
|
|
12.00
|
|
|
|
0.15
|
|
|
250
|
|
|
25,000
|
|
|
|
25,000
|
|
31-Oct-14
|
|
31-Oct-17
|
|
12.00
|
|
|
|
0.15
|
|
|
500
|
|
|
50,000
|
|
|
|
50,000
|
|
17-Feb-15
|
|
28-Feb-18
|
|
12.00
|
|
|
|
0.15
|
|
|
200
|
|
|
20,000
|
|
|
|
20,000
|
|
26-Mar-14
|
|
28-Feb-18
|
|
12.00
|
|
|
|
0.15
|
|
|
6,450
|
|
|
145,000
|
|
|
|
200,000
|
|
Total Face Value
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,375,000
|
|
|
$
|
2,455,000
|
|
Unamortized Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,937
|
)
|
|
|
(31,000
|
)
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,366,063
|
|
|
$
|
2,424,000
|
|
Following are maturities of the long –term debt as of December 31, 2016:
|
|
|
|
|
|
Principal
Payments
|
2017
|
|
$
|
2,230,000
|
2018
|
|
|
120,000
|
2019
|
|
|
25,000
|
Total
|
|
$
|
2,375,000
|
Note 7. Royalty Financing
On October 31, 2014, the Company entered into a royalty purchase agreement with Grenville Strategic Royalty Corp. (“Grenville”) for the amount of $2,000,000. The agreement calls for a monthly payment to Grenville based on a percentage of the total of certain revenue items and subject to a minimum payment amount until $8,000,000 has been paid. The amount financed is recorded net of discount to be amortized during the term. For the years ended December 31, 2016 and 2015, the Company has recorded discount amortization expense of $315,827 and $340,372, respectively. The balance as shown on the consolidated balance sheet as of December 31, 2016 was $2,007,424, net of $5,302,853 in unamortized discount. The balance as shown on the consolidated balance sheet as of December 31, 2015 was $1,935,101, net of $5,618,680 in unamortized discount. As of December 31, 2016, the Company paid a total of $689,723 in royalty payments, additionally the Company has accrued $181,096 in unpaid royalty fees from August to December 2016.
F-11
Note 8. Income Taxes
ASC 740 requires the recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns. Under this method, deferred tax liabilities and assets are determined based on the difference between consolidated financial statements and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
For the year ended December 31, 2016, the Company had a cumulative net operating loss carryover of approximately $1,839,366 available for U.S federal income tax, which expire beginning in 2017. The net operating loss carryovers may be subject to limitations under Internal Revenue Code due to significant changes in the Company’s ownership. The Company has provided a full valuation allowance against the full amount of the net operating loss benefit, since, in the opinion of management, based upon the earnings history of the Company, it is more likely than not that the benefits will not be realized.
Deferred net tax asset (34%) consists of the following at December 31, 2016:
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Deferred tax asset
|
$
|
1,515,712
|
|
|
$
|
1,062,352
|
|
Less valuation allowance
|
|
(1,515,712
|
)
|
|
|
(1,062,352
|
)
|
Net deferred tax asset
|
$
|
-
|
|
|
$
|
-
|
|
A reconciliation between income taxes at statutory tax rates (34%) and the actual income tax provision for continuing operations as of December 31, 2016 follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
|
2015
|
|
Expected Provision (based on statutory rate)
|
$
|
(453,360
|
)
|
|
$
|
(551,219
|
)
|
Increase to deferred tax valuation allowance for net operating loss carry forward
|
|
453,360
|
|
|
|
551,219
|
|
Net provision
|
$
|
-
|
|
|
$
|
-
|
|
The Company has filed its tax returns through December 31, 2015, and filed for a six months extension on its December 31, 2016 tax return filing.
The provisions of ASC 740 require companies to recognize in their financial statements the impact of a tax position if that position is more likely than not to be sustained upon audit, based upon the technical merits of the position. ASC 740 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken on a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods and disclosure.
Management does not believe that the Company has any material uncertain tax positions requiring recognition or measurement in accordance with the provisions of ASC 740. The Company’s policy is to record interest and penalties on uncertain tax positions, if any, as income tax expense.
All past six tax years for the Company remain subject to future examinations by the applicable taxing authorities.
Note 9. Related Party Transactions
During January 2015, the Company entered into an agreement with a company that is owned and controlled by a major shareholder to provide consulting services. Fees payable for performance of the consulting services are $10,000 per month. In addition to the monthly fees, the consultant was paid at signing of the agreement, four million two hundred thousand (4,200,000) options to purchase common stock of the client at an exercise price of $0.15 per share with an expiry date of December 31, 2019; details of the options recognition are disclosed in Note 10. On December 28, 2015, 450,000 shares of common stock were issued as compensation of $20,250 owed and outstanding towards the 2015 consulting agreement. Fees incurred to the related party consultant for the years ended December 31, 2016 and 2015 were $120,000, respectively, and are included as an expense in Legal and Professional fees in the accompanying statement of operations for the period.
Note 10. Common Stock Transactions
On November 28, 2016, 100,000 shares were issued for services valued at $9,000 based upon the closing price of the Company’s common stock at the grant date.
On June 16, 2016, the Company issued 30,000 shares of common stock of the Company as part of the bridge convertible note to a private investor. The shares were valued at $609 based upon the closing price of the Company’s common stock at the grant date.
On June 7, 2016, 50,000 shares were issued for services valued at $5,000 based upon the closing price of the Company’s common stock at the grant date.
On March 22, 2016, the Company issued 70,000 shares of common stock of the Company as part of the bridge convertible note to a private investor. The shares were valued at $1,421 based upon the closing price of the Company’s common stock at the grant date.
On February 18, 2016, the Company issued 100,000 shares of common stock of the Company as part of the bridge convertible note to a private investor. The shares were valued at $7,000 based upon the closing price of the Company’s common stock at the grant date.
For the year ended December 31, 2015, 1,425,000 shares were issued for services valued at $65,465 based upon the closing price of the Company’s common stock at the grant date.
F-12
For the year ended December 31, 2015, 20,000 shares were issued as part of Series C convertible note agreements. The shares were valued at $1,040 based upon the closing price of the Company’s common stock at the grant date.
On December 1, 2015, the Company issued 1,840,000 warrants to holders of Series B convertible notes (see Note 6) as part of the agreements to extend the maturity dates of the notes. The warrants are exercisable at a price of $0.07 per full share at any time from December 1, 2015 to July 1, 2018. The Company has valued the warrants at a $0.0058 per issued share.
On January 27, 2015, the Company granted options as considerations for services provided by the CEO of the Company. The options are to purchase up to 4,200,000 shares of common stock, with an exercise price equal to $0.15 per share. The options shall have a five (5) year term. Inputs used in Binomial Option Pricing model were as follow: stock price at grant date: $0.0517, exercise price $0.15, expected life of the option two and a half (2.5) years, volatility of 70%, and risk free rate of 0.03%. The options were recorded on the grant date at a value of $34,683.
On January 27, 2015, the Company granted options as considerations for consulting services provided to the Company. The options are to purchase up to 4,200,000 shares of common stock, with an exercise price equal to $0.15 per share. The options shall have a five (5) year term. Inputs used in Binomial Option Pricing model were as follow: stock price at grant date: $0.0517, exercise price $0.15, expected life of the option two and a half (2.5) years, volatility of 70%, and risk free rate of 0.03%. The options were recorded on the grant date at a value of $34,683.
On January 27, 2015, the Company granted options as considerations for services provided by the CFO of the Company. The options are to purchase up to 1,600,000 shares of common stock, with an exercise price equal to $0.15 per share. The options shall have a five (5) year term. Inputs used in Binomial Option Pricing model were as follow: stock price at grant date: $0.0517, exercise price $0.15, expected life of the option two and a half (2.5) years, volatility of 70%, and risk free rate of 0.03%. The options were recorded on the grant date at a value of $13,213.
Note 11. Going Concern
As shown in the accompanying consolidated financial statements, the Company incurred net comprehensive loss of $1,333,411, and $1,621,233 for the years ended December 31, 2016 and 2015, as well as a working capital deficit of $5,276,282 at December 31, 2016. These conditions raise substantial doubt as to the Company’s ability to continue as a going concern. Management plans to raise additional financing in order to continue its operations and fulfill its debt obligations in 2017, but there can be no assurances that the plan will be successful. These consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Note 12. Subsequent Events
On February 23, 2017, 765,000 shares were issued for services valued at $30,600 based upon the closing price of the Company’s common stock at the grant date.
The Company evaluated subsequent events through the date the consolidated financial statements were issued.
F-13