Our financial statements for the fiscal years ended December 31, 2019 and 2018 are attached hereto.
SPINE INJURY SOLUTIONS, INC.
CONSOLIDATED BALANCE SHEETS
|
|
December 31,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
Cash and Cash equivalents
|
|
$
|
110,587
|
|
|
$
|
59,679
|
|
Accounts receivable, net
|
|
|
480,350
|
|
|
|
1,040,117
|
|
Prepaid expenses
|
|
|
12,314
|
|
|
|
10,650
|
|
Inventories
|
|
|
-
|
|
|
|
116,221
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
603,251
|
|
|
|
1,226,667
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net of allowance for doubtful accounts
of $589,243 and $395,873 at December 31, 2019 and 2018, respectively
|
|
|
531,573
|
|
|
|
1,923,421
|
|
Property and equipment, net
|
|
|
25,379
|
|
|
|
77,187
|
|
Intangible assets and goodwill
|
|
|
|
|
|
|
170,200
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
1,160,203
|
|
|
$
|
3,397,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
Line of credit
|
|
$
|
1,070,000
|
|
|
$
|
1,565,000
|
|
Notes payable
|
|
|
-
|
|
|
|
90,000
|
|
Accounts payable and accrued liabilities
|
|
|
41,239
|
|
|
|
75,975
|
|
Due to related parties
|
|
|
|
|
|
|
4,967
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,111,239
|
|
|
|
1,735,942
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
|
|
|
Common stock: $0.001 par value, 50,000,000 shares authorized,
20,240,882 shares issued and outstanding at
December 31, 2019 and 2018, respectively
|
|
|
20,241
|
|
|
|
20,241
|
|
Additional paid-in capital
|
|
|
19,869,511
|
|
|
|
19,869,511
|
|
Accumulated deficit
|
|
|
(19,840,788
|
)
|
|
|
(18,228,219
|
)
|
|
|
|
|
|
|
|
|
|
Total stockholders’ equity
|
|
|
48,964
|
|
|
|
1,661,533
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders’ equity
|
|
$
|
1,160,203
|
|
|
$
|
3,397,475
|
|
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, 2019 and 2018
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Net service revenue
|
|
$
|
136,327
|
|
|
$
|
1,795,964
|
|
Lease revenue
|
|
|
73,046
|
|
|
|
39,656
|
|
Total revenue
|
|
|
209,373
|
|
|
|
1,835,620
|
|
|
|
|
|
|
|
|
|
|
Cost of providing services, including amounts billed by
|
|
|
|
|
|
|
|
|
Third party providers
|
|
|
-
|
|
|
|
307,890
|
|
Related party providers
|
|
|
-
|
|
|
|
50,000
|
|
Inventory impairment
|
|
|
115,235
|
|
|
|
298,887
|
|
|
|
|
115,235
|
|
|
|
656,777
|
|
Total cost of providing services
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
94,138
|
|
|
|
1,178,843
|
|
|
|
|
|
|
|
|
|
|
Operating, general and administrative expenses
|
|
|
1,643,803
|
|
|
|
1,792,554
|
|
|
|
|
|
|
|
|
|
|
Loss from operations
|
|
|
(1,549,665
|
)
|
|
|
(613,711
|
)
|
|
|
|
|
|
|
|
|
|
Other income and (expense):
|
|
|
|
|
|
|
|
|
Other income
|
|
|
2,399
|
|
|
|
8,297
|
|
Interest expense
|
|
|
(65,303
|
)
|
|
|
(66,241
|
)
|
|
|
|
|
|
|
|
|
|
Total other income and (expense)
|
|
|
(62,904
|
)
|
|
|
(57,944
|
)
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,612,569
|
)
|
|
$
|
(671,655
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per common share:
|
|
|
|
|
|
|
|
|
Basic/ diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares used in loss per common share:
|
|
|
|
|
|
|
|
|
Basic/ diluted
|
|
|
20,240,882
|
|
|
|
20,228,382
|
|
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, 2019 and 2018
|
|
Common Stock
|
|
|
Additional
|
|
|
Accumulated
|
|
|
Total
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
Balances, December 31, 2017
|
|
|
20,215,882
|
|
|
$
|
20,216
|
|
|
$
|
19,864,536
|
|
|
$
|
(17,556,564
|
)
|
|
$
|
2,328,188
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock options for compensation of officers
|
|
|
25,000
|
|
|
|
25
|
|
|
|
4,975
|
|
|
|
-
|
|
|
|
5,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(671,655
|
)
|
|
|
(671,655
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2018
|
|
|
20,240,882
|
|
|
|
20,241
|
|
|
|
19,869,511
|
|
|
|
(18,228,219
|
)
|
|
|
1,661,533
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,612,569
|
)
|
|
|
(1,612,569
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances, December 31, 2019
|
|
|
20,240,882
|
|
|
$
|
20,241
|
|
|
$
|
19,869,511
|
|
|
$
|
(19,840,788
|
)
|
|
$
|
48,964
|
|
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, 2019 and 2018
|
|
2019
|
|
|
2018
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(1,612,569
|
)
|
|
$
|
(671,655
|
)
|
Adjustments to reconcile net (loss) to net cash
provided (used) in operating activities:
|
|
|
|
|
|
|
|
|
Bad debt expense
|
|
|
538,577
|
|
|
|
523,030
|
|
Factoring expense
|
|
|
71,194
|
|
|
|
-
|
|
Issuance of common stocks for services
|
|
|
-
|
|
|
|
5,000
|
|
Obsolete inventory
|
|
|
116,221
|
|
|
|
50,000
|
|
Impairment of goodwill
|
|
|
170,200
|
|
|
|
-
|
|
Depreciation expense
|
|
|
51,808
|
|
|
|
25,503
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
|
1,341,844
|
|
|
|
(2,547
|
)
|
Prepaid expenses
|
|
|
(1,664
|
)
|
|
|
(1,400
|
)
|
Inventories
|
|
|
-
|
|
|
|
(24,922
|
)
|
Accounts payable and accrued liabilities
|
|
|
(34,736
|
)
|
|
|
(3,230
|
)
|
Due to related party
|
|
|
(4,967
|
)
|
|
|
(22,943
|
)
|
|
|
|
|
|
|
|
|
|
Net cash provided (used) in by operating activities
|
|
|
635,908
|
|
|
|
(123,164
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments on notes payable
|
|
|
(90,000
|
)
|
|
|
(135,000
|
)
|
(Payments) proceeds from line of credit, net
|
|
|
(495,000
|
)
|
|
|
240,000
|
|
|
|
|
|
|
|
|
|
|
Net cash (used) provided in financing activities
|
|
|
(585,000
|
)
|
|
|
105,000
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
50,908
|
|
|
|
(18,164
|
)
|
Cash and cash equivalents at beginning of period
|
|
|
59,679
|
|
|
|
77,843
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
110,587
|
|
|
$
|
59,679
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
65,305
|
|
|
$
|
66,241
|
|
Taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Reclassification of inventory to equipment
|
|
$
|
-
|
|
|
$
|
59,256
|
|
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 are a technology, marketing, billing, and collection company facilitating diagnostic services for patients who have sustained spine injuries resulting from traumatic accidents. We deliver turnkey solutions to spine surgeons, orthopedic surgeons and other healthcare providers for necessary and appropriate treatment of musculo-skeletal spine injuries resulting from automobile and work-related accidents. Our goal is to become a leader in providing technology and monetizing services to spine and orthopedic surgeons and other healthcare providers to facilitate proper treatment of their injured clients. By monetizing the providers accounts receivable, which includes diagnostic testing and non-invasive surgical care, patients are not unnecessarily delayed or prevented from obtaining needed treatment. By facilitating early treatment through affiliated doctors, we believe that health conditions can be prevented from escalating and injured victims can be quickly placed on the road to recovery. Through our affiliate system, we facilitate spine surgeons, orthopedic surgeons and other healthcare providers to provide reasonable, necessary, and appropriate treatments to patients with musculo-skeletal spine injuries. We assist the centers that provide the spine diagnostic injections and treatment and pay the doctors a fee for the medical procedures they performed. After a patient is billed for the procedures performed by the affiliated doctor, we take control of the patients’ unpaid bill and oversee collection. In most instances, the patient is a plaintiff in an accident case, where the patient is represented by an attorney. Typically, the defendant (and/or the insurance company of the defendant) in the accident case pays the patient’s bill upon settlement or final judgment of the accident case. The payment to us is made through the attorney of the patient. In most cases, we must agree to the settlement price and the patient must sign off on the settlement. Once we are paid, the patient’s attorney can receive payment for his or her legal fee. During the fourth quarter of 2018, the decision was made to discontinue funding future medical procedures due to our cash position, and we have not funded any procedures in 2019 and will not do so unless we can access additional capital (see Note 2 below). However, we continue to actively pursue the collection of previously funded procedures.
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 (“QVH”) 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.
In September 2014, we created a wholly-owned subsidiary, Quad Video Halo, Inc. The purpose of this entity is to hold certain company assets in connection with the QVH units.
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 $4,836,090 to $19,840,788 as of December 31, 2019. We plan to increase our operating expenses as we increase our service development, marketing efforts and brand building activities, while no specific plans are in place. We also plan to pursue a merger with another company. 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.
Additionally, during the fourth quarter of 2018, the decision was made to discontinue funding future medical procedures due to our cash position, which also hampered our ability to pay back existing debt to Wells Fargo and a current director and shareholder (see Note 6—Notes Payable). We did not fund any procedures in 2019 and will not do so unless we can access additional capital. The previous service revenue we have funded has resulted in longer settlement times, which has created a slowdown in cash collections. Additionally, our efforts to establish a market for the Quad Video Halo has not met our expectations and we have cut back its development and operations. If we are unable to access additional capital in the near future, these recent developments could have a material negative impact on our financial performance and could have a material adverse effect on our results of operations and financial condition. As an alternative, we are also investigating possible strategic business transactions with third party companies.
We are actively pursuing a merger with a private company where they become the controlling company. We find this the best course of actions for our shareholders.
NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Consolidation
The accompanying consolidated financial statements include the accounts of Spine Injury Solutions, Inc. and its wholly owned subsidiary, Quad Video Halo, Inc. 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
The Company’s accounting for revenues is governed by two accounting standards. The Company’s service and product sale revenue are accounted for under ASC 606, Revenue from Contracts with Customers. Additionally, the Company’s QVH rental revenues are accounted for under ASC 842, Leases.
Service and Product Sale Revenue Recognition
Our net revenues include service revenues. Service revenues arise from the delivery of medical diagnostic services provided to the patient by medical professionals at the spine injury diagnostic centers, only after the patient completes and signs required medical and financial paperwork. Service revenues are recorded as net patient service revenues based on variable consideration elements further described below and in Note 4. Product sales arise from the sale and transfer of control of the Company’s QVH units to a consumer.
For service revenues, 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.
Additionally, service 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 (“gross revenue”) less account discounts that are expected to result when individual cases are ultimately settled, which is the variable consideration associated with this revenue stream.
While we do collect 100% of the accounts on some patients, our historical collection rate is used to estimate the variable consideration expected and is reflected in the carrying balance of the accounts receivable and service revenue to be recorded. A discount rate of 48%, based on payment history, was used to reduce revenue to 52% of CPT code billings during the year ended December 31, 2018. We recorded no revenue related to service revenue during the year ended December 31, 2019.
Lease Revenues
Rental revenues from operating leases are recognized on a straight-line basis over the term of the lease. Rental billings for periods extending beyond period end are recorded as deferred income and are recognized in the period earned. For the QVH Leases, rental related services revenues for support, maintenance and video processing, delivery, and installation are lease related because the payments are considered minimum lease payments that are an integral part of the negotiated lease agreement with the customer. These revenues are recognized on a straight-line basis over the term of the lease. As of the year ended December 31, 2019 the Company’s leases consisted solely of operating leases.
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, 2018 are classified as finished-goods and consist of our Quad Video Halo. During the year ended December 31, 2019 the Company determined its inventory to be obsolete due to enhancements in technology that rendered the current inventories value to be $0. As such, during the year ended December 31, 2019 and 2018, respectively the company wrote off $116,221 and $50,000.
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 consist of computers and equipment and are depreciated over their estimated useful lives of three to five years, using the straight-line method.
Intangible Assets and Goodwill
Intangible assets acquired are initially recognized at cost. Intangible assets acquired in a business combination are recognized at their estimated fair value at the date of acquisition. Intangibles with a finite life are amortized, ratably, based on the contractual terms of the associated agreements.
Goodwill recognized in a business combination is subjective and represents the value of the excess amount given to the acquired company above the estimated fair market value of the identifiable net assets on the acquisition date. Each year, during the fourth quarter, the goodwill amount is reviewed to determine if any impairment has occurred. Impairment occurs when the original amount of goodwill exceeds the value of the expected future net cash flows from the business acquired. During the year ended December 31, 2019, the Company noted significant indicators of impairment, and performed an impairment test on goodwill, noting the discounted future cash flows did not fully support the goodwill balance along with the Company’s reduced emphasis on the marketing and development of the QVH, resulting in full impairment of goodwill as of December 31, 2019.
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, 2018, no impairment of the long-lived assets was determined to have occurred, however, the Company’s goodwill was determined to be fully impaired in the year ended December 31, 2019.
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. 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, we have established an allowance for doubtful accounts in the amount of $589,243 and $395,873, at December 31, 2019 and 2018, 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 year ended December 31, 2019, we did not recognize compensation expense for the issuance of our common stock in exchange for services. During the year ended December 31, 2018 we recognized compensation expense for issuance of our common stock in exchange for services of $5,000.
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, 2019 and 2018, 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, 2019 and 2018, common stock equivalents from outstanding stock options and warrants have been excluded from the calculation of the diluted loss per share in the 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 Not Yet Adopted
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 generally accepted accounting principles (“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 June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718). The amendments expand the scope of Topic 718, which currently only includes share-based payments to employees, to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This ASU is effective for all organizations for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The Company does not expect the adoption of this standard to have a material impact on its consolidated financial statements.
Recent Accounting Pronouncements Adopted
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. The adoption of ASU No. 2017-01 did not have material impact on the Company’s consolidated financial position, results of operations and disclosures.
In February 2016, the FASB issued ASU No. 2016-02, Leases, which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (1) a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and (2) a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. Under ASU No. 2016-02, lessor accounting is largely unchanged. ASU No. 2016-02 is effective for fiscal years beginning after December 15, 2018 with early application permitted. Lessees and lessors must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. Management has adopted the provisions of ASU No. 2016-02 noting it did not have any material leases falling under this guidance where the Company is considered the lessee. The Company has lease agreements with customers for the use of QVH units where the Company is considered the lessor. As part of the implementation of ASU No. 2016-02, the Company elected the package of practical expedients that allows for not reassessing: (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases and (3) initial direct costs for any expired or existing leases.
The Company’s QVH unit rentals are governed by agreements that detail the lease terms and conditions. The determination of whether these contracts with customers contain a lease generally does not require significant judgement. The Company accounts for these rentals as operating leases. These leases do not include material amounts of variable payments and the Company has made the accounting policy election to exclude all taxes assessed by a governmental authority. The Company provides an option for the lessee to purchase the rented equipment upon the termination of the lease for the as then fair market value; however, the Company has not generated material revenue from sales of equipment under such options. Initial lease terms vary in length based upon customer needs and generally range from twelve to thirty-six months. Customers have the option to keep equipment on rent beyond the initial lease term on a one-year successive term that auto renews unless canceled by the customer. All of the Company’s rental products have long useful lives relative to the typical rental term with the original investment typically recovered in approximately five years. The rental products are typically rented for a majority of the time owned and a significant portion of the original investment is recovered when sold from inventory. The Company’s lease agreements do not contain residual value guarantees or restrictive covenants.
As of December 31, 2019, maturities of operating lease payments to be received are as follows:
(in thousands)
|
|
|
|
|
2020
|
|
|
103
|
|
2021
|
|
|
39
|
|
|
|
$
|
142
|
|
Included in property and equipment, net, as of December 31, 2019 and December 31, 2018 is equipment available for rent in the amount of $25,379 and $39,654, respectfully.
NOTE 4. ACCOUNTS RECEIVABLE
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 year ended December 31, 2018. During the year ended December 31, 2019 no service revenue was recorded.
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 2018, 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, 2019 and 2018 that 30% of cases will be collected within one year of a medical procedure.
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. As of December 31, 2019 and 2018, we determined an allowance for uncollectable accounts of $589,243 and $395,873, respectively was needed for those customer accounts whose collections appear doubtful. During the years ended December 31, 2019 and 2018 we recorded bad debt expense, net of recoveries of $538,577 and $523,030, respectively.
For the year ended December 31, 2019, we sold certain individual accounts receivable balances to a third party at a discounted rate without recourse resulting in the receipt of $136,665 which resulted in the recognition of $71,194 in factoring expense for the year ended December 31, 2019. This expense represents the discount provided to the purchaser and was recorded as an operating, general and administrative expense in the Company’s statement of operations for the year ended December 31, 2019.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2019 and 2018:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Computers and equipment
|
|
$
|
145,025
|
|
|
$
|
151,638
|
|
Less: accumulated depreciation
|
|
|
(119,646
|
)
|
|
|
(74,451
|
)
|
|
|
$
|
25,379
|
|
|
$
|
77,187
|
|
Depreciation expense totaling $51,808 and $25,503, respectively, was charged to operating, general and administrative expenses during the years ended December 31, 2019 and 2018.
NOTE 6. NOTES PAYABLE
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, such warrants 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, 2017, then again in September 2017, we extended the maturity date of the promissory note to September 8, 2018. In connection with the extension of the Wells Fargo line of credit discussed below, on September 5, 2018 we entered into a Financing Agreement with Mr. Dalrymple and an Amendment to Amended and Restated Secured Promissory Note, under which we extended the maturity date of the promissory note with Mr. Dalrymple to be due and payable on September 8, 2019. We paid off this note in September 2019. We will continue to provide collateral to Mr. Dalrymple in an amount of $3,000,000 in our gross accounts receivable to secure payment of his obligations in connection with the line of credit with Wells Fargo. As of December 31, 2019 and 2018, the note had a principal balance of $0 and $90,000, respectively. During the year ended December 31, 2019 and 2018, the Company recorded $3,032 and $9,606, respectively, 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 3.76% at December 31, 2019.
In September 2017, the line of credit agreement was amended, whereby the outstanding principle was due and payable in full on August 31, 2018 and the maximum amount we can borrow under the line of credit is $1,750,000. On September 7, 2018 we entered into an Amended and Restated Revolving Line of Credit Note to extend our revolving line of credit facility, whereby the outstanding principal is due and payable in full on August 31, 2019. On September 30, 2019 the credit line was amended into a one year term loan precluding any additional draws on the note, but all other terms of the loan remained the same. The term loan also 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, 2019 and 2018, the outstanding borrowings under the line of credit totaled $1,070,000 and $1,565,000 respectively. During the years ended December 31, 2019 and 2018 the Company recorded $61,808 and $56,635 in interest expense related to this note.
NOTE 7. STOCKHOLDERS’ EQUITY
Common Stock
During the year ended December 31, 2019 we did not issue any common stock to compensate officers, employees, directors or outside professionals. During the year ended December 31, 2018 we issued 25,000 shares for services provided. 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, 2019 and 2018:
During the year ended December 31, 2019 we did not issue any shares of common stock.
During the year ended December 31, 2018, we issued 25,000 shares of common stock, valued at $0.20 per share, in connection with consulting agreements. During the year ended December 31, 2018, we expensed $5,000, in connection with this agreement which is included in operating, general and administrative expenses in the accompanying consolidated statements of operations.
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 expired in August 2018. There are no warrants outstanding as of December 31, 2019. A summary of the warrant activity for the year ended December 31, 2018 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, 2017
|
|
|
333,333
|
|
|
$
|
1.60
|
|
|
|
0.6
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants expired
|
|
|
(333,333
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at December 31, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
|
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, 2019 and 2018 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, 2019 and 2018 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, 2017
|
|
|
20,000
|
|
|
$
|
0.40
|
|
|
|
3.5
|
|
|
|
-
|
|
Options expired in 2018
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2018
|
|
|
20,000
|
|
|
|
0.40
|
|
|
|
2.5
|
|
|
|
-
|
|
Options expired in 2019
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2019
|
|
|
20,000
|
|
|
$
|
0.40
|
|
|
|
1.5
|
|
|
|
-
|
|
The following summarizes outstanding stock options and their respective exercise prices at December 31, 2019:
|
|
Shares
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
Underlying
|
|
|
Exercise
|
|
Date of
|
|
Contractual
|
|
Description
|
|
Options
|
|
|
Price
|
|
Expiration
|
|
Term (in years)
|
|
Employee Options
|
|
|
20,000
|
|
|
$
|
0.40
|
|
Aug 2021
|
|
|
1.5
|
|
For the year ended December 31, 2019 and 2018, no options were issued or expired. As of December 31, 2019, 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 at Houston and Odessa spine injury diagnostic centers. As of December 31, 2019 and 2018, we had balances payable to NSO of $0 and $4,967, 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 6, 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 $0 and $90,000 at December 31, 2019 and 2018, respectively.
NOTE 9. INCOME TAXES
We have not made provision for income taxes for the years ended December 31, 2019 or 2018, since we have net operating loss carryforwards generated from recurring net losses offset by a full valuation allowance as described below.
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, 2019, but did not recognize any incremental income tax expense in 2018 due to the revaluation of the valuation allowance.
Deferred tax assets consist of the following at December 31:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Benefit from net operating loss carryforwards
|
|
$
|
2,388,540
|
|
|
$
|
2,101,778
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
113,101
|
|
|
|
129,150
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
(2,501,641
|
)
|
|
|
(2,230,928
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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 21%, we have determined that it is not currently more likely than not that we will realize our deferred income tax assets of approximately $2,502,000 and $2,231,000 attributable predominantly to the future utilization of the approximate $11,374,000 and $9,762,000 in eligible net operating loss carryforwards, and the allowance for doubtful accounts, as of December 31, 2019 and 2018, 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 2020 to 2038, with those net operating losses generated during the year ended December 31, 2019 set to never expire based on the provisions of the Tax Reform Act.
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 21% federal statutory rate:
For the years ended December 31, 2019 and 2018, the reasons for the difference between the statutory federal rate of 21% and the effective tax rate were as follows:
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
of Pre-Tax
|
|
|
|
|
|
|
of Pre-Tax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for income tax
at federal statutory rate
|
|
$
|
338,639
|
|
|
|
21.0
|
%
|
|
$
|
141,047
|
|
|
|
21.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for state
income tax, net of federal effect
|
|
|
38,218
|
|
|
|
2.4
|
%
|
|
|
15,918
|
|
|
|
2.4
|
%
|
Non-deductible expenses
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Effect of change in enacted tax rate
|
|
|
-
|
|
|
|
-
|
%
|
|
|
-
|
|
|
|
-
|
%
|
Change in available NOLs
|
|
|
(97,775
|
)
|
|
|
(6.1
|
%)
|
|
|
(44,222
|
)
|
|
|
(6.6
|
%)
|
Change in valuation allowance
|
|
|
(270,713
|
)
|
|
|
(16.8
|
%)
|
|
|
(112,743
|
)
|
|
|
(16.8
|
%)
|
Other
|
|
|
(8,369
|
)
|
|
|
(0.5
|
%)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
-
|
|
|
|
-
|
%
|
|
$
|
-
|
|
|
|
-
|
%
|
NOTE 10. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leased office space under an operating lease that expired in January 2017 with minimum lease payments of $6,000. Subsequent to the expiration the Company maintained the lease at $6,000 per month on a month-to-month basis.
In June 2019, the Company moved its offices and is currently maintaining a month-to-month lease at $3,750 for the new office space.
During 2018, we leased a 2,400 square foot warehouse/office in Clear Lake Shores, Texas where we assembled, developed, tested, and marketed the Quad Video Halo. The lease was month-to-month with a monthly rent of $1,950. We moved out of this location in February 2019.