Our financial statements for the fiscal years ended December 31, 2018 and 2017 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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2018
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2017
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ASSETS
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Current assets:
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|
|
|
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Cash and Cash equivalents
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$
|
59,679
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|
|
$
|
77,843
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|
Accounts receivable, net
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|
|
1,040,117
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|
|
|
1,078,184
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|
Prepaid expenses
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10,650
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|
|
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9,250
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|
Inventories
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116,221
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|
|
|
200,825
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|
|
|
|
|
|
|
|
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Total current assets
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1,226,667
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1,366,102
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|
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Accounts receivable, net of allowance for doubtful accounts
of $395,873 and $106,433 at December 31, 2018 and 2017, respectively
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1,923,421
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2,405,837
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Property and equipment, net
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77,187
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43,164
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Intangible assets and goodwill
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170,200
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170,200
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|
|
|
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Total assets
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$
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3,397,475
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$
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3,985,303
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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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1,565,000
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$
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1,325,000
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Notes payable
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90,000
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|
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225,000
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Accounts payable and accrued liabilities
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75,975
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|
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79,205
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Due to related parties
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4,967
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27,910
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|
|
|
|
|
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Total current liabilities
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1,735,942
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1,657,115
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Commitments and contingencies
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Stockholders’ equity:
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Common stock: $0.001 par value, 50,000,000 shares authorized,
20,240,882 and 20,215,882 shares issued and outstanding at
December 31, 2018 and 2017, respectively
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20,241
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20,216
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Additional paid-in capital
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19,869,511
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19,864,536
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Accumulated deficit
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(18,228,219
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)
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(17,556,564
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)
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Total stockholders’ equity
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1,661,533
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2,328,188
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Total liabilities and stockholders’ equity
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$
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3,397,475
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$
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3,985,303
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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,
2018 and 2017
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201
8
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201
7
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Net revenue
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$
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1,835,620
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$
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1,855,615
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Cost of providing services, including amounts billed by a related
party of $298,888 and $534,886 during the years ended
December 31, 2018 and 2017, respectively
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656,777
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571,769
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Gross profit
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1,178,843
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1,283,846
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Research and Development
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-
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15,688
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Operating, general and administrative expenses
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1,792,554
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1,624,717
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Loss from operations
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(613,711
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)
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(356,559
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)
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Other income and (expense):
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Other income
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8,297
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6,357
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Interest expense
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(66,241
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)
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(55,722
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)
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Total other income and (expense)
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(57,944
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)
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(49,365
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)
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Net loss
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$
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(671,655
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)
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$
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(405,924
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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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(0.03
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)
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$
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(0.02
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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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20,228,382
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20,158,594
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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,
2018 and 2017
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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, 2016
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20,135,882
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|
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$
|
20,136
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|
|
$
|
19,843,716
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$
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(17,150,640
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)
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$
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2,713,212
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Issuance of common stock options 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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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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|
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|
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Net loss
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-
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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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|
|
|
|
|
|
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|
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Balances, December 31, 2017
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20,215,882
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20,216
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19,864,536
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(17,556,564
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)
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2,328,188
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Issuance of common stock for consulting services
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25,000
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25
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4,975
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-
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5,000
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Net loss
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-
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|
|
|
-
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|
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|
-
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(671,655
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)
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|
(671,655
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)
|
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|
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|
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|
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Balances, December 31, 2018
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|
20,240,882
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|
|
$
|
20,241
|
|
|
$
|
19,869,511
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|
|
$
|
(18,228,219
|
)
|
|
$
|
1,661,533
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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,
2018 and 2017
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201
8
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|
201
7
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Cash flows from operating activities:
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|
|
|
|
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Net loss
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|
$
|
(671,655
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)
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|
$
|
(405,924
|
)
|
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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523,030
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270,000
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Issuance of common stocks for services
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5,000
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|
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5,100
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|
Issuance of stock based compensation
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|
-
|
|
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|
15,800
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|
Depreciation and amortization expense
|
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|
25,503
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|
|
|
19,091
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|
Changes in operating assets and liabilities:
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|
|
|
|
|
|
|
|
Accounts receivable, net
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|
|
(2,547
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)
|
|
|
(61,538
|
)
|
Prepaid expenses
|
|
|
(1,400
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)
|
|
|
-
|
|
Inventories
|
|
|
25,078
|
|
|
|
(16,927
|
)
|
Accounts payable and accrued liabilities
|
|
|
(3,230
|
)
|
|
|
(3,318
|
)
|
Due to related party
|
|
|
(22,943
|
)
|
|
|
27,910
|
|
|
|
|
|
|
|
|
|
|
Net cash used in by operating activities
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|
|
(123,164
|
)
|
|
|
(149,806
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
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|
|
|
|
|
|
|
|
Purchase of equipment
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|
|
-
|
|
|
|
(3,614
|
)
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
-
|
|
|
|
(3,614
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)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Repayments on notes payable
|
|
|
(135,000
|
)
|
|
|
(75,000
|
)
|
Net Proceeds from line of credit
|
|
|
240,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
105,000
|
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
|
Decrease in cash and cash equivalents
|
|
|
(18,164
|
)
|
|
|
(178,420
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
77,843
|
|
|
|
256,263
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period
|
|
$
|
56,679
|
|
|
$
|
77,843
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
Interest paid
|
|
$
|
66,241
|
|
|
$
|
54,661
|
|
Taxes paid
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Supplementary disclosure of non-cash investing and financing activities:
|
|
|
|
|
|
|
|
|
Reclassification of inventory to equipment
|
|
$
|
59,526
|
|
|
$
|
-
|
|
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. We are seeking additional funding for expansion by way of reasonable debt financing or equity investment to fund 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 $3,223,521 to $18,228,219 as of December 31, 2018. 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.
Additionally, during the fourth quarter of 2018, the decision was made to discontinue funding future medical procedures due to our cash position, which also hampers our ability to pay back existing debt to Wells Fargo and a current shareholder (see Note 6—Notes Payable and Long-Term Debt). We have not funded any procedures in 2019 and will not do so unless we can access additional capital. The 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.
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
Our net revenues include service and product 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. QVH services sales arise when a customer requests use of a QVH unit along with video processes and storage. The QVH services are provided on a monthly basis satisfying the contractual performance obligation. The Company did not have material product or service sales related to the QVH units included during the year ended December 31, 2018 and September 30, 2017.
As such, for the purposes of the consolidated financial statements, there is no material disaggregation of revenues as the material portion of revenues consisted of the service revenues.
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 for 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 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 (“gross revenue”) during the years ended December 31, 2018 and 2017.
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). As of December 31, 2018 and 2017, there were no material contract assets, contract liabilities, or deferred contract costs recorded on the consolidated financial statements.
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 and 2017 are classified as finished-goods and consist of our Quad Video Halo. We wrote down our inventory by $50,000 related to certain obsolete inventory.
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. As of December 31, 2018 and 2017 the Company’s balance of intangible assets consisted solely of goodwill totaling $170,200 and $170,200 respectively
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. We determined that there were indicators of impairment present and performed an analysis of future cash flows related to the QVH Halo which consisted of contracts entered into with customers during late 2018. The analysis concluded that the discounted cash flows from these contracts supported the value of goodwill as of December 31, 2018. As such no impairment expenses was recorded.
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, 2018 and 2017, were $0 and $15,688, 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, 2018 and 2017, 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 $395,873 and $106,443, at December 31, 2018 and 2017, 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, 2018 and 2017, we recognized compensation expense related to our stock based compensation of $0 and $15,800, respectively. We also recognized compensation expense for issuances of our common stock in exchange for services of $5,000 and $5,100 during the years ended December 31, 2018 and 2017, respectively.
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, 2018 and 2017, 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, 2018 and 2017, common stock equivalents from outstanding stock options and warrants 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 Financial Accounting Standards Board (“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 goods 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 have adopted the provisions within this ASU and it did not have a material impact on the financial statements other than the required disclosures included here-in.
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
26
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 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 have adopted the provisions within this ASU and it did not have a material impact on the financial statements other than the required disclosures included here-in.
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 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 have adopted the provisions within this ASU and it did not have a material impact on the financial statements other than the required disclosures included here-in.
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 is 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 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 has adopted the provisions of this ASU, January 1, 2018 and there were no significant effects on the consolidated financial statements or 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.
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 years ended December 31, 2018 and 2017.
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, 2018 and 2017 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, 2018 and 2017, we determined an allowance for uncollectable accounts of $395,873 and $106,443, respectively was needed for those customer accounts whose collections appears doubtful. During the years ended December 31, 2018 and 2017 we recorded bad debt expense, net of recoveries of $523,030 and $270,000, respectively.
NOTE 5. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at December 31, 2018 and 2017:
|
|
201
8
|
|
|
201
7
|
|
|
|
|
|
|
|
|
|
|
Computers and equipment
|
|
$
|
151,638
|
|
|
$
|
98,169
|
|
Less: accumulated depreciation
|
|
|
(74,451
|
)
|
|
|
(55,005
|
)
|
|
|
$
|
77,187
|
|
|
$
|
43,164
|
|
Depreciation expense totaling $25,503 and $19,091, respectively, was charged to operating, general and administrative expenses during the years ended December 31, 2018 and 2017.
NOTE 6. NOTES PAYABLE AND LONG TERM DEBT
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, 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 originally entered into with Mr. Dalrymple in August 2012 to be due and payable on September 8, 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 both his promissory note with us and his obligations in connection with the line of credit with Wells Fargo. As of December 31, 2018 and 2017, the note had a principal balance of $90,000, and $225,000, respectively. During the years ended December 31, 2018 and 2017 the Company recorded $9,606 and $15,000 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 4.51% at December 31, 2018.
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. The maximum amount we can borrow under the line of credit remains $1,750,000. The line of credit 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, 2018 and 2017, outstanding borrowings under the line of credit totaled $1,565,000 and $1,325,000, respectively. During the years ended December 31, 2018 and 2017 the Company recorded $56,635 and $39,736 in interest expense related to this note. As of December 31, 2018 and 2017, there was no unrecognized expense or interest expense associated with the financing agreement.
NOTE 7. STOCKHOLDERS’ EQUITY
Common Stock
During the years ended December 31, 2018 and 2017, 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, 2018 and 2017:
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 are included in operating, general and administrative expenses in the accompanying consolidated statements of operations.
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.
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. A summary of the warrant activity for the years ended December 31, 2018 and 2017 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, 2016
|
|
|
383,333
|
|
|
$
|
1.60
|
|
|
|
0.6
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants expired
|
|
|
(50,000
|
)
|
|
|
0.60
|
|
|
|
-
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2018 and 2017 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, 2018 and 2017 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, 2016
|
|
|
1,050,000
|
|
|
$
|
0.47
|
|
|
|
2.8
|
|
|
|
-
|
|
Options expired in 2016
|
|
|
(1,030,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
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
|
|
|
|
-
|
|
The following summarizes outstanding stock options and their respective exercise prices at December 31, 2018:
|
|
Shares
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
Underlying
|
|
|
Exercise
|
|
Date of
|
|
Contractual
|
|
Description
|
|
Options
|
|
|
Price
|
|
Expiration
|
|
Term (in years)
|
|
Employee Options
|
|
|
20,000
|
|
|
$
|
0.40
|
|
Aug 2021
|
|
|
2.5
|
|
For the year ended December 31, 2018, no options were issued or expired. For the year ended December 31, 2017, no options were granted and 1,030,000 options expired. As of December 31, 2018, 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, 2018 and 2017, we had balances payable to NSO of $4,967 and $27,910, 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 $90,000 and $225,000 at December 31, 2018 and 2017, respectively.
NOTE 9. INCOME TAXES
We have not made provision for income taxes for the years ended December 31, 2018 or 2017, 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, 2018, but did not recognize any incremental income tax expense in 2017 due to the revaluation of the valuation allowance.
Deferred tax assets consist of the following at December 31:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Benefit from net operating loss carryforwards
|
|
$
|
2,101,778
|
|
|
$
|
1,998,057
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts
|
|
|
129,150
|
|
|
|
22,353
|
|
|
|
|
|
|
|
|
|
|
Less: valuation allowance
|
|
|
(2,230,928
|
)
|
|
|
(2,020,410
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
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 $2,231,000 and $2,020,000 attributable predominantly to the future utilization of the approximate $9,762,000 and $9,486,000 in eligible net operating loss carryforwards, and the allowance for doubtful accounts, as of December 31, 2018 and 2017, 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 2019 to 2037, with those net operating losses generated during the year ended December 31, 2018 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, 2018 and 2017, the reasons for the difference between the statutory federal rate of 21% and 34% and the effective tax rate were as follows:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
of Pre-Tax
|
|
|
|
|
|
|
of Pre-Tax
|
|
|
|
Amount
|
|
|
Income
|
|
|
Amount
|
|
|
Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for income tax at federal statutory rate
|
|
$
|
141,047
|
|
|
|
21.0
|
%
|
|
$
|
138,014
|
|
|
|
34.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit for state income tax, net of federal effect
|
|
|
15,918
|
|
|
|
2.4
|
%
|
|
|
12,178
|
|
|
|
3.0
|
%
|
Non-deductible expenses
|
|
|
-
|
|
|
|
-
|
%
|
|
|
(11,170
|
)
|
|
|
(2.8
|
%)
|
Effect of change in enacted tax rate
|
|
|
-
|
|
|
|
-
|
%
|
|
|
(1,250,730
|
)
|
|
|
(308.1
|
%)
|
Change in available NOLs
|
|
|
(44,222
|
)
|
|
|
(6.6
|
%)
|
|
|
(283,003
|
)
|
|
|
(69.7
|
%)
|
Change in valuation allowance
|
|
|
(112,743
|
)
|
|
|
(16.8
|
%)
|
|
|
1,394,711
|
|
|
|
343.6
|
%
|
Other
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 of $6,000. Subsequent to the expiration the Company has maintained the lease at $6,000 per month on a month to month basis.
We lease a 2,400 square foot warehouse/office in Clear Lake Shores, Texas where we assemble, develop, test, and market the Quad Video Halo. The lease is month-to-month with a monthly rent of $1,950. We moved out of this location in February 2019.