10-K 1 v337025_10k.htm

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

 

FORM 10-K
(Mark One)

 

S Annual report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2012.

 

£ Transition report under Section 13 or 15(d) of the Securities Exchange Act of 1934 (No fee required)
For the transition period from _______ to _______.

 

Commission file number: 000-27407

 

SPINE PAIN MANAGEMENT, INC.
(Name of Registrant in Its Charter)

 

Delaware 98-0187705
(State or Other Jurisdiction of Incorporation or (I.R.S. Employer Identification No.)
Organization)  

 

5225 Katy Freeway
Suite 600
Houston, Texas 77007
(Address of Principal Executive Offices)

 

(713) 521-4220
(Issuer's Telephone Number, Including Area Code)

 

Securities registered under Section 12(g) of the Exchange Act:

Common Stock ($0.001 Par Value)

(Title of Each Class)

 

Indicate by check mark if the registrant is a well-known seasoned issuer as defined in Rule 405 of the Securities Act.    Yes ¨    No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes ¨    No x

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes x    No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  ¨

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨    Accelerated filer  ¨

Non-accelerated filer  ¨    Smaller reporting company x

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

 

At June 30, 2012, the aggregate market value of shares of common stock held by non-affiliates of the registrant (based upon 9,195,355 shares held by non-affiliates on June 30, 2012) was approximately $10,666,611.

 

At March 21, 2013, there were 18,415,882 shares of the registrant’s common stock outstanding (the only class of voting common stock).

 

DOCUMENTS INCORPORATED BY REFERENCE

None.

 

 
 

 

PART I    
     
Item 1. Business 3
Item 1A. Risk Factors 7
Item 1B. Unresolved Staff Comments 12
Item 2. Properties 12
Item 3. Legal Proceedings 12
Item 4. Mine Safety Disclosures 12
     
PART II
     
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities 12
Item 6. Selected Financial Data 14
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations 14
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 16
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 38
Item 9A. Controls and Procedures 38
Item 9B. Other Information 39
     
PART III
     
Item 10. Directors, Executive Officer and Corporate Governance 39
Item 11. Executive Compensation 41
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 44
Item 13. Certain Relationships and Related Transactions, and Director Independence 45
Item 14. Principal Accountant Fees and Services 46
Item 15. Exhibits, Financial Statement Schedules 47
     
  Signatures 48

 

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PART I

 

ITEM 1.  BUSINESS

 

History

 

As used herein, the terms “Company,” “we,” “our”, and “us” refer to Spine Pain Management, Inc. (formerly known as Versa Card, Inc.), a Delaware corporation and its subsidiaries and predecessors, unless the context indicates otherwise.  We were incorporated on March 4, 1998.

 

Since inception, we have engaged in and contemplated several ventures and acquisitions, many of which were not consummated. In December 2008, we began moving forward to launch our new business concept of delivering turnkey solutions to spine surgeons, orthopedic surgeons and other healthcare providers for necessary and appropriate treatment of musculo-skeletal spine injuries. Our first spine injury diagnostic center opened in Houston, Texas in August 2009. We currently manage a total of five spine injury diagnostic centers in the United States. We are also evaluating the expansion of our services through additional spine injury diagnostic centers in multiple markets across the country.

 

Spine Pain Management, Inc.

 

We are a medical marketing, management, 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 health care 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 care management services to spine and orthopedic surgeons and other healthcare providers to facilitate proper treatment of their injured clients.  By pre-funding diagnostic testing and non-invasive and surgical care, patients are not unnecessarily delayed or prevented from obtaining needed treatment.  By providing early treatment, we believe that health conditions can be prevented from escalating and injured victims can be quickly placed on the road to recovery.  We believe our patient advocacy will be rewarding to patients who obtain needed relief from painful conditions, and moreover, provides spine surgeons and orthopedic surgeons a solution to offset the cost of care prior to settlement.

 

Through our care management system, we engage spine surgeons, orthopedic surgeons and other healthcare providers to operate as our independent contractors and diagnose and treat patients with musculo-skeletal spine injuries. We manage the centers that provide the spine diagnostic injections and treatment and pay the doctors a fixed rate for the medical procedures they performed. After a patient is billed for the procedures performed, 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.

 

We currently manage five spine injury diagnostic centers in the United States, which are located in Houston, Texas; McAllen, Texas; Orlando, Florida; Sarasota, Florida and the Tampa Bay Area of Florida. In March 2013, we ceased managing a center in Jacksonville, Florida when the affiliation with our healthcare provider there ended, but we are currently negotiating with a different healthcare provider to open a new center in Jacksonville within the next few months. We are also currently evaluating the development of additional spine injury diagnostic centers across the United States in major metropolitan cities.  We are seeking additional funding for this expansion by way of reasonable debt financing to combine with increased cash flow to accelerate this future development. In connection with this strategy, we plan to open additional diagnostic centers in new market areas that are attractive under our business model, assuming adequate funds are available.

 

In May 2012, we acquired Gleric Holdings, LLC which owns a device and process by which a video recording system is attached to a fluoroscopic x-ray machine, the “four camera technology,” that we believe can attract additional physicians and patients, expedite settlements and provide us with additional revenue streams. During the last half of 2012, through additional research and development, we have refined the technology into the fully commercialized Quad Video Halo System 2.0. Using this technology, diagnostic 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 plaintiff’s attorney to verify the treatment received. We believe the video will expedite the settlement process. Each of our affiliated centers can lease the hardware from us. Additionally, independent medical representatives will sell Quad Video Halo units to outside hospitals and clinics.

 

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Market

 

The market trends in treatment of musculo-skeletal injury all point to increased costs to the American public, government and the insurance carriers for the foreseeable future. We believe this creates a major opportunity under our business model.

 

Business Model

 

We plan to address this market by:

 

·Continuing our plan of rolling out spinal diagnostic services to spine surgeons, orthopedic surgeons, and other healthcare providers.
·Employing contract management services at regional, state and local levels.
·Identifying and targeting key spinal healthcare providers who handle large numbers of accident-type cases.

 

Care Management Strategy

 

Our care management program was developed by William Donovan, M.D., our Chief Executive Officer and Director. Our care management program generally begins with rehabilitation therapy. If there is no improvement in a patient’s condition following sufficient amounts of rehabilitation therapy, the patient is referred for diagnostic imaging, pain management and if medically necessary, surgery.

 

We believe that our care management program improves the medical outcomes for injured victims by providing medically necessary, appropriate and reasonable treatment of injuries and facilitates the settlement of the injured victim's case by completing required medical treatment and providing clear and consistent medical records.

 

Billing and Operations

 

We engage an independent contractor to perform medical services for patients and pay the independent contractor a fixed fee for the services. The patient is billed for the procedures performed, and we take control of the patient’s 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, the healthcare providers must agree to the settlement price and the patient must sign off on the settlement. Once the healthcare providers are paid, the patient’s attorney can receive payment for his or her legal fee.

 

The clinic facilities where our spine injury diagnostic centers operate are owned or leased by our independent contractor or a third party. We have no ownership interest in these clinic facilities, nor do we have any responsibilities towards building or operating the clinic facilities. Each of our independent contractors performs services for us (in the form of providing medical diagnostic services for patients) pursuant to a medical services agreement.

 

Marketing

 

Direct contact with key spine surgeons, orthopedic surgeons and other healthcare providers who are highly visible in their communities is an important step in targeting appropriate referral sources. Additional marketing to spine surgeons is done at national medical meetings and trade shows.  We believe that our services are favorably received and result in referrals of injury patients. We intend to continue expanding our spine injury diagnostic business operations to additional areas across the United States, of which there can be no assurance.

 

Governmental Regulation

 

Although all of the medical diagnostic procedures offered by us are performed through independent contractors, we are still a provider of healthcare management services, and we are subject to regulation by a number of governmental entities at the federal, state, and local levels. We are also subject to laws and regulations relating to business corporations in general. In recent years, Congress and state legislatures have introduced an increasing number of proposals to make significant changes in the healthcare system. Changes in law and regulatory interpretations could reduce our revenue and profitability.

 

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Corporate Practice of Medicine and Other Laws

 

We are not licensed to practice medicine. Every state in which our business operates or in which we anticipate it will operate limits the practice of medicine to licensed individuals or professional organizations comprised of licensed individuals. Business corporations generally may not exercise control over the medical decisions of physicians. Many states also limit the scope of business relationships between business entities and medical professionals, particularly with respect to fee splitting. Most state fee-splitting laws only prohibit a physician from sharing medical fees with a referral source, but some states have interpreted certain management agreements between business entities and physicians as unlawful fee-splitting. Statutes and regulations relating to the practice of medicine, fee-splitting, and similar issues vary widely from state to state. Because these laws are often vague, their application is frequently dependent on court rulings and attorney general opinions.

 

Under the medical service agreements we have entered into and plan to enter into with medical services providers, the doctors retain sole responsibility for all medical decisions, developing operating policies and procedures, implementing professional standards and controls, and maintaining malpractice insurance. We attempt to structure all our health services operations, including arrangements with our doctors, to comply with applicable state statutes regarding corporate practice of medicine, fee-splitting, and similar issues. However, there can be no assurance:

 

·that private parties, or courts or governmental officials with the power to interpret or enforce these laws and regulations, will not assert that we are in violation of such laws and regulations;

 

·that future interpretations of such laws and regulations will not require us to modify the structure and organization of our business; or

 

·that any such enforcement action, which could subject us and our affiliated professional groups to penalties or restructuring or reorganization of our business, will not adversely affect our business or results of operations.

 

HIPAA Administrative Simplification Provisions—Patient Privacy and Security

 

The Health Insurance Portability and Accountability Act of 1996, commonly known as “HIPAA,” requires the adoption of standards for the exchange of health information in an effort to encourage overall administrative simplification and to enhance the effectiveness and efficiency of the healthcare industry. Pursuant to HIPAA, the Secretary of the Department of Health and Human Services has issued final rules concerning the privacy and security of health information, the establishment of standard transactions and code sets, and the adoption of a unique employer identifier and a national provider identifier.  Noncompliance with the administrative simplification provisions can result in civil monetary penalties up to $100 per violation as well as criminal penalties that include fines and imprisonment. The Department of Health and Human Services Office of Civil Rights is charged with implementing and enforcing the privacy standards, while the Centers for Medicare and Medicaid Services are responsible for implementing and enforcing the security standards, the transactions and code sets standards, and the other HIPAA administrative simplification provisions.

 

The HIPAA requirements only apply to “covered entities,” such as health plans, healthcare clearinghouses, and healthcare providers, which transmit any health information in electronic form. Our business is likely considered a “covered entity” under HIPAA.

 

Of the HIPAA requirements, the privacy standards and the security standards have the most significant impact on our business operations. The privacy standards require covered entities to implement certain procedures to govern the use and disclosure of protected health information and to safeguard such information from inappropriate access, use, or disclosure. Protected health information includes individually identifiable health information, such as an individual’s medical records, transmitted or maintained in any format, including paper and electronic records. The privacy standards establish the different levels of individual permission that are required before a covered entity may use or disclose an individual’s protected health information, and establish new rights for the individual with respect to his or her protected health information.

 

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The final security rule establishes security standards that apply to covered entities. The security standards are designed to protect health information against reasonably anticipated threats or hazards to the security or integrity of the information, and to protect the information against unauthorized use or disclosure. The security standards establish a national standard for protecting the security and integrity of medical records when they are kept in electronic form.

 

The administrative simplification provisions of HIPAA require the use of uniform electronic data transmission standards for healthcare claims and payment transactions submitted or received electronically. We believe that we are in substantial compliance with the transaction and code set standards. The transaction standards require us to use standard code sets when we transmit health information in connection with certain transactions, including health claims and health payment and remittance advice.

 

In addition, the Secretary of the Department of Health and Human Services issued a final rule that requires each healthcare provider to adopt a standard unique health identifier, the National Provider Identifier (“NPI”). The NPI will identify healthcare providers in the electronic transactions for which the Secretary has already adopted standards (the “standard transactions”). These transactions include claims, eligibility inquiries and responses, claim status inquiries and responses, referrals, and remittance advices. All health plans and all healthcare clearinghouses must accept and use NPIs in standard transactions.

 

 Other Privacy and Confidentiality Laws

 

In addition to the HIPAA requirements described above, numerous other state and federal laws regulate the privacy of an individual’s health information. These laws specify how an individual’s health information may be used internally, the persons to whom health information may be disclosed, and the conditions under which such uses and disclosures may occur. Many states have requirements relating to an individual’s right to access his or her own medical records, as well as requirements relating to the use and content of consent or authorization forms. Also, because of employers’ economic interests in paying medical bills for injured employees and in the timing of the injured employees’ return to work, many states have enacted special confidentiality laws relating to disclosures of medical information in workers’ compensation claims. These laws limit employer access to such information. Many states have also passed laws that regulate the notification process to individuals when a security breach involving an individual’s personally identifiable information, such as social security number or date of birth, occurs. To the extent that state law affords greater protection of an individual’s health information than that provided under HIPAA, the state law will control.

 

We anticipate that there will be more regulation in the areas of privacy and confidentiality, particularly with respect to medical information. We regularly monitor the privacy and confidentiality requirements that relate to our business, and we anticipate that we may have to modify our operating practices and procedures in order to comply with these requirements.

 

Environmental

 

Although we currently contract with independent contractor medical providers, who are responsible for compliance with environmental laws, our operations may be subject to various federal, state, and local laws and regulations relating to the protection of human health and the environment, including those governing the management and disposal of infectious medical waste and other waste generated and the cleanup of contamination. If an environmental regulatory agency finds any of our facilities to be in violation of environmental laws, penalties and fines may be imposed for each day of violation and the affected facility could be forced to cease operations. The responsible party could also incur other significant costs, such as cleanup costs or claims by third parties, as a result of violations of, or liabilities under, environmental laws. Although we believe that our independent medical providers’ environmental practices, including waste handling and disposal practices, will be in material compliance with applicable laws, future claims or violations, or changes in environmental laws, could have an adverse effect on our business.

 

Competition

 

The market to provide healthcare pain diagnostic services is highly competitive and fragmented.  Our primary competitors are typically independent physicians, chiropractors, hospital emergency departments, and hospital-owned or hospital-affiliated medical facilities.  As managed care techniques continue to gain acceptance in the automobile accident marketplace, we believe that our competitors will increasingly consist of nationally-focused care management service companies providing their service to insurance companies and litigation defense experts.

 

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Because the barriers to entry in our geographic markets have a low threshold and our diagnostic centers’ patients have the flexibility to move easily to new healthcare service providers, the addition of new competitors may occur relatively quickly.  Some of our contracted physicians and other healthcare providers may elect to compete with us by offering their own products and services to patients.  If competition within our industry intensifies, our ability to retain patients or associated physicians, or maintain or increase our revenue growth, price flexibility and control over medical costs, trends, and marketing expenses, may be compromised.

 

In order to mitigate the effects of intensifying competition, we will make careful study of population trends and demographic growth patterns in determining the best locations to compete.  Moreover, we will endeavor to have all of our physicians under strict contract to avoid unnecessary attrition and loss of skilled personnel.

 

Research and Development

 

During the year ended December 31, 2012, we spent $18,488 in design fees for our Quad Video Halo system. No funds were spent on research and development activities during the year ended December 31, 2011.

 

Employees

 

We currently have seven full time employees, including three officers and four other employees at our corporate headquarters.  We expect to continue to use independent contractors, consultants, attorneys and accountants as necessary, to complement services rendered by our employees.

 

ITEM 1A. RISK FACTORS

 

Our future operating results are highly uncertain. Before deciding to invest in us or to maintain or increase your investment, you should carefully consider the risks described below, in addition to the other information contained in this annual report. If any of these risks actually occur, our business, financial condition or results of operations could be seriously harmed. In that event, the market price for our common stock could decline and you may lose all or part of your investment.

 

Risks Related to Our Company

 

Our limited history in the healthcare services business makes an evaluation of us and our future extremely difficult, and profits are not assured.

 

We have a limited operating history, having begun development of our healthcare services business at the end of December 2008 and having opened our first spine injury diagnostic center in August 2009.  There can be no assurance that we will be profitable in the future or that investors’ investments in us will be returned to them in full, or at all, over time.  In view of our limited history in the healthcare industry, an investor must consider our business and prospects in light of the risks, expenses and difficulties frequently encountered by companies in their early stages.  There can be no assurance that we will be successful in undertaking any or all of the activities required for successful commercial operations.  Our failure to undertake successfully such activities could materially and adversely affect our business, prospects, financial condition and results of operations.  There can be no assurance that our business operations will generate significant revenues, that we will generate additional positive cash flow from our operations or that we will be able to achieve or sustain profitability in any future period.

 

Our auditor has indicated that certain factors raise doubt about our ability to continue as a going concern, and our continued existence is dependent upon our ability to successfully execute our business plan.

 

The financial statements included with this report are presented under the assumption that we will continue as a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business over a reasonable length of time. We had a net loss of approximately $430,000 for the year ended December 31, 2012 and an accumulated deficit in aggregate of approximately $13.0 million at year end. We are not generating sufficient operating cash flows to support continuing operations.

 

In our financial statements for the year ended December 31, 2012, our auditor indicated that certain factors raised doubt about our ability to continue as a going concern. These factors included our accumulated deficit of $13.0 million as of December 31, 2012, as well as the fact that we were not generating sufficient cash flows to meet our regular working capital requirements. Our ability to continue as a going concern is dependent upon our ability to successfully execute our business plan, obtain additional financing and achieve a level of cash flows from operations adequate to support our cost structure. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

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We are dependent on key personnel.

 

We depend to a large extent on the services of certain key management personnel, including our executive officers and other key consultants, the loss of any of which could have a material adverse effect on our operations. Specifically, we rely on William Donovan, M.D., Director, Chief Executive Officer and President, to maintain our strategic direction.  Although Dr. Donovan serves under an employment agreement, there is no assurance that he will continue to be employed by us.  We do currently maintain $1,000,000 in key-man life insurance with respect to Dr. Donovan.

 

We may experience potential fluctuations in results of operations.

 

Our future revenues may be affected by a variety of factors, many of which are outside our control, including the success of implementing our healthcare services business and trends and changes in the healthcare industry.  As a result of our limited operating history and the emerging nature of our business plan, it is difficult to forecast revenues or earnings accurately, which may fluctuate significantly from quarter to quarter.

 

We had a history of significant operating losses prior to the opening of our first diagnostic center in August, 2009.

 

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, we have been able to reduce our deficit, and our accumulated deficit is $13,018,362 as of December 31, 2012. We intend to increase our operating expenses as we increase our service development, marketing efforts and brand building activities. We will 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, 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.

 

If we are unable to manage growth, we may be unable to achieve our expansion strategy.

 

The success of our business strategy depends in part on our ability to expand our operations in the future. Our growth has placed, and will continue to place, increased demands on our management, our operational and financial information systems, and other resources. Further expansion of our operations will require substantial financial resources and management attention. To accommodate our past and anticipated future growth, and to compete effectively, we will need to continue to improve our management, to implement our operational and financial information systems, and to expand, train, manage, and motivate our workforce. Our personnel, systems, procedures, or controls may not be adequate to support our operations in the future. Further, focusing our financial resources and diverting management’s attention to the expansion of our operations may negatively impact our financial results. Any failure to improve our management, to implement our operational and financial information systems, or to expand, train, manage, or motivate our workforce may reduce or prevent our growth.

 

We may incur significant expenses as a result of being a publically traded company, which may negatively impact our financial performance.

 

We may incur significant legal, accounting and other expenses as a result of being a publically traded company. The Sarbanes-Oxley Act of 2002, as well as related rules implemented by the Commission, has required changes in corporate governance practices of public companies. We expect that compliance with these laws, rules and regulations, including compliance with Section 404 of the Sarbanes-Oxley Act of 2002 as discussed in the following risk factor, may substantially increase our expenses, including our legal and accounting costs, and make some activities more time-consuming and costly. As a result, there may be a substantial increase in legal, accounting and certain other expenses in the future, which would negatively impact our financial performance and could have a material adverse effect on our results of operations and financial condition.

 

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Our internal control over financial reporting may not be considered effective, which could result in a loss of investor confidence in our financial reports and in turn could have an adverse effect on our stock price.

 

Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, with our annual reports, we are required to furnish a report by our management on our internal control over financial reporting. Such report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of the year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. If we are unable to assert that our internal control is effective, investors could be adversely affected.

 

Our healthcare services business model is unproven.

 

Our healthcare services business model depends upon our ability to implement and successfully execute our business and marketing strategy, which includes our ability to find and form relationships with spine surgeons, orthopedic surgeons and other healthcare providers, from whom we may obtain referrals for injured patients.  If we are unable to find and form relationships with such healthcare providers, our business will likely fail.

 

If competition increases, our growth and profits may decline.

 

The market to provide healthcare services and solutions is highly fragmented and competitive. Currently, we believe the solutions that we can provide to spine surgeons, orthopedic surgeons and other healthcare providers for necessary, reasonable and appropriate treatment for musculo-skeletal spine injuries resulting from automobile and work-related accidents, are somewhat unique in most geographic markets.  However, if we achieve our goal of becoming a leader in providing care management services to spine surgeons, orthopedic surgeons and other healthcare providers to facilitate proper treatment of their injured clients, we believe that competition for our business model will substantially increase.  Further, there are many alternatives to the care management services we can provide, that are currently available to surgeons and their injured patients. We can make no assurances that we will be able to effectively compete with the various care management services that are currently available or may become available in the future.

 

Because the barriers to entry in our geographic markets are not substantial and customers have the flexibility to move easily to new care management service providers, we believe that the addition of new competitors may occur relatively quickly. Some physicians and other healthcare providers may elect to compete with us by offering their own products and services to their clients and patients. In addition, significant merger and acquisition activity has occurred in our industry as well as in industries that will supply products to us, such as the hospital, physician, pharmaceutical, medical device, and health information systems industries. If competition within our industry intensifies, our ability to retain patients and/or obtain physician referrals, or maintain or increase our revenue growth, pricing flexibility, control over medical cost trends, and marketing expenses may be compromised.

 

Future acquisitions and joint ventures may use significant resources or be unsuccessful.

 

As part of our business strategy, we may pursue acquisitions of companies providing services that are similar or complementary to those that we provide or plan to provide in our business, and we may enter into joint ventures to provide services at certain facilities. These acquisitions and joint venture activities may involve:

 

·significant cash expenditures;
·additional debt incurrence;
·additional operating losses;
·increases in intangible assets relating to goodwill of acquired companies; and
·significant acquisition and joint venture related expenses,

 

any of which could have a material adverse effect on our financial condition and results of operations.

 

Additionally, a strategy of growth by acquisitions and joint ventures involves numerous risks, including:

 

·difficulties integrating acquired personnel and harmonizing distinct corporate cultures into our current businesses;
·diversion of our management’s time from existing operations; and

 

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·potential losses of key employees or customers of acquired companies.

 

We cannot assure you that we will be able to identify suitable candidates or negotiate and consummate suitable acquisitions or joint ventures. Also, we cannot assure you that we will succeed in obtaining financing for any future acquisitions or joint ventures at a reasonable cost, or that such financing will not contain restrictive covenants that limit our operating flexibility or other unfavorable terms. Even if we are successful in consummating acquisitions or joint ventures, we may not succeed in developing and achieving satisfactory operating results for the acquired businesses or integrating them into our existing operations.

 

If lawsuits against us are successful, we may incur significant liabilities.

 

Although we are not a medical service provider, spine surgeons, orthopedic surgeons and other healthcare providers with whom we form relationships are involved in the delivery of healthcare and related services to the public. In providing these services, the physicians and other licensed providers in our affiliated professional groups are exposed to the risk of professional liability claims. Further, plaintiffs have proposed expanded theories of liability against managed care companies as well as against employers who use managed care in many cases that, if established and successful, could expose us to liability from such claims, and could adversely affect our operations.

 

Regulatory authorities or other parties may assert that, in conducting our business, we may be engaged in unlawful fee splitting or the corporate practice of medicine.

 

The laws of many states prohibit physicians from splitting professional fees with non-physicians and prohibit non-physician entities, such as us, from practicing medicine, self-referral and from employing physicians to practice medicine. The laws in most states regarding the corporate practice of medicine have been subjected to limited judicial and regulatory interpretation. We believe our current and planned activities do not constitute fee-splitting or the unlawful corporate practice of medicine as contemplated by these laws. There can be no assurance, however, that future interpretations of such laws will not require structural and organizational modification of our existing relationships with the practices. In addition, statutes in some states in which we do not currently operate could require us to modify our affiliation structure. If a court, payor or regulatory body determines that we have violated these laws, we could be subject to civil or criminal penalties, our contracts could be found legally invalid and unenforceable (in whole or in part), or we could be required to restructure our arrangements with our contracted physicians and other licensed providers.

 

We operate in an industry that is subject to extensive federal, state, and local regulation, and changes in law and regulatory interpretations could reduce our revenue and profitability.

 

The healthcare industry is subject to extensive federal, state, and local laws, rules, and regulations relating to, among other things:

·payment for services;
·conduct of operations, including fraud and abuse, anti-kickback, physician self-referral, and false claims prohibitions;
·operation of provider networks and provision of case management services;
·protection of patient information;
·business, facility, and professional licensure, including surveys, certification, and recertification requirements;
·corporate practice of medicine and fee splitting prohibitions;
·ERISA health benefit plans; and
·medical waste disposal and environmental protection.

 

In recent years, both federal and state government agencies have increased civil and criminal enforcement efforts relating to the healthcare industry. This heightened enforcement activity increases our potential exposure to damaging lawsuits, investigations, and other enforcement actions. Any such action could distract our management and adversely affect our business reputation and profitability.

 

In the future, different interpretations or enforcement of laws, rules, and regulations governing the healthcare industry could subject our current business practices to allegations of impropriety, self-referral or illegality or could require us to make changes in our facilities, equipment, personnel, services, and capital expenditure programs, increase our operating expenses, and distract our management. If we fail to comply with these extensive laws and government regulations, we could suffer civil and criminal penalties, or be required to make significant changes to our operations. In addition, we could be forced to expend considerable resources to respond to an investigation or other enforcement action under these laws or regulations.

 

10
 

 

Changes in federal or state laws, rules, and regulations, including those governing the corporate practice of medicine, fee splitting, workers’ compensation, and insurance laws, rules, and regulations, may affect our ability to expand our operations into other states and, therefore, may reduce our profitability.

 

State laws, rules, and regulations relating to our business vary widely from state to state, and courts and regulatory agencies have seldom interpreted them in a way that provides guidance with respect to our business operations. Changes in these laws, rules, and regulations may adversely affect our profitability. In addition, the application of these laws, rules, and regulations may affect our ability to expand our operations into new markets.

 

Most states limit the practice of medicine to licensed individuals or professional organizations comprised of licensed individuals. Many states also limit the scope of business relationships between business entities like ours and licensed professionals and professional organizations, particularly with respect to fee splitting between a licensed professional or professional organization and an unlicensed person or entity. We plan to operate our business by maintaining long-term administrative and management agreements with affiliated professional doctors. Through these agreements, we plan to perform only non-medical administrative services. All control over medical matters is retained by the affiliated physicians or professional groups. Although we believe that our arrangements with physicians and the other affiliated licensed providers comply with applicable laws, regulatory authorities or other third parties may assert that we are engaged in the corporate practice of medicine or that our arrangements with the physicians or affiliated professional groups constitute fee-splitting or self-referral, or new laws may be introduced that would render our arrangements illegal. If this were to occur, we and/or the affiliated professional groups could be subject to civil or criminal penalties and/or we could be required to restructure these arrangements, all of which may result in significant cost to us and affect our profitability.

 

Confidentiality laws and regulations may increase the cost of our business, limit our service offerings, or create a risk of liability.

 

The confidentiality of individually identifiable health information, and the conditions under which such information may be maintained, included in our databases, used internally, or disclosed to third parties are subject to substantial governmental regulation. Legislation governing the possession, use, and dissemination of such protected health information and other personally identifiable information has been proposed or adopted at both the federal and state levels. Such laws and regulations may require us to implement new security measures. These measures may require substantial expenditures of resources or may limit our ability to offer some of our products or services, thereby negatively impacting the business opportunities available to us. If we are found to be responsible for any violation of applicable laws, regulations, or duties related to the use, privacy, or security of protected health information or other individually identifiable information, we could be subject to a risk of civil or criminal liability.

 

Risks Related to Our Common Stock

 

We may issue shares of common stock in the future, which could cause further dilution to all stockholders.

 

We may seek to raise equity or equity-related capital in the future. Any issuance of shares of our common stock will dilute the percentage ownership interest of all stockholders and may further dilute the book value per share of our common stock.

 

We do not anticipate paying any cash dividends.

 

We have never paid cash dividends on our common stock and do not anticipate doing so for the foreseeable future. The payment of dividends, if any, would be contingent upon our revenues and earnings, if any, capital requirements, and general financial condition. The payment of any dividends will be within the discretion of our board of directors. We presently intend to retain all earnings, if any, to implement our business strategy; accordingly, we do not anticipate the declaration of any dividends in the foreseeable future.

 

The market for our stock is limited and our stock price may be volatile.

 

There is a limited market for our shares of common stock and a stockholder may not be able to liquidate his or her shares regardless of the necessity of doing so.  The prices of our shares are highly volatile. This could have an adverse effect on developing and sustaining the market for our securities.  We cannot assure you that the market price of our common stock will not fluctuate or decline significantly.  In addition, the stock markets in general can experience considerable price and volume fluctuations.

 

11
 

 

The trading price of our common stock entails additional regulatory requirements, which may negatively affect such trading price.

 

Generally, the Securities and Exchange Commission defines a “penny stock” as any equity security not traded on an exchange or quoted on NASDAQ that has a market price of less than $5.00 per share.  The trading price of our common stock is below $5.00 per share.  As a result of this price level, our common stock is considered a penny stock and trading in our common stock is subject to the requirements of certain rules promulgated under the Securities Exchange Act of 1934.  These rules require additional disclosure by broker-dealers in connection with any trades generally involving penny stocks subject to certain exceptions.  Such rules require the delivery, before any penny stock transaction, of a disclosure schedule explaining the penny stock market and the risks associated therewith, and impose various sales practice requirements on broker-dealers who sell penny stocks to persons other than established customers and accredited investors (generally institutions).  For these types of transactions, the broker-dealer must determine the suitability of the penny stock for the purchaser and receive the purchaser's written consent to the transaction before sale.  The additional burdens imposed upon broker-dealers by such requirements may discourage broker-dealers from effecting transactions in our common stock.  As a consequence, the market liquidity of our common stock could be severely affected or limited by these regulatory requirements.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

 

Not Applicable.

 

ITEM 2. PROPERTIES

 

We currently maintain our executive offices at 5225 Katy Freeway, Suite 600, Houston, Texas 77007. This office space encompasses approximately 1,948 square feet and was provided to us in 2012, on a month-to-month basis, at $3,500 per month by Northshore Orthopedics, Assoc. (“NSO”), a company owned by William Donovan, M.D., our Director and Chief Executive Officer. Because of increased personnel, NSO began providing us additional office space in February 2013 for a total monthly rental of $5,000 per month. The rent includes the use of the telephone system, computer server, and copy machines.

 

ITEM 3. LEGAL PROCEEDINGS

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES

 

Not Applicable.

 

PART II

 

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

 

Our common stock is quoted on the Over-the-Counter Bulletin Board under the symbol, “SPIN.” Trading in our common stock in the over-the-counter market has been limited and sporadic and the quotations set forth below are not necessarily indicative of actual market conditions. The high and low sales prices for the common stock for each quarter of the fiscal years ended December 31, 2011 and 2012, according to OTC Markets Group Inc., were as follows:

 

12
 

 

Quarter
ended
  High   Low 
3/31/11  $0.92   $0.50 
6/30/11  $0.88   $0.55 
9/30/11  $1.30   $0.25 
12/31/11  $1.24   $0.66 
3/31/12  $2.00   $1.01 
6/30/12  $1.69   $1.00 
9/30/12  $1.34   $0.91 
12/31/12  $1.01   $0.41 

 

Record Holders

 

As of March 21, 2013, there were approximately 77 stockholders of record of our common stock, and we estimate that there were approximately 611 additional beneficial stockholders who hold their shares in “street name” through a brokerage or other institution. As of March 21, 2013 we have a total of 18,415,882 shares of common stock issued and outstanding. The holders of the common stock are entitled to one vote for each share held of record on all matters submitted to a vote of stockholders. Holders of the common stock have no preemptive rights and no right to convert their common stock into any other securities. There are no redemption or sinking fund provisions applicable to the common stock.

 

Dividends

 

We have not declared any cash dividends since inception and do not anticipate paying any dividends in the foreseeable future. The payment of dividends is within the discretion of the board of directors and will depend on our earnings, capital requirements, financial condition, and other relevant factors. There are no restrictions that currently limit our ability to pay dividends on our common stock other than those generally imposed by applicable state law.

 

Equity Compensation Plan Information

 

As of December 31, 2012, we do not have any compensation plans under which our equity securities are authorized for issuance.

 

Sales of Unregistered Securities

 

Other than the issuances described below, all equity securities that we have sold during the period covered by this report that were not registered under the Securities Act have previously been included in a Quarterly Report on Form 10-Q or in a Current Report on Form 8-K:

 

In December 2012, we issued a total of 600,000 unvested stock options to purchase shares of common stock, including 200,000 stock options to each of three of our officers, in connection with each officer’s acceptance of a new employment agreement. Each option has an exercise price of $0.54 per share and expires on December 1, 2017. For each of the three officers, 50,000 of the stock options will vest and become exercisable every six months during the term of his employment agreement. If at any time during the term of the agreement his employment with the company should end, all unvested stock options will be relinquished. We issued the options under the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and the rules and regulations promulgated thereunder. The issuance of securities did not involve a “public offering” based upon the following factors: (i) the issuance of the securities was an isolated private transaction; (ii) a limited number of securities were issued to a limited number of offerees; (iii) there was no public solicitation; (iv) the offerees were “accredited investors”; (v) the investment intent of the offerees; and (vi) the restriction on transferability of the securities issued.

 

13
 

 

In December 2012, we issued 30,000 restricted shares of common stock as consideration for the engagement of an investor relations consultant. We issued the securities under the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and the rules and regulations promulgated thereunder. The issuance of securities did not involve a “public offering” based upon the following factors: (i) the issuance of the securities was an isolated private transaction; (ii) a limited number of securities were issued to a single offeree; (iii) there was no public solicitation; (iv) the investment intent of the offeree; and (v) the restriction on transferability of the securities issued.

 

In December 2012, we issued 10,000 restricted shares of common stock to two separate consultants for their work on various matters, for a total of 20,000 shares of common stock. We issued the securities under the exemption from registration provided by Section 4(2) of the Securities Act of 1933 and the rules and regulations promulgated thereunder. The issuance of securities did not involve a “public offering” based upon the following factors: (i) the issuance of the securities was an isolated private transaction; (ii) a limited number of securities were issued to a limited number of offerees; (iii) there was no public solicitation; (iv) the investment intent of the offerees; and (v) the restriction on transferability of the securities issued.

 

ITEM 6. SELECTED FINANCIAL DATA

 

Not Applicable.

 

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with the audited financial statements and the related notes to the financial statements included in this Form 10-K.

 

FORWARD LOOKING STATEMENT AND INFORMATION

 

We are including the following cautionary statement in this Form 10-K to make applicable and take advantage of the safe harbor provision of the Private Securities Litigation Reform Act of 1995 for any forward-looking statements made by us or on behalf of us. Forward-looking statements include statements concerning plans, objectives, goals, strategies, future events or performance and underlying assumptions and other statements, which are other than statements of historical facts. Certain statements in this Form 10-K are forward-looking statements. Words such as "expects," "believes," "anticipates," "may," and "estimates" and similar expressions are intended to identify forward-looking statements. Such statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Such risks and uncertainties include, but are not limited to, service demands and acceptance, our ability to expand, changes in healthcare practices, changes in technology, economic conditions, the impact of competition and pricing, government regulation and approvals and other risks and uncertainties set forth below and in the “Risk Factors” section above. Our expectations, beliefs and projections are expressed in good faith and we believe that they have a reasonable basis, including without limitation, our examination of historical operating trends, data contained in our records and other data available from third parties. There can be no assurance that our expectations, beliefs or projections will result, be achieved, or be accomplished.

 

Management Overview

 

At the end of 2008, we launched our new business concept of delivering turnkey solutions to spine surgeons, orthopedic surgeons and other healthcare providers for necessary, reasonable and appropriate treatment for musculo-skeletal spine injuries. Moving forward, our main focus will be on the expansion and development of spine injury diagnostic centers across the nation.

 

Results of Operations

 

We recorded $3,459,231 in net revenues with $1,468,731 in costs of services and gross profit of $1,990,500 for the year ended December 31, 2012. For the same period in 2011, we recorded $5,212,165 in net revenues with $2,120,800 in costs of services and a gross profit of $3,091,365. Revenue was down in 2012 due to multiple factors. The change in our discount rate from 50% in 2011 to 52% in 2012 (as described in the paragraph below) resulted in a decrease in revenue previously recorded. Revenue was also negatively affected by lower case volume in 2012. Our affiliated healthcare providers accepted fewer patient cases from certain attorneys whose cases had a history of low returns. Additionally in 2012, because of the low returns we have experienced on cases of patients with minimal insurance coverage limits, our diagnostic centers performed fewer of the medically-necessary procedures needed by these patients.

 

14
 

 

We recognize revenue by reference to “net revenue,” which is gross amounts billed using CPT (Current Procedural Terminology) codes less account discounts that are expected to result when individual cases are ultimately settled. A discount rate of 52% and 50%, based on settled patient cases, was used to determine net revenue during 2012 and 2011, respectively. Accordingly, we had gross revenues of $7,865,542 with net revenues of $3,459,231 for the year ended December 31, 2012, versus gross revenues of $10,594,259 with net revenues of $5,212,165 for the year ended December 31, 2011.

 

During the year ended December 31, 2012, our operations focused on continued development of our spine injury diagnostic business in Tampa, Orlando, Jacksonville and Sarasota. During the year ended December 31, 2011, our operations focused on continued development of our spine injury diagnostic centers in Houston, McAllen, Tampa, Orlando, and Jacksonville.

 

Expenses

 

Operating, general and administrative expenses for the year ended December 31, 2012, were $1,898,925 as compared to $1,750,219 for the year ended December 31, 2011. The increase in operating expenses was primarily the result of additional overhead associated with opening new centers coupled with increased personnel staffing, bad debt provision, and consulting costs.

 

Other income (expenses) for the year ended December 31, 2012 was an expense of $521,793 as compared to expense of $26,142 for the year ended December 31, 2011. For the year ended December 31, 2012, other income of $33,436 and gain on extinguishment of debt of $95,568 was offset by $324,147 of interest expense and a litigation settlement expense of $326,650. For the same period in 2011, other income of $24,567 and gain on extinguishment of debt of $150,562 was offset by $201,271 of interest expense.

 

Net Income or Loss

 

Net loss for the year ended December 31, 2012 was $430,218 compared to net income of $1,315,004 for the year ended December 31, 2011. Lower revenue, coupled with additional personnel and non-cash charges (interest costs for stock options and stock warrants, litigation settlements, consulting, and bad debt expense) resulted in net income decreasing in 2012 from 2011.

 

Liquidity and Capital Resources

 

During 2012, cash used in operating activities was $566,227 as compared to $642,532 in 2011.  The decrease in cash used in operations was due to the increased collections of our spine injury diagnostic centers, partially offset by increased personnel costs. Cash collections received in settlements totaled $2,597,000 and $1,781,000 for the years ended December 31, 2012 and 2011, respectively.

 

There was a purchase of equipment of $5,000 during the year ended December 31, 2012 but no cash was provided by or used in investing activities for the year ended December 31, 2011.

 

Cash flows provided by financing activities totaled $1,534,400 for the year ended December 31, 2012, consisting of proceeds from issuance of long term debt and warrants of $1,550,000, proceeds from related party notes payable of $296,300 offset by repayments on related notes payable of $311,900. For the year ended December 31, 2011, cash flows provided by financing activities totaled $519,911, consisting of proceeds from issuance of long term debt and warrants of $200,000, proceeds from related party notes payable of $642,453, offset by the cancellation of common stock in settlement of a legal dispute of $36,789 and a repayment on related party notes payable of $362,753.

 

Capital Expenditures

 

We purchased a Quad Video Halo system at a cost of $5,000 in the year ended December 31, 2012. During the year ended December 31, 2011, no capital expenditures were made.

 

Impact of Inflation

 

Management believes that inflation may have a negligible effect on future operations. Management also believes that it may be able to offset inflationary increases in the cost of sales by increasing sales and improving operating efficiencies.

 

15
 

 

Income Tax Expense (Benefit)

 

We have experienced losses and as a result have net operating loss carryforwards available to offset future taxable income.

 

Critical Accounting Policies

 

In Note 3 to the audited financial statements for the years ended December 31, 2012 and 2011 included in this Form 10-K, we discuss those accounting policies that are considered to be significant in determining the results of operations and our financial position. The following critical accounting policies and estimates are important in the preparation of our financial statements:

 

Preparation of Financial Statements

 

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires our management to make significant estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. By their nature, these judgments are subject to an inherent degree of uncertainty. On an on-going basis, we evaluate estimates. We base our estimates on historical experience and other facts and circumstances that are believed to be reasonable, and the results form the basis for making judgments about the carrying value of assets and liabilities. The actual results may differ from these estimates under different assumptions or conditions.

 

Revenue Recognition

 

We conform to the guidance provided by SEC Staff Accounting Bulletin, Topic 13, “Revenue Recognition.”  Persuasive evidence of an arrangement is obtained prior to services being rendered when the patient completes and signs the medical and financial paperwork.  Delivery of services is considered to have occurred when medical diagnostic services are provided to the patient.  The price and terms for the services are considered fixed and determinable at the time that the medical services are provided and are based upon the type and extent of the services rendered.  Our credit policy has been established based upon extensive experience by management in the industry and has been determined to ensure that collectability is reasonably assured.  Payment for services are primarily made to us by a third party and the credit policy includes terms of net 240 days for collections.

 

Accounting Standards Updates

 

In Note 3 to the audited financial statements for the years ended December 31, 2012 and 2011 included in this Form 10-K, we discuss those recent accounting pronouncements that may be considered to be significant in determining the results of operations and our financial position.

 

Going Concern

 

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, we have been able to reduce our deficit, and our accumulated deficit is $13,018,362 as of December 31, 2012. During the year ended December 31, 2012, we realized net revenue of $3,459,231 and a net loss of $430,218. Successful business operations and our transition to attaining profitability are dependent upon obtaining additional financing and achieving a level of revenue adequate to support our cost structure. Considering the nature of the business, we are not generating immediate liquidity and sufficient working capital within a reasonable period of time to fund our planned operations and strategic business plan through December 31, 2013. There can be no assurances that there will be adequate financing available to us. The accompanying financial statements have been prepared assuming that we will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not Applicable.

 

16
 

 

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

 

Our financial statements for the fiscal years ended December 31, 2012 and 2011 are attached hereto.

 

17
 

 

TABLE OF CONTENTS

 

Report of Independent Registered Public Accounting Firm 19
   
Financial Statements  
     
  Balance Sheets at December 31, 2012 and 2011 20
     
  Statements of Operations for the Years Ended December 31, 2012 and 2011 21
 
  Statements of Stockholders’ Equity for the Years Ended December 31, 2012 and 2011 22
     
  Statements of Cash Flows for the Years Ended December 31, 2012 and 2011 23
   
Notes to Financial Statements 24-37

 

18
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Stockholders and Board of Directors of Spine Pain Management, Inc.:

 

We have audited the accompanying balance sheets of Spine Pain Management, Inc. (the “Company”) as of December 31, 2012 and 2011, and the related statements of operations, changes in stockholders’ equity and cash flows for the years then ended. These financial statements are the responsibility of the Company’s management.  Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).  Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement.  An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements.  An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation.  We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Spine Pain Management, Inc. as of December 31, 2012 and 2011, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements referred to above have been prepared assuming that the Company will continue as a going concern.  As more fully described in Note 2, the Company has an accumulated deficit of $13,018,362 and working capital of $3,632,469 as of December 31, 2012.  Additionally, the Company is not generating sufficient cash flows to meet its regular working capital requirements. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.  Management’s plans as to these matters are also described in Note 2.  The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

We were not engaged to examine management's assertion about the effectiveness of Spine Pain Management, Inc.'s internal control over financial reporting as of December 31, 2012 and 2011 and, accordingly, we do not express an opinion thereon.

 

  /s/ Ham, Langston & Brezina, LLP
   
  Houston, Texas
  March 29, 2013

 

19
 

 

SPINE PAIN MANAGEMENT, INC.

BALANCE SHEETS

December 31, 2012 and 2011

 

   2012   2011 
ASSETS          
           
Current assets:          
Cash  $1,017,755   $54,582 
Accounts receivable, net   3,209,191    2,876,848 
Prepaid expenses   257,684    99,083 
Debt cost   55,786    - 
           
Total current assets   4,540,416    3,030,513 
           
Accounts receivable, net of allowance for doubtful accounts of $52,628 and $40,000, respectively   3,287,552    2,954,269 
Note receivable from related party   -    163,703 
Debt cost   -    167,386 
Intangible assets, net   215,200    - 
Other assets   10,417    - 
           
Total assets  $8,053,585   $6,315,871 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
           
Current liabilities:          
Accounts payable and accrued liabilities  $183,950   $923,665 
Due to related parties   352,909    1,330,899 
Current portion of long-term debt, net   371,088    - 
           
Total current liabilities   907,947    2,254,564 
           
Long-term debt, including convertible note payable and secured note payable, net   1,332,365    314,280 
           
Total liabilities   2,240,312    2,568,844 
           
Commitments and contingencies          
           
Stockholders' equity:          
Common stock: $0.001 par value, 50,000,000 shares authorized; 18,415,882 and 17,088,396 shares issued and outstanding   at December 31, 2012 and 2011, respectively   18,416    17,088 
Additional paid-in capital   18,813,219    16,318,083 
Accumulated deficit   (13,018,362)   (12,588,144)
           
Total stockholders’ equity   5,813,273    3,747,027 
           
Total liabilities and stockholders' equity  $8,053,585   $6,315,871 

  

The accompanying notes are an integral part of the financial statements.

 

20
 

 

SPINE PAIN MANAGEMENT, INC.

STATEMENTS OF OPERATIONS

For the Years Ended December 31, 2012 and 2011

 

   2012   2012 
         
Net revenue  $3,459,231   $5,212,165 
           
Cost of providing services, including amounts billed by a related party of $761,832 and $635,700 during the years ended December 31, 2012 and 2011, respectively   1,468,731    2,120,800 
           
Gross profit   1,990,500    3,091,365 
           
Operating, general and administrative expenses   1,898,925    1,750,219 
           
Income from operations   91,575    1,341,146 
           
Other income and (expense):          
Other income   33,436    24,567 
Gain from debt extinguishment   95,568    150,562 
Interest expense   (324,147)   (201,271)
Litigation settlement expense   (326,650)   - 
           
Total other income and (expense)   (521,793)   (26,142)
           
Net (loss) income  $(430,218)  $1,315,004 
           
Net (loss) income per common share:          
Basic  $(0.02)  $0.08 
Diluted  $(0.02)  $0.08 
           
Shares used in (loss) income per common share:          
Basic   17,956,615    17,423,696 
Diluted   17,956,615    17,435,830 

 

The accompanying notes are an integral part of the financial statements.

 

21
 

 

SPINE PAIN MANAGEMENT, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Years Ended December 31, 2012 and 2011

 

       Additional       Total 
   Common Stock   Paid-in   Accumulated   Stockholders' 
   Shares   Amount   Capital   Deficit   Equity 
Balances, December 31, 2010   17,403,396   $17,403   $15,658,734   $(13,903,148)  $1,772,989 
                          
Issuance of common stock for compensation of employees   100,000    100    93,900    -    94,000 
Issuance of common stock options for compensation of officers and directors   -    -    171,585    -    171,585 
Issuance of common stock upon exercise of stock options   100,000    100    76,900    -    77,000 
Cancellation of common stock in settlement of legal dispute   (515,000)   (515)   (36,274)   -    (36,789)
Warrants issued for debt costs associated with sale of debentures   -    -    279,000    -    279,000 
Detachable warrants issued with debentures   -    -    74,238    -    74,238 
Net income   -    -    -    1,315,004    1,315,004 
                          
Balances, December 31, 2011   17,088,396    17,088    16,318,083    (12,588,144)   3,747,027 
                          
Issuance of common stock for debt conversions   557,486    558    1,019,642    -    1,020,200 
Issuance of common stock for acquisition of assets of Gleric   Holdings, LLC (See Note 4)   170,000    170    231,030    -    231,200 
Issuance of common stock options for compensation of officers and directors   -    -    300,000    -    300,000 
Issuance of common stock for consulting services   365,000    365    358,735    -    359,100 
Issuance of common stock in settlement of legal dispute   235,000    235    326,415    -    326,650 
Detachable warrants issued with convertible debt   -    -    46,716    -    46,716 
Detachable warrants issued with secured note payable   -    -    212,598    -    212,598 
Net loss   -    -    -    (430,218)   (430,218)
                          
Balances, December 31, 2012   18,415,882   $18,416   $18,813,219   $(13,018,362)  $5,813,273 

  

The accompanying notes are an integral part of the financial statements.

 

22
 

  

SPINE PAIN MANAGEMENT, INC.

STATEMENTS OF CASH FLOWS

For the Years Ended December 31, 2012 and 2011

 

   2012   2011 
Cash flows from operating activities:          
Net (loss) income  $(430,218)  $1,315,004 
Adjustments to reconcile net (loss) income to net cash used in operating activities:          
Provision for bad debts   240,000    40,000 
Gain from debt extinguishment   (95,568)   (150,562)
Interest expense related to warrant amortization   168,408    163,546 
Accretion of debt discount on long term debt   41,679    - 
Stock based compensation   474,084    265,585 
Common stock issued in settlement of litigation   326,650    - 
Depreciation and amortization expense   10,583    - 
Changes in operating assets and liabilities:          
Accounts receivable, net   (905,627)   (2,894,979)
Related party receivable   163,703    (140,106)
Prepaid expenses   26,416    52,250 
Due to related party   57,810    - 
Accounts payable and accrued liabilities   (644,147)   706,730 
           
Net cash used in operating activities   (566,227)   (642,532)
           
Cash flows from investing activities:          
Purchase of equipment   (5,000)   - 
           
Net cash used in investing activities   (5,000)   - 
           
Cash flows from financing activities:          
Proceeds from exercise of stock options   -    77,000 
Proceeds from issuance of long-term debt and warrants   1,550,000    200,000 
Treasury stock recovered and cancelled in legal dispute   -    (36,789)
Proceeds from related party notes payable   296,300    642,453 
Repayments on related party notes payable   (311,900)   (362,753)
           
Net cash provided by financing activities   1,534,400    519,911 
           
Net increase (decrease) in cash and cash equivalents   963,173    (122,621)
           
Cash and cash equivalents at beginning of period   54,582    177,203 
           
Cash and cash equivalents at end of period  $1,017,755   $54,582 
           
Supplementary disclosure of cash flow information:          
Interest paid  $114,059   $37,726 
Taxes paid  $-   $- 
           
Supplementary disclosure of non-cash investing and financing activities:          
Warrants issued for debt costs associated with sale of debentures  $-   $279,000 
Common stock issued to acquire Gleric Holdings, LLC  $231,200   $- 
Common stock issued in conversion of related party payable  $1,020,200   $- 

 

The accompanying notes are an integral part of the financial statements.

 

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NOTE 1. DESCRIPTION OF BUSINESS

 

Spine Pain Management, Inc., (the “Company,” “we” or “us”) formerly known as Versa Card, Inc., was incorporated in Delaware on March 4, 1998 to acquire interests in various business operations and assist in their development. In November 2009, we changed (i) our name from Versa Card, Inc. to Spine Pain Management, Inc. and (ii) our trading symbol from "IGLB" to "SPIN."

 

At the end of December 2008, we began moving forward to launch our new business concept of delivering turnkey solutions to spine surgeons, orthopedic surgeons and other healthcare providers for necessary and appropriate treatment of musculo-skeletal spine injuries. We currently manage five spine injury diagnostic centers within the United States, which are located in Houston, Texas; McAllen, Texas; Orlando, Florida; Sarasota, Florida; and the Tampa Bay Area of Florida. In March 2013, we ceased managing a center in Jacksonville, Florida when the affiliation with our healthcare provider there ended, but we are currently negotiating with a different healthcare provider to open a new center in Jacksonville within the next few months. We are also evaluating the expansion of our services through additional spine injury diagnostic centers in multiple markets across the United States.

 

We are a medical marketing, management, 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 that provide necessary and appropriate treatment of musculo-skeletal spine injuries resulting from automobile and work-related accidents. Our care management services help reduce the financial burden on healthcare providers that provide patients with early-stage diagnostic testing and non-invasive surgical care, preventing many patients from being unnecessarily delayed or inhibited from obtaining needed treatment. We believe that our patient advocacy will be rewarding to patients who obtain needed relief from painful conditions.

 

Through our care management system, we engage spine surgeons, orthopedic surgeons and other healthcare providers to operate as our independent contractors to diagnose and treat patients with musculo-skeletal spine injuries. We manage the centers that provide the spine diagnostic injections and treatment and pay the doctors a fixed rate for the medical procedures they performed. After a patient is billed for the procedures performed, 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.

 

The clinic facilities where the spine injury diagnostic centers operate are owned or leased by third parties. We have no ownership interest in these clinic facilities and have no responsibilities towards building or operating the clinic facilities.

 

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, we have been able to reduce our deficit, and our accumulated deficit is $13,018,362 as of December 31, 2012. During the year ended December 31, 2012, we realized net revenue of $3,459,231 and a net loss of $430,218. Successful business operations and our transition to positive cash flows from operations are dependent upon obtaining additional financing and achieving a level of collections adequate to support our cost structure. Considering the nature of our business, we are not generating immediate liquidity and sufficient working capital within a reasonable period of time to fund our planned operations and strategic business plan through December 31, 2013. There can be no assurances that there will be adequate financing available to us. The accompanying financial statements have been prepared assuming that we will continue as a going concern. This basis of accounting contemplates the recovery of our assets and the satisfaction of liabilities in the normal course of business. The financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the outcome of this uncertainty.

 

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NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Accounting Method

 

Our financial statements are prepared using the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.

 

Use of Estimates

 

The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of our financial position and results of operations.

 

Revenue Recognition

 

Revenues are recognized in accordance with SEC staff accounting bulletin, Topic 13, Revenue Recognition, which specifies that only when persuasive evidence for an arrangement exists; the fee is fixed or determinable; and collection is reasonably assured can revenue be recognized.

 

Persuasive evidence of an arrangement is obtained prior to services being rendered when the patient completes and signs the medical and financial paperwork.  Delivery of services is considered to have occurred when medical diagnostic services are provided to the patient.  The price and terms for the services are considered fixed and determinable at the time that the medical services are provided and are based upon the type and extent of the services rendered.  Our credit policy has been established based upon extensive experience by management in the industry and has been determined to ensure that collectability is reasonably assured.  Payment for services are primarily made to us by a third party and the credit policy includes terms of net 240 days for collections; however, collections occur upon settlement or judgment of cases (see Note 5).

 

Fair Value of Financial Instruments

 

Cash, accounts receivable, accounts payable and accrued expenses, and notes payable as reflected in the 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.

 

Intangible Assets

 

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.

 

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 assets on the balance sheet. Each year the goodwill amount will be reviewed to determine if any impairment has occurred. Impairment occurs when the original amount of goodwill exceeds the value of the expected future net cash flows from the business acquired. At December 31, 2012, no impairment to the asset was determined to have occurred.

 

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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 statement 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.

  

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 recorded an allowance for doubtful accounts in the amount of $52,268 and $40,000, at December 31, 2012 and 2011, 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 statements of income.  We use the Black-Scholes Option Pricing Model to determine the fair-value of stock-based awards.

 

We utilize the prospective transition method, which requires the application of the accounting standard to new awards made, as well as awards from previous years that have been modified, repurchased, or cancelled after December 31, 2005.  We continue to account for any portion of awards outstanding at December 31, 2005 using the accounting principles originally applied to those awards (either the minimum value method, or the authoritative guidance for accounting for certain transactions involving stock based compensation). We recognized stock based compensation cost of $474,084 and $265,585, respectively, during 2012 and 2011.

 

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 bases. 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

 

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.

 

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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.

 

During 2011, we filed federal and applicable state income tax returns for the year ended December 31, 2010, and during 2010, we filed federal and applicable state income tax returns for the year ended December 31, 2009 and prior years.  Although we had been incurring losses since our inception, we were obligated but were delinquent in filing income tax returns in compliance with IRS regulations and those of applicable state jurisdictions. Management believes that we will not incur significant penalties or interest for delinquent filing of federal and state income tax returns, nor federal or state income tax liabilities, as applicable, for the years prior to 2010, considering our history of losses since inception. We have not made any provision for federal and state income tax liabilities that may result from this uncertainty as of December 31, 2012 and 2011, respectively. Management believes that because we have now filed all delinquent tax returns that our failure to timely file will not have a material adverse impact on our financial position, results of operations or cash flows.

 

The number of years with open tax audits varies depending on the tax jurisdiction. Our major taxing jurisdictions include the United States (including applicable states). Because U.S. federal and applicable state tax returns for years 2004 to 2009 were filed in 2010, management believes that all these years of returns will remain subject to audit until 2013.

 

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 Income/Loss per Share

 

Basic and diluted net income/loss per common share is presented in accordance with ASC Topic 260, “Earnings per Share”, for all periods presented. During year ended December 31, 2012, common stock equivalents from outstanding stock options, warrants and convertible debt have been excluded from the calculation of the diluted loss per share in the statement of operations, because all such securities were anti-dilutive. During year ended December 31, 2011, common stock equivalents from outstanding stock options and warrants have been included in the calculation of the diluted income per share in the statement of operations, because these securities were dilutive. The net income per share is calculated by dividing the net income by the weighted average number of shares outstanding during the periods.

 

Recent Accounting Pronouncements

 

In February 2013, the FASB issued ASU 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This new accounting guidance under ASC 220, Comprehensive Income, provides an improvement on the reporting of reclassifications out of accumulated other comprehensive income by requiring an entity to report the effect of significant reclassifications out of accumulated other comprehensive income by component either on the income statement or in the notes to the financial statements. The guidance will become effective prospectively for fiscal years and interim reporting periods beginning after December 15, 2013. Early adoption is permitted. The adoption of ASU 2013-02 is not expected to have a significant impact on the financial statements.

 

In July 2012, the FASB issued ASU No. 2012-02, Intangible - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment. ASU No. 2012-02 permits an entity to first assess qualitative factors to determine whether it is more likely than not that an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test in accordance with Subtopic 350-30, Intangibles – Goodwill and Other – General Intangibles Other than Goodwill. The more likely than not threshold is defined as having a likelihood of more than 50 percent. Under ASU No. 2012-02, an entity is not required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines it is more likely than not that its fair value is less than its carrying value. ASU No. 2012-02 is effective for annual periods beginning after September 15, 2012. We are currently evaluating the impact of this new guidance but we do not expect that it will have a significant impact on our financial statements.

 

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In December 2011, the FASB issued ASU No. 2011-11, Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. ASU No. 2011-11 was issued to provide enhanced disclosures that will enable users of the financial statements to evaluate the effect or potential effect of netting arrangements on an entity's financial position. The amendments under ASU No. 2011-11 require enhanced disclosures by requiring entities to disclose both gross information and net information about both instruments and transactions subject to an agreement similar to a master netting arrangement. This scope would include derivatives, sale and repurchase agreements, reverse sale and repurchase agreements, and securities borrowing and lending arrangements. ASU No. 2011-11 is effective retrospectively for annual periods beginning on or after January 1, 2013, and interim periods within those periods. We do not expect the adoption of ASU 2011-11 to have a significant impact on our financial position or results of operations.

 

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220): Presentation of Comprehensive Income. ASU No. 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of changes in stockholders' equity. The guidance now requires the company to present the components of net income and other comprehensive income either in one continuous statement of comprehensive income or in two separate but consecutive statements. Regardless of whether the company chooses to present comprehensive income in a single continuous statement or in two separate but consecutive statements, the company is required to present on the face of the financial statements reclassification adjustments for items that are reclassified from other comprehensive income to net income in the statement(s) where the components of net income and the components of other comprehensive income are presented. The standard does not change the items which must be reported in other comprehensive income, how such items are measured or when they must be reclassified to net income. ASU No. 2011-05 is effective retrospectively for fiscal years and interim reporting periods within these years beginning after December 15, 2011, with early adoption permitted. We adopted the pronouncement, on January 1, 2012, and it had no significant impact on our financial statements.

 

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards ("IFRS"). This pronouncement was issued to provide a consistent definition of fair value and ensure that the fair value measurement and disclosure requirements are similar between U.S. GAAP and IFRS. ASU 2011-04 changes certain fair value measurement principles and enhances the disclosure requirements, particularly for Level 3 fair value measurements. ASU 2011-04 was effective for reporting periods beginning after December 15, 2011 with application on a prospective basis. We adopted the pronouncement, on January 1, 2012, and it had no significant impact on our financial statements.

 

Reclassifications

 

Certain items in the 2011 financial statements have been reclassified to conform to the 2012 financial statement presentation. Such reclassifications had no effect on our financial position, results of operations and cash flows.

 

NOTE 4. ACQUISITIONS

 

On May 9, 2012, we entered into a Membership Interest Purchase Agreement (the “Agreement”), whereby we purchased 100% of Gleric Holdings, LLC (“Gleric”) from Dr. Eric K. Groteke and Dr. Glen C. Pettersen for aggregate consideration of 170,000 restricted shares of our common stock. Gleric owns a patent-pending technology and process, known at the Quad Video Halo system, involving a video and accessory apparatus for a video fluoroscopy unit. The accessory apparatus is designed for the purpose of maintaining a sterile environment during video fluoroscopy procedures in order to video and audio document medical procedures that utilize this type of equipment. The Quad Video Halo system is designed to provide greater transparency and impartial evidence to medical, legal, and insurance companies. The system is used to create a quad-screen multi-media view of the treatment process, which is incorporated into the patient’s medical records and provides a clear video of the overall procedure to further support claim review. The evidence provided by the video is tamper-proof and provides a candid reality of what the patient experienced.

 

We performed an internal valuation based upon analysis performed by our CEO on the value of the potential sales of the patent-pending video fluoroscopy units to other health care providers coupled with the incentive to employ Dr. Groteke as our Chief Technology Officer, who was hired on May 9, 2012. Gleric’s sole asset was the video camera they had assembled with the total material cost approximating $7,000 and no other assets or liabilities were assumed in the transaction. The $231,200 consideration given (170,000 shares of our common stock at $1.36 per share based on the quoted closing price on the date of the transaction), was assigned to the assets acquired as follows:

 

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Incentive to hire Dr. Groteke as Chief Technology Officer coupled with non-compete agreements for both Dr. Groteke and Dr. Pettersen  $54,000 
Quad Video Halo system equipment   7,000 
Goodwill   170,200 
      
   $231,200 

 

During the year ended December 31, 2012, we recorded amortization expense of $9,000 related to the non-compete agreements for both parties included in the Gleric acquisition.

 

NOTE 5. ACCOUNTS RECEIVABLE

 

We recognize revenue and accounts receivable in accordance with SEC staff accounting bulletin, Topic 13, “Revenue Recognition”, which requires persuasive evidence that a sales arrangement exists; the fee is fixed or determinable; and collection is reasonably assured before revenue is recognized. We manage certain spine injury diagnostic centers where we engage healthcare providers as our independent contractors to perform medical services for patients. We pay the healthcare providers a fixed rate for medical services performed. The patients are billed 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. The patients are billed the normal billing amount, based on national averages, for a particular CPT code procedure. We take control of the patients’ unpaid bills.

 

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. A discount rate of 52% and 50%, based on settled patient cases, was used to reduce revenue to 48% and 50% of CPT code billings (“gross revenue”) during 2012 and 2011, respectively.

 

The patients who receive medical services at the diagnostic centers are typically plaintiffs in accident lawsuits. The timing of collection of receivables is dependent on the timing of a settlement or judgment of each individual case associated with these patients. Historical experience, through 2012, 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 currently indicates that 49% of cases will be subject to a settlement or judgment within one year of a medical procedure.

 

We take the following steps to establish an arrangement between all parties and facilitate collection upon settlement or final judgment of cases:

 

·The patient completed and signed medical and financial paperwork, which included an acknowledgement of the patient’s responsibility of payment for the services provided. Additionally, the paperwork should include an assignment of benefits derived from any settlement or judgment of the patient’s case.

 

·The patient's attorney issued the healthcare provider a Letter of Protection designed to guarantee payment for the medical services provided to the patient from proceeds of any settlement or judgment in the accident case. This Letter of Protection also should preclude any case settlement without providing for payment of the patient’s medical bill.

 

·Most of the patients who received medical services at the diagnostic centers have typically been previously referred to a doctor who performed the initial two to four months of conservative treatment based on a recommendation by their attorney. The doctor then typically refers the patient to one of our healthcare providers for an evaluation because of continuing symptoms. Patients are only accepted if the initial referral was from a reputable plaintiff's attorney with adequate experience in personal injury lawsuits. Before referring a patient, the attorney is expected to have evaluated the patient’s accident case, including the conditions that gave rise to the patient's injuries and the extent and quality of general liability insurance held by the defendant. The attorney is also responsible for determining that a settlement favorable to the patient/plaintiff is expected.

 

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Accounts Receivable Factoring

 

During the years ended December 31, 2012 and 2011, we factored $17,165 and $1,008,778, respectively, of gross receivables to a third party (the “factor”) for cash consideration of $5,150 and $302,633, respectively, or 30% of the gross receivable. In the event the factor does not receive at least 30% of the gross receivable purchased, we will transfer additional accounts receivable to the factor at no charge until the factor collects monies in the aggregate of the original gross receivables purchased. At December 31, 2012, factored gross receivables totaling $428,381 remained subject to the provisions of the factoring terms noted above.

 

NOTE 6. DUE TO RELATED PARTIES

 

Due to related parties consists of the following at December 31:

 

   2012   2011 
         
Due to Northshore Orthopedics Associates  $4,400   $1,020,200 
Due to Chief Executive Officer   290,699    310,699 
Due to Wellness Works   57,810    - 
   $352,909   $1,330,899 

 

Amounts due to Northshore Orthopedics, Assoc. (“NSO”, a company owned by our Chief Executive Officer) and our Chief Executive Officer are non-interest bearing, due on demand and do not follow any specific repayment schedule. We used the amounts received to meet our working capital requirements (see Note 9). The $1,020,200 outstanding NSO debt at December 31, 2011 was converted to 557,486 shares of common stock in February 2012.

 

Amounts due to Wellness Works, LLC (“Wellness”, a company owned by our Chief Technology Officer) are non-interest bearing and are due by the 15th of the month following the month in which they were billed. See Note 9 for further information on the amounts due to Wellness.

 

NOTE 7. NOTES PAYABLE AND LONG TERM DEBT

 

Debentures

 

In February 2011, two investors subscribed to purchase an aggregate of $200,000 of debentures and warrants from us. The debentures have an aggregate principal amount of $200,000 and bear interest at 10% per year. The entire principal amount of the debentures is due in one lump sum on June 30, 2013. The debentures were issued with three sets of detachable warrants as follows: (i) Series A Warrants to purchase an aggregate of 100,000 shares of common stock at the price of $1.50 per share that expired on December 31, 2012, (ii) Series B Warrants to purchase an aggregate of 50,000 shares of common stock at the price of $3.00 per share that expire on December 31, 2013, (iii) Series C Warrants to purchase an aggregate of 50,000 shares of common stock at the price of $5.00 per share that expire on December 31, 2013.

 

Between October and December 2010, three investors subscribed to purchase an aggregate of $200,000 of debentures and warrants from us. The debentures have an aggregate principal amount of $200,000 and bear interest at 10% per year. The entire principal amount of the debentures is due in one lump sum on June 30, 2013. The debentures were issued with three sets of detachable warrants as follows: (i) Series A Warrants to purchase an aggregate of 100,000 shares of common stock at the price of $1.50 per share that expired on December 31, 2012, (ii) Series B Warrants to purchase an aggregate of 50,000 shares of common stock at the price of $3.00 per share that expire on December 31, 2013 (iii) Series C Warrants to purchase an aggregate of 50,000 shares of common stock at the price of $5.00 per share that expire on December 31, 2013.

 

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Following is an analysis of debentures payable at December 31:

 

   2012   2011 
         
Stated value of debentures payable  $400,000   $400,000 
           
Less: unamortized value of warrants issued   28,912    85,720 
           
   $371,088   $314,280 

 

During the years ended December 31, 2012 and 2011, we recorded $56,808 and $51,931 in interest expense related to the amortization of the warrants value associated with the debentures.

 

Third-party note payable

 

On March 9, 2012, we entered into an uncollateralized note payable with a third party for $50,000. The note is due March 9, 2015 and bears interest at 10% per year. Interest is payable quarterly and the full principal amount is due upon maturity. The note payable balance was $50,000 and $0 at December 31, 2012 and December 31, 2011, respectively.

 

Convertible and secured notes payable

 

On June 27, 2012, we issued a $500,000 convertible promissory note bearing interest at 12% per year which matures on March 27, 2014. This note provides for six quarterly payments of interest commencing on September 27, 2012, and continuing thereafter on December 27, March 27, June 27, and September 27 throughout the term of the promissory note. On the maturity date, a balloon payment of the entire outstanding principal plus any accrued but unpaid interest is due. Under the terms of the convertible note, the holder received a detachable warrant to purchase 69,445 shares of our common stock at the price of $1.80 per share that expires on June 27, 2014. The holder of the note also has the right to convert into common stock, at $1.50 per share, up to 50% of the principal amount after twelve months and up to 100% of the principal amount after fifteen months from the original issue date.

 

On August 29, 2012, we issued 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, 2012, 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 expires on August 29, 2015. 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.

 

In accordance with ASC 470-20, Debt with Conversion and Other Options, the proceeds received from the convertible note were allocated between the convertible note and the detachable warrant based on the fair value of the convertible note without the warrant and the warrant. The portion of the proceeds allocated to the warrant was recognized as additional paid-in capital and a debt discount. The debt discount related to the warrant is accreted into interest expense through the maturity of the convertible note. The effective conversion price of the common stock did not exceed the stated conversion rate; therefore, there is no beneficial conversion feature associated with the convertible note. Similarly, the proceeds received from the secured note were allocated between the secured note and the detachable warrant based on the fair value of the secured note without the warrant and the warrant. The portion of the proceeds allocated to the warrant was recognized as additional paid-in capital and a debt discount. The debt discounts related to the warrants are accreted into interest expense over the lives of the notes.

 

The weighted-average estimated fair value of the warrants issued with the convertible and secured notes was $0.62 and $0.81 per share, respectively, using the Black-Sholes pricing model with the following assumptions:

 

 

   Convertible   Secured 
Description  Note   Note 
         
Expected volatility   128%   133%
Risk-free interest rate   0.31%   0.36%
Expected life   2 years    3 years 
Dividend yield   0%   0%

 

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The following table provides an analysis of activity related to the convertible and secured notes for the year ended December 31, 2012:

 

   Convertible   Secured 
Description  Note   Note 
Proceeds received on issuance of notes in 2012  $500,000   $1,000,000 
Discount allocated to warrants   (46,716)   (212,598)
Note balances after discount   453,284    787,402 
Accretion of discount to interest expense   11,679    30,000 
Note balances at December 31, 2012  $464,963   $817,402 
Total allocated to additional paid in capital  $46,716   $212,598 
Unamortized discount at December 31, 2012  $35,037   $182,598 
Contractual interest expense for 12 months ended  at December 31, 2012  $30,000   $40,000 
Effective interest rate on notes   17.3%   19.1%

 

The following table provides a listing of the future maturities of long-term debt:

 

   Contractual   Principal 
   Amounts   Amounts 
Year  Due   Due 
         
2013  $400,000   $257,576 
2014   500,000    453,284 
2015   1,050,000    837,402 
           
Total  $1,950,000   $1,548,262 

 

NOTE 8. STOCKHOLDERS’ EQUITY

 

Common Stock

 

During the years ended December 31, 2012 and 2011, we issued common stock to compensate officers, employees, directors and outside professionals, to make an acquisition and to settle a lawsuit. 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, 2012 and 2011:

 

In February 2012, we converted $1,020,200 of outstanding debt into 557,486 shares of common stock. See Note 6.

 

In May 2012, we issued 170,000 shares of common stock to acquire Gleric Holdings, LLC. See Note 4.

 

In May 2012, we entered into a Settlement Agreement and Mutual General Release with James McKay and Celebrity Foods, Inc., which agreement settled and released all parties from claims in connection with the lawsuit originally filed on January 19, 2010 in the United States District Court, Eastern District of Pennsylvania. The terms of the agreement provide that Mr. McKay and Celebrity Foods will retain an aggregate of 448,000 shares of stock and be issued an aggregate of 135,000 additional restricted shares at $1.39 per share. All of the shares retained by and issued to Mr. McKay and Celebrity Foods are subject to a leak-out provision. We also agreed to pay certain attorney’s fees which included the issuance of 100,000 restricted shares valued at $1.39 per share of common stock to the attorney of Mr. McKay and Celebrity Foods, which shares are also subject to a leak-out provision. See Note 11.

 

32
 

 

In July 2012 and December 2012, we issued 15,000 and 30,000 restricted shares of common stock valued at $1.14 and $0.54 per share, respectively, in connection with the engagement of an investor relations consultant.

 

In August 2012, we issued an aggregate of 300,000 restricted shares of common stock, valued at $1.05 per share, in connection with the engagement of a business development consultant.

 

In December 2012, we issued 10,000 restricted shares of common stock to two separate consultants for their work on various matters for a total of 20,000 shares of common stock valued at $0.54 per share.

 

In September 2011, we issued 100,000 restricted shares of common stock to John Bergeron, our Chief Financial Officer, valued at $94,000, as compensation under his employment agreement.

 

In August and December 2011, we received and cancelled a total of 515,000 shares of common stock in settlement of a legal dispute. The legal fees we incurred in obtaining the return of this common stock were treated as cost of treasury stock subsequently retired.

 

Warrants

 

We currently have five series of outstanding warrants. Series B and Series C warrants were issued with the debentures that we sold to five investors during 2011 and 2010. See Note 7 for further details.

 

During 2012, as described in Note 7, we issued two warrants to investors 1) to purchase 69,445 shares of common stock in conjunction with the convertible note payable and 2) to purchase 333,333 shares of common stock in conjunction with the secured note payable.

 

During 2011, we issued 400,000 Series D warrants as compensation for the consultants who sold the debentures. The warrants were immediately exercisable. The weighted-average estimated fair value of the warrants issued ranged from $0.57-$0.74 per share using the Black-Scholes model with the following assumptions:

 

  Expected volatility ranging from 177.23 to 187.74
  Risk-free interest rate ranging from 0.52% to 1.25%
  Expected life 4 years
  Estimated forfeitures 0%, based on limited forfeiture history
  Dividend yield 0%

 

The fair value of the Series D warrants issued in 2011 was $279,000 and was recorded as a Debt Cost asset which is amortized over the life of the warrants. The remaining unamortized portion of the Debt Cost asset is $55,786 at December 31, 2012. Interest expense of $111,600 and $111,614 was recognized in the Statements of Operations for the years ended December 31, 2012 and 2011, respectively.

 

A summary of the warrant activity for the years ended December 31, 2012 and 2011 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, 2010   200,000   $2.75    2.5   $- 
                     
Warrants issued with long-term debentures   200,000   $2.75    1.5   $- 
                     
Warrants issued as consultant compensation   400,000   $1.00    3.1   $400,000 
                     
Outstanding and exercisable at  December 31, 2011   800,000   $1.88    2.3   $400,000 
                     
Warrants issued with long-term notes payable   402,778   $1.63    2.5   $- 
                     
Warrants expired (Series A)   (200,000)  $-    -   $- 
                     
Outstanding and exercisable at  December 31, 2012   1,002,778   $1.85    2.0   $- 

 

33
 

 

The following summarizes outstanding warrants and their respective exercise prices at December 31, 2012:

 

   Shares           Remaining 
   Underlying   Exercise   Dates of   Contractual 
Description  Warrants   Price   Expiration   Term (in years) 
                 
Series B Warrants   100,000   $3.00    Dec 2013    1 
Series C Warrants   100,000   $5.00    Dec 2013    1 
Series D Warrants   200,000   $1.00    Dec 2014    2 
Series D Warrants Series C warrants   200,000   $1.00    Mar 2015    2.3 
Convertible Note Warrants   69,445   $1.80    Sep 2014    1.5 
Secured Note Warrants   333,333   $1.60    Aug 2015    2.7 
                     
    1,002,778                

 

Stock Options

 

The Company recognizes compensation expense related to stock options in accordance with the Financial Accounting Standards Board (“FASB”) standard regarding share-based payments, and as such, has measured the share-based compensation expense for stock options granted during the years ended December 31, 2012 and 2011 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.

 

On June 28, 2012, we issued 150,000 stock options to directors as follows:

 

·Options to purchase up to a total of 150,000 shares of common stock were granted to the certain members of the Board of Directors. These options vested and became exercisable immediately. The weighted-average estimated fair value of the stock options granted was $1.15 per share using the Black-Scholes model with the following assumptions:

 

  Expected volatility 136.0
  Risk-free interest rate 0.40%
  Expected life 3 years
  Dividend yield 0%

 

On December 1, 2012, we issued 600,000 stock options to officers as follows:

 

·Options to purchase up to a total of 600,000 shares of common stock were granted to three officers as they each were given employment agreements which included the right to purchase 200,000 shares of common stock at the price of $.54 per share for the next two years. These options vest evenly every six months over the first two years of the five-year life of the options. The weighted-average estimated fair value of the stock options granted was $0.46 per share using the Black-Scholes model with the following assumptions:

 

34
 

 

  Expected volatility 130.21
  Risk-free interest rate 0.61%
  Expected life 5 years
  Dividend yield 0%

 

On June 6, 2011, we issued 975,000 stock options to directors and officers as follows:

 

·Options to purchase up to a total of 75,000 shares of common stock were granted to our three independent members of the Board of Directors. These options vested and became exercisable immediately. The weighted-average estimated fair value of the stock options granted was $0.65 per share using the Black-Scholes model with the following assumptions:

 

  Expected volatility 164.6
  Risk-free interest rate 0.74%
  Expected life 3 years
  Dividend yield 0%

 

·Options to purchase up to a total of 900,000 shares of common stock were granted to our two executive officers. These options vest and become exercisable in twelve quarterly periods for the first three years of the five-year life of the options. The weighted-average estimated fair value of the stock options granted was $0.72 per share using the Black-Scholes model with the following assumptions:

 

  Expected volatility 164.6
  Risk-free interest rate 1.60%
  Expected life 5 years
  Dividend yield 0%

 

Details of stock option activity for the years ended December 31, 2012 and 2011 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, 2010   -   $-    -   $- 
Options granted   975,000   $0.77    3.2   $- 
Options exercised   (100,000)  $0.77    -   $- 
Outstanding at December 31, 2011   875,000   $0.77    3.2   $- 
Options granted   750,000   $0.66    4.4   $- 
Options forfeited   (225,000)  $0.77    -   $- 
                     
Outstanding at December 31, 2012   1,400,000   $0.71    3.8   $- 
                     
Exercisable at December 31, 2012   513,736   $0.88    3.0   $- 

 

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The following summarizes outstanding stock options and their respective exercise prices at December 31, 2012:

 

   Shares           Remaining 
   Underlying   Exercise   Dates of   Contractual 
Description  Options   Price   Expiration   Term (in years) 
                 
Directors Options   50,000   $0.77    Jun 2014    1.4 
Officers Options   600,000   $0.77    Jun 2016    3.4 
Directors Options   150,000   $1.15    Jun 2015    2.5 
Officers Options   600,000   $0.54    Dec 2017    4.9 
                   

 
    1,400,000                

 

The fair value of the options granted during the years ended December 31, 2012 and 2011 was $408,000 and $696,750, respectively, which includes the forfeiture of $151,055 by John Talamas, our former COO, when he left his employment in May 2012. We recorded $300,000 and $171,585 in compensation expense in operating, general and administrative expenses in the Statements of Operations for the years ended December 31, 2012 and 2011, respectively. As of December 31, 2012, there was approximately $482,110 of total unrecognized compensation expense related to non-vested stock option awards. The remaining $482,110 in compensation expense will be recognized at $72,000 per quarter with the final $122,110 being recognized in the last three quarters ended December 31, 2014.

 

NOTE 9. RELATED PARTY TRANSACTIONS

 

Due to Related Parties

 

We have an agreement with NSO, which is 100% owned by our Chief Executive Officer, William Donovan, M.D., to provide medical services as our independent contractor. As of December 31, 2012 and 2011, we had balances payable to NSO of $4,400 and $1,020,200, 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. In February 2012, the $1,020,200 outstanding NSO balance payable was converted to stock at the price of $1.83 per share, which was the closing market price on Friday, February 17, 2012. This resulted in the issuance of 557,486 restricted shares of common stock.

 

As shown in Note 6, at December 31, 2012 and 2011, we had balances of $290,699 and $310,699, respectively, due to Dr. Donovan, in his individual capacity, for working capital advances and payments made on our behalf. This outstanding payable is non-interest bearing, due on demand and does not follow any specific repayment schedule.

 

Also, as shown in Note 6, we have an agreement with Wellness, a company 100% owned by Eric Groteke, D.C., who became our Chief Technology Officer on May 9, 2012 (See Note 4), to provide medical services as our independent contractor in Florida. Wellness is paid for services on a monthly basis dependent upon the services provided. At December 31, 2012, $57,810 was owed to Wellness. At December 31, 2011, we owed Wellness $115,500 recorded in the accounts payable and accrued liabilities balance as a third-party medical services provider. For the year ended December 31, 2012, Wellness billed us for service costs in the amount of $459,532 as a related party and $296,299 as a third-party. For the year ended December 31, 2011, Wellness billed us $917,100 as a third-party for service costs.

 

Note Receivable from a Related Party

 

We entered into the 6% promissory note with a major stockholder (a beneficial owner of over 5% of our common stock) on June 30, 2011, as part of a transaction where we recorded a liability for legal expenses from 2008-2010 for which the stockholder and we were held jointly and severally liable. In September 2012, the legal expenses were settled with the law firm for a $200,000 cash payment. We wrote off the promissory note with the shareholder and realized a net credit to other income of approximately $66,000.

 

NOTE 10. INCOME TAXES

 

We have not made provision for income taxes for the years ended December 31, 2012 or 2011, since we have net operating loss carryforwards to offset current taxable income.

 

36
 

 

Deferred tax assets consist of the following at December 31:

 

   2012   2011 
         
Benefit from net operating loss carryforwards  $2,279,261   $2,218,568 
           
Less:  valuation allowance   (2,279,261)   (2,218,568)
           
   $-   $- 

 

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 37%, we have determined that it is not currently likely that a deferred income tax asset of approximately $2,279,261 and $2,218,568 attributable to the future utilization of the approximate $7,043,430 in eligible net operating loss carryforwards as of December 31, 2012 will be realized. We will continue to review this valuation allowance and make adjustments as appropriate. The net operating loss carryforwards will begin to expire in varying amounts from year 2018 to 2031.

 

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 Statements of Operations, to the expected amount at the 34% federal statutory rate:

 

   2012   2011 
         
Income tax (provision) benefit at the 34% statutory rate  $146,274   $(447,101)
Effect of state income taxes   12,906    (39,511)
Non-deductible interest expense   (98,487)   (55,605)
Other   -    (2,112)
Less change in valuation allowance   (60,693)   544,329 
           
Income tax (provision) benefit  $-   $- 

 

During 2010, we filed certain delinquent U.S. federal and state tax returns and are now current in our income tax return filings. Such filings did not have any significant impact on our financial position, results of operations and cash flows considering our net operating loss carryforward position.

 

We are subject to taxation in the United States and certain state jurisdictions. Our tax years for 2002 and forward are subject to examination by the United States and applicable state tax authorities due to the carryforwards of unutilized net operating losses and the timing of tax filings.

 

NOTE 11. COMMITMENTS AND CONTINGENCIES

 

Legal Proceedings

 

In May 2012, we entered into a Settlement Agreement and Mutual General Release with James McKay and Celebrity Foods, Inc., which agreement settled and released all parties from claims in connection with the lawsuit originally filed on January 19, 2010 in the United States District Court, Eastern District of Pennsylvania. The terms of the agreement provide that Mr. McKay and Celebrity Foods will retain an aggregate of 448,000 shares of stock and be issued an aggregate of 135,000 additional restricted shares. All of the shares retained by and issued to Mr. McKay and Celebrity Foods are subject to a leak-out provision. We also agreed to pay certain attorney’s fees which included the issuance of 100,000 restricted shares of common stock to the attorney of Mr. McKay and Celebrity Foods, which shares are also subject to a leak-out provision.

 

37
 

 

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

 

Not applicable.

 

ITEM 9A. CONTROLS AND PROCEDURES

 

William Donovan, M.D., our President and Chief Executive Officer, is our principal executive officer and John Bergeron, our Chief Financial Officer, is our principal financial officer.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, as of December 31, 2012. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective and adequately designed to ensure that the information required to be disclosed by us in the reports we submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the applicable rules and forms and that such information was accumulated and communicated to our principal executive officer and principal financial officer, in a manner that allowed for timely decisions regarding disclosure.

 

Management’s Annual Report on Internal Control over Financial Reporting.

 

Our management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act). Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States. Our internal control over financial reporting includes those policies and procedures that:

 

  (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
  (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements; and

 

  (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized transactions.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with policies or procedures may deteriorate.

 

In making this assessment, our management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework and Internal Control over Financial Reporting – Guidance for Smaller Public Companies.

 

Our management evaluated the effectiveness of our internal control over financial reporting as of December 31, 2012.  Based on this evaluation, our management concluded that, as of December 31, 2012, we maintained effective internal control over financial reporting.

 

Changes in internal control over financial reporting

 

There were no changes in our internal control over financial reporting during the year ended December 31, 2012 that have materially affected, or are reasonably likely to materially affect our internal control over financial reporting.

 

38
 

 

Our management, including our principal executive officer and principal financial officer, does not expect that its disclosure controls or internal controls will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. In addition, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake.

 

Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people or by management’s override of the control.  The design of any systems of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.  Over time, control may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.  Individual persons perform multiple tasks which normally would be allocated to separate persons and therefore extra diligence must be exercised during the period these tasks are combined.

 

ITEM 9B.  OTHER INFORMATION

 

None.

 

PART III

 

ITEM 10.  DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

 

Our directors and executive officers are as follows:

 

Name   Age   Position(s) and Office(s)
William Donovan, M.D.   70   Chief Executive Officer, President and Director
John Bergeron   56   Chief  Financial Officer and Director
William Lawrence   52   Director
Jerry Bratton   60   Director
Franklin Rose, M.D.   61   Director

 

William Donovan, M.D. – Dr. Donovan has served as our Chief Executive Officer since January 2009 and as our President since May 2010.  He has served as one of our Directors since April 2008.  He is a Board Certified Orthopedic Surgeon, and has been involved with venture funding and management for over 25 years.  He was the co-founder of DRCA (later known as I.O.I) and became Chairman of this company that went from the pink sheets, to NASDAQ and then to the AMEX before being acquired by a subsidiary of the Bass Family.  He was a founder of “I Need A Doc,” later changed to IP2M that was acquired by Dialog Group, a publicly traded company.  He was the Chairman of House of Brussels, an international chocolate company and president of ChocoMed, a specialized confectionery company combining Nutraceuticals with chocolate bars.  Dr. Donovan has been practicing as a physician in Houston since l975. Throughout his career as a physician, he has been involved in projects with both public and private enterprises. He received his Orthopedic training at Northwestern University in Chicago.  He was a Major in the USAF for 2 years at Wright Patterson Air Force base in Dayton, Ohio. He established Northshore Orthopedics in 1975 and continues in active practice in Houston, Texas specializing in Orthopedic Surgery.

 

John Bergeron, CPA – Mr. Bergeron has served as our Chief Financial Officer since October 2011 and as one of our Directors since July 2010.  He currently serves as President of Jolpeg Inc., a private firm that consults on financial matters in service industries, a position he has held since May 2008.  Also since May 2008, he has worked as Controller of Christian Brothers Automotive Corporation, of which he also currently owns and operates a franchise.  From May 2005 until May 2008, Mr. Bergeron served as Divisional Controller of Able Manufacturing, a division of NCI Group, Inc, where his responsibilities included financial reporting, budgeting and Sarbanes-Oxley Act compliance.  Prior to that, Mr. Bergeron worked as controller of different internet companies and as an accounting manager for several other private firms.  He has also worked as an auditor for Arthur Andersen.  Mr. Bergeron has more than thirty years experience in financial management and corporate development of manufacturing and service industry companies.  He has extensive experience in financial reporting of public companies, risk management, business process re-engineering, structuring and implementing accounting procedures and internal control programs for Sarbanes-Oxley Act compliance.  Mr. Bergeron is a Certified Public Accountant.  He received a Bachelor of Business Administration in Accounting from Lamar University in 1979.  He is also currently the President of the Montgomery County MUD #83.

 

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William A. Lawrence, MBA – Mr. Lawrence has served as one of our Directors since June 2012. He is currently Partner, President and Chief Financial Officer of C&J Cladding LLC, located in Houston, Texas. Mr. Lawrence and his business partner acquired C&J Cladding in March 2007 and have transformed it into one of the premier cladding companies in the Americas. Prior to acquiring C&J Cladding, Mr. Lawrence served for 23 years in progressive corporate and operational roles from analyst, treasurer, and controller to finance leadership, always with an eye on improving processes, accountability, financial disclosure and overall business performance. He has held management positions with companies such as NCI Building Systems, one of the nation’s largest integrated manufacturers of products for the metal construction industry; Telxon Corporation, a global manufacturer of wireless handheld computing devices; Monarch Marking Systems, a supplier of bar-code products to retail and industrial customers worldwide; and Lockheed Martin, a global security and aerospace company. Mr. Lawrence thrives in roles in which he can improve and redefine an organization, and position it for accelerated growth, both through exceptional financial and operational management, and through a focus on employee development and collaboration. He is an alumnus of the University of Florida, where he earned a Bachelor of Science in Finance (with honors) in 1982 and a Master of Business Administration in 1984..

 

Jerry Bratton, J.D., MBA – Mr. Bratton has served as one of our Directors since July 2010.  He has served as President of Bratton Steel, L.P. since 2006 and previously with Bratton Steel, Inc. (its predecessor) since 1991.  Bratton Steel is a structural steel fabricating company. As President, Mr. Bratton has grown the company from a startup to a company that employs up to approximately 75 employees.  He has significant experience in overseeing sales, estimating, project management and contracting.  Mr. Bratton served as President of the Texas Structure Steel Institute from 2007 to 2008.  He is also a member of the American Institute of Steel Construction.  Mr. Bratton has business and investment background in medical software, personal medical information records storage, RFID security products and energy ventures.  Mr. Bratton is a licensed attorney in the State of Texas and previously served as an assistant general counsel in the construction industry.  Mr. Bratton earned Juris Doctorate and Master of Business Administration degrees from Texas Tech University in 1977.

 

Franklin A. Rose, M.D. – Dr. Rose has served as one of our Directors since July 2010.  He is a Board Certified plastic and reconstructive surgeon.  He has been in private practice since 1984 and currently has hospital affiliations in Houston, Texas with First Street Surgical Center, Woman’s Hospital of Texas, Memorial Hermann Hospital-Northwest and Twelve Oaks Hospital.  Dr. Rose is an experienced surgeon, well acquainted with various surgical and medical procedures.  He has also been involved in investing with multiple micro-cap medical companies.  Dr. Rose earned a Doctor of Medicine degree from the University of Colorado in 1977, and a Bachelor of Science degree from the University of Wisconsin, Madison in 1973.  He is a member of the American Medical Association, the American Society of Plastic Surgeons, the Lipolysis Society of North America and the American Society of North America.  He is also the attending plastic surgeon to The Texas Institute of Plastic Surgery.

 

Section 16(a) Beneficial Ownership Reporting Compliance

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers, and persons who own beneficially more than ten percent of our common stock, to file reports of ownership and changes of ownership with the Securities and Exchange Commission. Based solely upon a review of Forms 3, 4 and 5 furnished to us during the fiscal year ended December 31, 2012, we believe that the directors, executive officers, and greater than ten percent beneficial owners have complied with all applicable filing requirements during the fiscal year ended September 30, 2012, with the exception of (i) a Form 4 that our Chief Financial Officer, John Bergeron, was late in filing, (ii) a Form 3 and Form 4 that our director, William Lawrence, was late in filing , and (iii) a Form 4 that our director, Franklin Rose, was late in filing.

 

Code of Ethics

 

We have adopted a code of ethics that applies to our directors, principal executive officers, principal financial officers, principal accounting officer or controller, and persons performing similar functions.  The Code of Ethics for Directors and Executive Officers can be found on our website at www.spinepaininc.com/investor-information.  Further, we undertake to provide by mail to any person without charge, upon request, a copy of such code of ethics if we receive the request in writing by mail to: Spine Pain Management, Inc., 5225 Katy Freeway, Suite 600, Houston, Texas 77007.

 

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Procedures for Stockholders to Recommend Nominees to the Board

 

There have been no material changes to the procedures by which stockholders may recommend nominees to our Board of Directors since we last provided disclosure regarding this process in the proxy statement material we mailed to stockholders on or around June 1, 2012 for our Annual Meeting held June 28, 2012.

 

Audit Committee

 

We have established a separately-designated standing audit committee.  The Audit Committee consists of our three independent Directors, Jerry Bratton, William Lawrence, and Franklin Rose, M.D.  Mr. Bratton is the Chairman of the Audit Committee, and the Board of Directors has determined that he is an audit committee financial expert as defined in Item 5(d)(5) of Regulation S-K.  The Audit Committee reviews, acts on and reports to the Board of Directors with respect to various auditing and accounting matters, including the recommendations and performance of independent auditors, the scope of the annual audits, fees to be paid to the independent auditors, and internal accounting and financial control policies and procedures.

 

ITEM 11. EXECUTIVE COMPENSATION

 

The following table provides summary information for the years 2012 and 2011 concerning cash and non-cash compensation paid or accrued to or on behalf of certain executive officers (“named executive officers”).

 

Summary Executive Compensation Table

 

Name and1
Principal
Position
      Salary
($)
   Bonus
($)
   Stock
Awards
($)
   Option
Awards
($)
   Non-
Equity

Incentive
Plan
Compensation
($)
   Change in
Pension
Value
and
Nonqualified
Deferred
Compensation
($)
   All Other
Compensation
($)
   Total
($)
 
William Donovan, M.D.   2012    81,231    -    -    144,000(1)   -    -    -    225,231 
CEO and President   2011    -    -    -    81,890(1)   -    -    -    81,890 
                                              
John Bergeron   2012    67,734    -         -    -    -         67,734 
CFO   2011    12,750    -    94,000(2)   -    -              106,750 

 

  (1) On June 6, 2011, we granted Dr. Donovan stock options to purchase 600,000 shares of common stock at an exercise price of $0.77 per share.  We granted the options as consideration for his employment as Chief Executive Officer and President.  The options vest and become exercisable in twelve quarterly periods for the first three years of the five-year life of the options.  The fair value of the options was $432,000, of which $144,000 and $81,890 in compensation expense was recognized in the Statement of Operations for the years ended December 31, 2012 and December 31, 2011, respectively. (See Note 8 of the accompanying financial statements)
     
  (2) In October 2011, we issued 100,000 restricted shares of common stock to Mr. Bergeron as consideration for his employment as Chief Financial Officer.

 

41
 

 

Employment Agreements

 

On February 16, 2012, we entered into an employment agreement with our President and Chief Executive Officer, William F. Donovan, M.D. On February 20, 2012, the agreement was amended to eliminate certain stock award provisions. The employment agreement, as amended, (i) terminates and supersedes the previous employment agreement that we entered into with Dr. Donovan on or about May 17, 2010, which was to expire in May 2012 unless earlier terminated, (ii) has a term that ends on March 31, 2014, and (iii) provides that we will pay Dr. Donovan an annual base salary of $96,000. The agreement also provides that we may grant Dr. Donovan performance bonuses from time to time at the discretion of the Board of Directors. The termination of Dr. Donovan’s May 2010 employment agreement accordingly terminated his right under that agreement to receive 1,000,000 restricted shares of common stock if he is employed by us on June 30 of the calendar year in which we achieve an annual fully diluted earning per share of at least $0.01 as reflected in the audited financial statements filed with an annual report on Form 10-K filed with the SEC.

 

On November 30, 2012, we entered into a new employment agreement with John Bergeron, our Chief Financial Officer. His previous employment agreement expired on September 30, 2012. The terms of the new employment agreement include (i) a two-year term beginning on December 1, 2012, (ii) an annual salary of $90,000, and (iii) 200,000 unvested stock options to purchase shares of common stock at an exercise price of $0.61 per share. The stock options will expire on December 1, 2017, and 50,000 of the stock options will vest and become exercisable every six months during the term of the agreement. If at any time during the term of the agreement Mr. Bergeron’s employment with us should end, all unvested stock options will be relinquished.

 

Outstanding Equity Awards at Fiscal Year End 

 

The following table details all outstanding equity awards held by our named executive officers at December 31, 2012:

 

   Option Awards 
Name  Number of
Securities
Underlying
Unexercised
Options
(#)
Exercisable
   Number of
Securities
Underlying
Unexercised
Options
(#)
Unexercisable
   Equity
Incentive
Plan
Awards:
Number of
Securities
Underlying
Unexercised
Unearned
Options
(#)
   Option
Exercise
Price
($)
   Option
Expiration
Date
 
William F. Donovan, M.D.   250,000(1)   300,000    -    0.77    6/6/2016 
John R. Bergeron   0(2)   200,000    -    0.54    12/01/2017 

 

  (1)  On June 6, 2011, we granted Dr. Donovan stock options to purchase 600,000 shares of common stock at an exercise price of $0.77 per share.  We granted the options as consideration for his employment as Chief Executive Officer and President.  The options vest and become exercisable in twelve quarterly periods for the first three years of the five-year life of the options.  Dr. Donovan exercised 50,000 of the options on September 9, 2011.
     
  (2) On November 30, 2012, we granted Mr. Bergeron stock options to purchase 200,000 shares of common stock at an exercise price of $0.54 per share.  We granted the options as consideration for his employment as Chief Financial Officer.  The options vest and become exercisable in four six month periods for the first two years of the five-year life of the options.  

  

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Compensation of Directors

 

At present, we do not pay our Directors for attending meetings of the Board of Directors, although we may adopt a director compensation policy in the future. We have no standard arrangement pursuant to which Directors are compensated for any services they provide or for committee participation or special assignments.  We did, however, provide compensation to certain directors during the year ended December 31, 2012 as follows:

 

Summary Director Compensation Table

 

Name  Fees Earned
or Paid in
Cash
($)
   Stock
Awards
($)
   Option
Awards
($)
   Non-Equity
Incentive Plan
Compensation
($)
   Nonqualified
Deferred
Compensation
Earnings
($)
   All Other
Compensation
($)
   Total
($)
 
John Bergeron   -    -    22,000(1)   1    -    -    22,000 
Jerry Bratton   -    -    22,000(2)        -    -    22,000 
William Donovan, M.D.   -    -    -         -    -    -(3)
Franklin Rose, M.D.   -    -    22,000(4)        -    -    22,000 
John Talamas   -    -    22,000(5)        -    -    22,000 
William Lawrence             44,000(6)                  44,000 

 

  (1) In June 2012, we granted Mr. Bergeron three-year stock options to purchase 25,000 shares of common stock at an exercise price of $1.15 per share. The options vested and became exercisable immediately. The fair value of the options was $22,000, which was recognized in the Statement of Operations for the year ended December 31, 2012. (See Note 8 of the accompanying financial statements)

 

  (2) In June 2012, we granted Mr. Bratton three-year stock options to purchase 25,000 shares of common stock at an exercise price of $1.15 per share. The options vested and became exercisable immediately. The fair value of the options was $22,000, which was recognized in the Statement of Operations for the year ended December 31, 2012. (See Note 8 of the accompanying financial statements)

 

  (3) Dr. Donovan received no compensation in his capacity as a Director during the year ended December 31, 2012.  He did, however, receive compensation in his capacity as an executive officer.  (See the “Summary Executive Compensation Table” above.)

 

  (4) In June 2012, we granted Dr. Rose three-year stock options to purchase 25,000 shares of common stock at an exercise price of $1.15 per share. The options vested and became exercisable immediately. The fair value of the options was $22,000, which was recognized in the Statement of Operations for the year ended December 31, 2012. (See Note 8 of the accompanying financial statements)

 

  (5)

In June 2012, we granted Mr. Talamas three-year stock options to purchase 25,000 shares of common stock at an exercise price of $1.15 per share. The options vested and became exercisable immediately. The fair value of the options was $22,000, which was recognized in the Statement of Operations for the year ended December 31, 2012. (See Note 8 of the accompanying financial statements.)

 

  (6) In June 2012, we granted Mr. Lawrence three-year stock options to purchase 50,000 shares of common stock at an exercise price of $1.15 per share. The options vested and became exercisable immediately. The fair value of the options was $44,000, which was recognized in the Statement of Operations for the year ended December 31, 2012. (See Note 8 of the accompanying financial statements.)

 

Compensation Policies and Practices as they Relate to Risk Management

 

We attempt to make our compensation programs discretionary, balanced and focused on the long term.  We believe goals and objectives of our compensation programs reflect a balanced mix of quantitative and qualitative performance measures to avoid excessive weight on a single performance measure. Our approach to compensation practices and policies applicable to employees and consultants is consistent with that followed for its executives.  Based on these factors, we believe that our compensation policies and practices do not create risks that are reasonably likely to have a material adverse effect on us.

 

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth certain information at March 21, 2013 with respect to the beneficial ownership of shares of common stock by (i) each person known to us who owns beneficially more than 5% of the outstanding shares of common stock (based upon reports which have been filed and other information known to us), (ii) each of our directors, (iii) each of our named executive officers and (iv) all of our named executive officers and directors as a group.  Unless otherwise indicated, each stockholder has sole voting and investment power with respect to the shares shown.  As of March 21, 2013, there were 18,415,882 shares of common stock outstanding. 

 

Name and Address of Beneficial Owner  Number of
Common Shares
Beneficially Owned
   Percent of Class 
William F. Donovan, M.D. (1)   3,979,427(2)   21.26%
William Lawrence (1)   50,000(3)   0.27%
Franklin A. Rose, M.D. (1)   200,000(4)   1.08%
John Bergeron (1)   210,000(5)   1.14%
Jerry Bratton (1)   1,606,100(6)   8.70%
All Directors and named executive officers as a group (5 persons)   6,045,527    31.92%
Rene Hamouth (7)   1,800,000    9.77%

 

  (1)  The named individual is one of our executive officers or directors.  Our business address is 5225 Katy Freeway, Suite 600, Houston, Texas 77007.

 

  (2)  Includes 557,486 shares of common stock held indirectly through NorthShore Orthopedics, Assoc. (of which Dr. Donovan is the sole shareholder and has voting and investment control) and 3,121,941 shares held directly by Dr. Donovan.  Also includes 300,000 shares of common stock issuable upon exercise of options that are fully vested and exercisable.

 

  (3)  Includes 50,000 shares of common stock issuable upon exercise of options that are fully vested and exercisable.

 

  (4)  Includes 175,000 shares of common stock and 25,000 shares of common stock issuable upon exercise of options that are fully vested and exercisable.

 

  (5)  Includes 160,000 shares of common stock and 50,000 shares of common stock issuable upon exercise of options that are fully vested and exercisable.

 

  (6)  Includes 1,556,100 shares of common stock held by Mr. Bratton, of which Mr. Bratton has sole voting power of 320,000 shares and shared voting power with his spouse of 1,236,100 shares.  Also includes 50,000 shares of common stock issuable upon exercise of options that are fully vested and exercisable.

 

  (7)  Mr. Hamouth’s address is 202-80 Richards Street, Vancouver, BC, Canada, V6B 2G2.

 

44
 

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table summarizes our equity compensation plan information as of December 31, 2012:

 

Plan Category   (a)
Common Shares to be
Issued Upon Exercise of
Outstanding Options,
Warrants and Rights
    (b)
Weighted-average
Exercise Price of
Outstanding Options,
Warrants and
Rights  ($)
    (c)
Common Shares Available
for Future Issuance Under
Equity Compensation
Plans (Excluding
Securities Reflected in
Column (a))
 
Equity compensation plans approved by our stockholders                  
Equity compensation plans     650,000     0.77          
not approved by     150,000       1.15          
our stockholders     600,000 (1)     0.54        
Total     1,400,000       0.71        

 

 

(1)  Consists of common shares to be issued upon exercise of outstanding stock options as follows:

·In June 2011, we granted three of our Directors stock options to purchase a total of 75,000 shares of common stock at an exercise price of $0.77 per share. The three-year options vested and became exercisable immediately. A total of 50,000 of these options remain unexercised.
·In June 2011, we granted our CEO and COO stock options to purchase a total of 900,000 shares of common stock at an exercise price of $0.77 per share. The options vest and become exercisable in twelve quarterly periods for the first three years of the five-year life of the options. A total of 600,000 of these options remain outstanding and unexercised. Mr. Talamas left the employ of the company resulting in the forfeiture of 225,000 shares of common stock.
·In June 2012, we granted five of our Directors stock options to purchase a total of 150,000 shares of common stock at an exercise price of $1.15 per share. The three-year options vested and became exercisable immediately.
·In November 2012, we granted three of our employees stock options to purchase 600,000 shares of common stock at an exercise price of $.54 per share. The five year options vest every six months at 50,000 options per period.

 

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED 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, 2012 and 2011, we had balances payable to NSO of $295,099 and $1,020,200, 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. In February 2012, however, NSO agreed to convert into common stock $1,020,200 of outstanding debt at the price of $1.83 per share, which was the closing market price on Friday, February 17, 2012. This resulted in us issuing to NSO 557,486 restricted shares of common stock on February 28, 2012.

 

Additionally, as shown in Note 6 of the accompanying financial statements, at December 31, 2012 and 2011, we had balances of $290,699 and $310,699, respectively, due to Dr. Donovan, in his individual capacity, for working capital advances and payments made on behalf of us. This outstanding payable is non-interest bearing, due on demand and does not follow any specific repayment schedule.

 

We entered into the 6% promissory note with a major stockholder (a beneficial owner of over 5% of our common stock) on June 30, 2011, as part of a transaction where we recorded a liability for legal expenses from 2008-2010 for which the stockholder and we were held jointly and severally liable. In September 2012, the legal expenses were settled with the law firm for a $200,000 cash payment. We wrote off the promissory note with the shareholder and realized a net credit to other income of approximately $66,000.

 

45
 

 

Director Independence

 

We currently have three independent Directors on our Board, Jerry Bratton, William Lawrence, and Franklin A. Rose, M.D.  The definition of “independent” used herein is arbitrarily based on the independence standards of The NASDAQ Stock Market LLC.  The Board performed a review to determine the independence of Franklin A. Rose, M.D., William Lawrence, and Jerry Bratton and made a subjective determination as to each of these Directors that no transactions, relationships or arrangements exist that, in the opinion of the Board, would interfere with the exercise of independent judgment in carrying out the responsibilities of a Director of Spine Pain Management, Inc.  In making these determinations, the Board reviewed information provided by these Directors with regard to each Director’s business and personal activities as they may relate to us and our management.

 

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

 

The following table sets forth the fees paid or accrued by us for the audit and other services provided or to be provided by our principal independent accountants during the years ended December 31, 2011 and 2012.  

 

   2012   2011 
Audit Fees(1)  $82,216   $73,559 
Audit Related Fees(2)   -    - 
Tax Fees(3)   -    - 
All Other Fees   -    - 
Total Fees  $82,216   $73,599 

(1) Audit Fees: This category represents the aggregate fees billed for professional services rendered by the principal independent accountant for the audit of our annual financial statements and review of financial statements included in our Form 10-Q and services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for the fiscal years.

 

(2) Audit Related Fees: This category consists of the aggregate fees billed for assurance and related services by the principal independent accountant that are reasonably related to the performance of the audit or review of our financial statements and are not reported under “Audit Fees.”

 

(3) Tax Fees: This category consists of the aggregate fees billed for professional services rendered by the principal independent accountant for tax compliance, tax advice, and tax planning.

 

Pre-Approval of Audit and Non-Audit Services

 

All above audit services, audit-related services and tax services, for the fiscal years ended December 31, 2012 and 2011, were pre-approved by our Audit Committee, which concluded that the provision of such services was compatible with the maintenance of that firm’s independence in the conduct of its auditing functions. The Audit Committee’s outside auditor independence policy provides for pre-approval of all services performed by the outside auditors.

 

46
 

 

PART IV

 

ITEM 15. EXHIBITS

 

Exhibit
No.
  Description
3.1   Articles of Incorporation dated March 4, 1998. (Incorporated by reference from Form 10-KSB filed with the SEC on January 5, 2000.) *
     
3.2   Amended Articles of Incorporation dated April 23, 1998. (Incorporated by reference from Form 10-KSB filed with the SEC on January 5, 2000.) *
     
3.3   Amended Articles of Incorporation dated January 4, 2002. (Incorporated by reference from Form 10KSB filed with the SEC on May 21, 2003.) *
     
3.4   Amended Articles of Incorporation dated December 19, 2003. (Incorporated by reference from Form 10-KSB filed with the SEC on May 20, 2004.) *
     
3.5   Amended Articles of Incorporation dated November 4, 2004. (Incorporated by reference from Form 10-KSB filed with the SEC on April 15, 2005) *
     
3.6   Amended Articles of Incorporation dated September 7, 2005. (Incorporated by reference from Form 10-QSB filed with the SEC on November 16, 2005) *
     
3.7   By-Laws dated April 23, 1998. (Incorporated by reference from Form 10K-SB filed with the SEC on January 5, 2000.) *
     
10.1   Amendment to Employment Agreement with William F. Donovan, M.D. dated February 16, 2012 (Incorporated by reference from Form 8-K filed with the SEC on February 21, 2012) *
     
10.2   Employment Agreement with John Bergeron dated November 30, 2012 (Incorporated by reference from Form 8-K filed with the SEC on December 13, 2012) *
     
14.1   Code of Ethics (Incorporated by reference from our website.  It can be found at: www.spinepaininc.com/investor-information) *
     
31.1   Certification of principal executive officer required by Rule 13a – 14(1) or Rule 15d – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
31.2   Certification of principal financial officer required by Rule 13a – 14(1) or Rule 15d – 14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
32.1   Certification of principal executive officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.
     
32.2   Certification of principal financial officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and Section 1350 of 18 U.S.C. 63.
     
101.INS   XBRL Instance Document
     
101.SCH   XBRL Taxonomy Extension Schema
     
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
     
101.DEF   XBRL Taxonomy Extension Definitions Linkbase
     
101.LAB   XBRL Taxonomy Extension Label Linkbase
     
101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

* Incorporated by reference from our previous filings with the SEC

 

47
 

 

SIGNATURES

 

In accordance with the requirements of Section 13 of 15(d) of the Exchange Act, the Registrant has caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 30, 2013.

 

  Spine Pain Management, Inc.
   
  /s/ William F. Donovan, M.D.
  By: William F. Donovan, M.D.
  Chief Executive Officer

 

Pursuant to the requirements of the Exchange Act, this report has been signed below by the following persons in the capacities and on the dates indicated:

 

Signature   Title   Date
         
/s/ William F. Donovan, M.D.       March 30, 2013
William F. Donovan, M.D.   Chief Executive Officer (Principal Executive Officer), President and Director    
         
/s/ John Bergeron       March 30, 2013
John Bergeron   Chief Financial Officer (Principal Financial and Accounting Officer) and Director    
         
/s/ Jerry Bratton       March 29, 2013
Jerry Bratton   Director    
         
/s/ Franklin Rose, M.D.       April 1, 2013
Franklin Rose, M.D.   Director    
         
/s/ William Lawrence       March 29, 2013
William Lawrence   Director    

 

48