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

 
FORM 10-Q
 

 
(Mark One)
 
x Quarterly report under Section 13 or 15(d) of the Securities Exchange Act of 1934
 
For the Quarter Ended June 30, 2014
 
o 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)

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 whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x    No  ¨

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. (Check one):

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

As of August 14, 2014, there were 18,715,882 shares of the registrant’s common stock outstanding (the only class of voting common stock).
 
 
FORM 10-Q

TABLE OF CONTENTS

PART I
FINANCIAL INFORMATION
 
     
Item 1.
3
     
  3
     
  4
     
  5
     
  6
     
Item 2.
12
     
Item 3.
15
     
Item 4.
15
     
PART II
OTHER INFORMATION
 
     
Item 1A.
16
     
Item 2.
16
     
Item 6.
16
     
  18

 
PART I   FINANCIAL INFORMATION
 
 
ITEM 1.   FINANCIAL STATEMENTS
SPINE PAIN MANAGEMENT, INC.
CONSOLIDATED BALANCE SHEETS

   
JUNE 30,
   
DECEMBER 31,
 
   
2014
   
2013
 
ASSETS
 
(Unaudited)
       
             
Current assets:
           
    Cash
  $ 388,740     $ 687,549  
Accounts receivable, net
    2,627,892       2,663,652  
Prepaid expenses
    73,583       116,314  
                 
Total current assets
    3,090,215       3,467,515  
                 
Accounts receivable, net of allowance for doubtful accounts
    of $422,970 and $352,615 at June 30, 2014  and
    December 31, 2013, respectively
    3,518,868       3,642,864  
Intangible assets, net
    188,200       197,200  
Other assets
    17,763       15,770  
                 
Total assets
  $ 6,815,046     $ 7,323,349  
                 
                 
LIABILITIES AND STOCKHOLDERS' EQUITY
               
                 
Current liabilities:
               
Accounts payable and accrued liabilities
  $ 90,483     $ 76,381  
Due to related parties
    74,667       164,293  
Current portion of notes payable and long-term debt, net
    550,000       500,000  
                 
Total current liabilities
    715,150       740,674  
                 
 Notes payable and long-term debt, net of discount
    993,921       995,723  
                 
Total liabilities
    1,709,071       1,736,397  
                 
Commitments and contingencies
               
                 
Stockholders' equity:
               
Common stock: $0.001 par value, 50,000,000 shares authorized, 
18,715,882 shares issued and outstanding at June 30, 2014
    and December 31, 2013
    18,716       18,716  
    Additional paid-in capital
    19,365,224       19,212,669  
Accumulated deficit
    (14,277,965 )     (13,644,433 )
                 
         Total  stockholders' equity
    5,105,975       5,586,952  
                 
       Total liabilities and stockholders’ equity
  $ 6,815,046     $ 7,323,349  

The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
 
 
SPINE PAIN MANAGEMENT, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
   
FOR THE THREE MONTHS ENDED JUNE 30,
   
FOR THE SIX MONTHS ENDED JUNE 30,
 
   
2014
   
2013
   
2014
   
2013
 
Net revenue
  $ 859,860     $ 867,331     $ 1,194,548     $ 1,910,532  
                                 
Cost of providing services
                               
Third party providers
    338,994       129,782       439,883       374,076  
Related party providers
    84,657       230,226       128,920       372,693  
                                 
Total cost of providing services
    423,651       360,008       568,803       746,769  
                                 
Gross profit
    436,209       507,323       625,745       1,163,763  
                                 
Operating, general and administrative expenses
    532,958       477,280       1,112,031       967,972  
                                 
 (Loss) income from operations
    (96,749 )     30,043       (486,286 )     195,791  
                                 
Other income and (expense):
                               
Other income
    7,648       5,794       14,396       12,886  
Interest expense
    (64,144 )     (137,362 )     (161,642 )     (264,233 )
                                 
Total other income and (expense)
    (56,496 )     (131,568 )     (147,246 )     (251,347 )
                                 
Net loss
  $ (153,245 )   $ (101,525 )   $ (633,532 )   $ (55,556 )
                                 
Net loss per common share
                               
Basic
  $ (0.01 )   $ (0.01 )   $ (0.03 )   $ 0.00  
Diluted
  $ (0.01 )   $ (0.01 )   $ (0.03 )   $ 0.00  
                                 
Weighted average number of common shares outstanding:
                               
Basic
    18,715,822       18,415,822       18,715,822       18,415,822  
Diluted
    18,715,822       18,415,822       18,715,822       18,415,822  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
 
 
SPINE PAIN MANAGEMENT, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
   
FOR THE SIX MONTHS ENDED
JUNE 30,
 
   
2014
   
2013
 
Cash flows from operating activities:            
Net loss   $ (633,532 )   $ (55,556 )
Adjustments to reconcile net income to net cash
used in operating activities:
               
Provision for bad debts
    120,000       120,000  
Interest expense related to warrant amortization
    18,445       95,198  
Stock based compensation
    192,359       249,000  
Accretion of debt discount on long-term debt
    48,199       56,678  
Depreciation and amortization expense
    11,800       11,000  
Changes in operating assets and liabilities:
               
Accounts receivable, net
    39,756       (748,283 )
Prepaid expenses and other assets
    (15,519 )     676  
Due to related party
    374       (3,942 )
Accounts payable and accrued liabilities
    14,102       (19,481 )
                 
Net cash used in operating activities
    (204,016 )     (294,710 )
                 
Cash flows from investing activities
               
Purchase of equipment
    (4,793 )     -  
Net cash used in investing activities
    (4,793 )     -  
Cash flows from financing activities:
               
Payment of related party payable
    (90,000 )     (85,000 )
Payment of notes payable
    -       (350,000 )
                 
Net cash used in financing activities
    (90,000 )     (435,000 )
                 
Net decrease in cash and cash equivalents
    (298,809 )     (729,710 )
                 
Cash and cash equivalents at beginning of period
    687,549       1,017,755  
                 
Cash and cash equivalents at end of period
  $ 388,740     $ 288,045  
                 
Supplementary cash flow information:
               
Interest paid
  $ 95,000     $ 103,750  
   Taxes paid
  $ -     $ -  
 
The accompanying notes are an integral part of the unaudited condensed consolidated financial statements
 
 
SPINE PAIN MANAGEMENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
NOTE 1.  DESCRIPTION OF BUSINESS

Spine Pain Management, Inc. (formerly known as Versa Card, Inc.) was incorporated under the laws of Delaware 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 affiliated spine injury diagnostic center opened in Houston, Texas in August 2009.  Through contractual relationships, we currently are affiliated with a total of three 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.

During the six months ended June 30, 2014 we created a wholly owned subsidiary Quad Video Halo, Inc.  The purpose of this entity is to hold certain Company assets affiliated with the Quad Video Halo units.  As of June 30, 2014 the subsidiary held no assets or liabilities.

Spine Pain Management, Inc.
 
We are a technology, 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 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 management services to spine and orthopedic surgeons and other healthcare providers to facilitate proper treatment of their injured clients.  By pre-funding the providers accounts receivable, which includes diagnostic testing and non-invasive and surgical care, patients are not unnecessarily delayed or prevented from obtaining needed treatment.  By providing early treatment through affiliated doctors, we believe that health conditions can be prevented from escalating and injured victims can be quickly placed on the road to recovery.  Through our affiliate system, we facilitate spine surgeons, orthopedic surgeons and other healthcare providers to provide reasonable, necessary, and appropriate treatments to patients with musculo-skeletal spine injuries. We assist the centers that provide the spine diagnostic injections and treatment and pay the doctors a fee for the medical procedures they performed. After a patient is billed for the procedures performed, 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 are affiliated with three spine injury diagnostic centers in the United States, which are located in Houston, Odessa, and San Antonio, Texas. In January 2014 we made the decision to discontinue doing business in Florida and McAllen, Texas (see Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” below).  We are seeking additional funding for expansion by way of reasonable debt financing 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, however, opening of new centers is contingent upon the availiability of funds.

We own 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 2013 and continuing in 2014, we have refined the technology, through further research and development resulting in a fully commercialized Quad Video Halo System 3.0.  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 patient’s representative 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, with regulatory approval (if necessary) we anticipate independent medical representatives will sell Quad Video Halo units to outside hospitals and clinics.
 
 
 
SPINE PAIN MANAGEMENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 $14,277,965 as of June 30, 2014. During the six months ended June 30, 2014, we realized net revenue of $1,194,548 and a net loss of $633,532. 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 June 30, 2014. There can be no assurances that there will be adequate financing available to us. The accompanying consolidated 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 consolidated 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.

NOTE 3.  CRITICAL ACCOUNTING POLICIES

The following are summarized accounting policies considered to be critical by our management:

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC”). Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations. Nevertheless, we believe that the disclosures are adequate to make the information presented not misleading. These interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our 2013 Annual Report as filed on Form 10-K. In the opinion of management, all adjustments, including normal recurring adjustments necessary to present fairly our financial position with respect to the interim consolidated financial statements and the results of its operations for the interim period ended June 30, 2014, have been included. The results of operations for interim periods are not necessarily indicative of the results for a full year.

Basis of Consolidation

The accompanying unaudited condensed consolidated financial statements include accounts of Spine Pain Management, Inc. and its wholly owned subsidiary, Quad Video Halo, Inc.  All material intercompany balances of transactions have been eliminated upon consolidation.

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

Use of Estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of our consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of our financial position and results of operations.

 
SPINE PAIN MANAGEMENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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 4).

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This new accounting guidance under Accounting Standards Codification ("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 did not have a significant impact on the consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).  This ASU is designed to create greater comparability for financial statement users across industries and jurisdictions.  The provisions of ASU No. 2014-09 include a five-step process by which entities will recognize revenue to depict the transfer of good or services to customers in amounts that reflect the payment to which an entity expects to be entitled in exchange for those goods or services.  The standard also will require enhanced disclosures, provide more comprehensive guidance for transactions such as service revenue and contract modifications, and enhance guidance for multiple-element arrangements.  ASU No. 2014-09 will be effective for U.S. public companies for annual reporting periods beginning after December 15, 2016, including interim reporting periods (January 1, 2017 for us).  Early adoption is not permitted.  We are currently reviewing the effect of ASU No. 2014-09 on our revenue recognition.

In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period. This new accounting guidance under ASC 718, Compensation – Stock Compensation, provides explicit guidance on whether to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting or as a nonvesting condition that affects the grant-date fair value of an award. The guidance will become effective prospectively for fiscal years and interim reporting periods beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU 2014-12 is not expected to have a significant impact on the consolidated financial statements.

NOTE 4.  ACCOUNTS RECEIVABLE

We recognize revenue and accounts receivable in accordance with SEC staff accounting bulletin, Topic 13, “Revenue Recognition”, which requires persuasive evidence that a sales arrangement exists; the fee is fixed or determinable; and collection is reasonably assured before revenue is recognized. We are affiliated with certain spine injury diagnostic centers where healthcare providers are engaged as independent contractors to perform medical services for patients. We pay the healthcare providers a fee 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. Patients are billed at the normal billing amount, based on national averages, for a particular CPT code procedure. We take control of the patients’ unpaid bills.
 
 
SPINE PAIN MANAGEMENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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%, based on settled patient cases, was used to reduce revenue to 48% of CPT code billings (“gross revenue”) during the six months ended June 30, 2014 and 2013.

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 2013, demonstrated that the collection period for individual cases may extend for two years or more. Accordingly, we have classified receivables as current or long term based on our experience, which indicates that as of June 30, 2014 and 2013 that 40% and 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 from a plaintiff’s attorney, who performed the initial two to four months of conservative treatment. The doctor then typically refers the patient to one of our healthcare providers for an evaluation because of continuing symptoms.
 
NOTE 5.  DUE TO RELATED PARTIES

Due to related parties consists of the following:
 
   
June 30,
   
December 31,
 
   
2014
   
2013
 
             
Due to Northshore Orthopedics Associates
  $ 28,968     $ 10,406  
                 
Due to Chief Executive Officer
    45,699       135,699  
                 
Due to Spine Injury Physicians
    -       18,188  
                 
 
  $ 74,667     $ 164,293  

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. Amounts due to Spine Injury Physicians (“SIP,” 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 7 for further information on the amounts due to SIP.
 
 
SPINE PAIN MANAGEMENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 6. STOCKHOLDERS’ EQUITY

Stock Options

We recognized $62,110 and $72,000 in compensation expense, associated with stock options, in operating, general and administrative expenses in the Statements of Operations for the three months ended June 30, 2014 and 2013, respectively.  For the six months ended June 30, 2014 and 2013 we recognized $134,110 and $144,000 in compensation expense associated with stock options.  At June 30, 2014, there was approximately $60,000 of total unrecognized compensation expense related to non-vested stock option awards which will be recognized in the last two quarters ending December 31, 2014.

NOTE 7. 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 June 30, 2014 and December 31, 2013, we had balances payable to NSO of $28,968 and $10,406, respectively. This outstanding payable is non-interest bearing, due on demand and does not follow any specific repayment schedule. We do not directly pay Dr. Donovan (in his individual capacity as a physician) any fees in connection with NSO. However, Dr. Donovan is the sole owner of NSO, and we pay NSO under the terms of our agreement

As shown in Note 5, at June 30, 2014 and December 31, 2013, we had balances of $45,699 and $135,699, 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 5, we had an agreement with SIP, a company 100% owned by Eric Groteke, D.C., who became our Chief Technology Officer on May 9, 2012, to provide medical services as our independent contractor in Florida. SIP is paid for services on a monthly basis dependent upon the services provided.  We discontinued this agreement at the end of 2013.  At June 30, 2014 and December 31, 2013, $0 and $18,188, respectively, was owed to SIP.

NOTE 8.  LONG-TERM DEBT

During the three and six months ended June 30, 2014  we recorded $16,645 and $66,644 in interest expense, respectively, related to the amortization of warrants associated with long term debt compared to the three and six month totals for the six months ended June 30, 2013 of $53,369 and $96,091, respectively.  In June 2013 we repaid debentures totaling $350,000 based on the stated contractual terms.

NOTE 9.  INCOME TAXES

We have not made provision for income taxes for the six months ended June 30, 2014 or the year ended December 31, 2013, since we have net operating loss carryforwards to offset current taxable income.

Deferred tax assets consist of the following at June 30, 2014 and December 31, 2013:

   
June 30,
   
December 31
 
   
2014
   
2013
 
             
Benefit from net operating loss carryforwards
  $ 2,162,900     $ 2,041,083  
                 
Allowance from doubtful accounts
    143,809       119,889  
                 
 Less: valuation allowance
    (2,306,709 )     (2,160,972 )
                 
    $ -     $ -  
 
 
SPINE PAIN MANAGEMENT, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
Due to uncertainties surrounding our ability to generate future taxable income to realize these assets, a full valuation has been established to offset the net deferred income tax asset. Based on management’s assessment, utilizing an effective combined tax rate for federal and state taxes of approximately 34%, we have determined that it is not currently likely that a deferred income tax asset of approximately $2,306,709 and $2,160,972 attributable to the future utilization of the approximate $6,361,470 and $6,003,185 in eligible net operating loss carryforwards as of June 30, 2014 and December 31, 2013, respectively, 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:
 
   
Six Months Ended June 30,
 
   
2014
   
2013
 
             
   Income tax benefit (provision) at the 34% statutory rate
  $ 215,401     $ 163,298  
   Non-deductible interest expense
    (66,643 )     (41,480 )
   Other
    (3,021 )     (2,436 )
   Less change in valuation allowance
    (145,737 )     (119,382 )
                 
   Income tax (provision) benefit
  $ -     $ -  
 
We are subject to taxation in the United States and certain state jurisdictions. Our tax years for 2003 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.

 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion should be read in conjunction with our condensed consolidated financial statements and the related notes to the consolidated financial statements included in this Form 10-Q.

FORWARD LOOKING STATEMENT AND INFORMATION

We are including the following cautionary statement in this Form 10-Q 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-Q 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. 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.
 
Critical Accounting Policies
 
The following are summarized accounting policies considered to be critical by our management:
 
Basis of Presentation

The accompanying unaudited condensed consolidated financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the "SEC”). Certain information and footnote disclosures, normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such SEC rules and regulations. Nevertheless, we believe that the disclosures are adequate to make the information presented not misleading. These interim condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto included in our 2013 Annual Report as filed on Form 10-K. In the opinion of management, all adjustments, including normal recurring adjustments necessary to present fairly our financial position with respect to the interim consolidated financial statements and the results of its operations for the interim period ended June 30, 2014, have been included. The results of operations for interim periods are not necessarily indicative of the results for a full year.

Basis for Consolidation

The accompanying unaudited condensed consolidated financial statements include accounts of Spine Pain Management, Inc. and its wholly owned subsidiary, Quad Video Halo, Inc.  All material intercompany balances of transactions have been eliminated upon consolidation.

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

Use of Estimates
 
The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America 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 consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of our consolidated financial statements; accordingly, it is possible that the actual results could differ from these estimates and assumptions and could have a material effect on the reported amounts of our financial position and results of operations.

 
Revenue Recognition

Revenues are recognized in accordance with SEC staff accounting bulletin, Topic 13, Revenue Recognition, which specifies that only when persuasive evidence for an arrangement exists; the fee is fixed or determinable; and collection is reasonably assured can revenue be recognized.
 
Persuasive evidence of an arrangement is obtained prior to services being rendered when the patient completes and signs the medical and financial paperwork.  Delivery of services is considered to have occurred when medical diagnostic services are provided to the patient.  The price and terms for the services are considered fixed and determinable at the time that the medical services are provided and are based upon the type and extent of the services rendered.  Our credit policy has been established based upon extensive experience by management in the industry and has been determined to ensure that collectability is reasonably assured.  Payment for services are primarily made to us by a third party and the credit policy includes terms of net 240 days for collections; however, collections occur upon settlement or judgment of cases (see Note 4).

Recent Accounting Pronouncements

In February 2013, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2013-02, Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income. This new accounting guidance under Accounting Standards Codification ("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 consolidated 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 did not have a significant impact on the consolidated financial statements.

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606).  This ASU is designed to create greater comparability for financial statement users across industries and jurisdictions.  The provisions of ASU No. 2014-09 include a five-step process by which entities will recognize revenue to depict the transfer of good or services to customers in amounts that reflect the payment to which an entity expects to be entitled in exchange for those goods or services.  The standard also will require enhanced disclosures, provide more comprehensive guidance for transactions such as service revenue and contract modifications, and enhance guidance for multiple-element arrangements.  ASU No. 2014-09 will be effective for U.S. public companies for annual reporting periods beginning after December 15, 2016, including interim reporting periods (January 1, 2017 for us).  Early adoption is not permitted.  We are currently reviewing the effect of ASU No. 2014-09 on our revenue recognition.

In June 2014, the FASB issued ASU 2014-12, Accounting for Share-Based Payments When the Terms of an Award Provide That a Performance Target Could be Achieved after the Requisite Service Period. This new accounting guidance under ASC 718, Compensation – Stock Compensation, provides explicit guidance on whether to treat a performance target that could be achieved after the requisite service period as a performance condition that affects vesting or as a nonvesting condition that affects the grant-date fair value of an award. The guidance will become effective prospectively for fiscal years and interim reporting periods beginning after December 15, 2015. Early adoption is permitted. The adoption of ASU 2014-12 is not expected to have a significant impact on the consolidated financial statements.
 
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 expansion through new affiliations with spine surgeons, orthopedic surgeons and other healthcare providers across the nation.
 
During the six months ended June 30, 2014 we created a wholly owned subsidiary Quad Video Halo, Inc.  The purpose of this entity is to hold certain Company assets affiliated with the Quad Video Halo units.  As of June 30, 2014 the subsidiary holds no assets or liabilities.
 
 
Results of Operations
 
The unaudited consolidated financial statements as of June 30, 2014 and for the three and  six months ended June 30, 2014 and 2013 have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with instructions to Form 10-Q. In the opinion of management, the unaudited consolidated financial statements have been prepared on the same basis as the annual financial statements and reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the financial position as of June 30, 2014 and the results of operations and cash flows for the periods ended June 30, 2014 and 2013. The financial data and other information disclosed in these notes to the interim consolidated financial statements related to these periods are unaudited. The results for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for any subsequent quarter or of the entire year ending December 31, 2014.
 
Certain information and footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the Securities and Exchange Commission’s rules and regulations. These unaudited consolidated financial statements should be read in conjunction with our audited financial statements and notes thereto for the year ended December 31, 2013 as included in our previously filed report on Form 10-K.
 
Comparison of the three month period ended June 30, 2014 with the three month period ended June 30, 2013.
 
We recorded $1,767,599 in gross revenue for the three months ended June 30, 2014, offset by $907,939 of the expected settlement discount resulting in net revenue of $859,660.  For the same period in 2013, gross revenue was $1,790,073, offset by $922,742 of the expected settlement discount, resulting in net revenue of $867,331.  We are currently affiliated with three spine injury diagnostic centers in the United States, which are located in Houston, Texas; Odessa, Texas; and San Antonio, Texas.  While we were affiliated with fewer centers for the three months ended June 30, 2014, compared to same period in 2013, the revenue mix had higher priced procedures in 2014 period.
 
Service cost was $423,651 for the three months ended June 30, 2014 compared to $360,008 for the same period in 2013.  The increase is due mainly to a sales mix that had higher cost procedures.
 
During the three months ended June 30, 2014, we incurred $532,958 of operating, general and administrative expenses compared with the $477,280 for the same period in 2013.  The increase is attributable to increases, in travel expenses of approximately $13,000, QVH marketing of $57,000, $10,000 in audit costs, $6,000 in consulting costs, and legal fees of $27,000, coupled with decreases of investor relations by $9,000, decrease of $10,000 in director and officer non-cash compensation and non cash consulting expenses of $37,000 and other net general and administrative expenses of approximately $2,000.
 
As a result of the foregoing, we had net loss of $153,245 for the three months ended June 30, 2014, compared to a net loss of $101,525 for the three months ended June 30, 2013.
 
Comparison of the six month period ended June 30, 2014 with the six month period ended June 30, 2013.
 
We recorded $2,425,730 in gross revenue for the six months ended June 30, 2014, offset by $1,231,182 of the expected settlement discount resulting in net revenue of $1,194,548.  For the same period in 2013, gross revenue was $3,893,002, offset by $1,982,470 of the settlement discount, resulting in net revenue of $1,910,532.  Revenue was negatively affected by lower case volume in 2013 due to multiple factors.  In January 2014 we made the decision to terminate our affiliations with centers and healthcare providers in Florida.  This decision was made due to the state’s difficult personal injury case environment, coupled with our Florida affiliate’s bankruptcy (the bankruptcy court has deemed the previously issued letters of protection we obtained through this affiliate will remain our property and should be unaffected by the bankruptcy). Also in January 2014, we made the decision to discontinue doing business in McAllen, Texas in connection with increased competition in the area.  We have no revenue from our Florida or McAllen affiliates for the six months ended June 30, 2014. During the first quarter we affiliated with only two spine injury diagnostic centers: Houston and San Antonio, Texas.  The Odessa, Texas center was added in the second quarter.  Revenues for the six months ended June 30, 2014 compared to the same period in 2013 were also negatively affected by other factors.  Our affiliated healthcare providers accepted fewer patient cases from certain attorneys whose cases had a history of low returns.  Further, because of the low returns we have experienced on cases of patients with minimal coverage limits, our diagnostic centers performed fewer of the medically-necessary procedures needed by these patients.
 
 
Service cost was $568,803 for the six months ended June 30, 2014 compared to $746,769 for the same period in 2013. The decrease in service cost is attributable to the lower case volume in the first quarter of 2014.
 
During the six months ended June 30, 2014, we incurred $1,112,031 of operating, general and administrative expenses compared with the $967,972 for the same period in 2013.  The increase is attributable to increases in QVH marketing of $105,000 and legal expenses of approximately $79,000, coupled with  a decrease of $10,000 in stock based compensation, investor relations expense/filing fees of $27,000, consulting fees of $15,000, payroll of $7,000, research and development expenses of $4,000 and increases of other net general and administrative expenses of approximately $10,000.
 
As a result of the foregoing, we had net loss of $633,532 for the six months ended June 30, 2014, compared to a net loss of $55,556 for the six months ended June 30, 2013.
 
Liquidity and Capital Resources
 
For the six months ended June 30, 2014, cash used in operations was $204,016, which primarily included a net loss of $633,532, increases in prepaid expenses of $15,519, a decrease in accounts receivable of $39,756,  an increase in accounts payable of $14,102 and due to related parties of $374, offset by adjustments to reconcile net income of cash used in operating activities including bad debt expense, interest expense related to warrant amortization, stock based compensation, debt discount accretion and depreciation totaling $390,803.  For the six months ended June 30, 2013, cash used in operations was $294,710, which primarily included a net loss of $55,556, increases in accounts receivable of $748,283, an increase related party payables of $3,942 in related party payables,  accounts payable of $19,481,  a decrease in prepaid expenses of $676, offset by adjustments to reconcile net income of cash used in operating activities including bad debt expense, interest expense related to warrant amortization, stock based compensation, debt discount accretion and depreciation totaling $531,876.
 
For the six months ended June 30, 2014 cash used in financing activity was $90,000 which was used to pay related party debt. For the six months ended June 30, 2013 we repaid $85,000 in related party debt, coupled with the repayment of $350,000 plus interest to our debenture holders for debentures that expired on June 30, 2013.
 
During the three months ended June 30, 2014 and 2013, we collected $609,421and $521,044 in settlements, respectively.  For the six months ended June 30, 2014 and 2013 we collected $1,232,371 and $1,164,493 in settlements, respectively.

ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not Applicable.

ITEM 4.   CONTROLS AND PROCEDURES

Our principal executive officer and principal financial officer are responsible for establishing and maintaining our disclosure controls and procedures. Such officers have concluded (based upon their evaluation of these controls and procedures as of the end of the period covered by this report) that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in this report is accumulated and communicated to management, including our principal executive and principal financial officer as appropriate, to allow timely decisions regarding required disclosure.

Our principal executive officer and principal financial officer have also indicated that, upon evaluation, there were no changes in our internal control over financial reporting or other factors during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
 
Our management, including our principal executive officer and principal financial officer, does not expect that our disclosure controls or our 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 override of the control. The design of any system of controls also 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. Because of these inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
 
 
PART II   OTHER INFORMATION
 
ITEM 1A. RISK FACTORS
 
In addition to the other information set forth in this report, one should carefully consider the discussion of various risks and uncertainties contained in Part I, Item 1A,  “Risk Factors” in our 2013 Annual Report on Form 10-K.  We believe the risk factors presented in this filing and those presented on our 2013 Form 10-K are the most relevant to our business and could cause our results to differ materially from any forward-looking statements made by us.  

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 
ITEM 6.   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, 2013 (Incorporated by reference from Form 8-K filed with the SEC on February 21, 2013) *
     
10.2
 
Employment Agreement with John Bergeron dated November 30, 2013 (Incorporated by reference from Form 8-K filed with the SEC on December 13, 2013) *
     
31.1
 
     
31.2
 
     
32.1
 
     
32.2
 
 
 
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
 
 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
Spine Pain Management, Inc.
   
  Date: August 14, 2014
By: /s/ John Bergeron
 
John Bergeron
 
Chief Financial Officer
(Principal financial officer and duly authorized signatory)

 
 
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