(2) BACKGROUND AND MANAGEMENT’S PLANS

Background

For the years ended December 31, 2016 and 2015, we reported net income of $69 and net loss of $2,911, respectively. The Company’s total net revenue for the year ended December 31, 2016 was $13,313 compared to $11,641 in 2015. Revenue has declined significantly from $39.7 million in 2012 due to challenges with the company’s sales force focusing on competing lines of compound pain cream, resulting in significant losses, however revenue has grown consistently since 2014 and the company is now profitable. The Company’s assets, both at December 31, 2016 and at March 31, 2017, are significantly less than the Company’s liabilities, and the Company is dependent on its banking relationship to be able to pay its obligations as they become due.

As described in Item 2, herein, the Company received an investment of $1,035 on February 28, 2017 from 22 investors through NewBridge Securities Corporation, an investment banking firm. The investment has allowed the Company to pay additionally down on its loan with Triumph and build sufficient products to keep up with order demand.

During the fourth quarter of 2015, the electrotherapy industry experienced a significant development when our largest competitor, Empi announced closing their business in the electrotherapy market immediately. Empi previously held a large share of the electrotherapy market. We believe this presents us a significant growth opportunity. Through May 8, 2017, we have recruited 74 former Empi sales representatives, including those in areas where we had no previous representation. To focus on growth and the potential future positive cash flow, we have committed our limited resources to the new salesforce, the supporting product production and supporting administrative (customer service and billing) personnel. Orders had slowed down during 2016 due to lack of available funds to build enough products to fill orders timely and therefore discouraging physicians from sending recurring orders as well as demotivating sales reps to promote our products. Orders in Q3 of 2016 were 5,679, Q4 was 4,355 and orders in Q1 2017 was 3,824. The recent infusion of capital combined with improved cash collections gives the Company an expectation of increasing orders in the near future due to orders being filled instantly and sales reps being provided with demonstration units.

As of March 31, 2017, the Company had no available borrowing under our line of credit (which the lender declared to be in default in July 2014) although, based on an interim agreement with our lender, the lender continues to release cash collateral to us based on our cash collections. The Company’s working capital deficit at March 31, 2017 totaled ($3,514) as compared to ($4,972) at March 31, 2016. In addition, the Company remains in default of its secured line of credit and as a result, if its lender insists upon immediate repayment, the Company will be unable to do so and may be forced to seek protection from its creditors. The Company has not been in compliance with the financial covenants under the agreement with its primary lender since July 2014. See Note 7 to the Unaudited Condensed Consolidated Financial Statements in this Quarterly Report for further discussion.

The Company’s lack of liquidity and substantial working capital deficit raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Management’s Plans

The Company’s business plan for 2017 focuses on the Company’s effort to grow orders, attain additional financing, the Lender’s continued support, the vendors continued support and attaining positive cash flow from organic growth. The accomplishment of organic growth in revenues and cash flows is dependent on taking advantage of the Empi opportunity and the increased number of sales representatives and continued improvements to its billing organization and processes. The Company’s long-term business plan contemplates organic growth in revenues through an increase in the electrotherapy market share and the addition of new products such as the ZMS Blood Volume Monitor.

The Company has and will continue to seek external financing and monitor and control its sales growth, product production needs and administrative costs going forward. The Company has continued to increase its revenue while controlling its administrative costs and the Company has returned to profitability for the quarter ended March 31, 2017 as compared to the same quarter of the prior several years. The Company believes that:

as a result of the growth opportunities coupled the reduced administrative expenses,

the securing of additional capital, the continued support of our Lender, and

the continued support of our vendors to work with Company on the slow payment of past due bills,

that the Company’s cash flows from operating activities will be sufficient to fund the Company’s cash requirements through the next twelve months. Management believes that its cash flow projections for 2017 are achievable and that sufficient cash will be generated to meet the Company’s currently restrained operating requirements. There is no guarantee that the Company will be able to meet the requirements of its 2017 cash flow projections or that it will be able to address its working capital shortages; the principal component of which is the negative working capital (principally the line of credit and past due accounts payable which are considered a current liability in their entirety).

While the results from the Company’s first quarter of 2017 coupled with the last quarter of 2016 are positive as compared to the years of losses before, there can be no assurance that the Company will be able to secure additional external financing if needed, the Lender will continue to release cash collateral, the vendors will continue to work with slow repayment terms, and the sales and cash flow growth are attainable and sustainable. The Company’s dependence on operating cash flows means that risks involved in the Company’s business can significantly affect the Company’s liquidity. Contingencies such as unanticipated shortfalls in revenues or increases in expenses could affect the Company’s projected revenues, and cash flows from operations and liquidity, which may force the Company to curtail its operating plan or impede the Company’ growth.