X-spine Systems, Inc. Consolidated Financial Report (Reviewed)

X-spine Systems, Inc.

Consolidated Financial Report

Balance Sheets (Unaudited)

Notes to Consolidated Financial Statements.

Statements of Income (Unaudited)

Notes to Consolidated Financial Statements.

Statements of Retained Earnings (Unaudited)

Months Ended June 30, 2015 and 2014

Notes to Consolidated Financial Statements.

Statements of Cash Flows (Unaudited)

Months Ended June 30, 2015 and 2014

Notes to Consolidated Financial Statements.

Organizational structure: The consolidated financial

statements include the accounts of X-spine Sales Corporation (an interest charge domestic international sales corporation), which

is a wholly owned subsidiary of X-spine Systems, Inc. (the Company). Significant intercompany balances and transactions have been

eliminated in consolidation.

Nature of operations: The Company is engaged in the development,

manufacturing and sale of medical devices for use in orthopedic spinal surgeries.

Basis of presentation: The accompanying consolidated

financial statements are prepared in conformity with accounting principles generally accepted in the United States of America for

interim financial information. Accordingly, they may not include all of the information and disclosures required by accounting

principles generally accepted in the United States of America for a complete financial statement presentation. The interim financial

statements contained in this report should be read in conjunction with the Company's audited consolidated financial statements

and footnote disclosures for the year ended December 31, 2014.

Use of estimates: The preparation of consolidated financial

statements in conformity with accounting principles generally accepted in the United States of America requires management to make

estimates and assumptions relating to the reporting of assets and liabilities and the disclosure of contingent assets and liabilities.

Actual results could differ from those estimates.

Revenue recognition: The Company derives its revenues

primarily from the sale of spinal surgery implants used in the treatment of spine disorders. The Company sells its products primarily

through its direct sales force and independent distributors. Revenue is recognized when goods are shipped, title and risk of loss

has transferred to the buyer, the price is fixed or determinable and recoverability is reasonably assured.

Accounts receivable: Accounts receivable are uncollateralized

customer obligations due under normal trade terms requiring payment according to agreed-upon terms, in most cases within 30 days

from the invoice date. Accounts receivable are stated at the amount billed to the customer.

The carrying amount of accounts receivable is reduced by a valuation

allowance. The Company makes judgments as to its ability to collect outstanding receivables and provides allowance for a portion

of receivables when collection becomes doubtful. Provisions are made based upon a specific review of all outstanding invoices,

the overall quality and age of those invoices and management assessment of customer credit worthiness.

Inventories: Inventories are stated at the lower of cost

or market, with cost determined under the first-in, first-out method. The Company reviews the components of inventory on a periodic

basis for excess, obsolete and impaired inventory, and records a reserve for the identified items.

Inventory components at June 30, 2015 and 2014 were as follows:

Property and equipment: Property and equipment are carried

at cost. Expenditures for maintenance and repairs are charged to operations as incurred. Expenditures which significantly extend

the lives of assets and major improvements are capitalized. Impairment of asset value is recognized whenever events or changes

in circumstances indicate that carrying amounts are not recoverable. Gain or loss on the disposition of property and equipment

is reflected in current operations.

Depreciation is computed by the straight-line method for financial

reporting purposes over the estimated useful lives of the respective assets. Depreciation expense totaled approximately $1,330,200

and $873,000 for the six months ended June 30, 2015 and 2014, respectively. Depreciation expense totaled approximately $679,600

and $389,600 for the three months ended June 30, 2015 and 2014, respectively. Estimated useful lives are as follows:

Patents and trademarks: The cost of patents and trademarks

are being amortized on the straight-line method over their useful lives of seven years and tested for impairment whenever events

or changes in circumstances indicate that carrying amounts are not recoverable. Amortization expense charged to operations was

approximately $126,000 and $138,000 for the six months ended June 30, 2015 and 2014, respectively. Amortization expense charged

to operations was approximately $63,000 and $69,000 for the three months ended June 30, 2015 and 2014, respectively.

Shipping and handling costs: Shipping and handling costs

for the sale of products are either expensed as incurred and are included in operating expenses or charged to the distributor and

reimbursed to the Company. Shipping and handling costs for the six months ended June 30, 2015 and 2014 totaled approximately $452,500

and $349,600, respectively. Shipping and handling costs for the three months ended June 30, 2015 and 2014 totaled approximately

$233,900 and $205,400, respectively.

Cost of sales: Cost of sales includes amounts relating

to the medical device excise tax effective January 1, 2013. Total expense for the six months ended June 30, 2015 and 2014

totaled approximately $389,800 and $342,200, respectively. Total expense for the three months ended June 30, 2015 and 2014 totaled

approximately $197,100 and $222,000, respectively.

Research and development: Research and development expenses

include salaries and associated costs, contractor and consultant fees, and supplies and materials. These costs include the Company's

product development, regulatory and clinical functions and the costs for clinical studies and product development projects. The

costs incurred with respect to internally developed technology and engineering services are included in research and development

expense and are expensed as incurred. Research and development expenses were approximately $932,700 and $1,044,900 for the six

months ended June 30, 2015 and 2014, respectively. Research and development expenses were approximately $398,100 and $531,100 for

the three months ended June 30, 2015 and 2014, respectively.

Advertising costs: Advertising costs are expensed when

incurred and totaled approximately $523,600 and $414,600 for the six months ended June 30, 2015 and 2014, respectively. Advertising

costs are expensed when incurred and totaled approximately $201,700 and $194,700 for the three months ended June 30, 2015 and 2014,

Income taxes: The Company elected to be taxed under the

provisions of Subchapter S of the Internal Revenue Code and, accordingly, is not liable for federal or state corporate income taxes.

Instead, the shareholders include their respective portion of the Company's taxable income in their individual income tax

returns. The Company makes periodic distributions to its shareholders. The Company is liable for city income taxes. No provisions

were deemed necessary for uncertain tax positions. With few exceptions, the Company is no longer subject to income tax examinations

by federal, state, local or foreign tax authorities for years before 2012.

Financial instruments, which potentially subject the Company

to concentrations of credit risk, consist primarily of cash that exceed federally insured limits and trade accounts receivable.

The credit risk with regard to trade accounts receivable is minimized through the ongoing credit evaluations of its customers and

the use of allowance for doubtful accounts to recognize potential credit losses when necessary. For the six months ended June 30,

2015, net sales to one customer exceeded 10 percent of the Company's net sales. Net sales and trade receivables for the one

customer at June 30, 2015 totaled approximately $3,967,500 and $139,300, respectively. Net sales and trade receivables for the

one customer at June 30, 2014 totaled approximately $2,239,900 and $847,700, respectively. Net sales for the one customer for the