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

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ~~ACT OF 1934~~

~~For~~ACT ~~the~~OF ~~fiscal year ended December 31, 2013~~1934

For the fiscal year ended December 31, 2014

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ~~EXCHANGE ACT OF 1934~~

~~For the~~EXCHANGE ~~transition~~ACT ~~period~~OF ~~from to~~ 1934

For the transition period from_______________to

Commission file number: 000-52836

Dr. Tattoff, Inc. ~~(Exact name of registrant as specified in its charter)~~

(Exact name of registrant as specified in its charter)


Florida		20-0594204
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

8500 Wilshire Boulevard, Suite 105 Beverly Hills, California, 90211 (Address of principal executive offices)

Beverly Hills, California, 90211

(Address of principal executive offices)

(310) 659-5101

(Registrant’s telephone number, ~~including area code)~~

including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of Class		Name of each exchange on which registered
None		None

Securities registered pursuant to Section 12(g) of the Act:

common stock, $.0001 par value
(Title of class)

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

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 o No þNo 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 þ x NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations 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 þ NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Rule 405 of Regulation S-K (229.405 of this chapter) is not contained herein and will not be contained, to the best of registrants knowledge, in definitive proxy or other information incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ~~Yes~~ YES o NoNO þx

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer Accelerated filer Non-accelerated filer Smaller reporting company þx

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ~~Yes~~ YES o NoNO þx

As there is no market for our common stock as of March 1, ~~2014~~2015, the aggregate market value of the common stock held by non-affiliates (1112,~~605~~112,~~646~~481 shares) cannot be determined. For purposes of this disclosure, shares of common stock held by persons who hold more than 5% of the outstanding shares of common stock and shares held by executive officers and directors of the registrant have been excluded because such persons may be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes.

The number of shares of the registrant’s common stock, $0.0001 par value, outstanding as of March 1, ~~2014~~2015 was 19,~~308~~253,~~230~~880 shares.

DOCUMENTS INCORPORATED BY REFERENCE

None.

Table of Contents

		Page
	Part I
Item 1.	Business.	1
Item 1A.	Risk Factors.	9
Item 1B.	Unresolved Staff Comments.	19
Item 2.	Properties.	20
Item 3.	Legal Proceedings.	20
Item 4.	Mine Safety Disclosures.	21
	Part II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.	22
Item 6.	Selected Financial Data.	24
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.	24
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk.	3536
Item 8.	Financial Statements and Supplementary Data.	3536
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.	3536
Item 9A.	Controls and Procedures.	3637
Item 9B.	Other Information.	3637
	Part III
Item 10.	Directors, Executive Officers and Corporate Governance.	3738
Item 11.	Executive Compensation.	3940
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.	4648
Item 13.	Certain Relationships and Related Party Transactions, and Director Independence.	4850
Item 14.	Principal Accounting Fees and Services.	4951
	Part IV
Item 15.	Exhibits, Financial Statement Schedules.	5153
Signature Page

Part I

Item 1. Business. General

We currently operate or provide management services to ~~nine~~ten laser tattoo and hair removal clinics located in Texas, Arizona, Georgia and California, all of which operate under our registered trademark “Dr. Tattoff.” Our clinics provide safe, minimally invasive and affordable laser tattoo and hair removal services in a relaxed environment.

We own and operate clinics in Dallas, Frisco, Ft. Worth and Houston, Texas,; in Atlanta, Georgia,; and in Phoenix, Arizona,; and we provide management services to four clinics located in southern California pursuant to a management services agreement. The management services arrangement is structured to comply with a California state law limitation on the corporate practice of medicine. As we expand into other states, applicable state law will determine whether we operate, or provide management services to, our new clinics. Within this framework, we are seeking to establish Dr. Tattoff as the first nationally branded laser tattoo and hair removal business.

We have supported the provision of over ~~230~~325,000 procedures to more than 2930,000 patients during our operating history. Our first clinic opened in Beverly Hills, California in July 2004. In the past few years we opened two clinics in 2011, two clinics in 2012, ~~and two clinics in 2013,~~ one clinic in Sugar Land, Texas (a suburb of Houston) in March 2013 (which we closed in February 2014 due to poor performance) and one in Atlanta, Georgia in late October 2013. We opened a location in Frisco, Texas (a northern suburb of Dallas) in March 2014~~. We~~ ~~have~~and ~~executed~~ a ~~lease~~location ~~for an additional clinic~~ in Ft. Worth, Texas ~~that~~in weMay 2014. We intend to open ~~as soon as practicable and may open~~ additional clinics inas ~~Texas,~~our ~~Georgia,~~financial ~~Florida,~~resources ~~Arizona, and other states in 2014~~permits.

Corporate History; Recent Events

In February 2008, DRTATTOFF, LLC, a California limited liability company, merged with and into Lifesciences Opportunities Incorporated, a Florida corporation. The merged entity changed its name to Dr. Tattoff, Inc. in May 2008. Lifesciences Opportunities Incorporated had no operations prior to the merger. The merger was treated as a “public shell” reverse merger for financial reporting purposes.

On March 16, 2010, we filed a Form 15 with the Securities and Exchange Commission (the “SEC”) to terminate our registration under Section 12(g) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Upon the filing of the Form 15, our obligation to file periodic and other reports with the SEC was immediately suspended. However, at the time of filing, we were not in compliance with Section 13(a) of the Exchange Act, which requires every issuer of a security registered pursuant to Section 12 of the Exchange Act to file periodic and other reports with the SEC, as we had not filed any quarterly reports on Form 10-Q, annual reports on Form 10-K or other reports since our quarterly report on Form 10-Q for the period ending June 30, 2008.

On February 6, 2012, a registration statement on Form 10 that we filed with the SEC under Section 12(g) of the Exchange Act became effective. Accordingly, we are currently subject to the reporting requirements of the Exchange Act, and the rules and regulations thereunder, and are required to file annual, quarterly and current reports, proxy statements and other information with the SEC. We are current with all of our required filings as of December 31, ~~2013~~2014. However, our common stock is currently not registered under the Securities Act of 1933, as amended (the “Securities Act”) or under the securities laws of any state and any sales of our common stock would have to comply with a relevant state or federal exemption.

On February 21, 2012, we filed an amendment to our Articles of Incorporation with the Florida Department of State, Division of Corporations, to effect a seven-for-one reverse stock split. Pursuant to the reverse stock split, (i) each shareholder received one share of our common stock in exchange for every seven existing shares, rounded up to the nearest whole number, and (ii) our authorized shares of common stock and preferred stock were reduced proportionately to 25,714,286 shares and 2,857,143 shares, respectively. All presentations of share count included herein have been adjusted to reflect the reverse split. On June 25, 2012, we filed an amendment to our Articles of Incorporation with the Florida Department of State, Division of Corporations, to increase the maximum number of authorized shares to 77,857,143, consisting of 75,000,000 shares of common stock and 2,857,143 shares of preferred stock.

Services; Clinics

Laser Tattoo Removal

The laser tattoo removal services offered at our clinics are performed by licensed medical professionals using Q-switched lasers. These lasers deliver fast, powerful pulses in short intervals, thereby inducing selective photothermolysis. During a treatment, a patient may experience discomfort that can be alleviated through the use of numbing cream and chilled air.

Our clinics offer a free consultation to all prospective tattoo removal patients to determine, in part, the number of treatments required for the effective removal of a tattoo. Factors influencing this determination include skin type, tattoo location and tattoo color/size. Licensed medical professionals make this determination using the Kirby-Desai Scale, a scale developed by Dr. William Kirby and Dr. Alpesh Desai. Dr. Kirby is a former member of our Board of Directors and the owner of William Kirby, D.O., Inc., which is the entity through which laser services are provided at our California clinics. Dr. Desai is the owner of Pandora Laser Services, PLLC, which provides physician services to our ~~Dallas~~Texas ~~and Houston~~ clinics. The Kirby-Desai Scale was first published in the March 2009 issue of The Journal of Clinical and Aesthetic Dermatology. To our knowledge, the Kirby-Desai Scale is the only published medically-based scale in existence that estimates the requisite number of laser treatments for effective tattoo removal.

The average tattoo requires approximately nine treatments spaced at least seven weeks apart to achieve effective removal. Each treatment is generally performed in 30 seconds to five minutes, depending on size, and is administered by a licensed medical professional with physician oversight in compliance with applicable law. For the twelve months ending December 31, ~~2013~~2014, our clinics provided more than 3948,000 laser tattoo treatments, for a combined average of approximately 1920 laser tattoo removal treatments per operating day.

Pricing for tattoo removal services is based primarily on the size of the tattoo. Our clinics offer a variety of package discounts to prospective patients and satisfaction guarantees for tattoo removal services performed. For the twelve months ended December 31, 2014 ~~2013~~ the average cost for a package of ~~nine~~ten laser tattoo removal treatments purchased by new patients was approximately $1,~~044~~227.

Laser Hair Removal

The laser hair removal services offered at our clinics are performed by licensed medical professionals using laser and/or Intense Pulse Light, or IPL, devices. In each case, the process involves the destruction of the hair follicle with light based heat and can cause minor discomfort.

Our clinics offer a free consultation to all prospective hair removal patients to determine the number of treatments required for the effective removal of hair. Factors influencing this determination include the location of hair on the body, hormone levels and genetic disposition for hair growth. Effective hair removal requires an average of seven to nine treatments spaced three to six weeks apart. Each treatment is generally performed in five to 30 minutes depending on the area being treated, and is administered by a licensed medical professional with physician oversight in compliance with applicable state law. For the twelve months ended December 31, ~~2013~~2014, our clinics provided over 108,~~000~~700 hair removal treatments, for a combined average of ~~more~~approximately ~~than~~four ~~five~~ laser hair removal treatments per operating day.

Pricing for hair removal services conducted at our clinics is based on the size of the area being treated. Our clinics offer a variety of package discounts to prospective patients and satisfaction guarantees for the hair removal services performed. For the twelve months ended December 31, ~~2013~~2014 the average cost for a package of seven to nine hair removal treatments purchased by new patients was approximately $1,~~175~~206.

Clinic Physicians

We expect the physicians providing and supervising the laser tattoo and hair removal services offered at our clinics to have a reputation for providing quality dermatologic care within their respective markets and to meet our qualification criteria, which include an extensive review of state licensure, board certification, malpractice insurance and history, procedure experience and clinical outcome.

In connection with our California clinics, we entered into a management services agreement with William Kirby, D.O., Inc. pursuant to which we provide certain non-medical management, administrative and support services to the clinics in which William Kirby, D.O., Inc. provides laser tattoo and hair removal services. Dr. William Kirby, a former member of our Board of Directors, is the sole shareholder of William Kirby, D.O., Inc. Our arrangement with William Kirby, D.O., Inc. is structured to comply with a California state law limitation on the corporate practice of medicine.

In connection with our owned clinics, we have entered into consulting physician agreements with physicians located in the cities where the clinics are located to provide our clinics with (i) medical director services, (ii) assistance with the creation of clinic protocols and (iii) supervisory and consulting services regarding equipment procurement and operation, in each case consistent with applicable state and Federal law.

Clinic Equipment

Our clinics typically include one or more laser procedure rooms, private examination rooms and patient waiting areas. Each clinic is equipped with lasers and/or IPL devices in addition to air chilling devices, computer systems and standard office equipment. The lasers used in our clinics for tattoo removal were purchased by us pursuant to financing arrangements with unrelated third parties. The IPL ~~devices~~device currently used at our ~~Beverly Hills and Santa Ana, California clinics, and our~~ Dallas, Texas clinic for hair removal, ~~are~~is ~~leased or~~ owned by William Kirby, D.O., Inc. pursuant to ~~capitalized~~a ~~leases/~~finance ~~agreements~~agreement with ~~various~~a third party financing ~~sources~~source. Under the management services agreement, we have the right, at any time, to purchase the equipment from William Kirby, D.O., Inc. at a purchase price equal to the amount outstanding, if any, under the applicable ~~capitalized lease/~~finance agreement. ~~The~~ ~~laser used in our Montclair clinic for hair removal is owned by us.~~ The ~~lasers~~IPL devices used in our ~~Sherman~~other ~~Oaks, Phoenix and Atlanta~~ clinics for hair removal were acquired by us pursuant to financing agreements with third party financing sources or manufacturers. With respect to our future clinics, we intend to purchase lasers pursuant to financing arrangements with third party financing sources or manufacturers.

Each of our clinics is managed by an office manager, employed by the Company, who is responsible for the day-to-day business operations of the clinic, including collection of patient payments, scheduling and supply re-ordering. We also employ a patient coordinator who serves as receptionist and coordinates patient appointments.

In accordance with California state law, William Kirby, D.O., Inc., our contracting physician, hires and employs its own medical staff, which typically includes a registered nurse, a physician assistant and/or an advanced registered nurse practitioner. These licensed medical professionals are responsible for the provision of the medical services provided at our California clinics, with physician oversight from Dr. Kirby.

We hire and employ appropriately licensed staff providing non-physician medical services at our ~~Dallas,~~clinics ~~Houston,~~outside ~~Atlanta~~of ~~and Phoenix clinics~~California. Such professionals provide services at our clinics and are subject to the physician oversight provided by consulting physicians that we have entered into contracts with for each state. As we expand into other states, applicable law will govern our arrangements with the professionals providing services in our new clinics.

Industry

Laser Tattoo Removal

Laser tattoo removal is an elective, private pay procedure performed on an outpatient basis. According to the February 23, 2012 Harris Poll #22, the estimated percentage of the general population with one or more tattoos ranged from 18% to 26% in the United States, varying by region. In addition, the following percentages of the population in the United States have at least one tattoo, by age group:

●

22% of 18-24 year olds;

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30% of 25-29 year olds;

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38% of 30-39 year olds;

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27% of 40-49 year olds;

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11% of 50-64 year olds; and

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5% of over 65 year olds.

Furthermore, according to the Harris Poll #22, approximately 14% of Americans with a tattoo regret having it.

Laser Hair Removal

Laser hair removal is an elective, private pay procedure performed on an outpatient basis. Laser hair removal ranked as the ~~fourth~~third most popular nonsurgical cosmetic procedure in a ~~2012~~2014 report by The American Society for Aesthetic Plastic Surgery, and the most popular nonsurgical procedure performed by laser in the same report.

Competition; Business Strategy

Competing Businesses

Our clinics compete with a variety of laser tattoo removal providers and laser hair removal providers, including:

●

Local Dermatologists. Dermatologists offer laser tattoo removal and laser hair removal in addition to a variety of other clinical and cosmetic dermatological services within the communities in which we currently operate.

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“Medi-Spa” Providers. These companies offer laser tattoo removal services as one of many aesthetic services, including cosmetic injectables, skin tightening/rejuvenation treatments, skin peels, microdermabrasion and facials.

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Specialists. These companies offer tattoo removal as a specialty.

In addition, Ideal Image ~~and~~is ~~American~~a ~~Laser Skincare are two~~ national specialty providers of laser hair removal services that ~~compete~~competes with the laser hair removal services provided at our clinics. As laser tattoo and hair removal technology continues to develop and the demand for laser tattoo and hair removal services grows, the competition for the services provided at our clinics may increase.

We do not view other practice management companies as our direct competitors because we do not market practice management services to health care providers or seek new practice management contracts. We have established and anticipate establishing our clinics de novo, rather than contracting with existing clinics. In some jurisdictions, such as California, where state law restricts the corporate practice of medicine, we may provide management services to clinics at which the contracting physician provides medical services or enter into different arrangements to comply with applicable state law. Any such structure, however, should be viewed as an alternative structure for conducting business as dictated by applicable state law, rather than a change in our business plan and competitive strategy.

Differentiated Services and Business Strategy

Our objective is to position the Company as the first nationally branded laser tattoo and hair removal business. We differentiate the services offered at our clinics from those offered by our competitors by:

● Focusing on laser tattoo and hair removal. Historically, laser tattoo and hair removal services account for approximately 7577% and 2320% of our clinics’ revenues, respectively. Sales of product, incidental to the sale of hair and tattoo services, and other services each account for approximately 12% of sales. The vast majority of businesses that compete with our clinics offer a wide variety of services, as opposed to limiting their respective businesses to laser tattoo and hair removal. We believe that the significant experience and expertise we acquire by focusing on laser tattoo and hair removal services gives us a competitive advantage. The staff at each of our clinics is exposed to an average of 25-40 patients per operating day. We believe that this exposure provides our staff with a rapid and focused education, resulting in greater knowledge, and in turn, greater efficiency of operations. We believe that the credibility, name brand recognition and expertise we gain with our specialty focus will ultimately outweigh the benefits of “cross selling” other services to existing patients and attracting new patients seeking a wider variety of services.

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Providing services in a relaxed environment. We design our facilities to create a non-imposing, relaxed environment in contrast to a typical doctor’s office or surgi-center.

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Optimizing the location of our clinics. We seek to lease approximately 2,000 square feet of space in retail centers located in high volume traffic areas. With respect to new markets, we evaluate population demographics, analyze existing competition and identify local physicians to assess interest in developing a laser tattoo and hair removal business. We believe that our current clinics are located in areas with a higher concentration of our target demographic as compared to the location of many of our competitors’ clinics. We anticipate utilizing population and demographic analysis to locate future clinics in areas geographically central to high concentrations of our target demographic.

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Catering to our target demographic. Our ongoing patient demographic analysis shows that while a wide variety of individuals from various backgrounds seek the services offered at our clinics, the group that is most strongly represented consists of college-educated women between the ages of 20 and 40 who earn more than $50,000 a year. Based in part on the continuous feedback we receive from our patients in the form of standard surveys regularly solicited online and by telephone, we locate and design our clinics, train our staff and structure our marketing campaigns to cater to our target demographic.

● Marketing. The most common media outlet used to locate and research the services offered at our clinics is the Internet. Efforts are ongoing to maintain and expand our Internet presence, including online advertising campaigns, social networking and website development. We also employ traditional media to market our Company and the services provided at our clinics, including, but not limited to, outdoor, print and radio advertising. In addition, our clinics benefit from the celebrity of Dr. William Kirby, a member of our Board of Directors, who, in addition to being widely regarded as one of the leading authorities on laser tattoo removal, is a widely recognized personality in reality television.

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Advisory Committee. We have constituted a Medical Advisory Board consisting of leading dermatologists. We anticipate that our Medical Advisory Board will be instrumental in recruiting and maintaining top medical talent as we expand into new markets. Following are the individuals serving on our Medical Advisory Board:

David E. Cohen, M.D.

Neil Swanson, M.D.

Tejas Desai, D.O.

Brian Berman, M.D.

Michael H. Gold, M.D.

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Expansion. Based on our population and demographic analysis, we expect our future clinics to be located in areas geographically central to high concentrations of our target demographic. Our initial expansion focus is on large metropolitan markets that can support multiple clinic locations with favorable demographics, regulatory environments, and competitive landscapes. We are currently evaluating new clinic sites in Texas, Georgia, Florida and Arizona, and we have identified over 40 other viable markets in the United States for expansion. We estimate the cash requirements for each new clinic to be approximately $300,000, to be applied toward various start-up costs, including leasehold improvements, marketing expenses, equipment acquisition, supplies and personnel.

In addition, the ability of our clinics to compete will depend largely on the costs of labor and equipment, pricing and the level of overall customer satisfaction at each of our clinics. Some of our competitors may have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources. As a result, these competitors may be able to better respond to new or changing opportunities or customer requirements. Additionally, competing businesses could affect our ability to expand into other markets, generate sufficient revenues and maintain operations.

Based upon our marketing and advertising efforts as well as patient volume capabilities and history, we believe that Dr. Tattoff is currently positioned as the leading provider of tattoo removal services in southern California. As we enter into new markets, we intend to replicate our most effective marketing methods to quickly establish Dr. Tattoff in such markets. Through additional clinic openings throughout the country, continued effective marketing and advertising campaigns and ongoing efforts to continuously improve the customer experience, we intend to position the Company as the leading nationwide provider of laser tattoo and hair removal services.

Revenue Sources

In California

Our primary source of revenues through December 31, ~~2013~~2014 consisted of a management fee paid under a management services agreement with William Kirby, D.O., Inc. Dr. William Kirby, a former member of our Board of Directors, is the sole shareholder of William Kirby, D.O., Inc. A description of the management services agreement and two other agreements we entered into with William Kirby, D.O., Inc. and Dr. Kirby are set forth below. Our agreement with William Kirby, D.O., Inc. is structured to comply with a California state law limitation on the corporate practice of medicine.

Management Services Agreement. Effective January 1, 2010, we entered into an Amended and Restated Management Services Agreement with William Kirby, D.O., Inc., under which we provide certain non-medical management, administrative, marketing and support services and equipment as an independent contractor to the practice sites where William Kirby, D.O., Inc. provides or supervises laser tattoo and hair removal services. Under the agreement, William Kirby, D.O., Inc. retains sole responsibility for, and complete authority, supervision and control over, the provision of professional healthcare services performed by licensed medical professionals at the applicable clinics as it deems, in its sole discretion, appropriate and in accordance with all applicable California state and Federal laws and regulations. William Kirby, D.O., Inc. employs and pays the medical staff providing the services under this arrangement. Pursuant to the agreement, patient payables are deposited into the bank account of William Kirby D.O., Inc., and the Company prepares and makes payments on behalf of William Kirby D.O., Inc. with respect to employee salaries, employment taxes and employee benefits, among other payables. William Kirby, D.O., Inc. has the right to terminate the agreement upon a material breach by the Company, including, but not limited to, the Company’s failure to provide the services required under the agreement.

The Company has responsibility for most of the operations of the business conducted at the clinics, except for the dispensing of patient care services, in accordance with California state law. We do not own any equity in William Kirby D.O., Inc., and do not economically benefit from any increase in the value of William Kirby, D.O., Inc. We provide services under this agreement to all four of our California clinics. Pursuant to the agreement, we have the exclusive right to manage any other practice sites operated by William Kirby, D.O., Inc.

Following are certain of the material terms of the Amended and Restated Management Services Agreement:

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Term: A seven year initial term commencing on January 1, 2010 and ending on December 31, 2016.

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Renewal Terms: Automatic renewal terms of five years each, unless notice is given at least 180 days before the end of the current term.

● Fee: A management services fee to the Company for ~~2013~~2014 of 70.3% of the gross revenues of William Kirby, D.O., Inc. The management fee was verified by The Mentor Group, Inc., a third party valuation firm, as being reflective of the fair market value of the services provided by the Company under the agreement in light of the time, cost, expense and business risk incurred by the Company thereunder, and is subject to adjustment to ensure the fee is reflective of fair market value based on an annual review performed by the parties and a written report from a third party valuation expert. To be sustainable, any adjustment reducing the fee must not result in a fee so low that the Company is not compensated for its direct expenses of providing the services and its indirect expenses (general and administrative expense) or that the Company is not reasonably compensated for the business risks that it takes. Further, to be sustainable, any adjustment increasing the fee cannot result in a fee so high that William Kirby D.O., Inc. would not be able to cover its expenses, nor can it result in Company profits being substantially higher than firms offering similar services.

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Intellectual Property License: William Kirby, D.O., Inc. has a nonexclusive revocable license to use the name “Dr. Tattoff” owned by the Company.

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Security Interest: The Company has the right to require William Kirby, D.O., Inc. to execute a security agreement pursuant to which the Company would have a security interest in the gross revenues, accounts receivable, cash and other accounts of the businesses, securing the payment and performance of the obligations of William Kirby, D.O., Inc. under the agreement.

Medical Director Agreement. Effective January 1, 2010, we entered into a Medical Director Agreement with William Kirby, D.O., Inc. and Dr. Kirby, under which we receive administrative, consultative and strategic services from William Kirby, D.O., Inc. The initial term of the agreement iswas five years, toand beit ~~followed~~terminated byeffective ~~automatic~~December ~~renewal~~31, ~~terms of five years each~~2014. The agreement ~~provides~~provided for an annual payment of $250,000 to William Kirby, D.O., Inc. for these services. In addition, pursuant to the agreement, Dr. Kirby and William Kirby, D.O., Inc. agree that he/it will not perform any services for any company or individual that directly competes with the services offered by the Company.

Shareholders Agreement. Effective January 1, 2010, we entered into a Shareholders Agreement with William Kirby, D.O., Inc. and Dr. Kirby, pursuant to which, upon the occurrence of certain triggering events described below, Dr. Kirby is required to transfer his interest in William Kirby, D.O., Inc. to another licensed person approved by the Company. Such triggering events include, but are not limited to, (i) the death or incapacity of Dr. Kirby, (ii) the loss of Dr. Kirby’s medical license, (iii) a breach of the obligations of William Kirby, D.O., Inc. and/or Dr. Kirby under the Amended and Restated Management Services Agreement or the Medical Director Agreement, (iv) the voluntary or involuntary transfer of Dr. Kirby’s interest in William Kirby, D.O., Inc. and (v) the termination of the Amended and Restated Management Services Agreement in certain circumstances. The Company has only the right to approve a replacement licensed physician (which cannot be unreasonably withheld) upon the occurrence of one of these triggering events, and does not have the unilateral ability to select such replacement.

Outside of California

Funds from operations from our Dallas, Houston, Atlanta and Phoenix clinics serve as an additional source of revenue. We own and operate our ~~Dallas~~Texas, ~~Houston,~~Georgia ~~Atlanta~~ and ~~Phoenix~~Arizona clinics in compliance with relevant state law. We have entered into consulting physician agreements with physicians in those states, pursuant to which the consulting physician or other physicians engaged by the consulting physician provide our clinics with (i) medical director services, (ii) assistance with the creation of clinic protocols and (iii) supervisory and consulting services regarding equipment procurement and operation, in each case consistent with applicable state and Federal laws and regulations.

Following are certain of the material terms of the consulting physician agreements:

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Duties of Consulting Physicians: Includes, among other duties, reviewing and evaluating personnel performing services at the clinics; conducting audits of the tattoo and laser hair removal operations of the clinic; reporting all adverse reactions and customer complaints to the Company’s management; conducting education and training of the clinic’s staff; assisting with the development of clinic policies; and evaluating safety and effectiveness of treatments offered at the clinic. Pursuant to the agreement, the consulting physician or a designated alternate physician must be available in person or telephonically at all times during the clinic’s business hours for consultation with clinic personnel. Additionally, the consulting physician is required to work with us to develop written protocols for the performance of laser procedures at the clinic and to maintain and annually review such protocols.

● Fees: AnFixed ~~annual~~and ~~rate of $60,000,~~ payable in ~~equal~~ monthly installments ~~for the initial clinic covered with lower rates for additional clinics in the same geographic area~~.

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Term: An initial term of one year, with automatic renewal for one year terms thereafter.

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Restrictive Covenants: Pursuant to the consulting physician agreement the consulting physician and any alternate physician are subject to certain non-solicitation and non-competition covenants.

Intellectual Property

We own the rights to the registered trademark Dr. Tattoff® and the registered logo for Dr. Tattoff and have granted a non-exclusive license to use these rights to William Kirby, D.O., Inc. in compliance with applicable California state law. We have not granted any such license to any other person. We continually seek to protect our intellectual property.

Employees

As of December 31, ~~2013~~2014, we employed 5864 persons, 3231 of whom were full-time employees. As of December 31, ~~2013~~2014, William Kirby, D.O., Inc. employed 2319 persons, 9 of whom were full time.

Government Regulation

The health care industry in the United States is highly regulated. The Company and its operations conducted at its clinics are subject to extensive federal, state and local laws, rules and regulations, including those prohibiting corporations from practicing medicine and providing laser tattoo and hair removal services, prohibiting unlawful rebates and division of fees, anti-kickback laws, fee-splitting laws, self-referral laws, laws limiting the manner in which prospective patients may be solicited and professional licensing rules. Certain states, including California, impose restrictions related to the practice of medicine by business entities.

The Company has reviewed these laws and regulations with its health care counsel, and although there can be no assurance, the Company believes that its operations currently comply with applicable laws in all material respects.

Certain of the Federal and state laws and regulations impacting our business and the services provided at our current and future clinics are set forth below. As we expand into new jurisdictions, we will analyze and constantly reevaluate our compliance with applicable Federal, state and local law.

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Corporate Practice of Medicine. Certain states, including California, impose restrictions related to the practice of medicine by business entities.

● Licensing. Certain state and Federal laws and regulations govern the administration and licensing of the medical and technical staff providing services at our clinics. Each physician, registered nurse and physician assistant providing professional services at our clinics must, to the extent required by applicable law, hold valid licenses and have the required qualifications and/or experience for such services. Each person operating lasers at our clinics must, to the extent required by applicable law, hold valid licenses and/or have the required qualifications and/or experience for such services. Furthermore, these individuals are prohibited from providing services beyond the scope of their licensure and must operate lasers under appropriate supervision. In addition, certain states require that facilities providing laser tattoo and/or laser hair removal services obtain a license8

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Licensing. Certain state and Federal laws and regulations govern the administration and licensing of the medical and technical staff providing services at our clinics. Each physician, nurse and physician assistant providing professional services at our clinics must, to the extent required by applicable law, hold valid licenses and have the required qualifications and/or experience for such services. Each person operating lasers at our clinics must, to the extent required by applicable law, hold valid licenses and/or have the required qualifications and/or experience for such services. Furthermore, these individuals are prohibited from providing services beyond the scope of their licensure and must operate lasers under appropriate supervision. In addition, certain states require that facilities providing laser tattoo and/or laser hair removal services obtain a license.

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Anti-Kickback and Fee Splitting Laws. The business conducted at our clinics is subject to various state and Federal regulations restricting (i) kickback, rebate or division of fees between physicians and non-physicians, (ii) the manner in which a prospective patient may be solicited, (iii) the receipt or offering of remuneration as an inducement to refer patients and (iv) physician self-referral.

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FDA Approval. The lasers used in our clinics are medical devices subject to the jurisdiction of the Food and Drug Administration, or the FDA. The FDA has established stringent approval requirements applicable to the initial use and new uses of the lasers used in our clinics.

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Patient Confidentiality. The maintenance and safeguarding of patient records, charts and other information generated in connection with the provision of professional medical services at our clinics are regulated by confidentiality laws and regulations, including the Health Insurance Portability and Accountability Act of 1996, the California Confidentiality of Medical Information Act (relevant to our California clinics) and similar laws in the other states in which we operate.

Item 1A. Risk Factors.

Our business is subject to certain risks, including those described below. If any event described in the following risk factors actually occurs, then our business, results of operations and financial condition could be adversely affected. See “Item 1. Business,” “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and “Item 8. Financial Statements and Supplementary Data” for additional information concerning these risks.

Risks Related to our Business

A significant majority of our revenues are currently derived from a management services agreement relating to our California clinics.

The revenues from our California clinics, which represent a significant majority of the Company’s revenues, are derived from services provided under a management services agreement with William Kirby, D.O., Inc. Under the terms of the management services agreement, our management service fee for ~~2013~~2014 was equal to 70.3% of the gross revenues of William Kirby, D.O., Inc., which fee may be adjusted upward or downward on an annual basis to reflect the fair market value of the services provided by us under the agreement. A downward adjustment of our management services fee could negatively impact our results of operations, cash flows and financial condition. Furthermore, although we do not own any equity in William Kirby D.O., Inc. and do not economically benefit from any increase in the value of William Kirby, D.O., Inc., if our management services agreement is terminated for any reason or William Kirby, D.O., Inc. defaults on its obligations thereunder, our operating results, cash flows and financial performance may be adversely affected. Although our management services agreement provides us with the right to approve (but not select) a replacement contracting physician upon the occurrence of certain pre-determined triggering events (and not at our discretion), we can give no assurance that a qualified replacement will be expeditiously identified and approved. The termination of our management services arrangement could have a material adverse effect on our financial condition, cash flows and results of operations.

We have a limited operating history on which to evaluate our operations.

We have a limited operating history on which to base an evaluation of our business and prospects. Since our inception, we have funded operations through operating cash flows (when available), sales of equity securities, loans from shareholders, directors and management, salary deferrals and the issuance of debt. We are subject to all of the business risks and uncertainties associated with a growth-stage company, which include, but are not limited to, rejection or partial acceptance of the services provided at our clinics, the inability to effectively market such services and the inability to obtain sufficient capital necessary to enable us to pursue our opportunities. Any failure to implement and execute our business and marketing strategy successfully, failure to respond to competition and failure to attract, integrate, retain and motivate qualified personnel and physicians could have a material adverse effect on our business and results of operations. In addition, our revenues and operating results are difficult to forecast and our future revenues are dependent in large part on our ability to successfully complete our planned expansion into new markets. Accordingly, our historical operating results should not be relied on as an indication of future performance.

A general reduction in spending on discretionary items and services could result in a reduced demand for the services provided in our clinics.

Economic downturns typically adversely affect consumer spending, asset values, consumer indebtedness, the availability of consumer credit and unemployment rates, all of which could negatively impact our business. Our business depends on the market demand for laser tattoo and hair removal services in the geographic areas in which our clinics are located. The cost of tattoo and hair removal procedures are not reimbursed by third-party payors such as health care insurance companies or government programs. Accordingly, any significant decrease in consumer spending on these services may result in a corresponding decrease in the revenue generated at our clinics. In addition, a general economic downturn may result in customers becoming less willing to purchase packages of treatments administered over a period of time, or deciding to extend the period between treatments. Our clinics may be forced to respond to a reduction in discretionary consumer spending by lowering the prices for services rendered. Accordingly, weak economic conditions in our target markets resulting in a reduction in discretionary consumer spending or a reduction in the availability of consumer credit could lead to a decline in demand for the services provided at our clinics, longer sales cycles, lower prices for such services and reduced sales, which could have a material adverse effect on our financial condition, cash flows and results of operations.

We may experience a fluctuation in our revenues and results of operations.

Our future revenues and results of operations may vary from quarter to quarter. A number of factors, many of which are outside of our control, may cause variations in our results of operations, including: (i) the demand for laser tattoo and hair removal services, (ii) our ability to establish new clinics, (iii) unforeseen costs related to the establishment of new clinics, (iv) competition and pricing pressure, (v) increased expenses relating to a variety of factors, including facility operations, marketing and administration, (vi) the hiring, retention and utilization of key employees and (vii) general economic conditions. We may experience prolonged losses from operations that could adversely affect our long-term financial condition.

We will require additional capital to sustain our business and fund our future expansion.

We have historically experienced significant negative cash flow from operations and we expect to continue to experience significant negative cash flow from operations in the near future. Accordingly, we expect to raise additional capital to fund our current operations and future expansion through the sale of securities and/or the issuance of debt. There is no assurance that we will be able to raise this additional capital on terms acceptable to us or at all. Our inability to generate sufficient funds from operations and third party financing sources may negatively impact our ability to successfully execute on our business plan.

Our auditor’s opinion expresses doubt about our ability to continue as a “going concern.”

The reports of our independent registered public accounting firm on our December 31, ~~2013~~2014 and ~~2012~~2013 financial statements state that our recurring losses, lack of liquidity, negative cash flows from operations, and significant shareholders’ deficit raise substantial doubts about our ability to continue as a going concern. Our ability to continue as a going concern is subject to our ability to raise additional capital, increase sales and margins, and ultimately achieve sustained profitable operations. If we are unable to raise additional capital, we may have to discontinue operations or cease to exist, which would be detrimental to the value of our common stock. We can make no assurances that we will be able to raise a sufficient amount of funds to continue operations.

Global financial and economic conditions may deteriorate impacting the availability of capital.

We can provide no assurance that funding for our current or future operating and capital needs will be available on favorable terms or at all. If funding is not available, we may be unable to fund current operations or our expansion efforts, which may adversely affect our revenues, financial condition and results of operations.

We can provide no assurance that our expansion efforts will be successful.

Our plans for national expansion and the opportunities, efficiencies and economies of scale achieved through expansion are critical elements of our business plan. Our ability to expand into new markets will depend on a variety of factors, including our ability to:

● identify new markets receptive to our services;

● identify facilities suitable for our new clinics;

● negotiate leases for our new clinics on commercially reasonable terms;

● attract and contract with qualified physicians in connection with the services provided in our clinics, in accordance with applicable state law;

● market our services in new markets;

● implement and integrate new, expanded or upgraded operations and financial systems, procedures and controls;

● hire, train and retain new staff and managerial personnel;

● expand our infrastructure; and

● comply with applicable local, state and Federal law.

We can provide no assurance that we will be able to successfully expand our presence into new markets, if at all. Our inability to successfully execute on our plans for expansion may negatively impact our future results of operation and ability to execute on our business plan.

We may be unable to effectively manage our growth.

We may experience a period of rapid growth in the near or distant future. In June 2012, we opened a new clinic in Texas, in November 2012 we opened a new clinic in Arizona, we opened another new clinic in a suburb of Houston in March 2013 (which we closed in February 2014 due to poor performance), a new clinic in Atlanta in October 2013, a new clinic in Frisco, Texas (a suburb of Dallas) in March 2014, a new clinic in Ft. Worth, Texas in May 2014 and expect to open additional clinics in Texas, Georgia, Florida, Arizona, and/or other states in ~~2014~~the future. Significant short-term growth will strain our management, operational, financial and other resources. Our ability to manage future growth will depend on the implementation, expansion and/or subsequent improvement of a variety of systems, procedures and controls. Furthermore, we may need to train, motivate and manage newly hired employees and attract senior managers and other professionals in response to, or in anticipation of, any future growth. Our inability to effectively manage growth could negatively impact our business, financial condition and prospects.

The physicians providing services in our clinics will likely not devote 100% of their time to the Company’s business.

Dr. William Kirby, the sole shareholder of the entity through which our California clinics are operated and a former member of our Board of Directors, devotes approximately 10% of his time to (i) treating patients outside of his relationship with us, (ii) research and continuing education, (iii) managing the business affairs of William Kirby, D.O., Inc. and (iv) interviews and other media activities which may or may not benefit our business. Dr. Kirby ~~splits~~spends the balance of his time ~~between~~ supervising the provision of services at our clinics ~~and advising the Company in his capacity as a medical director and a member of our Board of Directors~~. We anticipate that all of the other primary physicians with whom we contract, and who assume responsibility for ensuring the overall supervision and operation of our clinics outside of California will similarly devote less than 100% of their time to our business or the provision of services at our clinics. There is a risk that our contracting physicians will not devote the requisite time to our business or the provision of services at our clinics, thereby adversely ~~effecting~~affecting our results of operations and financial condition.

The officers and directors of the Company exercise significant control over the Company.

Our officers and directors own approximately 2.61 million (1411%) shares of our outstanding common stock as of December 31 ~~2013~~2014. As stockholders, these individuals may have a significant influence on matters requiring stockholder approval, including the election of directors and the approval of business combinations. This concentration of ownership also could have the effect of delaying, discouraging or preventing changes of control or changes in management, or limiting the ability of the Company’s other stockholders to approve transactions that they may deem to be in their best interests. Conflicts of interest may arise as a result of such ownership.

We may be unable to attract and retain qualified physicians.

A significant majority of our current revenues are derived from a management services agreement with William Kirby, D.O. Inc., which provides laser tattoo and hair removal services at our California clinics. The provision of services by William Kirby, D.O. Inc. is critical to the success of our existing California clinics, and our expansion efforts are dependent on our ability to contract with additional qualified physicians. If we are unable to consistently attract, contract with and retain qualified physicians, our ability to maintain operations at existing clinics and open new clinics will be negatively affected.

Our strategy to promote the brand “Dr. Tattoff®” may be unsuccessful.

Our promotion of the Dr. Tattoff® brand and the services provided at our clinics is critical to the future success of our business and expansion efforts. We are unable to quantitatively measure the success of our current marketing campaigns or predict the future success of such campaigns in regions into which we may expand. Furthermore, we will require significant capital to fund our marketing efforts as we expand. We can provide no assurance that our revenues generated from future operations will be sufficient to fund our marketing efforts, or that we will be able to acquire the necessary funds from third party financing sources on terms acceptable to us or at all. Furthermore, we can provide no assurance that our marketing strategy will result in business generation or brand recognition in the markets into which we may expand.

~~Our~~Several of our current clinics are geographically concentrated in southern California.

Although we opened clinics in Dallas in June 2012 and March 2014, a clinic in Ft. Worth in May 2014, clinics in Houston in June 2013 and March 2013 (which was closed in February 2014), a clinic in Phoenix in November 2013 and a clinic in Atlanta in October 2013 and anticipate expanding our presence into those and other states in ~~2014~~the future, four of our clinics are geographically concentrated in southern California. As a result, our results of operations and financial condition are significantly tied to fluctuations in southern California economic conditions. A downturn in the economic conditions in southern California, or severe weather conditions and natural disasters endemic to southern California, such as earthquakes and floods, could negatively impact our financial condition, results of operations and cash flows.

We derive all of our revenue from laser tattoo and hair removal services.

We derive substantially all of our revenue from laser tattoo and hair removal services which we provide to patients directly in our owned clinics and are provided to patients of William Kirby, D.O., Inc. in California. We do not have other diversified revenue sources to offset a significant decrease in revenues from the provision of laser tattoo and hair removal services at our clinics. A decline in the demand for laser tattoo and/or hair removal services generally may result in a reduction in revenues generated at our clinics, which could have a material adverse effect on our financial condition, results of operations and cash flows.

Our clinics operate in a competitive environment and may have difficulty competing with larger and better financed competitors.

Our clinics compete with other local and national providers of laser tattoo and hair removal services. As laser tattoo and hair removal technology continues to develop and the demand for laser tattoo and hair removal services grows, the competition for the services provided at our current and future clinics may increase. Our clinics will compete based on a variety of factors, including quality of service, customer satisfaction and price and value. Some competitors may have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources. As a result, these competitors may be able to better respond to new or changing opportunities or customer requirements. Additionally, competing businesses could affect our ability to expand into other markets, generate sufficient revenues and maintain operations at a profitable level due to reduced margins or loss of market share. For all of the foregoing reasons, our clinics may not be able to compete successfully with current and future competitors.

An increase in the number of competing laser tattoo providers may harm our business.

Laser tattoo removal is a relatively new, but developing, procedure. As laser tattoo removal becomes more commonplace, new physicians and practice groups may begin to receive significant demand to economically justify the purchase or lease of laser tattoo removal technology. We currently use Q-switched lasers in our clinics, which have a retail price of approximately $100,000 to $150,000 per laser. A significant reduction in the price of lasers or a significant increase in the demand for laser tattoo removal could result in an increase in the number of competitors, thereby negatively impacting our business and prospects. To compete successfully, our clinics may be required to reduce prices, increase operating costs or take other measures that could have an adverse effect on our financial condition, results of operations, margins and cash flow.

We currently rely on third party financing of certain equipment used in our clinics, and our business plan contemplates the continued use of such financing.

The IPL ~~devices~~device used for hair removal at our ~~Beverly Hills, Santa Ana clinics, and~~ Dallas clinic, ~~are~~is ~~leased or~~ owned by William Kirby, D.O., Inc. pursuant to ~~various~~a ~~capitalized leases/~~finance ~~agreements~~agreement with a third party financing ~~sources~~source. Under the management services agreement, we have the right, at any time, to purchase the equipment from William Kirby, D.O., Inc. at a purchase price of the amount outstanding, if any, under the ~~applicable capitalized lease/~~finance agreement. The third party ~~lessors/financers~~financer ~~have~~has a security interest in ~~all of~~ the underlying equipment ~~at these three clinics~~. As a result, in the event that William Kirby, D.O., Inc. defaults on its obligations under anthe ~~outstanding capitalized lease/~~financing agreement, then the underlying equipment may be subject to repossession and other assets of William Kirby D.O., Inc. may be subject to the lender’s security interests. The loss of any such equipment or assets may negatively impact our business.

We purchased the tattoo lasers used in our clinics for tattoo removal pursuant to financing arrangements with unrelated third parties. We acquired the lasers used in our clinics, except Dallas, for hair removal pursuant to financing arrangements with third party financing sources. In the event that we default on our obligations under an outstanding financing agreement, then the underlying equipment may be subject to repossession. The loss of any such equipment may negatively impact our business.

WeWith ~~purchased~~respect ~~the~~to ~~tattoo lasers used in~~ our future clinics, ~~for~~we ~~tattoo~~intend ~~removal~~to ~~pursuant~~enter tointo similar financing arrangements with ~~unrelated~~manufacturers and third ~~parties. We~~party ~~purchased~~financing ~~the~~sources ~~laser~~to ~~used~~provide inlasers ~~our~~and ~~Montclair~~certain ~~clinic~~other ~~for~~necessary ~~hair~~equipment ~~removal~~to ~~with~~our ~~no encumbrance~~clinics. We ~~acquired~~There ~~the~~can ~~lasers~~be ~~used~~no inassurance ~~our~~that ~~Sherman~~such ~~Oaks,~~financing ~~Phoenix~~will ~~and~~be ~~Atlanta~~available ~~clinics~~to ~~for~~us ~~hair~~on ~~removal~~terms ~~pursuant~~acceptable to ~~financing~~us ~~arrangements~~or ~~with~~at ~~third party financing sources~~all. In the event that wefinancing ~~default~~is onnot ~~our~~available ~~obligations~~to ~~under~~us anon ~~outstanding~~terms ~~financing~~acceptable ~~agreement~~to us, then ~~the~~our ~~underlying~~ability ~~equipment~~to ~~may~~acquire bethe ~~subject~~equipment tonecessary ~~repossession. The~~for ~~loss~~the provision of ~~any~~services ~~such~~at ~~equipment~~our clinics would be restricted, which may negatively impact our business.

With respect to our future clinics, we intend to enter into similar financing arrangements with other manufacturers and third party financing sources to provide lasers and certain other necessary equipment to our clinics. There can be no assurance that such financing will be available to us on terms acceptable to us or at all. In the event that financing is not available to us on terms acceptable to us, then our ability to acquire the equipment necessary for the provision of services at our clinics would be restricted, which may negatively impact our business.

Advances in laser tattoo and hair removal technology may render our equipment or the services provided at our clinics obsolete.

We believe that the technology, equipment and systems employed at our clinics are state-of-the-art, and we are constantly monitoring technological advances and reassessing the technology. However, there can be no assurance that new, improved or more efficient technology will not be developed, or that our clinics will not lose customers due to obsolete or outdated technology or require significant funding to update this technology.

We may be unable to protect our intellectual property rights or infringe on the intellectual property rights of others.

We own the rights to the registered service mark of the name “Dr. Tattoff” and for the logo for Dr. Tattoff. We license, on a nonexclusive basis, the use of our trademarks to William Kirby, D.O., Inc., the provider of laser tattoo and hair removal services at our California clinics. We have not granted any such license to any other person. We may enter into similar arrangements with physicians as we expand. We will seek to protect our current and future intellectual property and to respect the intellectual property rights of others. In protecting our intellectual property, we will rely on international, state and/or Federal law regarding copyright, patents, trademarks and trade secrets. Furthermore, while we will attempt to ensure that the integrity of our intellectual property rights is maintained through restrictions in the licenses we grant to third parties, our licensees may take actions that could impair the value of our brand, our proprietary rights or the reputation of our clinics. We cannot guarantee that we will succeed in obtaining, registering, policing or defeating challenges to our intellectual property rights or that our licensees will preserve the integrity of our brand. Any inability to register or otherwise protect our intellectual property rights could harm our business.

Furthermore, third parties may assert intellectual property infringement claims against us. These claims could result in significant liability to us, our inability to use key rights and the invalidation of our proprietary rights. Regardless of the outcome, any litigation could be time-consuming, expensive and could prove to be a distraction to management’s time and attention. Any of the foregoing occurrences could have a material adverse effect on our business and results of operations.

Our success will depend on our ability to hire and retain key personnel.

Our future success will depend on the skills, experience and efforts of our officers and key personnel and members of our Board of Directors. Our executive management team and members of our Board of Directors have significant experience in the healthcare industry, and the loss of any one of them could materially and adversely affect our ability to execute our business strategy. ~~Specifically,~~ ~~the loss of Dr. William Kirby would have a material adverse effect on our current operations and prospects.~~ As we expand, our success will similarly depend on our ability to attract, train and retain qualified personnel, and attract and contract with qualified physicians. A failure to attract, hire and retain qualified personnel and new contracting physicians could have a material adverse effect on our business financial condition and expansion efforts.

Litigation brought against us may result in the expenditure of significant resources.

The services provided at our clinics involve medical procedures. As a result, we may become subject to claims and litigation arising out of the conduct of our business or the provision of services at our clinics, which include, but are not limited to, claims and litigation relating to:

● adverse side effects and reactions resulting from laser tattoo and hair removal;

● improper administration of laser tattoo and hair removal services; or

● professional malpractice.

The Company and the physicians with whom we contract will carry liability insurance as required by law, but there is no certainty as to the adequacy of such liability insurance to cover future claims. Litigation of any type could result in significant expense to the Company associated with defending any claim or litigation, negative publicity and damage awards in excess of insurance coverage, among other expenses.

We may not be able to maintain or obtain insurance.

We currently maintain professional liability insurance, general liability insurance, property insurance, worker’s compensation insurance, employment practices liability and director and officer liability insurance. Pursuant to our management services agreement with William Kirby, D.O., Inc., we agreed to procure and maintain medical malpractice and comprehensive general liability insurance policies on behalf of William Kirby, D.O., Inc. In addition, pursuant to the agreement, William Kirby, D.O., Inc. indemnifies the Company and its employees, officers, directors, representatives and agents from damages, liabilities and expenses incurred as a result of any action or omission by William Kirby, D.O., Inc. and its employees and agents. Pursuant to our standard consulting physician agreement with our consulting physicians, we agreed to procure and maintain medical malpractice insurance on the consulting physician and any alternate physician named under the consulting physician agreement. In addition, pursuant to the standard agreement, the consulting physician indemnifies the Company and its employees and agents from damages, liabilities and expenses incurred as a result of any action or omission by the consulting physician and its employees and agents. As we expand, we expect to enter into similar agreements with physicians, in accordance with applicable state law. However, we cannot guarantee that any particular liability will be covered by insurance or that any judgment or damages will not exceed the limits of coverage.

In addition, the insurance policies obtained by us may not continue to be available to us or, if they are available, they may become too expensive for us to maintain. Our failure to maintain adequate insurance may have a material adverse effect on our financial condition and results of operations.

We may not be able to enter into or renew a lease for a clinic on favorable terms or at all.

We are the named lessee with respect to the lease for all of our clinic locations. We have the right, but not the obligation, to use space at each of our current California clinics for the provision of management services pursuant to the terms of the management services agreement with William Kirby, D.O., Inc. Our clinic which was located in Encino until February 2013 was leased by William Kirby, D.O., Inc. pursuant to lease agreement with third party lessors which terminated on February 28, 2013. We entered into a lease for a new location in Sherman Oaks, approximately 5 miles from the Encino location and we moved to the new location in February 2013. We expect to be the named lessee under the leases with respect to our future clinics. The Company may be unable to renew existing leases or enter into new leases on terms acceptable to us or at all. Higher lease costs could adversely impact our results of operations, cash flows and financial condition. Failure by a lessor to renew an existing lease could require the relocation of a clinic, which could disrupt our business and require significant capital expenditures for leasehold improvements.

Terms of our credit facilities may restrict our financial and operating flexibility.

In December 2013, we entered into a revolving line of credit with a lender. The credit agreement includes both positive and negative covenants typical for such lending arrangements, including those that limit our ability to incur debt; invest in other businesses; issue securities; make capital expenditures; merge, consolidate, transfer, license, lease or otherwise dispose of our assets; or take certain other actions without first obtaining the lender’s written consent. The only financial covenant in our credit agreement requires that, beginning with the first quarter of 2014, our sales revenue is not less than 75% of the sales revenue for the corresponding calendar quarter of the prior year. These covenants could affect our financial and operational flexibility or impede our ability to operate or expand our business. Default under this credit agreement or our other credit facilities would allow the lender to declare all amounts outstanding to be immediately due and payable. Our lenders have a security interest in substantially all of our assets to secure the debt under our current credit facilities. If our lenders declare amounts outstanding under any credit facility to be due, depending on whether the loan is secured, the lenders could proceed against some or all of our assets. Any event of default, therefore, could have a material adverse effect on our business.

Risks Related to Regulation of our Industry

The Company and the services provided at our clinics are subject to significant regulation.

The healthcare industry is heavily regulated and changes in laws and regulations can be significant. See “Business – Government Regulation” for a description of certain of these laws and regulations. Many of these laws and regulations are ambiguous, and courts and regulatory authorities have provided limited clarification. Moreover, state and local laws vary from jurisdiction to jurisdiction. As we expand, we will need to analyze and constantly reevaluate our compliance with applicable local, state and Federal law. Our interpretations of applicable law and our business structure could be challenged. Any failure to comply with applicable law could result in substantial civil and criminal penalties. Non-compliance with applicable law could have a material adverse effect on our financial condition and could result in the cessation of our business.

The lasers used in our clinics are medical devices subject to Food and Drug Administration (FDA) approval.

The lasers used in our clinics are medical devices subject to the jurisdiction of the FDA. The FDA has established stringent approval requirements applicable to the initial use and new uses of lasers used for medical purposes. Any noncompliance with the approved use of a laser or the failure of the suppliers of our lasers to comply with FDA requirements could subject us to product seizure recalls, withdrawal of approvals and civil and criminal penalties, and could have a material adverse effect on our business, financial condition or results of operations.

The business conducted at our clinics is subject to new and amended Federal healthcare reform initiatives.

On March 23, 2010, President Obama signed into law the Patient Protection and Affordable Care Act. This law enacted numerous changes impacting the delivery of health care and health care insurance in the United States. Further, legislative proposals continue to be introduced in Congress and various state legislatures that could cause additional major reforms of the U.S. healthcare system. We cannot predict whether any of these proposals will be adopted or the full extent of how they might affect our business or the business conducted at our clinics. During the course of congressional deliberations leading up to the new legislation, Congress considered a tax on cosmetic procedures. The final legislation included a tax on tanning services but not cosmetic procedures in general. If a tax on cosmetic procedures in general is implemented at the federal or state level, it may result in higher costs for patients utilizing the services provided at our clinics, and a reduced demand for these services. We are unable to predict the ultimate outcome of healthcare reform efforts. However, should such reform efforts include a tax on the services provided at our clinics or otherwise increase the cost of such services, our business may be negatively impacted. New or revised legislation could have a material adverse effect on our business, financial condition and results of operations.

State regulations governing the level of physician supervision over advanced registered nurse practitioners, physician assistants and registered nurses are not definitive.

We have contracted with William Kirby, D.O., Inc. for the provision of laser tattoo and hair removal services at our current California clinics in compliance with applicable California state law. Dr. William Kirby, a former member of our Board of Directors, is the sole shareholder of William Kirby, D.O., Inc. and is a board certified dermatologist and licensed Osteopathic Physician and Surgeon in the State of California. With respect to our other clinics, we have entered into consulting physician agreements with physicians licensed in the state where our clinics are located in accordance with applicable state laws. As we expand, applicable state law will govern how we structure the provision of services in our new clinics.

Dr. Kirby employs and supervises advanced registered nurse practitioners, physician assistants and registered nurses (either as employees or independent contractors) to assist with the tattoo removal services performed at our California clinics. Accordingly, Dr. Kirby must comply with relevant California state laws and regulations applicable to the provision of healthcare services by nurses, nurse practitioners and physician assistants. See “Company and Business Overview – Government Regulation” for a description of such laws and regulations.

If the California Medical Board were to ultimately conclude that a physician must be within a limited number of miles from a clinic providing laser services, it would likely limit the number of procedures that can be conducted in our California clinics on any given day, thereby reducing the overall revenues to the physician and consequently reducing our management services fees. In addition William Kirby, D.O., Inc. would likely seek modifications to our management services agreement that would either increase our costs or decrease our fees, and our ability to grow our business in the State of California would be negatively impacted.

The Company employs the non-physician medical personnel necessary to assist with the tattoo and hair removal services performed at clinics located outside of California. The consulting physicians that we contract with in the state where is facility is located supervise such personnel. Accordingly, such physicians must comply with relevant state laws and regulations applicable to the provision of healthcare services by the Company’s non-physician medical personnel. The laws and regulations applicable to the provision of hair removal services contain more detailed requirements than the laws and regulations applicable to the provision of laser tattoo removal services.

Furthermore, if we expand our operations into other areas outside of our current geography, persons working in our clinics will be subject to the applicable state’s licensing procedures and rules and regulations governing the level of physician supervision required which may differ from those in the states where we currently operate. If physicians, registered nurses, advanced registered nurse practitioners, physician assistants, and other licensed personnel performing or assisting in laser tattoo and hair removal services at our clinics are deemed to have violated the laws or the rules of the appropriate licensing agency with respect to their scope of practice, they may face disciplinary action, including suspension or revocation of their medical or nursing license or credentials, which could have a material adverse effect on the Company.

Our services provided under the management services agreement with William Kirby, D.O., Inc. could implicate California anti-kickback and profit splitting prohibitions and our consulting physician agreements may implicate other states’ anti-kickback laws.

We believe that our agreements with William Kirby D.O., Inc. and our other consulting physicians are in compliance with applicable state anti-kickback statutes. There is a risk, however that services or items provided under any such agreement in California could be viewed as “referring or recommending” a person to a health-related facility “for profit” in violation of California Health & Safety Code Section 445 or “referring” a person in violation of California Business & Professions Code 650. There is also a risk that services or items provided under any such agreements in other states would violate applicable sections of that particular state’s laws or regulations. We can provide no assurance that government enforcement agencies will not view our agreements with physicians as violating applicable state anti-kickback laws.

Our services provided under the management services agreement with William Kirby, D.O., Inc. and our engagement of physicians under other consulting physician agreements could be determined by the California Medical Board or the applicable state medical boards, respectively, to constitute the unlawful practice of medicine.

With respect to our California clinics, we provide marketing and practice management services to William Kirby, D.O., Inc. pursuant to a management services agreement. See “Business – Revenue Sources” for a detailed description of the management services agreement. We believe that the management services agreement complies with applicable California state law. However, it is possible that the California Medical Board could allege or determine that our provision of management services to William Kirby, D.O., Inc. constitutes excessive control over the entity’s medical practice, that our fee for the provision of such services is excessive or that we are otherwise unlawfully engaged in the practice of medicine.

With respect to other clinics, we have entered into consulting physician agreements with physicians in the states where the clinics are located. Changes in applicable state law may require us to terminate or materially modify the obligations and/or financial terms of our current and future services agreements. As we expand into other states, we may enter into similar agreements with physicians for the provision of services at our clinics, in compliance with applicable state law. Such agreements would be subject to the same risk of non-compliance with relevant state restrictions on the corporate practice of medicine.

Risks Relating to our Securities

There is currently no public or private trading market for our common stock.

Our common stock is not publicly traded or quoted on any stock exchange or other electronic trading facility. While we are exploring the public trading of our securities, we have no present arrangements or understandings with any person that will in the near future lead to the development of a trading market in our common stock. We cannot assure you that a trading market for our common stock will ever develop. Our common stock has not been registered for resale under the blue sky laws of any state. The holders of shares of our common stock, and persons who may wish to purchase shares of our common stock in any trading market that might develop in the future, should be aware that significant state blue sky laws and regulations may exist which could limit the ability of our shareholders to sell their shares.

Shares of our common stock are subject to dilution.

As of December 31, ~~2013~~2014, we have approximately 19.3 million shares of common stock issued and outstanding, warrants to purchase approximately ~~6,508,000~~8.3 million shares of our common stock outstanding, and options to purchase approximately 1~~,540,000~~.6 million shares of our common stock outstanding. In addition, as of December 31, ~~2013~~2014, we have approximately $1,~~478~~578,000 in convertible debt outstanding which, if converted, would result in the issuance of approximately 2~~,388,000~~.5 million additional shares of common stock. The Company is currently seeking funding sources with respect to its expansion plans. Larger equity offerings and/or offerings at a lower per share price would result in a greater number of shares of common stock outstanding. If we issue additional shares of common stock in the future and do not issue those shares to all then-existing common shareholders proportionately to their interests, then such issuance will result in dilution to each shareholder by reducing the shareholder’s percentage ownership of the total outstanding shares of our common stock.

Our Board of Directors may issue shares of preferred stock that would adversely affect the rights of our common shareholders.

Our authorized capital stock includes 2,857,143 shares of preferred stock of which no preferred shares are issued and outstanding. Our Board of Directors, in its sole discretion, may designate and issue one or more series of preferred stock from the authorized and unissued shares of preferred stock. Subject to limitations imposed by law or our articles of incorporation, our Board of Directors is empowered to determine:

● the designation of, and the number of, shares constituting each series of preferred stock;

● the dividend rate for each series;

● the terms and conditions of any voting, conversion and exchange rights for each series;

● the amounts payable on each series on redemption or our liquidation, dissolution or winding-up;

● the provisions of any sinking fund for the redemption or purchase of shares of any series; and

● the preferences and the relative rights among the series of preferred stock.

We could issue preferred stock with voting and conversion rights that could adversely affect the voting power of the shares of our common stock and with preferences over the common stock with respect to dividends and in liquidation.

We do not anticipate paying dividends on our common stock in the foreseeable future.

We do not anticipate paying any dividends on our Common Stock in the foreseeable future. We intend to retain all available funds and future earnings, if any, for use in the operation and expansion of our business.

Our costs may increase significantly as a result of operating as a public reporting company, and our management will be required to devote substantial time to complying with public company rules and regulations.

As a result of becoming a reporting company under the Exchange Act, we are required to file periodic and current reports, proxy statements and other information with the SEC and to adopt and continuously evaluate policies regarding internal control over financial reporting and disclosure controls and procedures. The Sarbanes-Oxley Act of 2002, in addition to a variety of related rules implemented by the SEC, have required changes in corporate governance practices and generally increased the disclosure requirements of public companies. As an Exchange Act reporting company, we incur significant additional legal, accounting and other expenses in connection with our public disclosure and other obligations. We also believe that compliance with the rules and regulations applicable to Exchange Act reporting companies and related compliance issues divert time and attention of management away from operating and growing our business.

When we filed the Form 15 deregistering our common stock under Section 12(g) of the Exchange Act on March 16, 2010, we were not in compliance with Section 13(a) of the Exchange Act, and there can be no assurance that we will comply with Section 13(a) of the Exchange Act in the future.

On March 16, 2010, we filed a Form 15 with the SEC to terminate our registration under Section 12(g) of the Exchange Act. Upon the filing of the Form 15, our obligation to file periodic and other reports with the SEC was immediately suspended; however at the time of filing, we were not in compliance with Section 13(a) of the Exchange Act, which requires every issuer of a security registered pursuant to Section 12 of the Exchange Act to file periodic and other reports with the SEC, as we had not filed any quarterly reports on Form 10-Q, annual reports on Form 10-K or other reports since our quarterly report on Form 10-Q for the period ending June 30, 2008. On December 7, 2011 we filed a registration statement on Form 10 with the SEC to register our common stock pursuant to Section 12(g) of the Exchange Act. The amended registration statement became effective on February 6, 2012. Following the effectiveness of the registration statement, we are required to file periodic and other reports under Section 13(a) of the Exchange Act. We are current with all of our required filings under the Exchange Act and have filed annual reports on Form 10-K and quarterly reports on Form 10-Q for all required periods since the period ended December 31, 2011.

Failure to be in compliance with Section 13(a) of the Exchange Act may have a material adverse effect on our stock price and the value of our business if, as a result of such non-compliance, the SEC determines to revoke or suspend the registration of our common stock under Section 12(g) of the Exchange Act.

Item 1B. Unresolved Staff Comments.

None.

Item 2. Properties.

Our executive offices are located in our Beverly Hills clinic at 8500 Wilshire Boulevard, Suite 105, Beverly Hills, California 90211. The following table lists the locations of all of our clinics.

Location	Address	Size
Beverly Hills, California	8500 Wilshire Blvd., Suite 105 ~~Beverly Hills, CA 90211~~	1,882 square feet
Santa Ana, California	1441 W. Macarthur Blvd, Suite A Santa Ana, CA 92704	1,800 square feet
	Beverly Hills, CA 90211
Sherman Oaks, California	13833 Ventura Blvd., Suite 102 & 103 Los Angeles, CA 91423	1,922 square feet
Santa Ana, California	1441 W. Macarthur Blvd, Suite A	1,800 square feet
Montclair, California	9197 Central Avenue, Suite H Montclair, CA 91763	2,252 square feet
	Santa Ana, CA 92704
Dallas, Texas	11661 Preston Road, Suite 128 Dallas, TX 75230	1,806 square feet
Sherman Oaks, California	13833 Ventura Blvd., Suite 102 & 103	1,922 square feet
Houston, Texas	5385 Westheimer Road Houston, TX 77056	2,400 square feet
	Los Angeles, CA 91423
Phoenix, Arizona	740 S. Mill Avenue, Suite 130 Tempe, Arizona 85281	2,354 square feet
Montclair, California	9197 Central Avenue, Suite H	2,252 square feet
Sugar Land, Texas (1)	1935 Lakeside Plaza Dr. Sugar Land, Texas 77479	2,492 square feet
	Montclair, CA 91763
Atlanta, Georgia (2)	3637 Peachtree Road, Suite D-1 Atlanta, Georgia 30326	2,603 square feet
Dallas, Texas	11661 Preston Road, Suite 128	1,806 square feet
Frisco, Texas (3)	3401 Preston Rd., Suite D-6 Frisco, TX 75034	2,520 square feet
	Dallas, TX 75230
Ft. Worth, Texas (4)	2600 West 7th Street, Suite 104 Ft. Worth, Texas 76107	2,166 square feet
Houston, Texas	5385 Westheimer Road	2,400 square feet
	Houston, TX 77056
Phoenix, Arizona	740 S. Mill Avenue, Suite 130	2,354 square feet
	Tempe, Arizona 85281
Sugar Land, Texas (1)	1935 Lakeside Plaza Dr.	2,492 square feet
	Sugar Land, Texas 77479
Atlanta, Georgia	3637 Peachtree Road, Suite D-1	2,603 square feet
	Atlanta, Georgia 30326
Frisco, Texas (2)	3401 Preston Rd., Suite D-6	2,520 square feet
	Frisco, TX 75034
Ft. Worth, Texas (3)	2600 West 7th Street, Suite 104	2,166 square feet
	Ft. Worth, Texas 76107

(1)

The clinic commenced operations in March 2013 and ceased operations in February 2014.

(2) The clinic commenced operations in ~~October~~March ~~2013~~2014.

(3) The clinic commenced operations in ~~March~~May 2014.

(4) The clinic is in development and not currently operating. The Company expects to commence operations at this location in the second quarter of 2014.

Item 3. Legal Proceedings.

We are not a party to any material pending legal proceedings. We may, however, become involved in litigation from time to time relating to claims arising in the ordinary course of our business. We do not believe that the ultimate resolution of such claims would have a material effect on our business, results of operations, financial condition or cash flows. However, the results of these matters cannot be predicted with certainty, and an unfavorable resolution of one or more of these matters could have a material effect on our business, results of operations, financial condition, cash flows and prospects.

Item 4. Mine Safety Disclosures.

Not applicable.

Part II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

Market Information

There is no established public trading market for our common stock.

Holders

As of March 1, ~~2014~~2015, we had approximately ~~250~~306 shareholders of record of our common stock.

Dividends

We have not paid any cash dividends on our common stock and do not plan to pay any cash dividends in the foreseeable future. Our board of directors will determine our future dividend policy on the basis of many factors, including results of operations, capital requirements and general business conditions.

Securities authorized for issuance under equity compensation plans

As of December 31, ~~2013~~2014, shares of common stock authorized for issuance under our equity compensation plan are summarized in the following table. See Note 9 to the Financial Statements for a description of the plan.

~~Plan Category~~	Plan Category	~~Shares to be Issued Upon Exercise~~		Shares to be Issued Upon Exercise	~~Weighted Average Option Exercise Price~~		Weighted Average Option Exercise Price	~~Shares Available for Future Grant~~		Shares Available for Future Grant
~~Plan approved by stockholders~~	Plan approved by stockholders		~~1,540,414~~	1,553,906	$	~~0.45~~$	0.46		~~2,448~~	2,917,522
Plan not approved by stockholders			1,900,000			-			1,900,000
	Total			1,553,906		$	0.46			2,917,522
Total			3,440,414		$	0.45			1,902,448

InOur ~~July 2013, our~~ board of directors authorized and approved an increase in the maximum number of shares reserved for issuance under the Dr. Tattoff, Inc. ~~2012~~2011 Long-Term Incentive Plan byto 14,~~900~~471,~~000~~428 shares, ~~subject~~which towas ~~approval~~approved ofby our shareholders ~~within~~in ~~one~~July ~~year of the date of such authorization and approval~~2014.

Recent Sales of Unregistered Securities

The following summarizes all sales of our unregistered securities during the fiscal year ending December 31, ~~2013~~2014. The securities in each one of the below-referenced transactions were (i) issued without registration and (ii) were subject to restrictions under the Securities Act and the securities laws of certain states, in reliance on the private offering exemptions contained in Sections 4(2), 4(5) and/or 3(b) of the Securities Act and on Regulation D promulgated thereunder, and in reliance on similar exemptions under applicable state laws as a transaction not involving a public offering. Unless stated otherwise, no placement or underwriting fees were paid in connection with these transactions. Proceeds from the sales of these securities were used for general working capital purposes, including the repayment of indebtedness. The securities are deemed restricted securities for purposes of the Securities Act.

In ~~January~~February ~~2013~~2014, the Company issued 35five-year warrants to purchase 27,~~700~~273 shares of the Company’s common stock at a purchase price of $.65 per share to an employee ~~upon~~as ~~exercise~~part of anhis ~~incentive~~compensation ~~stock option~~package. The ~~Company~~warrants ~~received~~vest ~~gross~~on ~~proceeds~~a ofmonthly ~~approximately~~basis ~~$17~~through January 1,~~500~~ 2015.

In January ~~2013~~2014, the Company issued $~~300~~25,000 of ~~secured~~ senior subordinated convertible promissory notes. The notes are convertible at the option of the holder at any time during the term of the note into common stock of the Company at an initial conversion price of $.6065 per share, subject to adjustment for stock splits or subdivisions. The notes are mandatorily convertible in the event of a Qualified Transaction (as defined in the notes) and the conversion price is adjustable to the lower of 75% of the price of a share of common stock sold in the Qualified Transaction or $.65. The notes bear interest at 127% per annum, payable ~~quarterly,~~upon ~~and~~conversion or ~~are due~~ at maturity. The notes ~~mature~~matured in ~~December~~March ~~2014~~2015 and are ~~secured~~unsecured. byThe anotes ~~first~~are ~~priority~~unpaid ~~lien~~as onof the ~~ownership~~date ~~interest~~hereof ofand the Company inis ~~its~~seeking ~~wholly-owned~~an ~~subsidiary~~extension ~~DRTHC~~from ~~II,~~the ~~LLC~~holders. As additional consideration for the ~~investors~~investor purchasing the notes, the Company issued the note ~~holders~~holder ~~five~~fully vested three-year warrants to purchase an aggregate of ~~375~~38,~~000~~462 shares of the Company’s common stock at an exercise price equal to the lower of 120% of the conversion price or $.7578 per share.

In April ~~February~~2014, ~~2013,~~ the Company issued ~~$200,000~~fully invested ~~notes,~~five-year ~~secured~~warrants ~~by the reimbursements due from landlords with respect~~ to ~~tenant~~purchase ~~improvements~~an ~~made~~aggregate orof to239,353 beshares ~~made~~of by the Company’s common instock ~~connection~~at ~~with~~an ~~the~~exercise ~~development~~price of ~~clinics~~$.60 ~~The~~per ~~notes~~share ~~bear~~to ~~interest~~holders atof ~~15%~~its ~~and~~secured ~~were~~tenant ~~originally~~improvement ~~due~~notes onin ~~August~~exchange ~~15,~~for ~~2013~~their ~~but~~agreement to extend the maturity date ~~was~~of ~~extended~~the notes to ~~March~~September 3130, 2014. AsThe ~~additional~~holders ~~consideration~~subsequently ~~for~~agreed ~~the~~to ~~investors~~extend ~~purchasing~~ the notes, ~~the~~to ~~Company~~December 31, ~~issued~~2014 ~~the~~without ~~note~~additional ~~holders~~consideration. ~~fully~~In ~~vested~~2015, ~~five-year~~the ~~warrants~~maturity todate ~~purchase an aggregate~~ of ~~218,750 shares of~~ the ~~Company’s~~notes ~~common~~were ~~stock~~further atextended anto ~~exercise~~January ~~price~~1, ~~of $~~2016.~~60 per share.~~

In April ~~March 2013~~2014, the Company ~~sold~~issued ~~136~~fully vested five-year warrants to purchase an aggregate of 643,~~365~~973 shares of the Company’s common stock inat aan ~~private~~exercise ~~placement~~price ~~for~~of ~~aggregate~~$.60 ~~gross~~per ~~proceeds~~share to holders of ~~approximately~~its ~~$75,000.~~unsecured Asbridge ~~additional~~notes ~~consideration~~in exchange for ~~the~~their ~~investors~~agreement ~~purchasing~~to extend the ~~common~~maturity ~~stock,~~date of the ~~Company~~notes ~~issued~~to ~~the~~December ~~investors~~31, ~~fully~~2014. ~~vested~~The ~~five-year~~holders ~~warrants~~subsequently agreed to ~~purchase~~extend anthe ~~aggregate~~notes ofto ~~102~~December 31,~~274~~ ~~shares~~2014 ofwithout additional consideration. In 2015, the ~~Company’s~~maturity ~~common~~date ~~stock~~of atthe annotes ~~exercise~~were ~~price~~further ofextended ~~$.65~~to ~~per~~January ~~share~~1, 2016.

~~Also~~In May ~~in March 2013~~2014, the Company issued ~~423,061 shares of common stock and~~ fully- vested five -year warrants to purchase 76an aggregate of 985,~~530~~000 shares of the Company’s common stock at an exercise price of $.~~595~~60 per share to holders of its secured senior subordinated convertible promissory notes in exchange for ~~services~~their ~~provided~~agreement to extend the ~~Company~~maturity date of the notes to December 31, 2014. ~~The~~In ~~common~~2015, ~~stock~~the ~~issued~~maturity ~~included~~date anof the ~~aggregate~~notes were further extended to January 1, 2016. One holder of ~~270~~$100,000 ~~shares~~in ~~issued~~notes refused to ~~members~~extend ofthe ~~our~~due ~~board~~date. ofThe ~~directors~~Company is asworking ~~compensation~~with ~~for~~the ~~services~~note holder on a plan of repayment.

In ~~April~~June ~~2013~~2014, the Company ~~sold~~issued 90$75,~~910~~000 ~~shares~~ of ~~common~~senior ~~stock~~subordinated inconvertible apromissory ~~private~~notes. ~~placement~~The ~~for~~notes ~~aggregate~~are ~~gross~~convertible ~~proceeds~~at the option of ~~approximately~~the ~~$50,000.~~holder Asat ~~additional~~any ~~consideration~~time ~~for~~during the ~~investor~~term ~~purchasing~~of the note into common stock, of the Company ~~issued~~at ~~the~~an ~~investor~~initial ~~fully~~conversion ~~vested~~price ~~five-year~~of ~~warrants~~$.65 per share, subject to ~~purchase~~adjustment anfor ~~aggregate~~stock splits or subdivisions. The notes are mandatorily convertible in the event of ~~68,183~~a ~~shares~~Qualified Transaction (as defined in the notes) and the conversion price is adjustable to the lower of 75% of the ~~Company’s~~price of a share of common stock atsold anin ~~exercise~~the ~~price~~Qualified ofTransaction or $.65. The notes bear interest at 7% per ~~share~~annum, payable upon conversion or at maturity. ~~Also,~~The notes mature in ~~May~~November ~~2013~~2015 and are unsecured. As additional consideration for the investor purchasing the notes, the Company issued ~~145,455~~the ~~shares~~note ofholder ~~common~~fully ~~stock~~vested ~~and five~~three-year warrants, ~~vesting~~to ~~over~~purchase ~~one~~an ~~year,~~aggregate toof ~~purchase 34~~115,~~090~~386 shares of the Company’s common stock at an exercise price ofequal ~~$.65~~to ~~per~~the ~~share~~lower inof ~~exchange~~120% ~~for~~of ~~services~~the ~~provided~~conversion toprice ~~the~~or ~~Company~~$.78 per share.

In ~~May~~July ~~and June 2013~~2014, the Company issued ~~$450~~10,~~000~~500 ofshares ~~senior convertible promissory notes. The notes are convertible at the option~~ of ~~the holder at any time during the term of the note into~~ common stock ofto ~~the~~a ~~Company~~vendor valued at ~~an initial conversion price of~~ $0.6549 per share, ~~subject~~in toexchange ~~adjustment~~ for ~~stock splits or subdivisions. The notes are mandatorily convertible in the event of~~ a ~~Qualified~~reduction ~~Transaction (as defined~~ in ~~the notes) and the conversion price is adjustable to the lower of 75% of the price of a share of common stock sold in the Qualified Transaction or $~~fees.65. The notes bear interest at 7% per annum, payable upon conversion or at maturity. The notes mature November 1, 2014 and are unsecured. As additional consideration for the investors purchasing the notes, the Company issued the note holders fully vested five-year warrants to purchase an aggregate of 173,076 shares of the Company’s common stock at an exercise price equal to the lower of 120% of the conversion price or $.78 per share.

In July 2013, the Company issued $35,000 of senior convertible promissory notes. The notes are convertible at the option of the holder at any time during the term of the note into common stock of the Company at an initial conversion price of $.65 per share, subject to adjustment for stock splits or subdivisions. The notes are mandatorily convertible in the event of a Qualified Transaction (as defined in the notes) and the conversion price is adjustable to the lower of 75% of the price of a share of common stock sold in the Qualified Transaction or $.65. The notes bear interest at 7% per annum, payable upon conversion or at maturity. The notes mature in January 2015 and are unsecured. As additional consideration for the investors purchasing the notes, the Company issued the note holders fully vested five-year warrants to purchase an aggregate of 13,461 shares of the Company’s common stock at an exercise price equal to the lower of 120% of the conversion price or $.78 per share.

In September 2013, the Company issued $50,000 of senior subordinated convertible promissory notes. The notes are convertible at the option of the holder at any time during the term of the note into common stock of the Company at an initial conversion price of $.65 per share, subject to adjustment for stock splits or subdivisions. The notes are mandatorily convertible in the event of a Qualified Transaction (as defined in the notes) and the conversion price is adjustable to the lower of 75% of the price of a share of common stock sold in the Qualified Transaction or $.65. The notes bear interest at 7% per annum, payable upon conversion or at maturity. The notes mature in March 2015 and are unsecured. As additional consideration for the investor purchasing the notes, the Company issued the note holder fully vested three-year warrants to purchase an aggregate of 76,923 shares of the Company’s common stock at an exercise price equal to the lower of 120% of the conversion price or $.78 per share.

In December 2013, the Company issued $50,000 of senior subordinated convertible promissory notes. The notes are convertible at the option of the holder at any time during the term of the note into common stock of the Company at an initial conversion price of $.65 per share, subject to adjustment for stock splits or subdivisions. The notes are mandatorily convertible in the event of a Qualified Transaction (as defined in the notes) and the conversion price is adjustable to the lower of 75% of the price of a share of common stock sold in the Qualified Transaction or $.65. The notes bear interest at 7% per annum, payable upon conversion or at maturity. The notes mature in March 2015 and are unsecured. As additional consideration for the investor purchasing the notes, the Company issued the note holder fully vested three-year warrants to purchase an aggregate of 76,923 shares of the Company’s common stock at an exercise price equal to the lower of 120% of the conversion price or $.78 per share.

In December 2013, the Company issued 13,636 shares of common stock in exchange for services. The Company also issued 125,000 shares of common stock to a lender in connection with a revolving loan facility. Also in December 2013, the Company issued 5,300 shares of common stock to non-executive employees as additional compensation.

Issuer Purchases of Equity Securities

None.

Item 6. Selected Financial Data.

Not applicable.

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

~~Cautionary Statements Regarding~~ Forward-looking and Cautionary Statements

This report contains forward-looking statements within the meaning of the Federal securities laws. Forward-looking statements express our expectations or predictions of future events or results. The statements are not guarantees and are subject to risk and uncertainty. Except as required by applicable law, including Federal securities laws, we do not intend to publicly update or revise any forward-looking statements, whether as a result of new information, future developments or otherwise.

In light of the significant uncertainties inherent in the forward-looking statements made in this report, the inclusion of such statements should not be regarded as a representation by us or any other person that our objectives, future results, levels of activity, performance or plans will be achieved. We caution that these statements are further qualified by important factors that could cause actual results to materially differ from those contemplated in the forward-looking statements, including, without limitation, the following:

● those items discussed under “Risk Factors” in “Item 1A” of this report;

●

our failure to generate significant revenues from operations;

●

the availability and cost of capital required to fund our current and future operations;

● ~~Federal~~federal, state and local law and regulation, including regulation of the services provided at our clinics;

●

our failure to execute our business plan;

●

our failure to effectively execute our marketing strategies;

●

our failure to identify or negotiate new real property leases on reasonable terms as part of our expansion plans;

●

our ability to renew existing leases on reasonable terms;

●

the effect of competition in our industry;

●

our ability to protect our intellectual property;

●

our exposure to litigation;

●

our dependence on key management and other personnel, including the physicians providing services at our clinics;

●

a decline in the demand for services provided at our clinics;

●

the ability of holders of our securities to effect resales of our securities; and

●

the effect of adverse economic conditions generally, and on discretionary consumer spending and the availability of credit.

Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as “anticipate,” “estimate,” “expect,” “project,” “intend,” “plan,” “believe” or words of similar meaning. They may also use words such as “would,” “should,” “could” or “may.” ~~Factors that may cause our actual results to differ materially from those described in such forward-looking statements include the risks discussed under “Item 1A. Risk Factors.”~~

Introduction

Management’s Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is provided as a supplement to the accompanying financial statements and notes to help provide an understanding of the Company’s financial condition, cash flows and results of operations. MD&A is organized as follows:

Overview. This section provides a brief description of the Company’s business and operating plans.

Results of Operations. This section provides an analysis of the Company’s results of operations for the years ~~ending~~ended December 31, ~~2013~~2014 and ~~2012~~2013.

Liquidity and Capital Resources. This section provides an analysis of the Company’s cash flows for the years ~~ending~~ended December 31, ~~2013~~2014 and ~~2012~~2013, as well as a discussion of the Company’s outstanding commitments ~~that existed~~ as of December 31, ~~2013~~ 2014 and December 31, ~~2012~~2013. Included in the analysis is a discussion of the amount of financial capacity available to fund the Company’s future commitments, as well as a discussion of other financing arrangements ~~in 2013 and 2012~~.

Off -Balance Sheet Arrangements. This section discloses any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition.

Critical Accounting Estimates. This section identifies those accounting estimates that are considered important to the Company’s results of operations and financial condition, require significant judgment and require estimates on the part of management in application.

Significant Accounting Policies. This section identifies those accounting policies that are considered important to the Company’s results of operations and financial condition, require significant judgment and require estimates on the part of management in application. All of the Company’s significant accounting policies, including those considered to be critical accounting policies, are summarized in Note 2 to the ~~accompanying~~ financial statements included in Part I of this report.

Overview

Our clinics provide safe, minimally invasive and affordable laser tattoo and hair removal services in a relaxed environment. The services offered at our clinics are administered by licensed medical professionals in accordance with applicable state and Federal law. We currently manage four clinics located in southern California pursuant to a management services agreement with a contracting physician. This arrangement is structured to comply with a California state limitation on the corporate practice of medicine. In addition, we own and operate ~~five~~six clinics, in Dallas, Ft. Worth and Houston Texas, in Atlanta, Georgia and in Phoenix, Arizona. ~~The~~We opened a Sugar Land, Texas clinic ~~opened~~ in March 2013 (~~and~~which was closed in February 2014) and the Atlanta location opened in October 2013. We opened a location in Frisco, Texas (a suburb of Dallas) in March 2014~~. We~~ ~~have~~and ~~signed~~ a ~~lease~~location ~~for space for a clinic~~ in Ft. Worth, Texas ~~which we expect to open~~ in ~~the~~May ~~second quarter of~~ 2014. As we expand into other states, applicable state law will govern how we structure the provision of services in our new clinics. Within this framework, we are seeking to become the first nationally branded laser tattoo and hair removal business.

Throughout this report, the terms our clinics and our facilities refer to the laser tattoo and hair removal clinics we currently manage or operate, or will manage or operate in the future, in accordance with applicable state and Federal law; and the terms “the business” and “our business” refer to the business of owning, operating and/or managing our clinics.25

WeThroughout ~~have~~this ~~supported~~report, the ~~provision~~terms of“our ~~over~~clinics” ~~230,000~~and ~~procedures~~“our facilities” refer to ~~more~~the ~~than~~laser ~~29,000~~tattoo ~~patients~~and ~~during~~hair ~~our~~removal ~~operating~~clinics ~~history.~~we ~~Our~~currently ~~first~~manage ~~clinic~~or ~~opened~~operate, or will manage or operate in ~~Beverly~~the ~~Hills~~future, ~~California~~ in ~~July~~accordance ~~2004. We~~with ~~opened~~applicable ~~two~~state ~~clinics~~and inFederal ~~2011,~~law; ~~two~~and inthe ~~2012~~terms “the business” and ~~two~~“our inbusiness” ~~2013~~refer to the business of owning, operating and/or managing our clinics.

~~Our~~We ~~primary~~have ~~source~~supported ofthe ~~revenues~~provision ~~through December 31, 2013, consisted~~ of aover ~~management fee paid under a management services agreement with William Kirby~~325,000 ~~D.O.,~~procedures ~~Inc. related~~ to ~~clinics~~more ~~operated~~than by30,000 ~~that~~patients ~~entity~~during ~~and fees for services provided in~~ our ~~owned~~ ~~clinics. Pursuant~~operating ~~to the management services agreement, we provide certain non-medical management,~~history. ~~administrative,~~Our ~~marketing~~first ~~and~~clinic ~~support~~opened ~~services~~in ~~and~~Beverly ~~equipment as an independent contractor to the practice sites where William Kirby~~Hills, ~~D.O.,~~California ~~Inc.~~in ~~provides~~July ~~or supervises laser tattoo and hair removal services~~2004. ~~The~~We ~~Company~~opened ~~has~~two ~~responsibility for most of the operations of the business conducted at the~~ clinics, ~~except for the dispensing of patient care services,~~ in ~~accordance~~ ~~with California state law. As we expand into states outside of California~~2011, ~~applicable~~two ~~state law will govern how we structure the provision of services~~ in ~~our new clinics. Effective January 1~~2012, ~~2010, we entered into~~two anin ~~amended and restated management services agreement with William Kirby~~2013, D.O., Inc. Dr. William Kirby, a member of our board of directors, is the sole shareholder of William Kirby, D.O., Inc. Pursuant to the management services agreement, the percentage management fee that we receive is subject to annual adjustment and ~~was~~one ~~decreased~~each ~~from 73.5%~~in ~~to 70.3%, effective January 1, 2012. Under~~ the ~~agreement~~first ~~we absorb the cost of advertising while William Kirby, D.O., Inc. absorbs the cost of credit card fees~~ and ~~discounts~~second ~~which~~quarters ~~were approximately 5.0%~~ of ~~cash collections for the year ended December 31, 2013~~2014. ~~Advertising costs provided under the management services agreement were approximately 11.0% of our management service revenue in the year ended December 31, 2013.~~

~~Because~~Our ~~the~~primary source of ~~the~~revenues ~~majority~~through December 31, 2014, consisted of ~~our~~a ~~revenue~~management isfee ~~through~~paid ~~our~~under a management services agreement with William Kirby, D.O., Inc., ~~our~~related ~~financial~~to ~~performance~~clinics ~~could~~operated ~~be negatively impacted~~ by ~~unfavorable developments in~~ that ~~business.~~entity ~~Fee~~and fees for ~~service~~services ~~receipts~~provided ofin ~~William~~our ~~Kirby~~owned Dclinics.~~O.,~~ Pursuant ~~Inc.,~~to ~~less~~the ~~refunds,~~management ~~decreased~~services ~~by approximately $239~~agreement,~~000~~ ~~for~~we ~~the~~provide ~~year~~certain ~~ended~~non-medical ~~December~~management, 31administrative, ~~2013~~marketing ~~when~~and ~~compared~~support toservices ~~the~~and ~~prior~~equipment ~~year. Accordingly,~~as ~~our~~an ~~management~~independent ~~fees,~~contractor ~~which~~to ~~are a percentage of~~ the ~~fee~~practice ~~for~~sites ~~service~~where ~~receipts of~~ William Kirby, D.O., Inc. ~~also~~provides ~~decreased~~or bysupervises ~~approximately~~laser ~~$176,000. Dr.~~tattoo ~~Kirby’s~~and ~~staff~~hair ~~compensation~~removal ~~expense~~services, ~~also~~all ~~decreased~~of ~~for~~which ~~the~~are ~~year~~located ~~ended~~in ~~December~~southern ~~31,~~California. The ~~2013~~Company ~~when~~has ~~compared~~responsibility tofor most of the ~~prior~~operations ~~year~~of asthe abusiness ~~result~~conducted ofat athe ~~decrease~~clinics, inexcept for the ~~number~~dispensing of ~~hours~~patient ofcare ~~operation~~services, in ~~some~~accordance ~~locations~~with ~~and~~California ~~other~~state ~~efficiencies~~law. As awe ~~result~~expand into states outside of California, ~~despite~~applicable state law will govern how we structure the ~~decrease~~provision of services in ~~fee~~our ~~for~~new ~~service~~clinics. Effective ~~receipts~~January 1, 2010, we entered into an amended and restated management services agreement with William Kirby, D.O., Inc. Dr. ~~experienced~~William Kirby, a ~~cash~~former ~~basis~~member ~~profit~~of inour ~~2013.~~board Inof directors, is the ~~event~~sole ~~that~~shareholder of William Kirby, D.O., Inc. Pursuant ~~incurs~~to ~~losses,~~the itmanagement ~~may~~services ~~not~~agreement, ~~have~~the ~~adequate~~percentage ~~cash~~management tofee ~~meet~~that ~~its~~we ~~obligations~~receive is subject to usannual adjustment and itwas ~~may~~decreased ~~seek~~from ~~changes~~73.5% into ~~the~~70.3%, ~~management~~effective ~~services~~January ~~agreement~~1, ~~that~~2012. Under ~~would~~the ~~unfavorably~~agreement ~~impact~~we ~~our~~absorb ~~financial~~the ~~results. The~~cost ~~financial~~of ~~information~~advertising ~~related~~while to William Kirby, D.O., Inc. ~~included~~absorbs ~~herein~~the iscost onof acredit ~~cash~~card ~~and~~fees ~~not accrual basis,~~ and ~~has~~discounts ~~not~~which ~~been~~were ~~prepared~~approximately on5% aof ~~GAAP~~cash ~~basis~~collections ~~consistently~~for ~~applied. As a result,~~ the ~~foregoing~~year ~~financial~~ended ~~information related to William Kirby~~December 31, D2014.~~O.,~~ Advertising ~~Inc.~~costs isprovided ~~not~~under ~~directly~~the ~~comparable~~management toservices ~~the~~agreement ~~financial~~were ~~information~~approximately ~~prepared~~10% onof aour ~~GAAP~~management ~~basis~~service ~~regarding~~revenue in the ~~Company~~year ~~that~~ended isDecember ~~included~~31, ~~in this report~~2014.

26Because the source of the majority of our revenue is through our management services agreement with William Kirby, D.O., Inc., our financial performance could be negatively impacted by unfavorable developments in that business. Fee for service receipts of William Kirby D.O., Inc., less refunds, increased by approximately $198,000 or 5% for the year ended December 31, 2014 when compared to the prior year. Accordingly, our management fees, which are a percentage of the fee for service receipts of William Kirby, D.O., Inc. also increased by approximately $137,000. Dr. Kirby’s staff compensation expense decreased for the year ended December 31, 2014 when compared to the prior year. As a result, William Kirby, D.O., Inc. experienced improved cash basis profit in 2014 when compared to the prior year. In the event that William Kirby, D.O. Inc. incurs losses, it may not have adequate cash to meet its obligations to us and it may seek changes in the management services agreement that would unfavorably impact our financial results. The financial information related to William Kirby, D.O., Inc. included herein is on a cash and not accrual basis, and has not been prepared on a GAAP basis consistently applied. As a result, the foregoing financial information related to William Kirby, D.O., Inc. is not directly comparable to the financial information prepared on a GAAP basis regarding the Company that is included in this report.

Funds from operations from our Dallas, Frisco, Ft. Worth, Houston, Phoenix, and Atlanta clinics serve as an additional source of revenue. In connection with our Dallas, Frisco, Ft. Worth, Houston, Atlanta and Phoenix clinics, we entered into consulting physician agreements with licensed physicians, pursuant to which those physicians, or other physicians engaged by those physicians provide to our clinics (i) medical director services, (ii) assistance with the creation of clinic protocols and (iii) supervisory and consulting services regarding equipment procurement and operation, in each case consistent with applicable state and Federal laws and regulations.

We differentiate the services offered at our clinics from those of competitors by:

● focusing solely on tattoo and hair removal;

● providing services in a relaxed environment;

● optimizing the location of our clinics; and

● catering to our target demographic.

Our initial expansion focus is on large metropolitan markets that can support multiple clinic locations with favorable demographics, regulatory environments and competitive landscapes. We are currently evaluating potential clinic sites in Texas, Georgia, Florida and Arizona, and have identified over 40 other viable markets in the United States for expansion, however, our financial limitations have severely limited our ability to expand. We estimate our cash requirements for each new clinic to be approximately $300,000, to be applied toward various start-up costs, including leasehold improvements, marketing expenses, equipment acquisition, supplies and personnel. Absent additional investment from investors we will be unable to open additional clinics in the foreseeable future.

Our laser tattoo removal services are performed by licensed medical professionals using Q-switched lasers and our hair removal services are similarly performed by licensed medical professionals using laser and/or Intense Pulse Light, or IPL, devices, in each case, with physician oversight in compliance with applicable state law. From time to time, our affiliated physicians ~~and our Chief Medical Officer, William Kirby, D.O.,~~ evaluate the lasers used to perform procedures at the applicable clinic(s) and may recommend the use of new or additional technology.

With respect to our clinics, the amount of revenue generated by a clinic, whether for the Company directly (with respect to our Texas, Georgia and Arizona locations) or for William Kirby, D.O., Inc. (with respect to our California locations) is primarily a function of the size and characteristics of the tattoo and the area of the body to be treated for hair reduction, less any refunds. Under our management services agreement with William Kirby, D.O., Inc., our management services fee is based on a percentage of the contracting physician’s gross revenues. The costs of operating our California clinics are predominantly fixed or have a relatively small variable component, principally supplies. As a result, the contracting physician’s procedure volume can have a significant impact on our level of profitability since we operate under a fixed percentage of gross revenues arrangement. With respect to the clinics we operate directly, the costs of operating our clinics, not only include those that are fixed or have a relatively small variable component, principally supplies, but also include the expenses related to the personnel to staff the clinics. Here too, the procedure volume can have a significant impact on our level of profitability since many of the costs are relatively fixed.

Management measures volume in “encounters,” which includes a visit to the clinic whether or not a purchase is made, and telephone sales. Management believes this measurement best represents the variable resource requirements, primarily staff time, and because other measures would be difficult and expensive to implement with little added benefit.

Our management service fees are affected by a number of factors, including, but not limited to, our ability to assist the contracting physician to generate patients, placement for the physician through our consumer advertising and word of mouth referrals, the availability of patient financing and the effect of competition and discounting practices in the laser tattoo and hair removal industry. The majority of patients, approximately 90%, pay for services using a debit or credit card or outside financing agencies whose services our contracting physician offers. Historically, the outside financing agencies our contracting physician uses offer non-recourse programs. If the agency is unable to collect from the patient, it bears the cost thereof except in rare cases where there is a chargeback. In our role as manager, we evaluate alternative patient financing programs from time-to-time and may recommend other programs to our contracting physician. Our contracting physician offers a refund if a tattoo is fully removed in a lesser number of treatments than the patient has purchased, and occasionally in other circumstances. Refunds were less than 1% of our contracting physician’s gross revenue in the year ended December 31, 2013. Refunds and chargebacks result in a reduction of our management fee. Deterioration in the availability of consumer credit is likely to impact our contracting physician’s revenue and ultimately, our management service fees.

27The majority of patients, approximately 90%, pay for services using a debit or credit card or outside financing agencies whose services both we and our contracting physician offer. Historically, the outside financing agencies we and our contracting physician use offer non-recourse programs. If the agency is unable to collect from the patient, it bears the cost thereof except in infrequent cases where there is a chargeback. In our role as manager, we evaluate alternative patient financing programs from time-to-time and may recommend other programs to our contracting physician. Both we and our contracting physician offer a refund if a tattoo is fully removed in a lesser number of treatments than the patient has purchased, and occasionally in other circumstances. Refunds were less than 0.3% of our contracting physician’s gross revenue in the year ended December 31, 2014. Refunds and chargebacks result in a reduction of our management fee. Deterioration in the availability of consumer credit is likely to impact our contracting physician’s revenue and ultimately, our management service fees.

William Kirby, D.O., Inc. does not provide patient financing but offers a program whereby patients can pay monthly via automatic charge. Currently, patients may cease participation in the program at any time and no interest is charged. The program was developed to meet the needs of patients who are unable to finance a purchase using a credit card or outside financing agencies. Less than 2% of William Kirby, D.O., Inc.’s patients pay in this manner.

Effective marketing is an integral factor in our ability to generate patients and service fees our own clinics and for William Kirby, D.O., Inc. and ultimately affect our management service fees and revenue from our owned clinics. Our marketing efforts have traditionally focused on our website and its placement on search engines, email campaigns directed towards existing patients, and word of mouth referral. We also use outdoor and radio advertising. The purpose of our marketing is to educate prospective patients about the advantages of laser tattoo and laser/IPL hair removal compared to alternatives and to attract them to our clinics.

Gift certificate sales represented ~~approximately~~less than 1% of William Kirby, D.O., Inc.’s gross revenue in the ~~year~~twelve months ended December 31, ~~2013~~2014. The sale of gift certificates is included in William Kirby, D.O., Inc.’s gross revenue for purposes of calculating our management fee. We also offer gift certificates at our owned clinics. Sales of gift certificates at our owned clinics have not been significant to date.

The fees generated by William Kirby, D.O., Inc., and therefore our management services fees, as well as the revenues from our owned clinics have historically been weak in the fourth quarter. We believe that patients are less inclined to purchase discretionary services in the months of November and December as they have atypical demands on both their time and financial resources.

Our revenues have continued to increase despite relatively unfavorable economic conditions. However, we do not have sufficient history to predict what may occur if economic conditions in the United States further deteriorate. We believe that the typical customer of the services offered at our clinics is young, educated and affluent with adequate disposable income to afford the services. However, tattoo and hair removal is discretionary for most individuals and they may delay or forego removal if faced with a reduction in income or increase in non-discretionary expenses. We also believe that poor economic conditions have resulted in increased pressure on pricing and an expectation of greater value for the money by patients. Management believes that such pricing pressure is a result of a decrease in consumer confidence in economic conditions and their employment prospects together with the increased availability of competitive pricing information on the Internet. In addition, we believe that a portion of our core demographic is attracted to coupon programs such as those offered by Groupon and Living Social, particularly with respect to hair removal where we face a larger number of competitors.

Our operating costs and expenses include:

●

clinic operating expenses, including rent, utilities, parking and related costs to operate the clinics, laser equipment, maintenance costs, supplies, non-medical staff expenses for managed clinics and all staff expenses for owned locations and insurance;

●

marketing and advertising costs including marketing staff expense and the cost of outside advertising;

●

general and administrative costs, including corporate staff expense and other overhead costs; and

●

depreciation and amortization of equipment and leasehold improvements.

We opened a location in Sugar Land, Texas in March 2013 (which was closed in February 2014 after showing disappointing results), a location in Atlanta in October 2013, a location in Frisco, Texas in March 2014, and ~~currently~~a ~~anticipate~~location ~~opening an additional clinic~~ in Ft. Worth, Texas in ~~the~~May ~~second quarter of~~ 2014, and may open additional clinics in Texas, Georgia, Florida, Arizona, and other states ~~later in 2014~~ assuming that the availability of growth capital exists, we can maintain a highly skilled management team, and our business model is shown to be successful in varying markets. To our knowledge, there is currently no nationally branded provider of laser tattoo and hair removal services and the opportunity to gain first mover advantage is the motivation behind our aggressive expansion plan. To be successful, we believe that our new locations must be in areas attractive to our demographic, that our clinic staff must be adequately trained and motivated, and that our marketing programs must be effective.

We require substantial capital to fund our growth and will continue to seek substantial amounts of capital to effectuate our business plan. We have experienced significant negative cash flow from operations to date, and we expect to continue to experience negative cash flow in the near future. Our inability to generate sufficient funds from operations and external sources will have a material adverse effect on our business, results of operations and financial condition. If we are not able to raise additional funds, we will be forced to significantly curtail or cease our operations. See “Liquidity and Capital Resources” below for additional information.

Results of Operations

Comparison of the Twelve months Ended December 31, 2014 and the Twelve months Ended December 31, 2013

The following table sets forth, for the periods indicated, selected items from our statements of operations, expressed as a percentage of revenues.

	Twelve months Ended December 31,
	2014			2013

Revenues		100	%		100	%
Clinic operating expenses		86	%		92	%
General and administrative expenses		55	%		80	%
Marketing and advertising		14	%		21	%
Depreciation and amortization		13	%		11	%
Loss from operations		(67	)%		(103	)%
Interest expense, costs of financing and other		(86	)%		(14	)%
Net loss		(153	)%		(118	)%

Revenues. Revenues increased by approximately $660,000, or 18%, to approximately $4,314,000 for the twelve months ended December 31, 2014 compared to approximately $3,655,000 for the twelve months ended December 31, 2013. Same store revenue, representing revenue from clinics open more than one year, increased by approximately 9% when compared to the prior year to approximately $3,905,000. One clinic opened in the fourth quarter of 2013 accounted for revenue of approximately $225,000 and two clinics opened in 2014 accounted for revenue of approximately $166,000 in the twelve months ended December 31, 2014. Despite a decrease in marketing and advertising expenditures of approximately 24%, aggregate cash collections at all clinics (including those of William Kirby, D.O., Inc.) increased by approximately $536,000 or 9.7% to $6,067,000 for the twelve months ended December 31, 2014 compared to approximately $5,531,000 for the prior year. Cash collections, and ultimately revenue, are primarily impacted by the number of patients who are scheduled for a consultation. The consultation is typically the first time that a patient comes to one of our clinics during which they will have the tattoo evaluated and will be quoted a price. If the patient decides to proceed with the removal, they typically start treatment on the same day. The number of scheduled consultation appointments is a function of our ability to market and advertise, particularly in newer clinics that do not have an established base of customers or the benefit of longer term market presence. Scheduled tattoo consultations were 13,590 for the twelve months ended December 31, 2014 compared to 11,174 for the comparable period of the prior year. Same store cash collections per scheduled consultation were approximately $472 for the year ended December 31, 2014 compared to $502 for the prior year. Aggregate cash collections per scheduled consultation were approximately $446 for the year ended December 31, 2014 compared to $495 for the prior year. Our inability to provide adequate marketing support has impacted performance at our newer clinics.

Clinic Operating Expenses. Clinic operating expenses consist primarily of salaries, wages and benefits for the employees who work at our owned clinics and salaries, wages and benefits for the non-medical employees who work at our managed clinics, rent and utilities for all clinic premises, and supplies. Clinic operating expenses increased by 10% in the aggregate and decreased approximately 6% as a percentage of revenues to approximately $3,699,000 for the year ended December 31, 2014 versus approximately $3,354,000 for the year ended December 31, 2013. Of this increase of approximately $345,000, approximately $532,000 was related to two new clinics opened in 2014 and approximately $250,000 reflects a full year of operation for one clinic opened in 2013 offset by a decrease in operating expenses in clinics open prior to 2013 of approximately $267,000. Clinic expenses include approximately $178,000 in costs related to the closure of a clinic in Sugar Land, TX, including asset impairment charges of $40,000.

General and Administrative Expenses. General and administrative expenses include the salaries, wages and benefits for the employees who support the clinics including operational, legal and medical-professional oversight, finance and accounting, payroll and personnel, information technology, and risk management. Also included in our general and administrative expenses are professional fees paid to our attorneys, accountants, medical director and other advisors. General and administrative expenses also include insurance, travel, supplies and other costs associated with our corporate functions. General and administrative expenses decreased by approximately $546,000 to approximately $2,366,000 for the year ended December 31, 2014 when compared to $2,912,000 in the prior year. We took a number of steps to reduce our expenses in light of our continued financial challenges including the elimination of positions, reduction in management compensation and bonuses resulting in a decrease of approximately $264,000 in salaries and benefits. Stock compensation expense was reduced by approximately $66,000 as a result of a lower level of grant activity. In 2013, our independent directors received approximately $132,000 in equity based compensation and we conducted a brand development project which cost approximately $100,000, neither of which occurred in 2014. While our aggregate travel expense did not increase in 2014 when compared to 2013, the portion that we attributed to general and administrative activities increased by approximately $63,000.

Marketing and Advertising Expenses. Marketing and advertising expenses consist primarily of salaries, wages and benefits and the cost of outside advertising. Historically we have relied principally on internet advertising. During 2010, we began advertising using outdoor billboards in addition to our internet advertising, and we explore other advertising opportunities from time to time, such as radio and other forms of outreach. We also vary our marketing and advertising expenditures to respond to competitive activities as well as changes in our financial resources. We typically provide additional advertising support in a market when a new clinic is opening. Marketing and advertising expenses were approximately $593,000 for the year ended December 31, 2014, compared to approximately $776,000 for the year ended December 31, 2013 a decrease of approximately $183,000. Our salary and benefit costs were approximately $127,000 for the year months ended December 31, 2014 compared to $203,000 in the prior year. Our salary expense in the prior year included approximately $91,000 in severance paid to our former Chief Marketing Officer. Our advertising costs in the year ended December 31, 2014 were approximately $465,000 compared to $570,000 in the prior year, a decrease of approximately 18%. The decrease was a result of our financial limitations as we did not have cash available to support marketing at an equivalent level.

Depreciation and Amortization Expenses. Depreciation and amortization consist of depreciation and amortization of leasehold improvements, medical equipment, and the furniture, computers, telephone systems and other equipment used in our operations. Depreciation and amortization expenses increased by 37% in the aggregate to approximately $543,000 for the twelve months ended December 31, 2014 versus approximately $397,000 for the twelve months ended December 31, 2013. The depreciation and amortization related to the opening of two new clinics in 2014, a full year of operation for a clinic opened in 2013, and the replacement of laser devices in our California locations in December 2013 were the principal factors in the increase.

Interest Expense and Costs of Financing. Interest expense and costs of financing for the year ended December 31, 2014 was approximately $3,828,000, an increase of approximately $3,241,000 when compared to interest expense and costs of financing of $587,000 for the year ended December 31, 2013. The increase in interest expense and costs of financing is principally a result of the issuance of approximately $100,000 in convertible notes, $1,990,000 in non-convertible debt, borrowing of $1,300,000 under a revolving line of credit during the prior year, and the financing of new laser devices for new clinics together with amortization of debt discount related to warrants issued with or upon extension of convertible notes and non-convertible debt. A substantial portion of our new debt was provided by major shareholders and we are not paying current interest in cash. Amortization of debt discount to interest, a non-cash charge, was approximately $694,000 in the twelve months ended December 31, 2014 compared to $285,000 in the twelve months ended December 31, 2013. Of our total interest expense and costs of financing of $3,828,000 and $587,000 for the twelve months ended December 31, 2014 and 2013, respectively, only $283,000 and $136,000, respectively, was paid in cash.

Comparison of the Twelve Months Ended December 31, 2013 and the Twelve Months Ended December 31, 2012

The following table sets forth, for the periods indicated, selected items from our statements of operations, expressed as a percentage of revenues.

	Twelve Months Ended December 31,
		Twelve months Ended December 31,
	~~2013~~	2013		~~2012~~	2012
Revenues		100	%		100	%
Clinic operating expenses		92	%		77	%
General & administrative expenses		80	%		80	%
Marketing and advertising		21	%		19	%
Depreciation & amortization		11	%		9	%
Loss from operations		(103	%)		(86	%)
Interest expense and other		(14	%)		(3	%)
Interest expense, costs of financing and other		(14	%)		(3	%)
Net (loss) income		(118	%)		(89	%)

Revenues. Revenues increased by approximately $454,000, or 14%, to approximately $3,655,000 for the twelve months ended December 31, 2013 compared to approximately $3,200,000 for the twelve months ended December 31, 2012. Encounters increased from approximately 42,800 to 43,600 or 2%. Two new clinics opened in 2013 accounted for 827 encounters and revenue of approximately $85,000. Two clinics opened in 2012 accounted for an increase of approximately 4,000 encounters and $455,000 of the increase in revenue. Revenue from mature clinics decreased by approximately $86,000. Revenue at our Dallas, Texas clinic increased by $89,000 while management services fees from our California clinics decreased by approximately $176,000.

We attribute the decline in revenue at our California clinics principally to a decline in hair removal business that was not offset by increased tattoo removal revenue. All five of our mature clinics suffered a reduction in hair revenue in 2013, which we principally attribute to increased pricing pressure from social media coupon programs. We expect hair revenue to be a declining percentage of gross revenue in the future. Our revenue was also impacted by a decrease in the number of new tattoo consultations in 2013 when compared to the prior year. We believe that the decrease in consultations is a result of a decline in the effectiveness in online advertising we experienced in 2013. Further, financial constraints limited our ability to market, particularly in the second half of the year.

We measure the average fee paid by our customers per encounter as a key indicator of management performance. Since the majority of our customers purchase a package of treatments, the average fee per encounter is much higher in the first few months following a clinic opening and then declines as packages are redeemed. Average fee per encounter increased from $114 in 2012 to $126 in 2013. Fee per encounter in our mature clinics increased approximately 6% when compared to the prior year. Fee per encounter at clinics opened in 2012 decreased approximately 19% in the year ended December 31, 2013 when compared to the year ended December 31, 2012, reflecting the growth in encounters from package redemptions. Fee per encounter for clinics opened in 2013 averaged $237.

2931

Clinic Operating Expenses. Clinic operating expenses consist primarily of salaries, wages and benefits for the employees who work at our owned clinics and salaries, wages and benefits for the non-medical employees who work at our managed clinics, rent and utilities for all clinic premises, and supplies. We expect these expenses to increase as a percentage of revenue during periods when new clinics open as we expect revenue in the new clinics to build over time to mature levels. Clinic operating expenses increased by 36% in the aggregate and increased 15% as a percentage of revenues to approximately $3,354,000 for the year ended December 31, 2013 versus approximately $2,472,000 for the year ended December 31, 2012. Of this increase of approximately $882,000, approximately 62% or $544,000 was related to two new clinics (Sugar Land and Atlanta) opened in 2013 and approximately 48% or $421,000 reflects a full year of operation for two clinics opened in 2012 offset by a decrease in operating expenses in our mature clinics.

Marketing and Advertising Expenses. Marketing and advertising expenses consist primarily of salaries, wages and benefits and the cost of outside advertising. Historically we have relied principally on internet advertising. During 2010, we began advertising using outdoor billboards in addition to our internet advertising, and we explore other advertising opportunities from time to time, such as radio and other forms of outreach. We also vary our marketing and advertising expenditures to respond to competitive activities as well as changes in our financial resources. We typically provide additional advertising support in a market when a new clinic is opening. Marketing and advertising expenses were approximately $776,000 for the twelve months ended December 31, 2013, compared to approximately $622,000 for the twelve months ended December 31, 2012, an increase of approximately $154,000.

General and Administrative Expenses. General and administrative expenses include the salaries, wages and benefits for the employees who support the clinics including operational, legal and medical-professional oversight, finance and accounting, payroll and personnel, information technology, and risk management. Also included in our general and administrative expenses are professional fees paid to our attorneys, accountants, medical director and other advisors. General and administrative expenses also include insurance, travel, supplies and other costs associated with our corporate functions. General and administrative expenses increased by approximately $340,000 to approximately $2,912,000 for the twelve months ended December 31, 2013 when compared to $2,567,000 in the prior year. Salaries, wages and benefits increased as we added our Executive Vice President and Chief Operating Officer and additional clinical and operational support personnel. The increase in salaries and wages was significantly offset by a decrease in legal fees of approximately $220,000. Non-cash stock compensation expense increased by approximately $66,000 reflecting a higher level of grant activity under our long-term incentive plan in 2013 and our board of directors approved incentive compensation of $81,000 to our key employees. We also issued 270,000 shares of stock, which we valued at $.49 per share to our independent directors for their service. There was no stock grant to our independent directors in the prior year.

Depreciation and Amortization Expenses. Depreciation and amortization consist of depreciation and amortization of leasehold improvements, lasers held under capital leases, and the furniture, computers, telephone systems and other equipment used in our operations. Depreciation and amortization expenses increased by 41% in the aggregate to approximately $397,000 for the twelve months ended December 31, 2013 versus approximately $282,000 for the twelve months ended December 31, 2012. The depreciation and amortization related to the opening of two new clinics in 2013 and a full year of operation for two clinics opened in 2012 were the principal factors in the increase.

Interest Expense and Costs of Financing. Interest expense and costs of financing for the twelve months December 31, 2013 was approximately $592,000, an increase of approximately $476,000 when compared to interest expense and costs of financing of $116,000 for the twelve months ended December 31, 2012. The increase in interest expense and costs of financing is principally a result of the issuance of approximately $885,000 in convertible notes, $520,000 in non-convertible debt, and borrowing of $1,300,000 under a revolving line of credit during the year and the financing of new laser devices for two new clinics together with amortization of debt discount related to warrants issued with or upon extension of convertible notes and non-convertible debt. Amortization of debt discount to interest, a non-cash charge, was approximately $309,000 in 2013 compared to $40,000 in the prior year.

Comparison of the Twelve Months Ended December 31, 2012 and the Twelve Months Ended December 31, 2011

The following table sets forth, for the periods indicated, selected items from our statements of operations, expressed as a percentage of revenues.

	Twelve Months Ended December 31,
	2012			2011
Revenues		100	%		100	%
Clinic operating expenses		77	%		59	%
General & administrative expenses		80	%		103	%
Marketing and advertising		19	%		20	%
Depreciation & amortization		9	%		9	%
Loss from operations		(86	%)		(91	%)
Interest expense and other		(3	%)		(2	%)
Net (loss) income		(89	%)		(93	%)

Revenues. Revenues increased by approximately $534,000, or 20%, to approximately $3,200,000 for the twelve months ended December 31, 2012 compared to approximately $2,666,000 for the twelve months ended December 31, 2011. Encounters increased by approximately 10,000 from 33,000 to 43,000 or 30%. Two new clinics opened in 2012 accounted for 1,000 encounters, or approximately 10% of the increase in encounters. The clinics opened in 2012 generated approximately $74,000 in revenue. Two clinics opened in 2011 accounted for an increase of approximately 6,500 encounters and $417,000 of the increase in revenue. Revenue from mature clinics increased by approximately $43,000. Two of the three mature clinics collectively generated increased revenue of approximately $162,000, while our San Fernando, CA clinic suffered a decrease in revenue of approximately $119,000. We attribute the decline in revenue principally to a decline in hair removal business at the clinic that was not offset by increased tattoo removal revenue. All three of our mature clinics suffered a reduction in hair revenue in 2012, which we principally attribute to increased pricing pressure from social media coupon programs. We expect hair revenue to be a declining percentage of gross revenue in the future. We also moved the San Fernando Valley clinic to a new location in February 2013 that we believe will result in improved financial performance.

We measure the average fee paid by our customers per encounter as a key indicator of management performance. Since the majority of our customers purchase a package of treatments, the average fee per encounter is much higher in the first few months following a clinic opening and then declines as packages are redeemed. Average fee per encounter decreased slightly from $119 in 2011 to $114 in 2012. Fee per encounter in our three mature clinics was essentially unchanged in 2012 when compared to the prior year. Fee per encounter at clinics opened in 2011 decreased approximately 36% in the year ended December 31, 2012 when compared to the year ended December 31, 2011, reflecting the growth in encounters from package redemptions.

Clinic Operating Expenses. Clinic operating expenses consist primarily of salaries, wages and benefits for the employees who work at our owned clinics and salaries, wages and benefits for the non-medical employees who work at our managed clinics, rent and utilities for all clinic premises, and supplies. We expect these expenses to increase as a percentage of revenue during periods when new clinics open as we expect revenue in the new clinics to build over time to mature levels. Clinic operating expenses increased by 57% in the aggregate and increased 18% as a percentage of revenues to approximately $2,472,000 for the year ended December 31, 2012 versus approximately $1,570,000 for the year ended December 31, 2011. Of this increase of approximately $902,000, approximately 50% or $450,000 was related to two new clinics (Houston and Phoenix) opened in 2012 and approximately 32% or $289,000 reflects a full year of operation for two clinics opened in 2011.

Marketing and Advertising Expenses. Marketing and advertising expenses consist primarily of salaries, wages and benefits and the cost of outside advertising. Historically we have relied principally on internet advertising. During 2010, we began advertising using outdoor billboards in addition to our internet advertising, and we explore other advertising opportunities from time to time, such as radio and other forms of outreach. We also vary our marketing and advertising expenditures to respond to competitive activities as well as changes in our financial resources. We typically provide additional advertising support in a market when a new clinic is opening. Marketing and advertising expenses were approximately $622,000 for the twelve months ended December 31, 2012, compared to approximately $541,000 for the twelve months ended December 31, 2011, an increase of approximately $81,000.

General and Administrative Expenses. General and administrative expenses include the salaries, wages and benefits for the employees who support the clinics including operational, legal and medical-professional oversight, finance and accounting, payroll and personnel, information technology, and risk management. Also included in our general and administrative expenses are professional fees paid to our attorneys, accountants, medical director and other advisors. General and administrative expenses also include insurance, travel, supplies and other costs associated with our corporate functions. General and administrative expenses decreased by approximately $183,000 to approximately $2,567,000 for the twelve months ended December 31, 2012 when compared to $2,750,000 in the prior year. Professional and other fees associated with completion of our audits, tax returns, SEC filings, and other activities decreased approximately $426,000, reflecting completion of our Form 10 and prior year audits in 2011. The decrease in professional fees was partially offset by expenses related to fund raising of approximately $65,000, a brand review project of approximately $125,000, and settlement of a lawsuit filed by an employee of approximately $55,000. We also engaged an individual on a consulting basis to assist us with legal and other matters at a cost of approximately $70,000. Non-cash stock compensation expense decreased by approximately $147,000 reflecting a higher level of grant activity under our long-term incentive plan in 2011.

Depreciation and Amortization Expenses. Depreciation and amortization consist of depreciation and amortization of leasehold improvements, lasers held under capital leases, and the furniture, computers, telephone systems and other equipment used in our operations. Depreciation and amortization expenses increased by 20% in the aggregate to approximately $282,000 for the twelve months ended December 31, 2012 versus approximately $235,000 for the twelve months ended December 31, 2011. The depreciation and amortization related to the opening of two new clinics were the principal factors in the increase.

Interest Expense. Interest expense for the twelve months December 31, 2012 was approximately $116,000, an increase of approximately $77,000 when compared to interest expense of $39,000 for the twelve months ended December 31, 2011. The increase in interest expense is principally a result of the issuance of approximately $592,000 in convertible debt during the year and the financing of new laser devices for two new clinics.

Liquidity and Capital Resources

Cash and cash equivalents decreased by approximately $121,000 at December 31, 2013 when compared to December 31, 2012. Cash used in operations was approximately $1,628,000, cash using in investing activities was approximately $593,000, and cash provided by financing activities as approximately $2,100,000.

Cash from operations, which includes the management fees we receive from William Kirby, D.O., Inc. and service fees earned directly from patient services in our owned clinics represent our primary recurring source of funds, and less expenses, reflects the net loss from operations excluding non-cash charges, and changes in operating capital. The twelve months ended December 31, 2013 and 2012 reflected net cash used in operating activities of $1,628,000 and $1,589,000, respectively. While our clinics (both managed and owned) collectively were able to generate positive cash flow from operations during the twelve months ended December 31, 2013 and 2012, they were unable to generate enough positive cash flow to cover our overhead expenses, including the substantial professional fees we have incurred during 2012 to become a public reporting company and file reports required of such companies.

Net cash used in investing activities for the twelve months ended December 31, 2013 and 2012, respectively was $593,000 and $491,000, reflecting purchases of property and equipment. Our purchases of property and equipment in 2013 are principally related to the clinics we opened in Sugar Land in March 2013 and Atlanta in October 2013. Our purchases of property and equipment in 2012 are principally related to the clinics we opened in in Houston in June 2012 and in Phoenix in November 2012.

Net cash from financing activities for the twelve months ended December 31, 2013 was approximately $2,100,000 primarily consisting of the proceeds of the sale of convertible notes and short-term debt in private placements in March, July, August, September, October, and December 2013 of approximately $1,405,000 and cash received from our revolving loan in December 2013 of approximately $1,300,000, reduced by principal payments made on capital lease obligations and notes payable.

Liquidity and Capital Resources

Cash and cash equivalents decreased by approximately $165,000 at December 31, 2014 when compared to December 31, 2013. Cash used in operations was approximately $1,189,000, cash used in investing activities was approximately $334,000, and cash provided by financing activities was approximately $1,358,000.

Cash from operations, which includes the management fees we receive from William Kirby, D.O., Inc. and service fees earned directly from patient services in our owned clinics represent our primary recurring source of funds, and less expenses, reflects the net loss from operations excluding non-cash charges, and changes in operating capital. The twelve months ended December 31, 2014 and 2013 reflected net cash used in operating activities of $1,189,000 and $1,628,000, respectively. While our clinics (both managed and owned) collectively were able to generate positive cash flow from operations during the twelve months ended December 31, 2014 and 2013, they were unable to generate enough positive cash flow to cover our overhead expenses.

Net cash used in investing activities for the twelve months ended December 31, 2014 and 2013, respectively was $334,000 and $593,000, reflecting purchases of property and equipment. Our purchases of property and equipment in 2014 are principally related to the clinics we opened in in Frisco, Texas in March 2014 and Ft. Worth, Texas in May 2014. In 2014, we received proceeds of $87,500 from the sale of two laser devices. Our purchases of property and equipment in 2013 are principally related to the clinics we opened in Sugar Land, Texas in March 2013 and Atlanta, Georgia in October 2013 together with the replacement of laser devices in our California locations.

Net cash from financing activities for the twelve months ended December 31, 2014 was approximately $1,358,000 primarily consisting of the proceeds of the sale of convertible notes and short-term debt in private placements of approximately $2,090,000 reduced by principal payments made on capital lease obligations and notes payable. Net cash from financing activities for the twelve months ended December 31, 2013 was approximately $2,100,000 primarily consisting of the proceeds of the sale of convertible notes and short-term debt in private placements of approximately $1,405,000 and cash received from our revolving loan in December 2013 of approximately $1,300,000, reduced by principal payments made on capital lease obligations and notes payable.

The Company intends to use its available resources to open additional clinics. We have historically experienced significant negative cash flow from operations and we expect to continue to experience significant negative cash flow from operations in the near future as we open new clinics. Accordingly, we expect to raise additional capital to fund our current operations and future expansion through the sale of equity securities and/or the issuance of debt. We have been successful in raising small amounts of debt for equipment financing, but our financial condition and history of losses limits our ability to issue debt. If we are unable to raise additional equity capital, then we will not be able to grow our revenue and eliminate our operating losses. If that were to occur, management would attempt to reduce its professional fees, salaries, advertising and other costs and reduce operating cash requirements. The Company currently intends to raise additional capital and continue opening additional clinics but there can be no assurance that it will be successful.

Going Concern Issues

At December 31, ~~2013~~2014, the Company had accumulated losses of approximately $1118,~~708~~298,000, current liabilities that exceeded its current assets by approximately $56,~~435~~487,000, and shareholders’ deficit of approximately $49,~~013~~861,000. In ~~2013~~2014, the Company had a net loss on operations of approximately $32,~~784~~886,000 and the Company has not yet produced positive cash flow from operations. The Company’s ability to continue as a going concern is predicated on its ability to raise additional capital, increase sales and margins, and ultimately achieve sustained profitable operations. The uncertainty related to these conditions raises substantial doubt about the Company’s ability to continue as a going concern.

Management believes that the Company will need to continue to raise additional outside capital to expand the number of clinics in operation and reduce the level of expenses as a percentage of revenue it incurs to address its losses and ability to continue to operate. The Company intends to raise additional capital and continue opening additional clinics to achieve this goal.

In connection with the 2010 restructuring, the Company also expanded its board of directors to include individuals with substantial experience in raising capital and numerous relationships that may assist the Company in achieving its goals. In the event that the Company is unsuccessful in raising adequate equity capital, management will attempt to reduce losses and preserve as much liquidity as possible. Steps management would likely take would include limiting capital expenditures and reducing expenses. A reduction in expenses would likely include personnel costs, professional fees, and marketing expenses. While management would attempt to achieve break-even or profitable operations through these steps, there can be no assurance that it will be successful.

Commitments

As of December 31, ~~2013~~2014, our commitments for the following year totaled approximately $3,~~662~~147,000, comprised of $1011,000 in payments on capital lease obligations, $~~636~~626,000 in payments on operating leases, $~~948~~373,000 in payments on convertible notes, $~~717~~1,068,000 on other notes payable, and $1,~~101~~069,000 in payments on our revolving line of credit~~, and $250,000 in payments to William Kirby, D~~.~~O.,~~ ~~Inc.~~ As of December 31, ~~2012~~2013, our commitments for the following year totaled approximately $13,~~028~~662,000, comprised of $5110,000 in payments on capital lease obligations, $~~531~~636,000 in payments on operating leases, $~~196~~948,000 in payments on ~~long-term~~convertible notes, $717,000 on other notes payable, $1,101,000 in payments on our revolving line of credit, and $250,000 in payments to William Kirby, D.O., Inc. Cash balances were $~~197~~32,~~523~~767 and $~~318~~197,~~394~~ 523 at December 31, ~~2013~~2014 and December 31, ~~2012~~2013, respectively.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements, financings, or other relationships with entities or other persons, also known as “special purpose entities.”

Critical Accounting Estimates

The preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America requires our management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. As such, in accordance with the use of accounting principles generally accepted in the United States of America, our actual realized results may differ from management’s initial estimates as reported and such differences may be significant. Our most significant accounting estimates are those related to our consolidation policy, valuation of common stock, fair value measurements, uncertainty in income taxes and valuation allowance for deferred tax assets as set forth below.

Consolidation Policy. The Company has various contractual relationships with William Kirby D.O., Inc. including a management services agreement, medical director’s agreement, equipment subleases and guarantees. The Company evaluated the various relationships between the parties to determine whether to consolidate William Kirby, D.O., Inc. as a variable interest entity pursuant to ASC 810, Consolidation. The Company determined that it was not the primary beneficiary of the interest and that it should not consolidate William Kirby, D.O., Inc. The Company’s conclusion was based upon an analysis of the various relationships and California state law restrictions on relationships between licensed professionals and businesses. To complete its analysis, management made assumptions regarding the relevance of certain factors, including state law requirements, which were given significant weight. In the event that state law should change, there should be material changes in the relationships or management’s judgment as to the relevance of various factors should change, the Company might determine that consolidation would be appropriate.34

Consolidation Policy. The Company has various contractual relationships with William Kirby D.O., Inc. including a management services agreement, medical director’s agreement, and equipment arrangements. The Company evaluated the various relationships between the parties to determine whether to consolidate William Kirby, D.O., Inc. as a variable interest entity pursuant to ASC 810, Consolidation. The Company determined that it was not the primary beneficiary of the interest and that it should not consolidate William Kirby, D.O., Inc. The Company’s conclusion was based upon an analysis of the various relationships and California state law restrictions on relationships between licensed professionals and businesses. To complete its analysis, management made assumptions regarding the relevance of certain factors, including state law requirements, which were given significant weight. In the event that state law should change, there should be material changes in the relationships or management’s judgment as to the relevance of various factors should change, the Company might determine that consolidation would be appropriate.

Valuation of Common Stock. There is presently no trading market for common stock or other equity instruments of the Company. Management’s estimates of stock compensation expense and derivative liability are dependent upon an estimated fair value of a share of Company common stock. ASC 820, “Fair Value Measurement,” establishes a hierarchy for measurement of fair value and requires the Company to maximize the use of observable inputs in measuring fair value and minimize the use of unobservable inputs. Management estimates the fair value of a share of common stock primarily based upon the most recent actual purchases of common stock by unrelated third parties because it represents observable inputs and management believes it is the most reliable estimate available. Management may adjust the value per share as the time period between when actual purchases have been made and the measurement date increases or if it determines that events subsequent to the last actual sale transaction materially impact the value of a share of common stock. Such changes in estimated value may have a material impact on stock compensation expense and derivative liabilities.

Fair Value Measurements. The Company estimates its derivative liabilities using a Black-Scholes option pricing model using such inputs as management deems appropriate. The Black-Scholes option pricing model requires the use of input assumptions, including expected volatility, expected life, expected dividend rate and expected risk-free rate of return. The assumptions for expected volatility and expected life are the two assumptions that significantly affect the fair value. Changes in the expected dividend rate and expected risk-free rate of return do not significantly impact the calculation of fair value, and determining these inputs is not highly subjective.

Because there is no trading market for the Company’s common stock or any of its warrants or other derivative liabilities, the Company cannot calculate actual volatility. Management has estimated volatility by selecting a group of companies deemed by management to be similar. Changes in fair value estimates may have a material impact on the measurement of derivative liabilities.

Uncertainty in Income Taxes. We adopted the provisions of ASC 740-10 (formerly FIN 48), “Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,” effective January 1, 2010 (“ASC 740-10”). This interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10 also provides guidance on de-recognition of tax benefits, classification on the balance sheet, interest and penalties, accounting in interim periods, disclosure and transition. ASC 740-10 requires significant judgment in determining what constitutes an individual tax position as well as assessing the outcome of each tax position. Changes in judgment as to recognition or measurement of tax positions can materially affect the estimate of the effective tax rate.

3435

Valuation Allowance for Deferred Tax Assets. Deferred tax assets arise when we recognize charges or expenses in our financial statements that will not be allowed as income tax deductions until future periods. The term deferred tax asset also includes unused tax net operating losses and tax credits that we are allowed to carry forward to future years. Accounting rules permit us to carry deferred tax assets on the balance sheet at full value as long as it is “more likely than not” that the deductions, losses or credits will be used in the future. A valuation allowance must be recorded against a deferred tax asset if this test cannot be met. The accounting rules state that a company with a recent history of losses would have a difficult, perhaps impossible, time supporting a position that utilization of its deferred tax assets was more likely than not to occur.

We believe that the operating loss incurred by the Company in the current year, and the cumulative losses incurred in prior years, represent sufficient negative evidence to determine that the establishment of a valuation allowance against deferred tax assets is appropriate. Until an appropriate level of profitability is attained, we expect to continue to maintain a valuation allowance on our net deferred tax assets.

The estimates, judgments and assumptions used by us under “Consolidation Policy,” “Valuation of Common Stock,” “Fair Value Measurements,” “Uncertainty in Income Taxes” and “Valuation Allowance for Deferred Tax Assets” are, we believe, reasonable, but involve inherent uncertainties as described above, which may or may not be controllable by management. As a result, the accounting for such items could result in different amounts if management used different assumptions or if different conditions occur in future periods.

Significant Accounting Policies

The Company has defined a significant accounting policy as one that is both important to the portrayal of the Company’s financial condition and results of operations and requires management of the Company to make difficult, subjective or complex judgments. Estimates and assumptions about future events and their effects cannot be predicted with certainty. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments. These estimates may change as new events occur, as more experience is acquired, as additional information is obtained and as the Company’s operating environment changes.

We have identified the policies set forth in Note 2 to our consolidated financial statements as significant to our business operations and the understanding of our results of operations. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Results of Operations and Financial Condition, where such policies affect our reported and expected financial results. In the ordinary course of business, we have made a number of estimates and assumptions relating to the reporting of results of operations and financial condition in the preparation of our financial statements in conformity with accounting principles generally accepted in the United States of America. Actual results could differ significantly from those estimates under different assumptions and conditions. We believe that the discussion set forth in Note 2 to our consolidated financial statements addresses our most significant accounting policies, which are those that are most important to the portrayal of our financial condition and results of operations and require our most difficult, subjective and complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk.

Not Applicable.

Item 8. Financial Statements and Supplementary Data.

Our Financial Statements begin on page F-1 of this Annual Report on Form 10-K and are incorporated herein by reference.

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

None.

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Item 9A. Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that material information required to be disclosed in our periodic reports filed under the Exchange Act, is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and to ensure that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer (principal financial officer) as appropriate, to allow timely decisions regarding required disclosure. During the quarter ended December 31, ~~2013~~2014 we carried out an evaluation, under the supervision and with the participation of our management, including the principal executive officer and the principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rule 13(a)-15(e) under the Exchange Act. Based on this evaluation, management concluded that our disclosure controls and procedures were effective as of December 31, ~~2013~~2014.

Management’s 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) and 15d-15 (f) under the Exchange Act) and for assessing the effectiveness of our internal control over financial reporting. Our internal control system is designed to provide reasonable assurance to our management and Board of Directors regarding the preparation and fair presentation of published financial statements in accordance with United States generally accepted accounting principles (GAAP).

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, ~~2013~~2014, using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Management’s assessment included an evaluation of the design of our internal control over financial reporting and testing of the operational effectiveness of our internal control over financial reporting. Based upon this assessment, our management concluded that, as of December 31, ~~2013~~2014, our system of internal control over financial reporting was effective.

Because of its inherent limitations, a system of internal control over financial reporting can provide only reasonable assurance and may not prevent or detect misstatements. In addition, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions and that the degree of compliance with the policies or procedures may deteriorate.

During the Company’s fourth fiscal quarter, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal controls over financial reporting.

This Annual Report does not include an attestation report of our independent registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our independent registered public accounting firm.

Item 9B. Other Information.

Not applicable.

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Part III

Item 10. Directors, Executive Officers and Corporate Governance.

Directors and Executive Officers

Set forth below is information with respect to our current directors and executive officers as of the date of this report, except as otherwise indicated.

Name	~~Age~~	~~Position~~Age	Position
John Keefe	65	~~Chief Executive Officer and Director~~66	Chief Executive Officer and Director
Harry Zimmerman	58	~~Executive Vice President and Chief Operating Officer~~59	Executive Vice President and Chief Operating Officer
Mark Edwards	58	~~Chief Financial Officer~~60	Chief Financial Officer
Eugene Bauer, M.D.	71	~~Director (Chair)~~72	Director (Chair)
Gene Burleson	73	~~Director~~74	Director
Joel Kanter	57	~~Director~~58	Director
William Kirby, D.O.	41	Director

The business experience and background of each of our directors and executive officers is provided below. Our directors are elected at each annual shareholders meeting to serve a one-year term expiring at the next annual shareholders meeting and until their successors are elected and qualified.

John Keefe. As Chief Executive Officer of our Company, Mr. Keefe brings to our Board of Directors a depth of understanding of our business and operations, as well as financial and strategic planning expertise in the healthcare services industry. Mr. Keefe has served as our Chief Executive Officer since May 2008 and served as Chief Operating Officer from November 2007 to March 2013. Mr. Keefe has served as a member of our Board of Directors since August 2010. Mr. Keefe served as Chief Financial Officer of the Company and DRTATTOFF, LLC, our predecessor, from November 2007 to July 2008. From January 2007 to November 2007, Mr. Keefe served as the Chief Financial Officer of Equicare Capital, LLC, a healthcare revenue cycle company that merged with Argyle Solutions Inc. in August 2007. From 2002 to 2006, Mr. Keefe was a co-founder and served as the Chief Operating Officer of Centerre Healthcare Corporation, an operator of acute rehabilitation hospitals, where he was responsible for hospital operations, including implementations, regulatory compliance, clinical quality and marketing. Mr. Keefe earned a Bachelors degree in Business Administration in Accounting from Georgia State University and became licensed as a Certified Public Accountant (Georgia) in 1981.

Harry L. Zimmerman. Mr. Zimmerman began serving as our Executive Vice President on January 1, 2013 and became our Chief Operating Officer on March 5, 2013. He served as a consultant to the Company from June 2012 through December 2012. From July 2011 through March 2012 he served as Chief Financial Officer and General Counsel of Westech Capital Corporation, a company in the securities industry. From October 2008 through July 2010 Mr. Zimmerman served as Chief Financial Officer of Pet DRx Corporation (NCM: VETS), an owner and operator of veterinary care clinics. Mr. Zimmerman served as Executive Vice President and General Counsel of Encore Medical Corporation (NASDAQ: ENMC), a worldwide orthopedics medical device company, from October 2000 through November 2007 and served as Vice President — General Counsel of Encore Medical Corporation from April 1994 until October 2000 after twelve years of experience in the private practice of corporate, real estate and tax law. From 1992 to April 1994, Mr. Zimmerman was associated with the law firm of Winstead Sechrest & Minick, P.C., a law firm based in Texas, in the corporate, tax and real estate practices of the firm’s Austin office. Mr. Zimmerman is licensed as a Certified Public Accountant and attorney in the State of Texas. He has a B.S. (with honors) in Economics from the Wharton School of the University of Pennsylvania and a J.D. (with honors) from the University of Texas School of Law.

Mark Edwards. Mr. Edwards has served as our Chief Financial Officer since July 2008. From April 2008 to July 2008, Mr. Edwards served as Senior Financial Officer for Navvis Healthcare, LLC, a company providing strategic consulting services to hospitals and healthcare systems, where he was responsible for overall financial management of the firm and facilitated the merger of The Strategy Group into Navvis. From 2002 to April 2008, Mr. Edwards served as Vice President, Finance and Chief Information Officer for Centerre Healthcare Corporation, an operator of acute rehabilitation hospitals, where he was responsible for the preparation and presentation of financial reports and plans, structuring and negotiation of joint venture agreements, lease and project financing, and development and management of the company’s management information systems. Mr. Edwards earned a Bachelor of Arts in economics from the University of California at Los Angeles.

Eugene Bauer. Dr. Bauer brings to our Board of Directors extensive experience in healthcare and medical services, as well as experience in directorship of various companies in the healthcare industry. Dr. Bauer has served as the chairman of our Board of Directors since August 2010. Dr. Bauer is founder, Chief Medical Officer and a member of the board of directors of Dermira, Inc., a privately held development stage dermatology company, and is the immediate past President and Chief Medical Officer of Peplin Inc., the U.S.-based subsidiary of LEO Pharma. He was a co-founder of Connetics, a publicly-traded biotechnology company that was acquired by Stiefel Laboratories in 2006. Dr. Bauer previously served as Chief Executive Officer of Neosil Inc., which was acquired by Peplin in 2008. Since 2002, Dr. Bauer has served as a Lucy Becker Professor, Emeritus, in the School of Medicine at Stanford University. From 1995 to 2001, Dr. Bauer served as Vice President for Medical Affairs and Dean of the Stanford University School of Medicine, and from 1988-1995, he served as Chair of the Department of Dermatology at the Stanford University School of Medicine. During his tenure as department chair, Dr. Bauer also served as Program Director of the Stanford University General Clinical Research Center (GCRC), where he oversaw the Federal and industry-sponsored research carried out in the GCRC. In addition, Dr. Bauer currently serves on the board of directors of Medgenics, Inc., an Israeli biotechnology company and a member of the board of directors of five other privately-held companies. Dr. Bauer previously served on the Board of Directors of Arbor Vita Corp., Patient Safety Technologies, Inc. and Pet DRx Corporation.

Gene Burleson. Mr. Burleson brings to our Board of Directors extensive experience in the operation of companies in the medical services industry, as well as experience in public company directorship of companies in the healthcare industry. Mr. Burleson has served as a member of our Board of Directors since August 2010. From June 2005 to July 2010, Mr. Burleson served as a director of Pet DRx Corporation (NCM: VETS), an owner and operator of veterinary care clinics. Mr. Burleson also served as Chief Executive Officer of Pet DRx from November 2008 until its sale to VCA Antech in July 2010. Mr. Burleson currently serves on the board of directors of SunLink Health Systems, Inc. (AMEX:SSY), an owner and operator of acute care hospitals. From 2004 to 2008, Mr. Burleson served on the board of directors of Prospect Medical Holdings, Inc. (AMEX:PZZ), a provider of management services to affiliated independent physician associations. From 1995 to 2003, Mr. Burleson served as a member of the board of directors of Alterra Healthcare Corporation, a developer and operator of assisted living facilities, and as chairman of the board of directors during 2003. From 2000 to 2002, Mr. Burleson served as chairman of the board of directors of Mariner Post-Acute Network, Inc., and from 1990 to 1997, he served as chairman of the board of directors, President and Chief Executive Officer of GranCare. Mr. Burleson also serves on the board of directors of several private companies.

Joel Kanter. Mr. Kanter brings to our Board of Directors extensive experience in finance, investment banking and strategic planning, as well as experience in public company directorship of companies in the healthcare industry. Mr. Kanter has served as a member of our Board of Directors since August 2010. Since July 1986, Mr. Kanter has served as President of Windy City, Inc., a privately held investment firm. From 1989 to November 1999, Mr. Kanter served as the President, and subsequently as the President and Chief Executive Officer of Walnut Financial Services, Inc., a publicly traded company (NMS: WNUT). Walnut Financial’s primary business focus was the provision of different forms of financing to small business, by providing equity financing to start-up and early stage development companies, providing bridge financing to small and medium-sized companies, and providing later stage institutional financing to more mature enterprises. The company was sold to Tower Hill Capital Group in 1999 in a transaction valued at approximately $400 million. Mr. Kanter serves on the board of directors of several public companies including Magna-Labs, Inc., formerly involved in the development of a cardiac MRI device; Medgenics, Inc., an Israeli biotechnology company; and WaferGen, which is engaged in the development, manufacturing and sales of state-of-the-art systems for gene expression, genotyping and stem cell research. He also serves on the board of directors of several private companies. Mr. Kanter is a current Trustee and past President of the Board of Trustees of The Langley School in McLean, Virginia; and a former Trustee at the Georgetown Day School in Washington, D.C. He is also the current Board Chair of the Black Student Fund and a member of the executive committee of the Kennedy Center’s National Committee on the Performing Arts.

William Kirby. Dr. Kirby brings to our Board of Directors extensive experience in laser tattoo and hair removal services and a depth of understanding of our business and operations. Dr. Kirby has served as a member of our Board of Directors since March 2008 and is the sole shareholder of William Kirby, D.O., Inc., an entity that provides laser tattoo and hair removal services to our California clinics as set forth in a management services agreement with the Company. Dr. Kirby was a managing member of DRTATTOFF, LLC, our predecessor, since its inception in 2004. Since 2002, Dr. Kirby has practiced medicine in California as a licensed Osteopathic physician and surgeon and is board certified in dermatology through the American Osteopathic College of Dermatology. He currently serves as a Clinical Assistant Professor, Department of Internal Medicine, Division of Dermatology, at Nova Southeastern University and as a Clinical Assistant Professor of Dermatology at Western University of Health Sciences. Dr. Kirby earned a Bachelor of Science degree in Biology from Emory University in 1995 and a Doctor of Osteopathic Medicine degree from Nova Southeastern University in 2000. Kirby has authored approximately a dozen medical articles involving tattoo removal and served as the lead author on a textbook chapter on this subject in two textbooks.

Family Relationships

None

Code of Ethics

As part of our system of corporate governance, our Board of Directors has adopted a Code of Business Conduct and Ethics that is applicable to all of our directors, officers and other employees. This Code is available on our website at http://www.drtattoff.com/investor-relations. If we make amendments to the Code of Business Conduct and Ethics or grant any waiver, we will disclose the nature of such amendment or waiver on our website.

Item 11. Executive Compensation

Summary Compensation Table

The following table provides information regarding compensation awarded to, earned by or paid to our principal executive officer and our two other most highly compensated executive officers serving as such at December 31, ~~2013~~2014 for all services rendered in all capacities to us during our fiscal years ended December 31, ~~2013~~2014 and December 31, ~~2012~~2013. We refer to these three executive officers as our named executive officers.

Name and Principal Position	~~Year~~	Year	~~Salary~~	Salary		~~Option and Warrant Awards(1)~~	Option and Warrant Awards(1)		~~All Other Compensation~~	All Other Compensation		~~Total~~		Total
John Keefe Chief Executive Officer and Director	2013		$	334,630		$	30,629		$	-			$	365,259	(2)
John Keefe
	2012		$	309,630		$	2,050		$	-			$	311,680
Chief Executive Officer and Director		2014		$	279,702		$	-		$	-			$	279,702	(2)
Harry Zimmerman EVP and Chief Operating Officer	2013		$	276,000		$	109,968		$	-			$	385,968	(3)
		2013		$	334,630		$	30,629		$	-			$	365,259	(3)
Mark Edwards Chief Financial Officer	2013		$	264,646		$	23,809		$	-			$	288,455	(4)
Harry Zimmerman
	2012		$	248,646		$	1,710		$	-			$	250,356
EVP and Chief Operating Officer		2014		$	243,923		$	19,296		$	-			$	263,219	(4)
		2013		$	276,000		$	109,968		$	-			$	385,968	(5)
Mark Edwards
Chief Financial Officer		2014		$	224,654		$	-		$	-			$	224,654	(6)
		2013		$	264,646		$	23,809		$	-			$	288,455	(7)

(1)

See “Footnote 9, Equity” of the attached Consolidated Financial Statements for assumptions used in valuation of option and warrant awards.

(2) Includes $~~25,000 bonus awarded under the Company’s Short-Term Incentive Plan, $~~17,500 due as minimum bonus pursuant to the executive’s employment agreement, and $273,~~158~~521 in salary, all of which remains unpaid as of the date hereof.

(3) Includes $625,000 bonus awarded under the Company’s Short-Term Incentive Plan, $3017,~~000~~500 due as minimum bonus pursuant to the executive’s employment agreement, and $1027,~~096~~158 in salary, all of which remains unpaid as of the date hereof. ~~Mr. Zimmerman became an executive of the Company on January 1, 2013. He served as a consultant to the Company from June 2012 to December 2012.~~

(4) Includes $1615,000 ~~bonus awarded under the Company’s Short-Term Incentive Plan, $13,500~~ due as minimum bonus pursuant to the executive’s employment agreement, and $223,~~362~~231 in salary, all of which remains unpaid as of the date hereof.

(5)

Includes $6,000 bonus awarded under the Company’s Short-Term Incentive Plan, $30,000 due as minimum bonus pursuant to the executive’s employment agreement, and $10,096 in salary, all of which remains unpaid as of the date hereof. Mr. Zimmerman became an executive of the Company on January 1, 2013. He served as a consultant to the Company from June 2012 to December 2012.

(6)

Includes $13,500 due as minimum bonus pursuant to the executive’s employment agreement and $3,168 in salary, all of which remains unpaid as of the date hereof.

(7)

Includes $16,000 bonus awarded under the Company’s Short-Term Incentive Plan, $13,500 due as minimum bonus pursuant to the executive’s employment agreement, and $22,362 in salary, all of which remains unpaid.

Interest paid on loans made to the Company on terms the same as paid to non-employee lenders is excluded.

The Company does not as of the date hereof currently provide pension benefits or nonqualified deferred compensation to the named executive officers that would be subject to disclosure pursuant to the applicable securities regulations.

Employment Agreements

We have entered into employment agreements with John Keefe, Harry Zimmerman, and Mark Edwards, or the “Executives”. Under the agreements, Mr. Keefe will serve as our chief executive officer; Mr. Zimmerman will serve as our executive vice president and chief operating officer, and Mr. Edwards will serve as our chief financial officer. Each employment agreement is for a fixed term of two years, ending on the second anniversary of the effective date of each employment agreement. Mr. Keefe’s employment agreement is effective as of July 1, 2013 and extends until July 1, 2015; Mr. Zimmerman’s agreement is effective as of January 1, 2013 and extends to January 1, 2015; and Mr. Edwards’s agreement is effective as July 1, 2013 and extends until July 1, 2015.

Mr. Keefe will receive a base salary of $274,630 per year with a minimum bonus of $35,000; Mr. Zimmerman will receive a base salary of $240,000 with a minimum bonus of $30,000; and Mr. Edwards will receive a base salary of $221,646 per year with a minimum bonus of $27,000. Our Board of Directors will review the base salary for each Executive at least annually for possible increases. The employment agreements also provide that each Executive is eligible to receive an annual incentive compensation payment that is based on objective, subjective and personal performance criteria, as determined in the discretion of the Board of Directors. Our Board of Directors may also grant equity compensation to each Executive under an equity compensation plan maintained by us and approved by our Board of Directors, including the Long-Term Incentive Plan discussed below. We will also provide the Executives with certain benefits and perquisites under the employment agreements that are commensurate with each Executive’s position, including expense reimbursement, vacation time, and participation in our employee benefit plans that we may maintain from time to time.

In connection with their employment agreements, Mr. Keefe, Mr. Zimmerman and Mr. Edwards were also granted incentive stock options in the amounts of 63,636, 61,225, and 49,091 shares of common stock, respectively. Each option granted to Mr. Keefe and Mr. Edwards has an exercise price of $0.55 per share. The options granted to Mr. Zimmerman have an exercise price of $0.49 per share. Also in connection with their employment agreements, Mr. Keefe, Mr. Zimmerman and Mr. Edwards were also granted warrants to acquire common stock of the Company in the amounts of 47,727, 30,613, and 36,818 shares of common stock, respectively. Each warrant issued to Mr. Keefe and Mr. Edwards has an exercise price of $0.65 per share. The warrants issued to Mr. Zimmerman have an exercise price of $0.595 per share. The options and warrants granted to Mr. Zimmerman were issued on January 15, 2013, the date of execution of his employment agreement. The options and warrants granted to Mr. Keefe and Mr. Edwards were effective as of July 3, 2013, the execution date of their new employment agreements.

If, during the term of the employment agreement, we terminate an Executive’s employment without “cause” or if a change in control of the Company occurs and he resigns for “good reason” within twelve months after that change in control, we will continue to pay the Executive his then-current base salary for a specified period after his employment terminates as severance. If an Executive remains employed by us after the employment agreement expires, and we subsequently terminate that Executive’s employment without “cause,” we will continue to pay him his then-current base salary for a specified period after we terminate his employment. The specified periods for purposes of the severance amounts described above is twelve months with respect to Mr. Keefe and Mr. Zimmerman and nine months with respect to Mr. Edwards. Each Executive is required to execute a release of claims against us as a condition to the payment of severance benefits.

“Cause” is defined in the employment agreements as the willful refusal by the Executive to follow a lawful direction of the Board of Directors, so long as the direction is not materially inconsistent with the Executive’s job position; willful misconduct or reckless disregard by the Executive in the performance of his duties or the interest or property of our Company; the intentional disclosure by the Executive of our confidential information or trade secrets to an unauthorized individual, which causes material harm to us; any act by the Executive of fraud against, material misappropriation from, or significant dishonesty to us; arrest for, charged in relation to (by criminal information, indictment, or otherwise), or conviction of the Executive of a felony or a crime involving breach of trust or moral turpitude; or a material breach of the employment agreement that is not cured after notice and a reasonable cure period. “Good reason” is defined in the employment agreement as the occurrence, within twelve months after a change in control, of a material diminution in the Executive’s base salary, authority, duties or responsibilities; a material breach of the employment agreement by the Company or a relocation of the Executive’s employment that increases his regular commute by 50 miles or more.

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Each Executive is subject to certain restrictions on the use and disclosure of our confidential information and trade secrets during his employment with us and for as long thereafter as permitted by applicable law. In addition, while the Executive is employed by us, he is obligated not to engage in the business of laser tattoo removal, hair removal or other laser-based skin care services for any other business or entity or induce any other Company employee, consultant or business partner to engage in employment or provide services substantially similar to those provided to the Company. In addition, during the period of employment and for twelve months thereafter, each Executive agrees not to solicit or induce any employee or contractor of the Company to discontinue his or her employment or engagement with the Company.

Long-Term Incentive Plan

On April 15, 2011, our Board of Directors adopted the Dr. Tattoff, Inc. Long-Term Incentive Plan for the purpose of granting incentive awards, including equity awards such as stock options or restricted stock, to certain officers, employees, directors, consultants and other service providers of our Company, to provide such recipients with additional incentives to enhance the value of our Company and encourage stock ownership. Prior to the adoption of the Long-Term Incentive Plan, we had not granted equity awards, such as stock options or restricted stock, to our named executive officers pursuant to incentive plans. We expect the Long-Term Incentive Plan to be a material component of our compensation plan for executives.

Under the Long-Term Incentive Plan, we can grant incentive and nonqualified options to purchase shares of our common stock, stock appreciation rights, other stock-based awards, which are settled in either cash or shares of our common stock and are determined by reference to shares of our stock (such as grants of restricted common stock, grants of rights to receive stock in the future or dividend equivalent rights) and cash performance awards, which are settled in cash and are not determined by reference to shares of our common stock, or the Awards. The Board of Directors has reserved 4,471,428 shares of our common stock for issuance pursuant to Awards, subject to adjustment as provided in the Long-Term Incentive Plan, any or all of which may be granted as incentive stock options.

The Long-Term Incentive Plan is administered by a Committee appointed by the Board of Directors or, alternatively if no committee is appointed, by the entire Board of Directors. The Committee determines all questions of interpretation of the Long-Term Incentive Plan. Awards granted under the Long Term Incentive Plan and the terms of Awards, including the number of shares of common stock as to which an Award is granted and the potential payout of any Award not denominated in shares of common stock, will be determined by the Committee. The Committee’s decisions relating to the administration of the Long-Term Incentive Plan and grants of Awards are final and binding on all persons.

Awards generally are not transferable or assignable except by will or the laws of intestate succession, unless the terms of the individual Award (other than incentive stock options) provide otherwise. At the Committee’s discretion, Awards may be modified following their grants, to the extent not inconsistent with other provisions of the Long-Term Incentive Plan, and Awards may be cancelled, accelerated, paid or continued, subject to the terms of the applicable Award agreement and the Long-Term Incentive Plan, upon the holder’s termination of employment. However, incentive stock options will expire no later than three months after the holder’s termination of employment (one year if termination of employment is due to the holder’s death or disability). The Committee may, however, permit an incentive stock option to continue beyond these time limits, in which case the option will become a nonqualified stock option.

Effective as of June 1, 2012, the Board of Directors adopted limitations on the awards that may be granted to each employee per year with the intention that the awards qualify as performance-based compensation under Section 162 of the Code. The maximum number of shares of common stock that may be granted during any calendar year as to any employee with respect to which options, stock appreciation rights or other awards that are denominated in shares of common stock and are intended to be performance-based compensation under Code Section 162(m) shall not exceed 428,571, subject to adjustment in accordance with the provisions of the Long-Term Incentive Plan. Furthermore, the maximum aggregate dollar amount that may be paid under any performance Award denominated in cash during any calendar year to an employee may not exceed $1,000,000.

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The Committee may, but is not required to, structure any Award so as to qualify as performance-based compensation under Code Section 162(m). To the extent that the Committee desires to base an Award on performance goals that are intended to qualify the Award as performance-based compensation under Code Section 162(m), the Committee may, but is not required to, make the vesting or payment of the Award subject to the achievement of one or any combination of the performance listed below during a specified period: (1) earnings per share; (2) book value per share; (3) operating cash flow; (4) free cash flow; (5) cash flow return on investments; (6) cash available; (7) net income (before or after taxes); (8) revenue or revenue growth; (9) total shareholder return; (10) return on invested capital; (11) return on shareholder equity; (12) return on assets; (13) return on common book equity; (14) market share; (15) economic value added; (16) operating margin; (17) profit margin; (18) stock price; (19) operating income; (20) EBIT or EBITDA; (21) expenses or operating expenses; (22) productivity of employees as measured by revenues, costs or earnings per employee; (23) working capital; (24) improvements in capital structure; or (25) cost reduction goals.

The performance goals may be applied to the Company, any affiliate or any business unit, either individually, alternatively or in combination. In addition, the Committee may modify the performance goals previously established with respect to a particular grant of an Award to address accounting expenses of equity compensation; amortization of acquired technology and intangibles; asset write- downs; litigation-related events; changes in laws affecting reported results; reorganizations; discontinued operations; and extraordinary and non-recurring events, except where such action would result in the loss of a tax deduction to the Company pursuant to Code Section 162(m).

Options. The Committee determines whether an option is an incentive stock option or a nonqualified stock option at the time the option is granted. The exercise price of any option granted under the Long-Term Incentive Plan may not be less than the fair market value of the common stock on the date of the grant or, in the case of incentive stock options granted to certain owner-employees, may not be less than 110% of the fair market value of the common stock on the date of grant. The Committee may permit an option exercise price to be paid in cash, by the delivery of previously-owned shares of the common stock, through a cashless exercise executed through a broker or by having a number of shares of common stock otherwise issuable at the time of exercise withheld.

The term of an incentive stock option may not exceed ten years from the date of grant (five years in the case of incentive stock options granted to certain owner-employees of the Company). Incentive stock options may only be granted under the Long-Term Incentive Plan within ten years from the date the Long-Term Incentive Plan was adopted by our Board of Directors. Nonqualified stock options have no defined expiration period under the Long-Term Incentive Plan, but an expiration period can be included in the applicable Award agreement.

Stock Appreciation Rights. Each stock appreciation right allows the recipient to receive, in cash or stock, the appreciation per share of our common stock over a defined price which may not be less than the fair market value of a share of our common stock on the date the stock appreciation right is granted. Stock appreciation rights have no defined expiration period under the Long-Term Incentive Plan, but an expiration period can be included in the applicable Award agreement or program.

Other Awards. The Long Term Incentive Plan allows the Committee to grant stock-based incentives other than options and stock appreciation rights that entitle the recipient to receive an amount equal to either the value of a specified number or a percentage or multiple of a specified number of shares of our common stock, or the value of dividends paid on a specified number of shares of common stock during a dividend period. The Committee can also grant cash performance awards under the Long-Term Incentive Plan that entitle the recipient to receive a cash payment equal to the value of a specified or determinable number of units other than shares of common stock.

Reorganizations and Recapitalizations. The number of shares of common stock reserved for issuance in connection with the grant of Awards, the number of shares underlying an Award, and the exercise price or settlement price of each Award are subject to adjustment in the event of an equity restructuring (i.e., any nonreciprocal transaction between the Company and the holders of the Company’s capital stock that causes the per share value to change, such as a stock dividend, stock split, spinoff, rights offering or recapitalization through a large, nonrecurring cash dividend). In the event of certain other corporate reorganizations, Awards may be substituted, cancelled, accelerated, cashed-out, or otherwise adjusted by the Committee, provided that the adjustment is not inconsistent with the terms of the Long-Term Incentive Plan or any agreement reflecting the terms of an Award.

Amendment or Termination. The Long-Term Incentive Plan may be amended or terminated by our Board of Directors without stockholder approval, subject to the requirement that shareholders must approve any amendment that increases the number of shares reserved under the Long-Term Incentive Plan (other than in connection with certain capital events, as described above), materially expands the class of eligible award recipients, or would otherwise require stockholder rules under the rules of any applicable exchange on which our shares of common stock are traded.

4243

Shareholder Approval. Our shareholders approved the Long-Term Incentive Plan on January 30, 2012 with respect to the initial 2,571,428 shares~~. They~~ ~~have~~and ~~not yet~~ approved the ~~additional~~increase 1to 4,~~900~~471,~~000~~428 shares ~~that were added to the Long-Term Incentive Plan by the Board of Directors~~ on July 3, ~~2013~~2014.

Short-Term Incentive Plan

Our Board of Directors also adopted the Dr. Tattoff, Inc. Short-Term Incentive Plan, or the STIP, on April 15, 2011 to reward eligible executives annually based on the performance of the Company and the executive during a calendar year. We expect that our STIP will be a material component of our compensation practices in future years.

Executives and employees who are employed in an incentive-eligible position for at least three months and who are designated by our chief executive officer and confirmed by our compensation committee are eligible to participate in the STIP. Amounts payable under the STIP are determined based on the achievement of Company and individual performance metrics approved annually by our compensation committee and independent directors, based on recommendations from our chief executive officer. The performance metrics are determined during the first fiscal quarter of each year and may change from year to year as defined by the Compensation Committee of the Board of Directors.

Accomplishment of each objective at its minimum threshold will permit a calculation for that objective without regard to the accomplishment of any of the other objectives. Our Board of Directors retains discretion to modify the attainment of any objective, including the adjustment of any calculation of performance and determination of the performance category in a positive or negative manner, the determination of whether the minimum performance metric has been met, or the amount of any award. The achievement percentages are as follows:

● 100% to 104.9% achievement results in 100% of the target incentive being earned

● 105% to 114.9% achievement results in 120% of the target incentive being earned

● 115% to 125% achievement results in 140% of the target incentive being earned

● Greater than 125% achievement results in 150% of the target incentive being earned (maximum payout amount)

The target incentive is a percentage of the applicable executive’s weighted average base salary for the calendar year. The ~~2013~~2014 target incentive percentage for the chief executive officer were 25%; for the chief operating officer 20%; and for the chief financial officer, 20%. When calculating annual incentives payable under the STIP, the chief executive officer can recommend the recognition of individual performance to modify calculations based solely on our Company’s performance, subject to approval by our compensation committee with respect to other executive officers and direct reports to the chief executive officer. The chief executive officer cannot make such a recommendation with respect to his position.

To receive an annual incentive under the STIP, the executive must receive an individual performance rating that is at or above a minimum threshold and must be on the active payroll of our Company on the date that our compensation committee and Board of Directors approve the annual incentive payments. Annual bonuses under the STIP are paid in both cash and equity. 50% of the annual incentive will be vested and paid in cash as soon as practicable after our compensation committee determines the payment amounts. The remaining 50% will be granted in equity, with one-half granted as stock options and one-half granted as restricted stock. 50% of the total equity will vest immediately, and the remaining 50% will vest on the first anniversary of the grant date if the Company’s performance in the year after the year in which the award is earned is equal to or greater than the Company’s Revenue and EBITDA achieved in the year in which the award is earned. The chief executive officer may recommend a different mix of equity awards for its review and approval for future annual incentive payments under the STIP.

4344

Option Awards to Executives under the Long-Term Incentive Plan in ~~2013~~2014 and ~~2012~~2013

In ~~2013,~~February ~~pursuant to the Long-Term Incentive Plan~~2014, the Company’s Board of Directors approved the grant of stock options to the Company’s executive officers to purchase an aggregate of 31,368 shares of the Company’s common stock, all of which were outstanding as of December 31, 2013. The options have an exercise price of $0.55, which the Board of Directors determined was no less than the fair value of a share of common stock on the date of the grant. The options vested immediately. In 2013, pursuant to the Long-Term Incentive Plan, the Company’s Board of Directors approved the grant of stock options to the Company’s executive officers to purchase an aggregate of 173,952 shares of the Company’s common stock, all of which were outstanding as of December 31, 2013. Of these, 112,727 have an exercise price of $0.55 and 61,225 have an exercise price of $.49, which in each instance the Board of Directors determined was no less than the fair value of a share of common stock on the date of the grant. The options vest ratably over twelve months. In June 2013, pursuant to the Long-Term Incentive Plan, the Company’s Board of Directors approved the grant of stock options to the Company’s Chief Operating Officer to purchase an aggregate of ~~212~~54,~~143~~545 shares of the Company’s common stock, all of which were outstanding as of December 31, ~~2013~~2014. The options have an exercise price of $0.55, which the Board of Directors determined was no less than the fair value of a share of common stock on the date of the grant. The options vest ~~20%~~over ona ~~grant~~period ~~and 20% on each anniversary date~~ of ~~May~~twelve ~~17, 2013~~months.

In 2013, ~~November~~pursuant ~~2012~~to the Long-Term Incentive Plan, the Company’s Board of Directors approved the grant of stock options to the Company’s executive officers to purchase an aggregate of 31,368 shares of the Company’s common stock, all of which were outstanding as of December 31, 2014. Of these, 24,041 have an exercise price of $0.49 and 7,327 have an exercise price of $0.55, which the Board of Directors determined was no less than the fair value of a share of common stock on the date of the grant. The options vested immediately. In 2013, pursuant to the Long-Term Incentive Plan, the Company’s Board of Directors approved the grant of stock options to the Company’s executive officers to purchase an aggregate of 17173,~~185~~952 shares of the Company’s common stock, all of which were outstanding as of December 31, 2014. Of these, 112,727 have an exercise price of $0.55 and 61,225 have an exercise price of $.49, which in each instance the Board of Directors determined was no less than the fair value of a share of common stock on the date of the grant. The options vest ratably over twelve months. In June 2013, pursuant to the Long-Term Incentive Plan, the Company’s Board of Directors approved the grant of stock options to the Company’s Chief Operating Officer to purchase an aggregate of 212,143 shares of the Company’s common stock, all of which were outstanding as of December 31, 2014. The options have an exercise price of $0.4955, which the Board of Directors determined was no less than the fair value of a share of common stock on the date of the grant. The options ~~vested~~vest ~~immediately~~20% on grant and 20% on each anniversary date of May 17, 2013.

Awards to Executives under the Short-Term Incentive Plan in ~~2013~~2014 and ~~2012~~2013

There were no awards to our named executive officers under the Short-Term Incentive Plan in ~~2012~~2014. In 2013, Mr. Keefe was awarded $25,000 and Mr. Edwards was awarded $16,000. In addition, the Compensation Committee awarded Mr. Zimmerman a bonus of $6,000 for work he had performed for the Company. None of these awards have been paid as of December 31, ~~2013~~2014.

Outstanding Equity Awards

The following table sets forth outstanding equity awards held by our named executive officers as of December 31, ~~2013~~2014:

		Number of Securities Underlying Unexercised Options and Warrants
	Number of Securities Underlying
Name		Exercisable	Unexercisable			Exercise price (per share)			Expiration Date
	Unexercised Options and Warrants
John Keefe Chief Executive Officer and Director		169,714	169,714	(1)		$	0.3687		4/15/2021
								Exercise price		Expiration
		7,021	-	(2)		$	0.49		11/12/2022
Name	Exercisable			Unexercisable				(per share)		Date
		11,848	-	(2)		$	0.49		3/5/23
John Keefe
		26,515	37,121	(3)		$	0.55		7/3/23
Chief Executive Officer and Director		254,570			84,857	(1)		$	0.3687	4/15/2021
		19,885	27,842	(3)		$	.65		7/3/18
		7,021			-	(2)		$	0.49	11/12/2022
		2,601	-	(2)		$	0.55		10/1/23
		11,848			-	(2)		$	0.49	3/5/23
Harry Zimmerman		56,123	5,102	(4)		$	0.49		1/15/23
		63,636			-	(3)		$	0.55	7/3/23
EVP and Chief Operating Officer		28,061	2,552	(4)		$	.595		1/15/18
		47,727			-	(3)		$	.65	7/3/18
		2,679	-	(2)		$	0.49		3/5/323
		2,601			-	(2)		$	0.55	10/1/23
		42,429	169,714	(5)		$	0.55		6/17/23
Harry Zimmerman		61,225			-	(4)		$	0.49	1/15/23
		2,386	-	(2)		$	0.55		10/1/23
EVP and Chief Operating Officer		30,613			-	(4)		$	.595	1/15/18
Mark Edwards Chief Financial Officer		102,857	102,857	(1)		$	0.3687		4/15/2021
		2,679			-	(2)		$	0.49	3/5/323
		5,855	-	(2)		$	0.49		11/12/2022
		84,857			127,286	(5)		$	0.55	6/17/23
		9,514		(2)		$	0.49		3/5/23
		2,386			-	(2)		$	0.55	10/1/23
		20,455	28,636	(3)		$	0.55		7/3/23
		50,000			4,545	(6)		$	0.55	2/20/24
		15,340	21,478	(3)		$	.65		7/3/18
		25,000			2,273	(6)		$	0.65	2/20/19
		2,340		(2)		$	0.55		10/1/23
Mark Edwards
Chief Financial Officer		154,286			51,427	(1)		$	0.3687	4/15/2021
		5,855			-	(2)		$	0.49	11/12/2022
		9,514			-	(2)		$	0.49	3/5/23
		49,091			-	(3)		$	0.55	7/3/23
		36,818			-	(3)		$	.65	7/3/18
		2,340			-	(2)		$	0.55	10/1/23

(1) Granted April 15, ~~2012~~2011 pursuant to the Company’s Long-Term Incentive Plan. The executives’ options vest in equal, 20% annual increments, with the first installment vesting immediately and each subsequent installment vesting on the anniversary of the grant date, over a period of four years measured from the grant date. In June 2012, Mr. Keefe and Mr. Edwards exercised their option with respect to the then exercisable portion of the award.

(2)

Granted pursuant to the Company’s Long-Term Incentive Plans. The executives’ options, issued in connection with the executives’ agreement to defer salary, vested immediately.

(3) Granted July 3, 2013 pursuant to the Company’s Long-Term Incentive Plan. The executives’ options and warrants ~~vest~~vested in equal monthly increments, over a period of twelve months measured from the grant date.

(4)

Granted January 15, 2013 pursuant to the Company’s Long-Term Incentive Plan. The executive’s options and warrants vest in equal monthly increments, over a period of twelve months measured from the grant date.

(5)

Granted June 17, 2013 pursuant to the Company’s Long-Term Incentive Plan. The executive’s options vest in equal, 20% annual increments, with the first installment vesting immediately and each subsequent installment vesting on the anniversary of May 17, 2013, over a period of four years measured from the grant date.

Director Compensation

The following table provides information regarding compensation awarded to, earned by or paid to non-employee members of our Board of Directors serving as such during our fiscal year ended December 31, 2013. On April 15, 2011 the Company approved the payment of a $20,000 annual retainer and equity grants to the independent directors. None of the annual retainer was paid in 2011, 2012 or 2013.

Name	Fees Earned or Paid in Cash		Stock Awards		Option Awards (1)		All Other Compensation			Total
Eugene Bauer	$	20,000	$	44,100	$	17,420		-		$	81,520
Gene Burleson	$	20,000	$	44,100	$	17,420		-		$	81,520
Joel Kanter	$	20,000	$	44,100	$	17,420		-		$	81,520
William Kirby	$	-	$	-	$	4,825	$	250,000	(2)	$	254,825

(1) See “Note 9, Equity” of the attached Consolidated Financial Statements for assumptions used in valuation of option awards.

(2) Paid or payable pursuant to Medical Director’s Agreement.

Option Awards and Stock Grants to Directors under the Long-Term Incentive Plan in 2012 and 2013

Non-Employee Director Options. In March 2013, pursuant to the Long-Term Incentive Plan, the Company’s Board of Directors approved the grant of nonqualified stock options to the Company’s independent directors to purchase an aggregate of 135,000 shares of the Company’s common stock, all of which were outstanding as of December 31, 2013. The options have an exercise price of $.49, which the Board of Directors determined was no less than the fair value of a share of common stock on the date of the grant. Fifty percent (50%) of the director options vested immediately upon the grant date, twenty five percent (25%) vest on the first anniversary of the grant date and the remaining twenty five percent (25%) vest on the second anniversary of the grant date. In March 2013, pursuant to the Long-Term Incentive Plan, the Company’s Board of Directors also approved the grant of nonqualified stock options to the Company’s independent directors to purchase an aggregate of 60,000 shares of the Company’s common stock, all of which were outstanding as of December 31, 2013. The options have an exercise price of $.49, which the Board of Directors determined was no less than the fair value of a share of common stock on the date of the grant. They all vested immediately upon the grant date.

~~Stock Grants. In~~(6) ~~March~~Granted ~~2013~~February 20, 2014 pursuant to the Company’s Long-Term Incentive Plan,. ~~the~~The ~~Company~~executive’s ~~Board~~options ofand ~~Directors~~warrants ~~also~~vest ~~approved~~in ~~the~~equal ~~grant~~monthly ~~of 90~~increments,~~000~~ ~~shares~~over ofa ~~the~~period ~~Company’s common stock to each~~ of ~~the~~twelve ~~Company’s~~months ~~independent~~measured ~~directors,~~from ~~which vested immediately upon~~ the grant date. ~~There were no stock grants pursuant to the Long-Term Incentive Plan to any of the Company’s directors in 2012.~~

Director Compensation

The following table provides information regarding compensation awarded to, earned by or paid to non-employee members of our Board of Directors serving as such during our fiscal year ended December 31, 2014. On April 15, 2011 the Company approved the payment of a $20,000 annual retainer and equity grants to the independent directors. None of the annual retainer was paid in 2011, 2012 ,2013 or 2014.

Name	Fees Earned or Paid in Cash		Stock Awards		Option Awards		All Other Compensation			Total
Eugene Bauer	$	20,000	$	-	$	-		-		$	20,000

Gene Burleson	$	20,000	$	-	$	-		-		$	20,000

Joel Kanter	$	20,000	$	-	$	-		-		$	20,000

William Kirby	$	-	$	-	$	-	$	250,000	(1)	$	250,000

(1) Paid or payable pursuant to Medical Director’s Agreement.

Option Awards and Stock Grants to Directors under the Long-Term Incentive Plan in 2013 and 2014

Non-Employee Director Options. In March 2013, pursuant to the Long-Term Incentive Plan, the Company’s Board of Directors approved the grant of nonqualified stock options to the Company’s independent directors to purchase an aggregate of 135,000 shares of the Company’s common stock, all of which were outstanding as of December 31, 2014. The options have an exercise price of $.49, which the Board of Directors determined was no less than the fair value of a share of common stock on the date of the grant. Fifty percent (50%) of the director options vested immediately upon the grant date, twenty-five percent (25%) vest on the first anniversary of the grant date and the remaining twenty-five percent (25%) vest on the second anniversary of the grant date. In March 2013, pursuant to the Long-Term Incentive Plan, the Company’s Board of Directors also approved the grant of nonqualified stock options to the Company’s independent directors to purchase an aggregate of 60,000 shares of the Company’s common stock, all of which were outstanding as of December 31, 2014. The options have an exercise price of $.49, which the Board of Directors determined was no less than the fair value of a share of common stock on the date of the grant. They all vested immediately upon the grant date. There were no grants of stock or stock options to our independent directors in 2014.

Stock Grants. In March 2013, pursuant to the Long-Term Incentive Plan, the Company’s Board of Directors also approved the grant of 90,000 shares of the Company’s common stock to each of the Company’s independent directors, which vested immediately upon the grant date. There were no stock grants pursuant to the Long-Term Incentive Plan to any of the Company’s directors in 2013 or 2014.

Kirby Agreements

Effective January 1, 2010, we entered into an Amended and Restated Management Services Agreement with William Kirby, D.O., Inc. Dr. William Kirby, a former member of our board of directors, is the sole shareholder of William Kirby, D.O., Inc. Pursuant to this agreement, the Company provides certain non-medical management, administrative, marketing and support services and equipment as an independent contractor to our California clinics where William Kirby, D.O., Inc. provides or supervises laser tattoo and hair removal services. The Company has responsibility for most of the operations of the business conducted at the clinics, except for the dispensing of patient care services, in accordance with California state law. The Company does not own any equity in William Kirby D.O., Inc., and does not economically benefit from any increase in the value of William Kirby, D.O., Inc. As compensation for services rendered, the Company receives a management fee for ~~2013~~2014 of 70.3% of the gross revenues of William Kirby, D.O., Inc.

In addition, effective January 1, 2010, we entered into a Medical Director Agreement with William Kirby, D.O., Inc. and Dr. Kirby, under which we receive administrative, consultative and strategic services from William Kirby, D.O., Inc. The initial term of the agreement iswas five years, toand beit ~~followed~~was byterminated ~~automatic~~as ~~renewal terms~~ of ~~five~~December ~~years~~31, ~~each~~2014. The agreement ~~provides~~provided for an annual payment of $250,000 to William Kirby, D.O., Inc. for these services.

Item 12. Security Ownership of Certain Beneficial Owners and Management.

The information set forth under “Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities – Securities authorized for issuance under equity compensation plans” is incorporated into this Item 12 by reference.

The following table sets forth, as of December 31, ~~2013~~2014, the number of shares of our common stock that are held by:

● each person or entity known by us to beneficially own more than 5% of our common stock;

● each of our executive officers named in the Summary Compensation Table;

● each of our directors; and

● all of our executive officers and directors as a group.

The percentage ownership information shown in the table is based upon 19,~~308~~268,~~230~~730 shares of common stock outstanding as of December 31, ~~2013~~2014.

4648

The number of shares beneficially owned by each person is determined under rules promulgated by the SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares as to which the person has the sole or shared voting power or investment power and also any shares the person has the right to acquire within 60 days of December 31, ~~2013~~2014, through the exercise of any stock option, warrant or other right. Except as indicated in this table, we believe each person or entity listed has sole investment and voting power with respect to the shares set forth in the table. The inclusion herein of any shares deemed beneficially owned does not constitute an admission of beneficial ownership of such shares. In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares subject to options, warrants or other rights held by that person that are or will become exercisable within 60 days of December 31, ~~2013~~2014, are deemed outstanding, although the shares are not deemed outstanding for purposes of computing percentage ownership of any other person.

Name of Beneficial Owner (1)	Amount and Nature of Beneficial Ownership			Percent (%) of Common Stock
Named Executive Officers
John Keefe (2)		~~554~~676,~~932~~909	(3)		23.8343	%
Harry Zimmerman		~~307~~434,~~010~~558	(4)		12.5722	%
Mark Edwards		~~315~~395,~~061~~142	(5)		12.6202	%
Non-Employee Directors
Eugene Bauer (Chair)		~~390~~401,~~269~~515	(6)		2.0107	%
Gene Burleson		12,~~825~~251,~~189~~020	(7)		810.9786	%
Joel Kanter		12,~~581~~094,~~825~~868	(8)		710.7806	%
William Kirby		577,191	(9)		2.98	%
All Directors and Officers as a Group (6 persons)		6,287,762			26.78	%
All Directors and Officers as a Group (7 persons)		5,551,491			24.97	%
5% Shareholders
CIBC Trust Company (Bahamas) Limited as Trustee of Settlement T-555		3,~~354~~779,~~791~~777	(109)		1618.4216	%
The Andrew M Heller 2009 GRAT		3,311,306	(1110)		15.7073	%
Chicago Investments, Inc.		1,~~551~~605,~~119~~866	(1211)		78.9321	%

(1)

Unless otherwise indicated, the address for each listed stockholder is c/o Dr. Tattoff, Inc., 8500 Wilshire Boulevard, Suite 105, Beverly Hills, California, 90211.

(2)

Member of the Company’s Board of Directors.

(3) Includes 234,965 shares of common stock, ~~217~~339,~~699~~676 options and 102,268 warrants held by John Keefe, which options and warrants are exercisable within 60 days of December 31, ~~2013~~2014.

(4) Includes 8886,~~520~~720 shares of common stock, ~~103~~205,~~617~~692 options and ~~114~~142,~~873~~146 warrants held by Harry Zimmerman, which options and warrants are exercisable within 60 days of December 31, ~~2013~~2014.

(5) Includes 125,528 shares of common stock, ~~141~~221,~~020~~086 options and 48,528 warrants held by Mark Edwards, which options and warrants are exercisable within 60 days of December 31, ~~2013~~2014.

(6) Includes 296,077 shares of common stock, 5364,~~218~~464 options, 25,589 warrants, and 15,385 shares of common stock issuable upon conversion of convertible debt held by Eugene Bauer, which options and warrants are exercisable within 60 days of December 31, ~~2013~~2014.

(7) Includes 790,646 shares of common stock, 6375,~~932~~178 options, ~~515~~930,~~481~~066 warrants, and 455,130 shares of common stock issuable upon conversion of convertible debt held by Gene Burleson, which options and warrants are exercisable within 60 days of December 31, ~~2013~~2014.

(8) Includes (a) 275,716 shares of common stock, 5364,~~218~~464 options, 41,667 shares of common stock issuable upon conversion of convertible debt and 56134,~~975~~348 warrants held by Joel Kanter which options and warrants are exercisable within 60 days of December 31, ~~2013~~2014 and (b) 271,429 shares of common stock, 375,001 shares of common stock issuable upon conversion of convertible debt and ~~507~~932,~~819~~243 warrants held by the Kanter Family Foundation which options and warrants are exercisable within 60 days of December 31, ~~2013~~2014, an entity over which Mr. Kanter, as President, is deemed to have sole investment and voting control. Mr. Kanter disclaims beneficial ownership of the shares of common stock, options and warrants held by the Kanter Family Foundation.

(9) Includes ~~(a) 230~~2,~~952~~234,309 shares of common stock, 171,~~350~~237,775 ~~options~~warrants, and 15307,~~306~~693 ~~warrants~~shares ~~held~~of bycommon ~~William~~stock ~~Kirby~~issuable ~~which~~upon ~~options~~conversion ~~and~~of ~~warrants~~convertible ~~are~~debt ~~exercisable~~held ~~within~~by 60CIBC ~~days~~Trust ofCompany ~~December 31, 2013, and~~ (bBahamas) ~~313,583~~Limited ~~shares~~as Trustee of ~~common~~Settlement ~~stock~~T-555, ~~held~~which bywarrants ~~William~~are ~~Kirby,~~exercisable ~~D.O.,~~within ~~Inc.,~~60 andays ~~entity~~of ~~solely~~December ~~owned~~31, ~~by William Kirby~~2014.

(10) Includes 21,~~234~~530,~~309~~613 shares of common stock, ~~812,789~~held ~~warrants,~~by ~~and~~the Andrew M. Heller 2009 GRAT, 307,693 shares of common stock issuable upon conversion of convertible debt held by ~~CIBC~~the ~~Trust~~Andrew ~~Company~~M. ~~(Bahamas)~~Heller ~~Limited~~2009 asGRAT, ~~Trustee~~400,000 ofwarrants ~~Settlement~~held ~~T-555~~by Andrew M. Heller, and 1,073,000 warrants held by The Andrew M. Heller 2009 GRAT which warrants are exercisable within 60 days of December 31, ~~2013~~2014.

(11) Includes ~~(a)~~1,310,246 ~~400~~shares of common stock,~~000~~ 257,158 warrants, ~~held~~and by38,462 ~~Andrew~~shares M.of ~~Heller~~common ~~and~~stock ~~(b)~~issuable ~~765,307~~upon ~~warrants~~conversion of convertible debt held by ~~The~~Chicago ~~Andrew~~Investments, MInc., ~~Heller 2009 GRAT~~ which warrants are exercisable within 60 days of December 31, ~~2013~~2014.

(12) Includes 1,310,246 shares of common stock, 202,411 warrants, and 38,462 shares of common stock issuable upon conversion of convertible debt held by Chicago Investments, Inc., which warrants are exercisable within 60 days of December 31, 2013.49

Item 13. Certain Relationships and Related Party Transactions, and Director Independence.

Agreements with William Kirby

The following is a description of certain transactions and agreements involving the Company and Dr. William Kirby, a former member of our board of directors, and William Kirby, D.O., Inc., an entity solely owned by Dr. Kirby.

Management Services Agreement. Effective January 1, 2010, we entered into an Amended and Restated Management Services Agreement with William Kirby, D.O., Inc., under which we provide certain non-medical management, administrative, marketing and support services and equipment as an independent contractor to the practice sites where William Kirby, D.O., Inc. provides or supervises laser tattoo and hair removal services. Under the agreement, William Kirby, D.O., Inc. retains sole responsibility for, and complete authority, supervision and control over, the provision of professional healthcare services performed by licensed medical professionals at the applicable clinics as it deems, in its sole discretion, appropriate and in accordance with all applicable California state and Federal laws and regulations. William Kirby, D.O., Inc. employs and pays the medical staff providing the services under this arrangement. Pursuant to the agreement, patient payables are deposited into the bank account of William Kirby D.O., Inc., and the Company prepares and makes payments on behalf of William Kirby D.O., Inc. with respect to employee salaries, employment taxes and employee benefits, among other payables. William Kirby, D.O., Inc. has the right to terminate the agreement upon a material breach by the Company, including but not limited to, the Company’s failure to make payment when due and failure to otherwise provide the services required under the agreement.

Following are certain of the material terms of the Amended and Restated Management Services Agreement:

●

Term: A seven year initial term commencing on January 1, 2010 and ending on December 31, 2016.

●

Renewal Terms: Automatic renewal terms of five years each, unless notice is given at least 180 days before the end of the current term.

4850

●

Intellectual Property License: William Kirby, D.O., Inc. has a nonexclusive revocable license to use the name “Dr. Tattoff” owned by the Company.

●

2010 Medical Director Agreement. Effective January 1, 2010, we entered into a Medical Director Agreement with William Kirby, D.O., Inc. and Dr. Kirby, under which we receive administrative, consultative and strategic services from William Kirby, D.O., Inc. The initial term of the agreement iswas five years, toand beterminated ~~followed~~effective byDecember ~~automatic~~31, ~~renewal terms of five years each~~2014. The agreement ~~provides~~provided for an annual payment of $250,000 to William Kirby, D.O., Inc. for these services. In addition, pursuant to the agreement, Dr. Kirby and William Kirby, D.O., Inc. ~~agree~~agreed that he/it will not perform any services for any company or individual that directly competes with the services offered by the Company.

Shareholders Agreement. Effective January 1, 2010, we entered into a Shareholders Agreement with William Kirby, D.O., Inc. and Dr. Kirby, pursuant to which, upon the occurrence of certain triggering events described below, Dr. Kirby is required to transfer his interest in William Kirby, D.O., Inc. to another licensed person approved by the Company. Such triggering events include but are not limited to (i) the death or incapacity of Dr. Kirby, (ii) the loss of Dr. Kirby’s medical license, (iii) a breach of the obligations of William Kirby, D.O., Inc. and/or Dr. Kirby under the Amended and Restated Management Services Agreement or the Medical Director Agreement, (iv) the voluntary or involuntary transfer of Dr. Kirby’s interest in William Kirby, D.O., Inc. and (v) the termination of the Amended and Restated Management Services Agreement in certain circumstances. Dr. Kirby’s transfer of his interest in William Kirby, D.O., Inc. can only be compelled upon the occurrence of one of these triggering events. The Company has no ability to cause a change in the ownership of William Kirby, D.O., Inc. in the absence of the occurrence of one of these triggering events. In addition, the Company has only the right to approve a replacement licensed physician, and does not have the unilateral ability to select such replacement.

Independence of Directors

Our Board of Directors has determined that Dr. Bauer, Mr. Kanter and Mr. Burleson, are independent under the NASDAQ Marketplace Rules.

Item 14. Principal Accounting Fees and Services. Independent Registered Public Accounting Firm Fees

Aggregate fees billed to us for the fiscal years ended December 31, ~~2013~~2014 and ~~2012~~2013 by our independent registered public accounting firm are as follows:

Types of Fees	~~2013~~2014		2013	~~2012~~
Audit Fees (1)	$	8197,~~998~~684	$	$81,998	~~70,418~~
Audit Related Fees		-		-	-
Tax Fees		-		-	-
All Other Fees	~~1,555~~	-		1,555	~~4,284~~

(1) This category also includes advice on audit and accounting matters that arose during, or as a result of, the audit of the annual consolidated financial statements or the reviews of the interim financial statements.

4951

Audit Committee Pre-Approval Policy

Consistent with policies of the SEC regarding auditor independence, the Audit Committee has responsibility for the appointment, compensation and oversight of the work of the independent auditor. As part of this responsibility, the Audit Committee has adopted, and our Board has ratified, an Audit and Non-Audit Services Pre-Approval Policy pursuant to which the Audit Committee is required to pre-approve the audit and non-audit services performed by our independent registered public accounting firm in order to assure that these services do not impair the auditor’s independence from us.

Prior to engagement of the independent auditor for the next year’s audit, the independent auditor and the Audit Committee will review a list of services and related fees expected to be rendered during that year within each of four categories of services to the Audit Committee for approval:

(i) Audit Services: Audit services include the annual financial statement audit (including required quarterly reviews), subsidiary audits, equity investment audits and other procedures required to be performed by the independent auditor to be able to form an opinion on our consolidated financial statements. Audit Services also include information systems and procedural reviews and testing performed in order to understand and place reliance on the systems of internal control, and consultations relating to the audit or quarterly review as well as the attestation engagement for the independent auditor’s report on management’s report on internal controls for financial reporting.

(ii) Audit-Related Services: Audit-related services are assurance and related services that are reasonably related to the performance of the audit or review of our financial statements, including due diligence related to potential business acquisitions/dispositions, accounting consultations related to accounting, financial reporting or disclosure matters not classified as “Audit Services,” assistance with understanding and implementing new accounting and financial reporting guidance from rulemaking authorities, financial audits of employee benefit plans, agreed-upon or expanded audit procedures related to accounting and/or billing records required to respond to or comply with financial, accounting or regulatory reporting matters and assistance with internal control reporting requirements.

(iii) Tax Services: Tax services include services such as tax compliance, tax planning and tax advice; however, the Audit Committee will not permit the retention of the independent registered public accounting firm in connection with a transaction initially recommended by the independent registered public accounting firm, the sole business purpose of which may be tax avoidance and treatment which may not be supported in the Internal Revenue Code and related regulations.

(iv) All Other Services: All other services are those permissible non-audit services that the Audit Committee believes are routine and recurring and would not impair the independence of the auditor and are consistent with the SEC’s rules on auditor independence.

Prior to engagement, the Audit Committee pre-approves the services and fees of the independent auditor within each of the above categories. During the year, it may become necessary to engage the independent auditor for additional services not previously contemplated as part of the engagement. In those instances, the Audit and Non-Audit Services Pre-Approval Policy requires that the Audit Committee specifically approve the services prior to the independent auditor’s commencement of those additional services. Under the Audit and Non-Audit Services Pre-Approval Policy, the Audit Committee may delegate the ability to pre-approve audit and non-audit services to one or more of its members provided the delegate reports any pre-approval decision to the Audit Committee at its next scheduled meeting. As of the date hereof, the Audit Committee has not delegated its ability to pre-approve audit services.

All of the ~~2013~~2014 and ~~2012~~2013 fees paid to Singer Lewak LLP described above were pre-approved by the Audit Committee in accordance with the Audit and Non-Audit Services Pre-Approval Policy.

5052

Item 15. Exhibits, Financial Statement Schedules

(a) Financial Statements:

See “Index to Financial Statements” set forth on page F-1.

(b) Exhibits:

The following exhibits are filed as part of this report:

Exhibit Number Description

Exhibit
Number	Description

2.1	Agreement and Plan of Merger, dated September 7, 2007 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 1, 2007).

2.2	Amendment Number 1 to the Agreement and Plan of Merger, dated October 5, 2007 (incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 11, 2008).

2.3	Amendment Number 2 to the Agreement and Plan of Merger, dated February 1, 2008 (incorporated by reference to Exhibit 2.3 to the Company’s Quarterly Report on Form 10-QSB filed with the SEC on February 8, 2008).

2.4	Articles of Merger as filed with the Florida Department of State, Division of Corporations (incorporated by reference to Exhibit 2.4 to the Company’s Current Report on Form 8-K filed with the SEC on February 11, 2008).

2.5	Certificate of Merger as filed with the Secretary of State of the State of California (incorporated by reference to Exhibit 2.5 to the Company’s Current Report on Form 8-K filed with the SEC on February 11, 2008).

3.1	Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 11, 2008).

3.2	By-Laws (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 11, 2008).

3.3	Articles of Amendment to the Articles of Incorporation designating Series A Preferred Stock as filed with the Florida Department of State, Division of Corporations on February 7, 2008 (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed with the SEC on February 11, 2008).

3.4	Articles of Amendment to the Articles of Incorporation changing the Company’s name as filed with the Florida Department of State, Division of Corporations on May 19, 2008 (incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on July 18, 2008).

3.5	Articles of Amendment to the Articles of Incorporation increasing the Company’s authorized capital stock as filed with the Florida Department of State, Division of Corporations on February 9, 2011 (incorporated by reference to Exhibit 3.5 to the Company’s Form 10-12g filed with the SEC on February 14, 2011).

3.6	Articles of Amendment to the Articles of Incorporation effecting a 7-for-1 stock split and decreasing the Company’s authorized capital stock as filed with the Florida Department of State, Division of Corporations on February 21, 2012 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 22, 2012).

3.7	Articles of Amendment to the Articles of Incorporation increasing the number of shares of the Company’s common stock authorized for issuance from 25,714,286 shares to 75,000,000 shares effective June 25, 2012 as filed with the Florida Department of State, Division of Corporations on June 25, 2012. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 26, 2012).

2.1 Agreement and Plan of Merger, dated September 7, 2007 (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on October 1, 2007).

2.2 Amendment Number 1 to the Agreement and Plan of Merger, dated October 5, 2007 (incorporated by reference to Exhibit 2.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 11, 2008).

2.3 Amendment Number 2 to the Agreement and Plan of Merger, dated February 1, 2008 (incorporated by reference to Exhibit 2.3 to the Company’s Quarterly Report on Form 10-QSB filed with the SEC on February 8, 2008).

2.4 Articles of Merger as filed with the Florida Department of State, Division of Corporations (incorporated by reference to Exhibit 2.4 to the Company’s Current Report on Form 8-K filed with the SEC on February 11, 2008).

2.5 Certificate of Merger as filed with the Secretary of State of the State of California (incorporated by reference to Exhibit 2.5 to the Company’s Current Report on Form 8-K filed with the SEC on February 11, 2008).

3.1 Articles of Incorporation (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on February 11, 2008).

3.2 By-Laws (incorporated by reference to Exhibit 3.2 to the Company’s Current Report on Form 8-K filed with the SEC on February 11, 2008).

3.3 Articles of Amendment to the Articles of Incorporation designating Series A Preferred Stock as filed with the Florida Department of State, Division of Corporations on February 7, 2008 (incorporated by reference to Exhibit 3.3 to the Company’s Current Report on Form 8-K filed with the SEC on February 11, 2008).

3.4 Articles of Amendment to the Articles of Incorporation changing the Company’s name as filed with the Florida Department of State, Division of Corporations on May 19, 2008 (incorporated by reference to Exhibit 3.4 to the Company’s Quarterly Report on Form 10-Q filed with the SEC on July 18, 2008).

3.5 Articles of Amendment to the Articles of Incorporation increasing the Company’s authorized capital stock as filed with the Florida Department of State, Division of Corporations on February 9, 2011 (incorporated by reference to Exhibit 3.5 to the Company’s Form 10-12g filed with the SEC on February 14, 2011).

3.6 Articles of Amendment to the Articles of Incorporation effecting a 7-for-1 stock split and decreasing the Company’s authorized capital stock as filed with the Florida Department of State, Division of Corporations on February 21, 2012 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on March 22, 2012).

3.7 Articles of Amendment to the Articles of Incorporation increasing the number of shares of the Company’s common stock authorized for issuance from 25,714,286 shares to 75,000,000 shares effective June 25, 2012 as filed with the Florida Department of State, Division of Corporations on June 25, 2012. (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed with the SEC on June 26, 2012).

4.1 Form of Secured Senior Convertible Promissory Note issued in a private placement in May 2012 (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-Q filed with the SEC on August 14, 2012).

4.2 Pledge and Security Agreement among Dr. Tattoff, Inc., certain holders and U.S. Bank National Association dated May 31, 2012 (incorporated by reference to Exhibit 4.2 to the Company’s Form 10-Q filed with the SEC on August 14, 2012).

4.3 Collateral Agency Agreement among Dr. Tattoff, Inc., certain holders and U.S. Bank National Association dated May 31, 2012 (incorporated by reference to Exhibit 4.3 to the Company’s Form 10-Q filed with the SEC on August 14, 2012).

4.4 Form of Common Stock Purchase Warrant issued in connection with the issuance of secured senior convertible promissory notes in a private placement in May 2012 (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-Q filed with the SEC on August 14, 2012).

4.5 Form of Senior Subordinated Convertible Promissory Note issued in a private placement in January 2013 (incorporated by reference to Exhibit 4.5 to the Company’s Form 10-Q filed with the SEC on May 15, 2013).

4.6 Form of Secured Promissory Note issued in a private placement in February 2013 (incorporated by reference to Exhibit 4.6 to the Company’s Form 10-Q filed with the SEC on May 15, 2013).

4.7 Form of Security Agreement between Dr. Tattoff, Inc. and holders of Secured Promissory Notes issued in February 2013 (incorporated by reference to Exhibit 4.7 to the Company’s Form 10-Q filed with the SEC on May 15, 2013).

4.8 Form of Senior Subordinated Convertible Promissory Note issued in a private placement in May and June 2013 (incorporated by reference to Exhibit 4.8 to the Company’s Form 10-Q filed with the SEC on August 13, 2013).

4.9 Form of Common Stock Purchase Warrant issued in connection with the issuance of senior subordinated convertible promissory notes in a private placement in May and June 2013 (incorporated by reference to Exhibit 4.9 to the Company’s Form 10-Q filed with the SEC on August 13, 2013).

4.10 Form of Common Stock Purchase Warrant issued in connection with the issuance of senior convertible promissory notes in a private placement in May, June, July, September and December 2013. †

10.1 Form of Common Stock Purchase Warrant issued by the Company in connection with the issuance of (i) shares of Series A Preferred Stock and (ii) convertible promissory notes to investors in a private placement from December 2007 to February 2008 (incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K filed with the SEC on February 11, 2008).

10.2 Amended and Restated Management Services Agreement between Dr. Tattoff, Inc. and William Kirby, D.O., Inc., effective as of January 1, 2010 (incorporated by reference to Exhibit 10.6 to the Company’s Form 10-12g filed with the SEC on February 14, 2011).

10.3 Medical Director Agreement among Dr. Tattoff, Inc., William Kirby, D.O., Inc. and William Kirby, D.O., effective as of January 1, 2010 (incorporated by reference to Exhibit 10.7 to the Company’s Form 10-12g filed with the SEC on February 14, 2011).

10.4 Shareholders Agreement among Dr. Tattoff, Inc., William Kirby, D.O., Inc. and William Kirby, D.O., effective as of January 1, 2010 (incorporated by reference to Exhibit 10.11 to the Company’s Form 10-12g filed with the SEC on October 5, 2011).

10.5 Dr. Tattoff, Inc. 2012 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.13 to the Company’s Form 10-12g filed with the SEC on October 5, 2011).*

10.6 Dr. Tattoff, Inc. Short-Term Incentive Plan (incorporated by reference to Exhibit 10.14 to the Company’s Form 10-12g filed with the SEC on October 5, 2011).*

10.7 Form of Incentive Stock Option Award under Dr. Tattoff, Inc. 2012 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.15 to the Company’s Form 10-12g filed with the SEC on October 5, 2011).*

10.8 Form of Director Nonqualified Stock Option Award under Dr. Tattoff, Inc. 2012 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.16 to the Company’s Form 10-12g filed with the SEC on October 5, 2011).*

10.9 Employment Agreement, effective as of January 1, 2013, between Dr. Tattoff, Inc. and Harry Zimmerman (incorporated by reference to Exhibit 10.15 to the Company’s Form 10-Q filed with the SEC on May 15, 2013).*

10.10 Employment Agreement, effective as of July 1, 2013, between Dr. Tattoff, Inc. and John Keefe (incorporated by reference to Exhibit 10.16 to the Company’s Form 10-Q filed with the SEC on August 13, 2013).*

10.11 Employment Agreement, effective as of July 1, 2013, between Dr. Tattoff, Inc. and Mark Edwards (incorporated by reference to Exhibit 10.17 to the Company’s Form 10-Q filed with the SEC on August 13, 2013).*

10.12 Form of Common Stock Purchase Warrant issued in connection with the issuance of common stock in private placements in December 2011; and March, July, August, September, and October 2012; and March and April 2013 (incorporated by reference to Exhibit 10.21 to the Company’s Form 10-Q filed with the SEC on May 15, 2012).

10.13 Form of Common Stock Purchase Warrant issued in connection with consulting services in August and November 2012 (incorporated by reference to Exhibit 10.14 to the Company’s Form 10-K filed with the SEC on March 25, 2013).

10.14 Credit Agreement dated as of October 31, 2013 but made effective as of December 2, 2013 by and among Dr. Tattoff, Inc., DRTHC I, LLC, and DRTHC II, LLC, collectively, as Borrowers, and TCA Global Credit Master Fund, LP, as Lender (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on December 5, 2013).

10.15 Revolving Note dated as of October 31, 2013 but made effective as of December 2, 2013 by and among Dr. Tattoff, Inc., DRTHC I, LLC, and DRTHC II, LLC, collectively, as Borrowers, and TCA Global Credit Master Fund, LP, as Lender (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on December 5, 2013).

10.16 Security Agreement dated as of October 31, 2013 but made effective as of December 2, 2013 by and among Dr. Tattoff, Inc., DRTHC I, LLC, and DRTHC II, LLC, collectively, as Debtors, and TCA Global Credit Master Fund, LP, as Secured Party (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on December 5, 2013).

21.1 Subsidiaries †

31.1 Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. †

31.2 Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. †

4.1	Form of Secured Senior Convertible Promissory Note issued in a private placement in May 2012 (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-Q filed with the SEC on August 14, 2012).

4.2	Pledge and Security Agreement among Dr. Tattoff, Inc., certain holders and U.S. Bank National Association dated May 31, 2012 (incorporated by reference to Exhibit 4.2 to the Company’s Form 10-Q filed with the SEC on August 14, 2012).

4.3	Collateral Agency Agreement among Dr. Tattoff, Inc., certain holders and U.S. Bank National Association dated May 31, 2012 (incorporated by reference to Exhibit 4.3 to the Company’s Form 10-Q filed with the SEC on August 14, 2012).

4.4	Form of Common Stock Purchase Warrant issued in connection with the issuance of secured senior convertible promissory notes in a private placement in May 2012 (incorporated by reference to Exhibit 4.1 to the Company’s Form 10-Q filed with the SEC on August 14, 2012).

4.5	Form of Senior Subordinated Convertible Promissory Note issued in a private placement in January 2013 (incorporated by reference to Exhibit 4.5 to the Company’s Form 10-Q filed with the SEC on May 15, 2013).

4.6	Form of Secured Promissory Note issued in a private placement in February 2013 (incorporated by reference to Exhibit 4.6 to the Company’s Form 10-Q filed with the SEC on May 15, 2013).

4.7	Form of Security Agreement between Dr. Tattoff, Inc. and holders of Secured Promissory Notes issued in February 2013 (incorporated by reference to Exhibit 4.7 to the Company’s Form 10-Q filed with the SEC on May 15, 2013).

4.8	Form of Senior Subordinated Convertible Promissory Note issued in a private placement in May and June 2013 (incorporated by reference to Exhibit 4.8 to the Company’s Form 10-Q filed with the SEC on August 13, 2013).

4.9	Form of Common Stock Purchase Warrant issued in connection with the issuance of senior subordinated convertible promissory notes in a private placement in May and June 2013 (incorporated by reference to Exhibit 4.9 to the Company’s Form 10-Q filed with the SEC on August 13, 2013).

4.10	Form of Common Stock Purchase Warrant issued in connection with the issuance of senior convertible promissory notes in a private placement in May, June, July, September and December 2013 (incorporated by reference to Exhibit 4.10 to the Company’s Form 10-K filed with the SEC on March 31, 2014).

4.11	Form of short-term unsecured promissory note issued in February to June 2014 (incorporated by reference to the Exhibit 4.11 to the Company’s Form 10-Q filed with the SEC on May 15, 2015).

10.1	Form of Common Stock Purchase Warrant issued by the Company in connection with the issuance of (i) shares of Series A Preferred Stock and (ii) convertible promissory notes to investors in a private placement from December 2007 to February 2008 (incorporated by reference to Exhibit 10.15 to the Company’s Current Report on Form 8-K filed with the SEC on February 11, 2008).

10.2	Amended and Restated Management Services Agreement between Dr. Tattoff, Inc. and William Kirby, D.O., Inc., effective as of January 1, 2010 (incorporated by reference to Exhibit 10.6 to the Company’s Form 10-12g filed with the SEC on February 14, 2011).

~~32.1 Certification of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002. †~~54

3210.23 ~~Certification~~Medical ofDirector ~~the~~Agreement ~~Chief~~among ~~Financial~~Dr. ~~Officer~~Tattoff, ~~under~~Inc., ~~Section~~William ~~906~~Kirby, D.O., Inc. and William Kirby, D.O., effective as of January 1, 2010 (incorporated by reference to Exhibit 10.7 to the ~~Sarbanes~~Company’s Form 10-~~Oxley~~12g ~~Act~~filed ofwith ~~2002.~~the †SEC on February 14, 2011).

101.INS XBRL Instance Document.**

10.4	Shareholders Agreement among Dr. Tattoff, Inc., William Kirby, D.O., Inc. and William Kirby, D.O., effective as of January 1, 2010 (incorporated by reference to Exhibit 10.11 to the Company’s Form 10-12g filed with the SEC on October 5, 2011).

10.5	Dr. Tattoff, Inc. 2011 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.13 to the Company’s Form 10-12g filed with the SEC on October 5, 2011).*

10.6	Dr. Tattoff, Inc. Short-Term Incentive Plan (incorporated by reference to Exhibit 10.14 to the Company’s Form 10-12g filed with the SEC on October 5, 2011).*

10.7	Form of Incentive Stock Option Award under Dr. Tattoff, Inc. 2011 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.15 to the Company’s Form 10-12g filed with the SEC on October 5, 2011).*

10.8	Form of Director Nonqualified Stock Option Award under Dr. Tattoff, Inc. 2011 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.16 to the Company’s Form 10-12g filed with the SEC on October 5, 2011).*

10.9	Employment Agreement, effective as of January 1, 2013, between Dr. Tattoff, Inc. and Harry Zimmerman (incorporated by reference to Exhibit 10.15 to the Company’s Form 10-Q filed with the SEC on May 15, 2013).*

10.10	Employment Agreement, effective as of July 1, 2013, between Dr. Tattoff, Inc. and John Keefe (incorporated by reference to Exhibit 10.16 to the Company’s Form 10-Q filed with the SEC on August 13, 2013).*

10.11	Employment Agreement, effective as of July 1, 2013, between Dr. Tattoff, Inc. and Mark Edwards (incorporated by reference to Exhibit 10.17 to the Company’s Form 10-Q filed with the SEC on August 13, 2013).*

10.12	Form of Common Stock Purchase Warrant issued in connection with the issuance of common stock in private placements in December 2011; and March, July, August, September, and October 2012; and March and April 2013 (incorporated by reference to Exhibit 10.21 to the Company’s Form 10-Q filed with the SEC on May 15, 2012).

10.13	Form of Common Stock Purchase Warrant issued in connection with consulting services in August and November 2012 (incorporated by reference to Exhibit 10.14 to the Company’s Form 10-K filed with the SEC on March 25, 2013).

10.14	Credit Agreement dated as of October 31, 2013 but made effective as of December 2, 2013 by and among Dr. Tattoff, Inc., DRTHC I, LLC, and DRTHC II, LLC, collectively, as Borrowers, and TCA Global Credit Master Fund, LP, as Lender (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on December 5, 2013).

10.15	Revolving Note dated as of October 31, 2013 but made effective as of December 2, 2013 by and among Dr. Tattoff, Inc., DRTHC I, LLC, and DRTHC II, LLC, collectively, as Borrowers, and TCA Global Credit Master Fund, LP, as Lender (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on December 5, 2013).

10.16	Security Agreement dated as of October 31, 2013 but made effective as of December 2, 2013 by and among Dr. Tattoff, Inc., DRTHC I, LLC, and DRTHC II, LLC, collectively, as Debtors, and TCA Global Credit Master Fund, LP, as Secured Party (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K filed with the SEC on December 5, 2013).

21.1	Subsidiaries †

31.1	Certification of the Chief Executive Officer under Section 302 of the Sarbanes-Oxley Act of 2002. †

101.SCH XBRL Taxonomy Extension Schema Document.**55

101.CAL XBRL Taxonomy Extension Calculation Linkbase Document.**

31.2	Certification of the Chief Financial Officer under Section 302 of the Sarbanes-Oxley Act of 2002. †

32.1	Certification of the Chief Executive Officer under Section 906 of the Sarbanes-Oxley Act of 2002. †

32.2	Certification of the Chief Financial Officer under Section 906 of the Sarbanes-Oxley Act of 2002. †

101.~~DEF XBRL~~ ~~Taxonomy~~INS ~~Extension~~XBRL ~~Definition~~Instance ~~Linkbase~~ Document.** †

101.~~LAB~~ SCH XBRL Taxonomy Extension ~~Label~~Schema ~~Linkbase~~ Document.** †

101.~~PRE~~ CAL XBRL Taxonomy Extension ~~Presentation~~Calculation Linkbase Document.** †

101. DEF XBRL Taxonomy Extension Definition Linkbase Document. †

101. LAB XBRL Taxonomy Extension Label Linkbase Document. †

101. PRE XBRL Taxonomy Extension Presentation Linkbase Document. †

† Filed herewith.

* Management contract or compensatory plan, contract or arrangement

** In accordance with Rule 406T of Regulation S-T, this XBRL-related information shall be deemed “furnished” and not “filed.”56

FINANCIAL STATEMENTS

Table of Contents


Report of Independent Registered Public Accounting Firm		F - 2

Consolidated Balance Sheets		F - 3

Consolidated Statements of Operations		F - 4

Consolidated Statements of Shareholders’ Deficit		F - 5

Consolidated Statements of Cash Flows		F - 6

Notes to Consolidated Financial Statements		F - 7

F - 1

Report of Independent Registered Public Accounting Firm

To the Board of Directors

Dr. Tattoff, Inc.

We have audited the accompanying consolidated balance sheets of Dr. Tattoff, Inc. and Subsidiaries (collectively, the “Company”) as of December 31, ~~2013~~2014 and ~~2012~~2013, and the related consolidated statements of operations, shareholders’ deficit and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated 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 audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, 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 consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of December 31, ~~2013~~2014 and ~~2012~~2013, and the results of its operations and its cash flows for the years then ended, in conformity with US generally accepted accounting principles.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company’s current liabilities exceeded its current assets by approximately $56,~~435~~487,000, has shareholders’ deficit of approximately $49,~~013~~861,000, has suffered recurring losses and negative cash flows from operations, and has an accumulated deficit of approximately $1118,~~708~~298,000 at December 31, ~~2013~~2014. This raises substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 1 to the consolidated financial statements. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

~~SingerLewak~~/s/ SingerLewak LLP ~~March 31, 2014 Los Angeles, California~~

April 15, 2015

Los Angeles, California

F - 2

DR. TATTOFF, INC.

CONSOLIDATED BALANCE SHEETS

As of December 31, 2014 and 2013

	2013			2012
	2014			2013
ASSETS
CURRENT ASSETS
Cash and cash equivalents	$	~~197~~32,~~523~~767		$	~~318~~197,~~394~~523
Management fee due from related party	-				189,484
Prepaid expenses and other current assets		72,736			397,115
Prepaid expenses and other current assets		397,115			138,927
Total current assets		105,503			594,638
Total current assets		594,638			646,805
Property and Equipment, net		1,984,201			2,050,287
Property and Equipment, net		2,050,287			1,311,309
Other Assets		161,487			251,270
Other Assets		251,270			230,517
Total assets	$	2,251,191		$	2,896,195
Total assets	$	2,896,195		$	2,188,631
LIABILITIES AND SHAREHOLDERS’ DEFICIT
CURRENT LIABILITIES
Accounts payable	$	869,313		$	504,074
Revolving line of credit	$	1,069,302		$	1,100,954
Related party payables		23,622		-
Accounts payable		1,027,331			869,313
Accrued expenses and other liabilities		587,598			502,052
Related party payables		290,567			23,622
Warrant liabilities		116,690			1,600
Accrued expenses and other liabilities		601,068			496,053
Deferred revenue		1,113,883			502,795
Accrued compensation		547,876			543,251
Accrued compensation		543,251			237,357
Accrued interest		51,269			91,545
Proceeds of pending offering of convertible notes	-				200,000
Warrant liabilities		24,260			116,690
Revolving line of credit		1,100,954		-
Deferred revenue		1,529,413			1,113,883
Notes payable, current portion (net of unamortized discount)		~~716~~1,~~531~~067,530			~~195~~716,~~819~~531
Convertible promissory notes, current portion (net of unamortized discount)		~~947~~373,~~987~~051		-	947,987
Capital lease obligations, current portion (related party)		1011,~~286~~323			5010,~~574~~286
Total current liabilities		6,~~030~~592,~~115~~990			26,~~194~~030,~~271~~115
LONG‐TERM LIABILITIES
Notes payable, net of current portion		~~255~~1,~~456~~729,206			~~121~~255,~~959~~456
Convertible promissory notes, net of current portion and unamortized discount		~~328~~1,~~388~~167,500			~~452~~328,~~779~~388
Capital lease obligations, net of current portion (related party)		4332,~~630~~307			~~120~~43,~~960~~630
Deferred rent		251,597			104,740
Accrued interest		2,302,462			-
Total liabilities		6,909,186			2,994,709
Deferred rent		287,852			251,597
Total liabilities		12,112,317			6,909,186
COMMITMENTS AND CONTINGENCIES (notes 8 and 10)
SHAREHOLDERS’ DEFICIT
Preferred stock, 2,857,143 shares authorized, none issued or outstanding at December 31, 2013 and 2012		-			-
Preferred stock, 2,857,143 shares authorized, none issued or outstanding at December 31, 2014 and 2013		-			-
Common stock, $.0001 par value, 75,000,000 shares authorized, 19,308,230 and 18,332,803 shares issued and outstanding at December 31, 2013 and 2012, respectively		1,931			1,833
Common stock, $.0001 par value, 75,000,000 shares authorized, 19,268,730 and 19,308,230 shares issued and outstanding at December 31, 2014 and 2013, respectively		1,927			1,931
Additional paid-in capital		78,~~692~~434,~~978~~783			67,~~599~~692,~~446~~978
Accumulated deficit		(1118,~~707~~297,~~900~~836	)		(711,~~407~~707,~~357~~900	)
Total shareholders’ deficit		(49,~~012~~861,~~991~~126	)		(~~806~~4,~~078~~012,991	)
Total liabilities and shareholders’ deficit	$	2,~~896~~251,~~195~~191		$	2,~~188~~896,~~631~~195

The accompanying notes are an integral part of these consolidated financial statements.

F - 3

DR. TATTOFF, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

Years Ended December 31, 2014 and 2013

	2013			2012
	2014			2013
Revenues
Revenues from related party	$	2,~~547~~684,~~021~~381		$	2,~~722~~547,~~528~~021
Owned clinic revenues		1,~~107~~630,~~579~~032			~~477~~1,~~614~~107,579
		3,654,600			3,200,142
		4,314,413			3,654,600
Operating costs and expenses
Clinic operating expenses		3,~~353~~699,~~765~~344			23,~~472~~353,~~117~~765
General and administrative expenses		2,~~911~~365,~~503~~514			2,~~567~~911,~~082~~503
Marketing and advertising		~~776~~592,~~064~~737			~~622~~776,~~037~~064
Depreciation and amortization		~~397~~542,~~413~~695			~~282~~397,~~068~~413
		7,438,745			5,943,304
		7,200,290			7,438,745
Loss from operations		(32,~~784~~885,~~145~~877	)		(23,~~743~~784,~~162~~145	)
Interest expense		(587,148	)		(115,881	)
Interest expense and costs of financing		(3,828,256	)		(587,148	)
Gain on sale of property and equipment		6222,~~366~~018			-62,366
Other income		9,184			20,047
Change in value of warrant liabilities		106,042			9,184
Loss before provision for income taxes		(46,~~299~~586,~~743~~073	)		(24,~~838~~299,~~996~~743	)
Provision for income taxes		~~800~~3,863			800
Net loss	$	(4,300,543	)	$	(2,839,796	)
Net Loss	$	(6,589,936	)	$	(4,300,543	)
Basic and diluted net loss per share applicable to common shareholders	$	(.2333	)	$	(.1823	)
Weighted average shares outstanding – basic and diluted		1820,~~743~~106,~~738~~722			1518,~~983~~743,~~905~~738

The accompanying notes are an integral part of these consolidated financial statements.

F - 4

DR. TATTOFF, INC.

CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ DEFICIT

Years Ended December 31, 2014 and 2013

	Common Stock						Additional Paid-in Capital (Deficit)			Accumulated Deficit			Total Shareholders’ Equity (Deficit)
													Total
	Shares			Par Value
							Additional Paid-in						Shareholders’
BALANCE – December 31, 2011		14,727,344		$	1,473		$	4,465,307		$	(4,567,561	)	$	(100,781	)
	Common Stock						Capital			Accumulated			Equity
Services paid in stock		87,930			8			43,078			-			43,086
	Shares			Par Value			(Deficit)			Deficit			(Deficit)
Stock compensation expense		-			-			70,532			-			70,532
Warrants issued for consulting service		-			-			120,600			-			120,600
Stock options exercised		21,428			2			7,898			-			7,900
Sale of common stock		3,496,101			350			1,712,740			-			1,713,090
Beneficial conversion feature on convertible notes		-			-			31,066			-			31,066
Warrants issued with convertible notes		-			-			148,225			-			148,225
Net loss		-			-			-			(2,839,796	)		(2,839,796	)
BALANCE – December 31, 2012		18,332,803		$	1,833		$	6,599,446		$	(7,407,357	)	$	(806,078	)
Services paid in stock		712,452			71			349,848			-			349,919
Stock compensation expense		-			-			136,151			-			136,151
Warrants issued for consulting service		-			-			116,824			-			116,824
Stock options exercised		35,700			4			17,489			-			17,493
Sale of common stock		227,275			23			124,978			-			125,001
Beneficial conversion feature on convertible notes		-			-			14,000			-			14,000
Warrants issued with convertible notes		-			-			334,242			-			334,242
Net loss		-			-			-			(4,300,543	)		(4,300,543	)
BALANCE – December 31, 2013		19,308,230		$	1,931		$	7,692,978		$	(11,707,900	)	$	(4,012,991	)
Fair value of warrants issued on debt extension		-			-			413,701			-			413,701
Common stock issued		2,010,500			201			980,443			-			980,644
Stock compensation expense		-			-			68,699			-			68,699
Common stock repurchased		(50,000	)		(5	)		(61,238	)		-			(61,243	)
Share redemption in restructuring of loan		(2,000,000	)		(200	)		(659,800	)		-			(660,000	)
Net loss		-			-			-			(6,589,936	)		(6,589,936	)
BALANCE – December 31, 2014		19,268,730		$	1,927		$	8,434,783		$	(18,297,836	)	$	(9,861,126	)

The accompanying notes are an integral part of these consolidated financial statements.

F - 5

DR. TATTOFF, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

Years Ended December 31, 2014 and 2013

	2013			2012
	2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(46,~~300~~589,~~543~~936	)	$	(24,~~839~~300,~~796~~543	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		~~397~~542,~~413~~695			~~282~~397,~~068~~413
Amortization of debt discount to interest		~~308~~693,~~633~~975			39308,~~570~~633
Stock compensation expense		136,151			70,532
Non-cash interest and costs of financing		2,617,961			-
Change in fair value of warrant liability		(7,415	)		(10,465	)
Stock compensation expense		68,699			136,151
Services paid for in stock and warrants		466,744			163,686
Change in fair value of warrant liability		(106,042	)		(7,415	)
Impairment charge		39,886			-
Loss on sale of equipment		40,637			-
Services paid for in stock and warrants		5,145			466,744
Changes in operating assets and liabilities:
Management fee due from related party		~~189,484~~-			94189,~~439~~484
Prepaid expenses and other current assets		~~(126~~470,~~330~~394	)		(33126,~~482~~330	)
Other assets		~~(28~~81,~~863~~608	)		(~~168~~28,~~512~~863	)
Accounts payable		~~365~~158,~~239~~017			64365,~~776~~239
Accrued expenses and other liabilities		83104,~~769~~558			~~277~~9,~~816~~752
Deferred revenue		~~611~~415,~~088~~530			~~317~~611,~~828~~088
Related party payable		23266,~~622~~945			~~(20~~23,~~095~~622	)
Accrued compensation		~~305~~4,~~894~~625			~~106~~305,~~646~~894
Deferred rent		(53,143	)		66,379
Accrued interest		(40,276	)		74,017
Net cash used in operating activities		(1,628,257	)		(1,588,610	)
Deferred rent		36,256			(53,143	)
Net cash used in operating activities		(1,189,323	)		(1,628,257	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment		(~~593~~421,~~059~~374	)		(~~490~~593,~~842~~059	)
Net cash used in investing activities		(593,059	)		(490,842	)
Proceeds received from sale of property and equipment		87,500			-
Net cash used in investing activities		(333,874	)		(593,059	)
CASH FLOWS FROM FINANCING ACTIVITIES
Principal payments on capital lease obligations		(~~117~~10,~~617~~286	)		(64117,~~604~~617	)
Principal payments on notes payable		(~~430~~501,~~386~~534	)		(~~161~~430,~~827~~386	)
Proceeds from sale of common stock		~~125,001~~-			1125,~~713,090~~001
Proceeds from issuance of convertible notes		885,000			592,500
Repurchase of common stock		(61,243	)		-
Proceeds from issuance of short-term notes		520,000			-
Proceeds received from issuance of convertible notes		100,000			885,000
Proceeds from pending offering of convertible notes		-			200,000
Proceeds received from issuance of short-term notes		1,988,156			520,000
Proceeds from revolving line of credit		1,301,000			-
Repayment of short-term notes		(125,000	)		-
Repayments on revolving line of credit		(200,046	)		-
Proceeds received from revolving line of credit		4,168,602			1,301,000
Proceeds from exercise of stock options		17,493			7,900
Repayments on revolving line of credit		(4,200,254	)		(200,046	)
Net cash provided by financing activities		2,100,445			2,287,059
Proceeds from exercise of stock options		-			17,493
Net (decrease) increase in cash and cash equivalents		(120,871	)		207,607
Net cash provided by financing activities		1,358,441			2,100,445
Cash and cash equivalents – beginning of year		318,394			110,787
Net (decrease) increase in cash and cash equivalents		(164,756	)		(120,871	)
Cash and cash equivalents – end of year	$	197,523		$	318,394
Cash and cash equivalents – beginning of year		197,523			318,394
Cash and cash equivalents – end of year	$	32,767		$	197,523
SUPPLEMENTAL CASH FLOW DISCLOSURE
Cash paid during the year for:
Interest	$	~~135~~282,~~972~~961		$	64135,~~095~~972
Taxes	$	~~800~~3,863		$	800
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES
Acquisition of property and equipment through issuance of notes payable	$	~~535~~214,~~222~~625		$	~~165~~535,~~786~~222
Non-cash financing related to revolving line of credit	$	~~129,301~~-		$	-129,301
Financing of insurance premiums	$	~~131~~146,~~859~~015		$	59131,~~765~~859

The accompanying notes are an integral part of these consolidated financial statements.

F - 6

NOTE 1. ORGANIZATION AND NATURE OF OPERATIONS

Organization

Dr. Tattoff, Inc., a Florida corporation formed in 2004, directly and through its wholly-owned subsidiaries, DRTHC I, LLC and DRTHC II, LLC, Delaware limited liability companies (collectively with Dr. Tattoff, Inc., the “Company”) operates clinics and provides marketing and practice management services to licensed physicians who primarily perform laser tattoo removal services. The Company currently operates clinics in Dallas and Houston, Texas; Phoenix, Arizona; and Atlanta, Georgia, and provides services under a management services agreement with a contracting physician at four Southern California locations whereby the Company provides management, administrative, marketing and support services, insurance, and equipment at the clinical sites. The contracting physician’s medical personnel provide laser tattoo and hair removal services.

In February 2008, the Company completed a reverse merger with Lifesciences Opportunities Incorporated a “public shell” company, and became a Securities and Exchange Commission (“SEC”) registrant (the “Merger”). The Company filed Form 10-Q for the quarters ended March 31, 2008 and June 30, 2008, but failed to file any Forms 10-Q or 10-K subsequently. On March 16, 2010, the Company filed a Form 15 with the SEC to terminate its registration under Section 12(g) of the Securities Exchanges Act of 1934, as amended, (the “Exchange Act”). Upon the filing of the Form 15, the Company’s obligation to file periodic and other reports with the SEC was immediately suspended. On December 7, 2011 the Company filed a registration statement on Form 10 with the SEC to register its common stock pursuant to Section 12(g) of the Exchange Act, which was subsequently amended on December 23, 2011 and January 20, 2012. The amended registration statement became effective on February 6, 2012.

Increase in Authorized Shares and Reverse Stock Split

In February 2011, the Company amended its Articles of Incorporation to increase the number of authorized shares to 28,571,429, consisting of 25,714,286 shares of common stock, par value $.0001 per share and 2,857,143 shares of preferred stock. Series of preferred stock may be created and issued from time to time, with such designations, preferences, rights and restrictions as shall be stated in resolutions adopted by the Board of Directors.

In February 2012, the Company amended its Articles of Incorporation to effect a 7-for-1 reverse stock split. Earnings per share amounts, weighted average common shares outstanding, shares issued and outstanding, exercise prices, and fair value per share amounts for all periods have been adjusted to reflect the Company’s 7-for-1 reverse stock split. Par value per share was unchanged with the difference between the originally calculated par value of issued and outstanding shares and the adjusted amounts reclassified to additional paid-in capital for all periods.

In June 2012, the Company amended its Articles of Incorporation to increase the number of shares of the Company’s common stock authorized for issuance from 25,714,286 shares to 75,000,000 shares.

Going Concern

The accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going concern, which assumes the realization of assets and the satisfaction of liabilities in the ordinary course of business. At December 31, ~~2013~~ 2014, the Company has accumulated losses approximating $1118,~~708~~298,000, current liabilities that exceeded its current assets by approximately $56,~~435~~487,000, shareholders’ deficit of approximately $49,~~013~~861,000, and has not yet produced operating income or positive cash flows from operations. The Company’s ability to continue as a going concern is predicated on its ability to raise additional capital, increase sales and margins, and ultimately achieve sustained profitable operations. The uncertainty related to these conditions raises substantial doubt about the Company’s ability to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Management believes that the Company will need to continue to raise additional outside capital to expand the number of clinics in operation and to address its losses and ability to continue to operate. The Company intends to raise additional capital and continue opening additional clinics to achieve this goal. In addition, the Company expanded its Board of Directors in 2010 to include individuals with substantial experience in raising capital and numerous relationships that may assist the Company in achieving its goals. In the event that the Company is unsuccessful in raising adequate equity capital, management will attempt to reduce losses and preserve as much liquidity as possible. Steps management would likely take would include limiting capital expenditures, reducing expenses and leveraging the relatively few assets that it owns without encumbrance. A reduction in expenses would likely include personnel costs, professional fees, and marketing expenses. While management would attempt to achieve break-even or profitable operations through these steps, there can be no assurance that it will be successful.

F - 7

In addition, the Company expanded its Board of Directors in 2010 to include individuals with substantial experience in raising capital and numerous relationships that may assist the Company in achieving its goals. In the event that the Company is unsuccessful in raising adequate equity capital, management will attempt to reduce losses and preserve as much liquidity as possible. Steps management would likely take would include limiting capital expenditures, reducing expenses and leveraging the relatively few assets that it owns without encumbrance. A reduction in expenses would likely include personnel costs, professional fees, and marketing expenses. While management would attempt to achieve break-even or profitable operations through these steps, there can be no assurance that it will be successful.

Consolidation Policy

The Company has various contractual relationships with William Kirby, D.O., Inc. including a management services agreement, medical director’s agreement, ~~equipment subleases,~~ and ~~guarantees~~equipment arrangements. The Company evaluated the various relationships between the parties to determine if it should consolidate William Kirby, D.O., Inc. as a variable interest entity pursuant to ASC 810, Consolidation. The Company determined that it was not the primary beneficiary of the interest due to the following: William Kirby, D.O., Inc. has the ability to control the activities that have the most significant impact on its economic performance; the Company does not have an obligation to absorb losses of William Kirby, D.O., Inc.; the Company is not guaranteed a return; and there are no interests that are subordinate to the equity interest at risk. The Company conclusion followed an analysis of both the contractual arrangements and California state law restrictions on relationships between licensed professionals and businesses. Among the restrictions of California law the Company considered most relevant in its analysis were those that prohibit a lay corporation from providing medical services, including laser tattoo and laser hair removal, employing medical personnel, and making key decisions about equipment and marketing initiatives. Therefore, the results of William Kirby, D.O., Inc. are not consolidated into the results of the Company.

The carrying amount and classification of assets and liabilities in the accompanying consolidated balance sheets relating to the Company’s relationship with William Kirby, D.O., Inc. are summarized as follows:

	December 31,
	2013		2012
	2014		2013
Current Assets
Management fee due from related party	$	-	$	189,484
Non-Current Assets
Assets under capital lease, net		-		39,064
Current Liabilities
Related party payables	$	23290,~~622~~567	$	-23,622
Capital lease obligations, current portion		1011,~~286~~323		5010,~~574~~286
Long-Term Liabilities
Capital lease obligations, net of current portion		4332,~~630~~307		~~120~~43,~~960~~630

The Company may be exposed to losses under its relationship with William Kirby, D.O., Inc. The Company’s most significant exposure to loss in the relationship is under the management services agreement. Losses could occur if the management fees are inadequate to cover the Company’s costs of providing the management services. The Company is unable to estimate its maximum exposure to such losses.

The Company’s relationship and agreements with William Kirby, D.O., Inc. and Dr. Kirby are further described in Note 7, “Capital Lease Obligations (Related Party)”; Note 8, “Related Party Transactions” and Note 10, “Commitments and Contingencies.”

Dr. Tattoff, Inc. formed two wholly owned subsidiaries, DRTHC I, LLC and DRTHC II, LLC that are responsible for the operations of some of the new clinics that the Company has established. The consolidated financial statements include the accounts of DRTHC I, LLC and DRTHC II, LLC.

F - 8

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying consolidated financial statements of Dr. Tattoff, Inc. and its subsidiaries have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

Cash and Cash Equivalents

The Company considers all highly liquid short-term investments with original maturity of three months or less to be cash equivalents.

Fair Value of Financial Instruments

The Company adopted the fair value measurement and disclosure requirements of ASC 820, Fair Value Measurements and Disclosure for financial assets and liabilities measured on a recurring basis. ASC 820 defines fair value, establishes a framework for measuring fair value under GAAP and expands disclosures about fair value measurements. This standard applies in situations where other accounting pronouncements either permit or require fair value measurements. ASC 820 does not require any new fair value measurements.

Fair value is defined in ASC 820 as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

The standard describes three levels of inputs that may be used to measure fair value:

Level 1: Quoted prices in active markets for identical or similar assets and liabilities.

Level 2: Quoted prices for identical or similar assets and liabilities in markets that are not active or observable inputs other than quoted prices in active markets for identical or similar assets and liabilities.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The Company’s financial instruments include cash and cash equivalents, ~~management fee due from related party,~~ prepaid expenses and other current assets, other assets, accounts payable, related party payable, accrued expenses and other liabilities, deferred revenue, accrued compensation, capital lease obligations, convertible promissory notes, notes payable, and warrant liabilities. The carrying amounts of ~~management fee due from related party,~~ prepaid expenses and other current assets, other assets, accounts payable, related party payable, accrued expenses and other liabilities, deferred revenue and accrued compensation approximate their fair values due to the short maturity of these instruments. The carrying amounts of capital leases, convertible promissory notes, and notes payable approximates their fair value as these instruments earn or are charged interest based on prevailing rates. The fair value of warrants is measured using level 3 inputs.

Long-lived Assets

Long-lived assets are reviewed for impairment in accordance with ASC No. 360 “Accounting for the Impairment or Disposal of Long-Lived Assets,” which requires impairment losses to be recorded on long-lived assets when events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. For purposes of the impairment review, assets are reviewed on an asset-by-asset basis. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of each asset to future net cash flows on an undiscounted basis expected to be generated by such asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount which the carrying amount of the assets on an undiscounted basis exceeds the fair value of the assets.

F - 9

The major long-lived assets of the Company are the lasers and Intense Pulse Light, or IPL, devices. While the Company has sustained losses, the clinics where the lasers and IPL devices are located are ~~either profitable~~ or ~~new~~are ~~and~~ expected to be profitable. As As a result, recoverability of assets to be held and used is measured by a comparison of the carrying amount of each asset to future net cash flows on an undiscounted basis expected to be generated by such asset in each clinic. There were no impairments of long-lived assets at December 31, 2013. In February 2014, the Company decided to close its Sugar Land, Texas (a suburb of Houston) clinic due to poor financial performance. The Company concluded that the capitalized tenant improvements were impaired and ~~2012~~recorded an impairment charge of approximately $40,000 related to the closure. The impairment charge is included in clinic operating expenses in the accompanying consolidated statements of operations. The Company moved the laser and other capital assets located there to other clinics. In February 2015, the Company entered into a mutual release and settlement agreement with the landlord pursuant to which the Company agreed to make payments totaling $87,000 over a period of two years to the landlord. There have been no other impairments in 2014.

Property and Equipment

Property and equipment is recorded at cost, less accumulated depreciation. Depreciation is recorded using the straight-line method over the estimated useful lives of the related assets. The Company uses the following estimated useful lives for computing depreciation expense: furniture and fixtures, 7 years; medical equipment, 7 years; other equipment, 3 to 5 years. Amortization of leasehold improvements is recorded using the straight-line method based on the lesser of the useful life of the improvement or the lease term, which is typically five years or less.

Debt and Other Financial Instruments

Debt/Equity Instruments Issued with Warrants

The Company estimates the relative fair values of the debt and warrants, and allocates the proceeds pro-rata based on these values. The allocation of proceeds to the warrants results in the debt instrument being recorded at a discount from the face amount of the debt and the value allocated to the warrant is recorded to additional paid-in capital.

The Company reviews the terms of convertible financial instruments it issues to determine whether there are embedded derivative instruments, including the conversion option that may be required to be bifurcated and accounted for separately as a derivative financial instrument. In circumstances where the convertible instrument contains more than one embedded derivative, including the conversion option that is required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.

When the convertible debt or equity instruments contain embedded derivative instruments that are to be bifurcated and accounted for as liabilities, the total proceeds from the convertible host instruments are first allocated to the bifurcated derivative instruments. The remaining proceeds, if any, are then allocated to the convertible instruments themselves, resulting in those instruments being recorded at a discount from their face value.

Derivative Financial Instruments

Derivative instruments are initially recorded at estimated fair value and are then revalued at each reporting date with changes in the estimated fair value reported as charges or credits to income.

Revenue Recognition

Currently, the majority of the Company’s revenues are derived from management services provided to William Kirby D.O., Inc., a related party, for our non-owned clinics. The Company provides nonmedical services and facilities based on contractual prices established in advance that extend continuously over a set time for a fixed percentage of the contracting physician’s gross revenues (as defined in the Management Services Agreement - See Note 8, “Related Party Transactions”) with no upfront fees paid by William Kirby D.O., Inc. The management services agreement with William Kirby D.O., Inc. covers all of the Company’s California locations.

Under the management service agreement with William Kirby D.O., Inc., there is no right to refund or rejection of services. The Company recognizes revenue when the following criteria of revenue recognition are met: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. Management services fees are paid by the contracting physician to the Company on a bi-weekly basis as earned, which is when the Company has substantially performed management services pursuant to the terms of the management services agreement with William Kirby D.O., Inc.

F - 10

The Company operates the Dallas, Houston, Atlanta and Phoenix locations directly, not pursuant to a management services agreement with a physician. Accordingly, patients contract with the Company and pay for the services they receive directly to the Company. The Company recognizes revenue when the following criteria of revenue recognition are met: (1) persuasive evidence that an arrangement exists; (2) delivery has occurred or services rendered; (3) the fee is fixed or determinable; and (4) collectability is reasonably assured. The Company requires payment at the time of the patient visit or in advance of the visit by those patients purchasing packages of treatments. Payments by patients made in advance of service delivery are recorded as “deferred revenue” on the accompanying consolidated balance sheets and amounted to approximately $1,~~114~~529,000 at December 31, ~~2013~~2014 and $~~503~~1,114,000 at December 31, ~~2012~~2013.

Patients who purchase a package of tattoo removal services at clinics the Company operates directly are eligible to participate in the Company’s tattoo removal guarantee program. Pursuant to the guarantee program, if the tattoo is not fully removed within the recommended number of treatments, the Company will continue to provide additional treatments, consistent with the Company’s medical protocols, for a period of up to one year following the date of the last paid treatment. The Company estimates the cost of the guarantee program based on historical usage and the average cost of treatments. The cost of the program is accrued on a per visit basis as visits occur and is included in clinic operating expense on the accompanying consolidated statements of operations. The Company recognized accrued expense of approximately $77132,000 and $3777,000 as of December 31, ~~2013~~2014 and December 31, ~~2012~~2013, respectively, related to the guarantee program, and this is included in the accrued expenses and other liabilities in the accompanying consolidated balance sheets. Patients who purchase a package of services and experience complete removal prior to completion of the package are eligible for a refund for the unused portion of the package. The Company recognizes refunds, which have been immaterial in amount, as a reduction in revenue as incurred. Patients who receive services in clinics operated under the management services agreement with William Kirby, D.O., Inc. are eligible for similar programs, which may reduce the management fee that the Company receives.

Advertising Costs

Advertising costs are expensed as incurred. For the years ended December 31, ~~2013~~2014 and ~~2012~~2013, advertising expense was approximately $~~570~~465,000 and $~~359~~570,000, respectively, and is included in marketing and advertising in the accompanying consolidated statement of operations.

Income Taxes

The Company accounts for income taxes in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 740 “Income taxes.” Under ASC 740, deferred income taxes are recognized to reflect the tax consequences in future years for the differences between the amounts of assets and liabilities recognized for financial reporting purposes and such amounts recognized for income tax reporting purposes using enacted tax rates in effect for the year in which the differences are expected to reverse. A valuation allowance is provided to reduce net deferred tax assets to amounts that are more likely than not to be realized.

The Company has incurred tax net operating losses since inception and, accordingly, has a deferred tax asset related to such tax net operating loss carryforwards. The Company has provided a 100% valuation allowance on such deferred tax asset at December 31, ~~2013~~2014 and ~~2012~~2013 (See Note 11, “Income Taxes”).

The Company accounts for uncertainty in income taxes in accordance with ASC 740-10, which prescribes a recognition threshold and measurement attribute for financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740-10 also provides guidance on the measurement, derecognition, classification and disclosure of tax positions, as well as the accounting for related interest and penalties. The Company’s policy is to recognize interest and penalties that would be assessed in relation to the settlement value of unrecognized tax benefits as a component of income tax expense. The Company has recognized no tax related interest or penalties since the adoption of ASC 740-10. As of December 31, ~~2013~~2014, the open tax years of the Company were 2009 to ~~2013~~2014.

F - 11

Earnings Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings per share reflects the potential dilution, using the treasury stock method, that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. In computing diluted earnings per share, the treasury stock method assumes that outstanding options are exercised and the proceeds are used to purchase common stock at the average market price during the period. Options will have a dilutive effect under the treasury stock method only when the Company reports net income and the average market price of the common stock during the period exceeds the exercise price of the options. Options, warrants and conversions of convertible debt instruments were not included in computing diluted earnings per share for the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively because their effects were antidilutive.

The following table illustrates the computation of basic and diluted earnings per share:

	2013			2012
	2014			2013
Net loss available to common stockholders (numerator)	$	(46,~~300~~589,~~543~~936	)	$	(24,~~839~~300,~~796~~543	)
Weighted average shares outstanding (denominator)		1820,~~743~~106,~~738~~722			1518,~~983~~743,~~905~~738
Basic and diluted EPS	$	(.2333	)	$	(.1823	)

Basic and diluted EPS are the same for all periods presented as the impact of all potentially dilutive securities were anti-dilutive. The following potentially dilutive securities were not included in the computation of diluted EPS because to do so would have been anti-dilutive for the periods presented.

	2013		2012
	2014		2013
Warrants		68,~~508~~332,~~415~~862		36,~~150~~508,~~434~~415
Common stock options		1,~~540~~553,~~402~~906		1,~~048~~540,~~351~~402
Convertible promissory notes		2,~~387~~541,~~510~~358		~~987~~2,~~500~~387,510
		10,436,327		5,186,285
		12,428,126		10,436,327

Accounting for Common Stock Options

The Company measures stock-based compensation expense at the grant date, based on the fair value of the award, and recognizes the expense over the employee’s requisite service (vesting) period using the straight-line method. The measurement of stock-based compensation expense is based on several criteria including, but not limited to, the valuation model used and associated input factors, such as expected term of the award, stock price volatility, risk free interest rate and forfeiture rate. Certain of these inputs are subjective to some degree and are determined based in part on management’s judgment. The Company recognizes the compensation expense on a straight-line basis for its graded vesting awards. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. However, the cumulative compensation expense recognized at any point in time must at least equal the portion of the grant-date fair value of the award that is vested at that date. As used in this context, the term “forfeitures” is distinct from “cancellations” or “expirations”, and refers only to the unvested portion of the surrendered equity awards.

Deferred Rent

The Company currently leases all of its locations under leases classified as operating leases. Minimum base rent for these operating leases, which generally have escalating rentals over the term of the lease is recorded on a straight-line basis over the lease term. As such, an equal amount of rent expense is attributed to each period during the term of the lease regardless of when actual payments occur. Lease terms begin on the inception date and include option periods only where such renewals are imminent and assured. The difference between rent expense and actual cash payments is classified as “deferred rent” in the accompanying consolidated balance sheets and approximated $~~252~~288,000 and $~~105~~252,000 at December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

F - 12

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates include those related to the realization of long-lived assets, deferred income tax asset valuation allowances, and the valuation of equity instruments issued.

Concentrations

Financial instruments that subject the Company to credit risk consist primarily of cash and revenues. The Company’s cash and cash equivalents are maintained at financial institutions in the United States. These accounts are insured by the Federal Deposit Insurance Corporation (“FDIC”). At times, such balances may be in excess of the amounts insured by the FDIC. The Company has not experienced any losses on such accounts and believes it is not exposed to any significant credit risks on its cash and cash equivalents.

A significant portion of the Company’s revenues in ~~2013~~2014 and ~~2012~~2013 were derived from a management services agreement relating to the Company’s California clinics pursuant to a management services agreement with William Kirby D.O., Inc. If the Company’s management services agreement is terminated for any reason or William Kirby, D.O., Inc. defaults on its obligations thereunder, the Company’s operating results, cash flows and financial performance may be adversely affected and the Company may need to negotiate and enter into a new agreement with a qualified physician. Although the Company’s management services agreement provides the Company with the right to approve a replacement contracting physician upon termination or default, the Company can give no assurance that it will be able to expeditiously identify and contract with a qualified replacement physician on commercially reasonable terms or at all. The termination of the Company’s management services arrangement could have a material adverse effect on the Company’s consolidated financial condition, cash flows and results of operations.

Significant Recent Accounting Pronouncements

In ~~July~~April ~~2013~~2014, the ~~Financial~~FASB ~~Accounting Standards Board~~ issued Accounting Standards Update No. ~~2013~~2014-1108, Presentation ~~Income~~of ~~Taxes~~Financial Statements (Topic ~~740~~205) and Property, Plant, and Equipment (Topic 360) (“ASU ~~2013~~2014-1108”), which ~~requires~~changes the ~~financial~~requirements ~~statement~~for ~~presentation~~reporting ofdiscontinued anoperations. ~~unrecognized~~ASU ~~tax~~2014-08 ~~benefit~~raises inthe athreshold ~~particular~~for ~~jurisdiction, or~~ a ~~portion~~disposal ~~thereof,~~to qualify as a ~~reduction~~discontinued tooperation aand ~~deferred~~requires ~~tax~~new ~~asset~~disclosures ~~for~~of aboth ~~net~~discontinued ~~operating~~operations ~~loss~~and ~~(“NOL”)~~certain ~~carryforward,~~other adisposals ~~similar~~that ~~tax~~do ~~loss,~~not ormeet athe ~~tax~~definition ~~credit~~of ~~carryforward,~~a ~~unless~~discontinued operation. Under the ~~uncertain~~revised ~~tax~~standard, ~~position~~a isdisposal ~~not~~that ~~available~~represents toa ~~reduce,~~strategic shift or ~~would~~will ~~not~~have bea ~~used~~major toeffect ~~reduce,~~on ~~the~~an ~~NOL~~entity’s oroperations ~~carryforward~~and ~~under~~financial ~~the~~results ~~tax~~will ~~law~~be inreported ~~the~~as ~~same~~discontinued ~~jurisdiction;~~operations ~~otherwise,~~while ~~the~~smaller ~~unrecognized~~disposals ~~tax~~will ~~benefit~~not. ~~should~~ASU be2014-08 ~~presented~~is aseffective ain ~~gross~~2015 ~~liability~~ and ~~should~~interim ~~not~~periods bewithin ~~combined~~that ~~with~~year afor ~~deferred~~calendar ~~tax~~year ~~asset~~companies. ~~ASU~~Early ~~2013-11~~adoption is ~~effective~~permitted ~~for~~and ~~interim~~the ~~and~~Company ~~annual~~has ~~periods~~adopted ~~beginning~~the ~~after~~new ~~December~~guidance ~~15,~~in ~~2013.~~the first quarter of 2014. The Company does not expect that this new guidance will have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.

~~Other~~In ~~recent~~May ~~accounting~~2014, ~~pronouncements~~FASB issued byASU ~~the~~2014-09, Revenue ~~FASB~~from Contracts with Customers (~~including~~“ASU ~~its~~2014-09”) ~~Emerging~~that ~~Issues~~updates ~~Task~~the ~~Force),~~principles for recognizing revenue. The core principle of the ~~American~~guidance ~~Institute~~is that an entity should recognize revenue to depict the transfer of ~~Certified~~promised ~~Public~~goods ~~Accountants~~or ~~(“AICPA”),~~services ~~and~~to customers in an amount that reflects the ~~SEC~~consideration ~~did~~to ~~not~~which the entity expects to be entitled in exchange for those goods or ~~are~~services. ~~not~~ASU ~~believed~~2014-09 byalso ~~management~~amends the required disclosures of the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. ASU 2014-09 is effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. On April 1, 2015, the FASB voted to ~~have~~propose ato ~~material~~defer ~~impact~~the oneffective date of the new revenue recognition standard by one year. The Company’s ~~present~~is orevaluating ~~future~~the ~~financial~~potential ~~statements~~impacts of the new standard on its existing revenue recognition policies and procedures.

F - 13

In August 2014, FASB issued ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40)(“ASU 2014-15”), which is intended to define management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern and to provide related footnote disclosures. ASU 2014-15 is effective in the annual period ending after December 15, 2016, with early application permitted. The Company does not expect that this new guidance will have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants (“AICPA”), and the SEC did not or are not believed by management to have a material impact on the Company’s present or future financial statements.

F - 14

NOTE 3. PROPERTY AND EQUIPMENT

Property and equipment, consists of the following at December 31:

	2013			2012
	2014			2013
Equipment	$	1,~~824~~905,~~871~~106		$	1,~~382~~824,~~005~~871
Furniture and fixtures		~~136~~143,~~426~~893			93136,~~129~~426
Leasehold improvements		1,~~217~~452,~~223~~144			~~803~~1,~~335~~217,223
		3,178,520			2,278,469
		3,501,143			3,178,520
Less accumulated depreciation and amortization		(1,~~128~~516,~~233~~942	)		(~~967~~1,~~160~~128,233	)
	$	21,~~050~~984,~~287~~201		$	12,~~311~~050,~~309~~287

Depreciation and amortization expense was approximately $~~397~~543,000 and $~~282~~397,000 for the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively.

Assets under capital leases (gross) were approximately $159,000 ~~and $511,000~~ at December 31, ~~2013~~2014 and ~~2012, respectively~~2013. Amortization expense recorded for the assets under capital leases amounted to approximately $~~12,000~~0 and $3512,000 for the years ended December 31, ~~2013~~2014 and ~~2012~~2013, respectively and is included in the depreciation and amortization amounts noted above. Accumulated amortization of assets under capital leases was approximately $159,000 ~~and $471,000~~ at December 31, ~~2013~~2014 and December 31, ~~2012, respectively~~2013.

In October 2013, the Company purchased three lasers it had previously held under capital lease obligations from the related party lessor for aggregate consideration of $75,000. In December 2013, the Company sold these assets to an unrelated third party in connection with the Company’s acquisition of three new lasers. These assets were previously held on the books of the Company at a gross amount of $228,000 and were fully amortized. The Company recorded a gain of $62,000 related to this sale as noted on the consolidated statements of operations.

NOTE 4. REVOLVING LINE OF CREDIT

In December 2013, the Company entered into a revolving line of credit with a lender with an initial commitment of $1,300,000 and a maximum revolving commitment of $7,000,000. Increase in the commitment above $1,300,000 is at the sole and absolute discretion of the lender. The term of the revolving loan is for six months subject to two automatic six month extensions as long as the Company is not in default on the credit agreement. In December 2014, the Company entered the final six month extension and the current term of the revolving line of credit expires on June 2, 2015. The line of credit is secured by a second lien on all encumbered equipment of the Company and a first lien on all other assets of the Company.

The credit agreement requires that all receipts of the Company, except receipts received from investors and receipts from landlords for tenant improvement allowances, be deposited in a lockbox account controlled by the lender. Provided the Company is not in default, it can draw from the lockbox an amount equal to all of the funds deposited in the lockbox less fees and expenses due the lender and a mandatory principal repayment equal to 2% of the funds deposited in the lockbox. The Company deposited $130,000 in the lockbox account as a mandatory principal payment at the time that the loan closed. At December 31, ~~2013~~ 2014, these funds remain in the lockbox and are unavailable to the Company to draw upon. As a result, the Company recorded a $130,000 reduction in the loan balance. At December 31, ~~2013~~2014, the Company had deposits in the lockbox account of approximately $652,000 available for draw under the revolving line of credit. Cash deposited in the lockbox by the Company in excess of fees and expenses due the lender and the mandatory 2% principal payment are recorded as a further reduction in the loan balance.

The outstanding principal balance of the loan, which is reduced by funds in the lockbox account, bears interest at 10% per annum and requires a surcharge in the form of a receipts collection fee such that the aggregate interest and receipts collection fee do not exceed 1.5% of the outstanding principal per month. In addition, the Company is obligated to pay an asset monitoring fee of $1,500 per quarter and certain other expenses of the lender. In connection with the initial closing of the revolving line of credit, the Company paid the lender fees for transaction advisory services, due diligence, legal review and related expenses and finder’s fees totaling $136,850 in cash. Additionally, the Company paid a financial advisory firm $26,000 in cash for services in connection with the loan.

In addition to the cash consideration, the Company issued 125,000 shares of its common stock to the lender. The common stock is subject to a make whole provision such that the value of the common stock issued to the lender is not less than nor can ever be more than $125,000. In August 2014, the Company and the lender entered in to an amendment pursuant to which the Company agreed to repurchase the 125,000 shares of stock at a rate of 10,000 shares per month from August 2014 to May 2015 and 25,000 shares in June 2015. The Company also issued fully vested three-year, callable warrants to three organizations affiliated to the financial advisory firm to purchase up to an aggregate of 39,000 shares of its common stock at an exercise price of $.78 per share in connection with the loan. Loan costs are included in prepaid expenses and ~~are~~were ~~being~~ amortized to interest expense over the initial six month term of the loan.

So long as the revolving note is outstanding, but only upon the occurrence and during the continuance of an event of default, and subject to certain limitations, the lender may convert all or any portion of the amounts due it into common stock of the Company. Beginning with the first quarter of 2014 the Company is subject to a financial covenant which requires that its sales revenue be not less than 75% of its sales revenue for the corresponding quarter of the prior year.

F - 1415

NOTE 5. NOTES PAYABLE

Notes payable consist of the following at December 31:

	2013			2012
	2014			2013
Financed insurance premiums	$	-		$	4,510
Equipment promissory notes	$	533,580		$	674,474
Equipment promissory notes		674,474			313,268
Tenant improvement secured loans		100,000			100,000
Tenant improvement secured loans		100,000			-
Unsecured promissory notes		2,163,156			300,000
Unsecured promissory notes		300,000			-
		2,796,736			1,074,474
		1,074,474			317,778
Less unamortized discount		–			(102,487	)
Less unamortized discount		(102,487	)		-
Less current portion (net of unamortized discounts)		(1,067,530	)		(716,531	)
Less current portion (net of unamortized discounts)		(716,531	)		(195,819	)
	$	1,729,206		$	255,456
	$	255,456		$	121,959

Financed Insurance Premiums

In ~~March~~January ~~2012~~2014, the Company entered into a financing agreement with an unrelated third party to finance the Company’s ~~directors~~medical malpractice, property and ~~officer~~casualty, and employment liability insurance ~~for~~over a period of 12nine months. The note, in the principal amount of $4499,~~200~~265, ~~bears~~bore interest at approximately 46.8725% per annum, and iswas repayable in 10one ~~monthly~~installment of $8,674 and eight installments of $411,~~519~~642. The note matured in ~~January~~September ~~2013~~2014 and ~~was~~is paid in full ~~at that time~~. ~~The balance outstanding on the note was $0 and $4,510 at December 31, 2013 and December 31, 2012, respectively.~~

In March 2014, the Company entered into a financing agreement with an unrelated third party to finance the Company’s directors and officer liability insurance over a period of nine months. The note, in the principal amount of $46,750, bore interest at approximately 7.68% per annum, and was repayable in nine monthly installments of $5,362. The note matured in December 2014 and is paid in full.

Equipment Promissory Notes

In November 2010, the Company entered into a financing agreement with an unrelated third party to finance computer and telephone equipment to upgrade existing systems and equip its clinic location in Montclair, California. The note, in the principal amount of $64,157, bears interest at approximately 6% per annum, and is repayable in 60 monthly ~~payments~~installments of $1,241. The note matures in October 2015 and is secured by a first priority purchase money security interest in the equipment. The ~~Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon. The~~ balance outstanding on the note was $2714,~~994~~417 and $4027,~~779~~994 at December 31, ~~2013~~2014 and December 31, ~~2012~~2013, respectively.

In February 2011, the Company entered into a financing agreement with an unrelated third party manufacturer to finance the purchase of a laser for the location in Montclair, California. The note, in the principal amount of $118,495, ~~bears~~bore interest at approximately 7% per annum, and iswas repayable in 36 monthly installments of $3,700. The note ~~matures~~matured in January 2014 and is was secured by a first priority purchase money security interest in the equipment. The ~~Company is required to maintain and insure the equipment secured by the~~ note ~~and~~was ~~pay~~paid ~~personal~~off ~~property~~in ~~taxes~~April ~~thereon~~2014. The balance outstanding on the note was $~~43,020~~0 and $5443,~~030~~020 at December 31, ~~2013~~2014 and December 31, ~~2012~~2013, respectively.

In May 2011, the Company entered into a financing agreement with an unrelated third party to finance computer and telephone equipment for its Dallas, Texas clinic and its call center in Irvine, California. The note, in the principal amount of $17,515, ~~bears~~bore interest at approximately 7% per annum, and iswas repayable in 36 monthly ~~payments~~installments of $539. The note ~~matures~~matured in June 2014 and ishas ~~secured~~been bypaid ~~a first priority purchase money security interest~~ in ~~the equipment~~full. The ~~Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon. The~~ balance outstanding on the note was $~~3,171~~0 and $93,~~201~~171 at December 31, ~~2013~~2014 and December 31, ~~2012~~2013, respectively.

F - 15

In June 2011, the Company entered into a financing agreement with an unrelated third party manufacturer to finance the purchase of a laser for the location in Dallas, Texas. The note, in the principal amount of $118,495, bears interest at approximately 7% per annum, and is repayable in 36 monthly installments of $3,700. The note matures in June 2014 and is secured by a first priority purchase money security interest in the equipment. The Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon. The balance outstanding on the note was $49,390 and $67,186 at December 31, 2013 and December 31, 2012, respectively.

In June 2012, the Company entered into a financing agreement with an unrelated third party to finance computer and telephone equipment for its Houston, Texas clinic and its clinic planned for Phoenix, Arizona. The note, in the principal amount of $37,870, bears interest at approximately 6% per annum, and is repayable in 36 monthly payments of $1,148. The note matures in May 2015 and is secured by a first priority purchase money security interest in the equipment. The Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon. The balance outstanding on the note was $18,697 and $31,008 at December 31, 2013 and December 31, 2012, respectively.

In June 2012, DRTHC I, LLC, a wholly-owned subsidiary of the Company, entered into a financing agreement with an unrelated third party manufacturer to finance the purchase of a laser for the location in Houston, Texas. The note, in the principal amount of $59,920, bears interest at approximately 7% per annum, and is repayable in 24 monthly installments of $2,683. The note matures in June 2014 and is secured by a first priority purchase money security interest in the equipment. The Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon. The balance outstanding on the note was $15,773 and $45,715 at December 31, 2013 and December 31, 2012, respectively.

In November 2012, DRTHC I, LLC, a wholly-owned subsidiary of the Company, entered into a financing agreement with an unrelated third party manufacturer to finance the purchase of a laser for the location in Phoenix, Arizona. The note, in the principal amount of $67,996, bears interest at approximately 7% per annum, and is repayable in 24 monthly installments of $3,044. The note matures in November 2014 and is secured by a first priority purchase money security interest in the equipment. The Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon. The balance outstanding on the note was $32,345 and $65,349 at December 31, 2013 and December 31, 2012, respectively.

In March 2013, the Company entered into a financing agreement with an unrelated third party to finance telephone equipment for its Sugar Land, Texas clinic and clinics planned for Fort Worth, Texas and Atlanta, Georgia. The note, in the principal amount of $29,347, bears interest at approximately 9% per annum, and is repayable in 36 monthly payments of $1,037. The note matures in February 2016 and is secured by a first priority purchase money security interest in the equipment. The Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon. The balance outstanding on the note was $22,538 and $0 at December 31, 2013 and December 31, 2012, respectively.

In March 2013, the Company entered into a financing agreement with an unrelated third party to finance computer equipment for its Sugar Land, Texas clinic and clinics planned for Fort Worth, Texas and Atlanta, Georgia. The note, in the principal amount of $37,524, bears interest at approximately 11% per annum, and is repayable in 36 monthly payments of $1,199. The note matures in February 2016 and is secured by a first priority purchase money security interest in the equipment. The Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon. The balance outstanding on the note was $28,590 and $0 at December 31, 2013 and December 31, 2012, respectively.

In March 2013, DRTHC I, LLC, a wholly-owned subsidiary of the Company, entered into a financing agreement with an unrelated third party manufacturer to finance the purchase of a laser for the Sugar Land, Texas clinic. The note, in the principal amount of $75,920, bears interest at approximately 7% per annum, and is repayable in 24 monthly installments of $3,399. The note matures in March 2015 and is secured by a first priority purchase money security interest in the equipment. The Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon. The balance outstanding on the note was $48,485 and $0 at December 31, 2013 and December 31, 2012, respectively. The Company relocated the laser to its Frisco, Texas clinic in March 2014.

In October 2013, DRTHC II, LLC, a wholly-owned subsidiary of the Company, entered into a financing agreement with an unrelated third party manufacturer to finance the purchase of lasers for the Atlanta, Georgia clinic. The note, in the principal amount of $114,000, bears interest at approximately 7% per annum, and is repayable in 24 monthly installments of $5,104. The note matures in November 2015 and is secured by a first priority purchase money security interest in the equipment. The Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon. The balance outstanding on the note was $109,561 and $0 at December 31, 2013 and December 31, 2012, respectively.

F - 16

In ~~October~~June ~~2013~~2011, ~~DRTHC I, LLC, a wholly-owned subsidiary of~~ the Company, entered into a financing agreement with an unrelated third party manufacturer to finance the purchase of a ~~hair~~laser ~~removal device~~ for the ~~Houston~~location in Dallas, Texas ~~clinic~~. The note, in the principal amount of $28118,~~000~~495, ~~bears~~bore interest at approximately 7% per annum, and iswas repayable in 2436 monthly installments of $13,~~254~~700. The note ~~matures~~was inset ~~November~~to ~~2015~~mature ~~and~~in isJune ~~secured~~2014 byand awas ~~first~~paid ~~priority~~off ~~purchase money security interest~~ in ~~the~~April ~~equipment~~2014. The ~~Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon. The~~ balance outstanding on the note was $~~26,910~~0 and $0 49,390 at December 31, ~~2013~~2014 and December 31, ~~2012~~2013, respectively.

In ~~December~~June ~~2013~~2012, the Company, entered into a financing agreement with an unrelated third party ~~manufacturer~~ to finance ~~the~~computer ~~purchase~~and oftelephone ~~three~~equipment ~~laser~~for ~~devices~~its ~~for~~Houston, Texas clinic and its ~~clinics~~clinic inplanned ~~Southern~~for ~~California~~Phoenix, Arizona. The note, in the principal amount of $~~248~~37,~~000~~870, bears interest at approximately 76% per annum, and is repayable in 2436 monthly installments of $111,~~104~~148. The note matures in ~~December~~May 2015 and is secured by a first priority purchase money security interest in the equipment. The ~~Company is required to maintain and insure the equipment secured by the note and pay personal property taxes thereon. The~~ balance outstanding on the note was $~~248~~5,~~000~~658 and $018,697 at December 31, ~~2013~~2014 and December 31, ~~2012~~2013, respectively.

~~Tenant~~In ~~Improvement~~June ~~Secured~~2012, ~~Loans~~DRTHC I, LLC, a wholly-owned subsidiary of the Company, entered into a financing agreement with an unrelated third party manufacturer to finance the purchase of a laser for the location in Houston, Texas. The note, in the principal amount of $59,920, bore interest at approximately 7% per annum, and was repayable in 24 monthly installments of $2,683. The note matured in June 2014 and has been paid in full. The balance outstanding on the note was $0 and $15,773 at December 31, 2014 and December 31, 2013, respectively.

In ~~February~~November ~~2013~~2012, ~~the~~DRTHC ~~Company~~I, ~~issued $200~~LLC,~~000~~ ina ~~notes,~~wholly-owned ~~secured~~subsidiary byof the ~~reimbursements~~Company, ~~due~~entered ~~from~~into ~~landlords~~a ~~with~~financing ~~respect~~agreement towith ~~tenant~~an ~~improvements~~unrelated ~~made~~third orparty manufacturer to befinance ~~made by~~ the ~~Company~~purchase inof ~~connection~~a ~~with~~laser for the ~~development~~location ofin ~~clinics~~Phoenix, Arizona. The ~~notes~~note, ~~bear~~in ~~interest~~the atprincipal ~~15%~~amount ~~and~~of ~~are~~$67,996, ~~were~~bore ~~initially~~interest ~~due~~at onapproximately ~~August~~7% 15per annum, ~~2013. As~~and ~~additional~~was ~~consideration~~repayable ~~for~~in ~~the~~24 ~~investors~~monthly ~~purchasing~~installments ~~the~~of ~~notes~~$3,044. ~~the~~The ~~Company issued the~~ note ~~holders~~was ~~fully~~scheduled ~~vested five-year warrants~~ to ~~purchase~~mature anin ~~aggregate~~November of2014 ~~218,750~~and ~~shares~~is ofsecured ~~the~~by ~~Company’s~~a ~~common~~first ~~stock~~priority atpurchase anmoney ~~exercise~~security ~~price~~interest ofin ~~$.60~~the ~~per share~~equipment. ~~The~~Effective ~~relative~~September ~~fair~~1, ~~values~~2014, of the ~~warrants~~parties atrenegotiated the ~~time~~loan ~~of issuance, determined by management~~ to beextend ~~$49,454 in~~ the ~~aggregate,~~term ~~were~~to ~~recorded~~March as2017 ~~a debt discount~~ and ~~will~~increase bethe ~~amortized to~~ interest ~~expense~~rate ~~over~~to ~~the~~10% ~~term~~per ~~of the notes~~annum. The ~~Company~~new ~~estimated~~installment ~~the~~amount ~~fair~~is ~~value~~$533 ofper ~~the~~month. ~~warrants~~The ~~issued~~balance ~~based~~outstanding ~~upon~~ on the ~~application~~note ofwas ~~the Black-Scholes option pricing model using the following assumptions: value of common share of~~ $~~.49~~12,422 ~~strike~~and ~~price~~ $~~.60~~32,345 ~~expected~~at ~~life~~December of31, ~~five~~2014 ~~years; risk free interest rate of .08%; volatility of 72%~~ and ~~expected~~December ~~dividend~~31, ~~yield~~2013, ~~of zero~~respectively.

In ~~July~~March 2013, the Company ~~issued~~entered ~~five-year~~into ~~fully~~a ~~vested~~financing ~~warrants~~agreement towith ~~purchase~~an ~~220,000~~unrelated ~~shares~~third ofparty ~~Company~~to ~~common~~finance ~~stock~~telephone atequipment anfor ~~exercise~~its ~~price~~Sugar ofLand, ~~$.60~~Texas ~~per~~clinic ~~share~~(which towas ~~the~~subsequently ~~note~~moved ~~holders in exchange for their agreement~~ to ~~extend~~Frisco, ~~the~~Texas) ~~original~~and ~~due~~clinics ~~date~~planned ~~from~~for ~~August~~Fort 15Worth, ~~2013~~Texas toand ~~December 31~~Atlanta, ~~2013~~Georgia. The ~~relative~~note, ~~fair~~in ~~values of~~ the ~~warrants~~principal atamount ~~the time~~ of ~~issuance~~$34,563 ~~determined~~bears byinterest ~~management~~at toapproximately be9% ~~$52,500~~per ~~in the aggregate~~annum, ~~were recorded as a debt discount~~ and ~~will~~is berepayable ~~amortized~~in to36 ~~interest~~monthly ~~expense~~payments ~~over the remaining term~~ of ~~the notes~~$1,037. The ~~Company~~note ~~estimated~~matures ~~the~~in ~~fair~~March ~~value~~2016 ofand ~~the~~is ~~warrants~~secured ~~issued~~by ~~based~~a ~~upon~~first ~~the~~priority ~~application~~purchase ofmoney ~~the~~security ~~Black-Scholes~~interest ~~option~~in ~~pricing model using~~ the ~~following~~equipment. The ~~assumptions:~~balance ~~value~~outstanding ofon ~~common~~the ~~share~~note ofwas $~~.49~~14,401 ~~strike~~and ~~price~~ $~~.60~~22,538 ~~expected~~at ~~life~~December of31, ~~five~~2014 ~~years; risk free interest rate of 1.42%; volatility of 63%~~ and ~~expected~~December ~~dividend~~31, ~~yield~~2013, ~~of zero~~respectively.

In ~~December~~March 2013, the Company ~~repaid~~entered ~~$100,000~~into ~~principal~~a ~~amount~~financing ofagreement ~~its tenant improvement secured loans together~~ with ~~interest~~an ~~due~~unrelated ~~thereon~~third ofparty ~~approximately $15,238~~ to ~~three~~finance ~~note~~computer ~~holders,~~equipment ~~one~~for ofits ~~whom~~Sugar ~~is an officer of the Company~~Land, ~~and~~Texas ~~entered~~clinic ~~into~~which ~~extension~~was ~~agreements~~subsequently ~~with~~moved ~~respect~~ to ~~the remaining outstanding balance of $100~~Frisco,~~000.~~ InTexas ~~exchange~~(a ~~for~~suburb ~~an extension~~ of ~~the~~Dallas) ~~due~~and ~~date~~clinics ofplanned ~~the~~for ~~notes~~Fort ~~through March 31~~Worth, ~~2014,~~Texas ~~the~~and ~~Company issued the note holders fully vested five-year warrants to purchase an aggregate of 115~~Atlanta,~~240~~ ~~shares of the Company’s common stock at an exercise price of $~~Georgia.~~60 per share.~~ The ~~fair~~note, ~~value~~in of the ~~warrants~~principal atamount ~~the time~~ of ~~issuance, determined by management to be~~ $2737,~~700 in the aggregate~~524, ~~was~~bears ~~recorded~~interest asat ~~additional~~approximately ~~debt~~11% ~~discount~~per annum, and ~~will~~is berepayable ~~amortized~~in to36 ~~interest~~monthly ~~expense~~installments ~~over the term~~ of ~~the extension~~$1,199. The ~~Company~~note ~~estimated~~matures ~~the~~in ~~fair~~February ~~value~~2016 ofand ~~the~~is ~~warrants~~secured ~~issued~~by ~~based~~a ~~upon~~first ~~the~~priority ~~application~~purchase ofmoney ~~the~~security ~~Black-Scholes~~interest ~~option~~in ~~pricing model using~~ the ~~following~~equipment. The ~~assumptions:~~balance ~~value~~outstanding ofon ~~common~~the ~~share~~note ofwas $~~.49~~16,746 ~~strike~~and ~~price~~ $~~.60~~28,590 ~~expected~~at ~~life~~December of31, ~~five~~2014 ~~years; risk free interest rate of 1.73%; volatility of 63%~~ and ~~expected~~December ~~dividend~~31, ~~yield~~2013, ~~of zero~~respectively.

~~Amortization~~In March 2013, DRTHC I, LLC, a wholly-owned subsidiary of the ~~debt~~Company, ~~discount~~entered into a financing agreement with an unrelated third party manufacturer to finance the purchase of a laser for the Sugar Land, Texas clinic (which was subsequently moved to Frisco, Texas). The note, in the principal amount of $~~101~~75,~~954~~920, ~~for~~bore interest at approximately 7% per annum, and was repayable in 24 monthly installments of $3,399. The note was scheduled to mature in March 2015 and is secured by a first priority purchase money security interest in the ~~year~~equipment. Effective ~~ended~~September ~~December~~1, 312014, ~~2013~~the parties renegotiated the loan to extend the term to March 2017 and increase the interest rate to 10% per annum. The new installment amount is $01,134 ~~for~~per month. The balance outstanding on the ~~year~~note ~~ended~~was $26,407 and $48,485 at December 31, ~~2012~~2014and December 31, 2013, respectively.

In October 2013, DRTHC II, LLC, a wholly-owned subsidiary of the Company, entered into a financing agreement with an unrelated third party manufacturer to finance the purchase of lasers for the Atlanta, Georgia clinic. The note, in the principal amount of $114,000, bore interest at approximately 7% per annum, and was repayable in 24 monthly installments of $5,104. The note was scheduled to mature in November 2015 and is secured by a first priority purchase money security interest in the equipment. Effective September 1, 2014, the parties renegotiated the loan to extend the term to March 2017 and increase the interest rate to 10% per annum. The new installment amount is $3,151 per month. The balance outstanding on the note was $73,388 and $109,561 at December 31, 2014 and December 31, 2013, respectively.

F - 17

In October 2013, DRTHC I, LLC, a wholly-owned subsidiary of the Company, entered into a financing agreement with an unrelated third party manufacturer to finance the purchase of a hair removal device for the Houston, Texas clinic. The note, in the principal amount of $28,000, bore interest at approximately 7% per annum, and was repayable in 24 monthly installments of $1,254. The note was scheduled to mature in November 2015 and is secured by a first priority purchase money security interest in the equipment. Effective September 1, 2014, the parties renegotiated the loan to extend the term to March 2017 and increase the interest rate to 10% per annum. The new installment amount is $774 per month. The balance outstanding on the note was $18,025 and $26,910 at December 31, 2014 and December 31, 2013, respectively.

In December 2013, the Company, entered into a financing agreement with an unrelated third party manufacturer to finance the purchase of three laser devices for its clinics in Southern California. The note, in the principal amount of $248,000, bore interest at approximately 7% per annum, and was repayable in 24 monthly installments of $11,104. The note was scheduled to mature in December 2015 and is secured by a first priority purchase money security interest in the equipment. Effective September 1, 2014, the parties renegotiated the loan to extend the term to March 2017 and increase the interest rate to 10% per annum. The new installment amount is $7,238 per month. The balance outstanding on the note was $168,560 and $248,000 at December 31, 2014 and December 31, 2013, respectively.

In May 2014, the Company, entered into a financing agreement with an unrelated third party manufacturer to finance computer equipment for its Fort Worth, Texas clinic. The note, in the principal amount of $4,625, bears interest at approximately 13.8% per annum, and is repayable in 36 monthly installments of $157. The note matures in April 2017 and is secured by a first priority purchase money security interest in the equipment. The balance outstanding on the note was $3,755 and $0 at December 31, 2014 and December 31, 2013, respectively.

In June 2014, the Company, entered into a financing agreement with an unrelated third party manufacturer to finance the purchase of laser and hair removal devices for the Ft. Worth, Texas and Inland Empire, California clinics. The note, in the principal amount of $210,000, bore interest at approximately 7% per annum, and was repayable in 24 monthly installments of $9,402. The note was scheduled to mature in May 2016 and is secured by a first priority purchase money security interest in the equipment. Effective September 1, 2014, the parties renegotiated the loan to extend the term to March 2017 and increase the interest rate to 10% per annum. The new installment amount is $7,702 per month. The balance outstanding on the note was $179,800 and $0 at December 31, 2014 and December 31, 2013, respectively.

All of the equipment promissory notes require the Company to maintain and insure the equipment secured by the note and pay personal property taxes thereon.

Tenant Improvement Secured Loans

In February 2013, the Company issued $200,000 in notes, secured by the reimbursements due from landlords with respect to tenant improvements made or to be made by the Company in connection with the development of clinics. The notes bear interest at 15% and were initially due on August 15, 2013. As additional consideration for the investors purchasing the notes, the Company issued the note holders fully vested five-year warrants to purchase an aggregate of 218,750 shares of the Company’s common stock at an exercise price of $.60 per share. The fair values of the warrants at the time of issuance, determined by management to be $49,454 in the aggregate, were recorded as a debt discount and were amortized to interest expense over the initial term of the notes. The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, strike price $.60, expected life of five years; risk free interest rate of .08%; volatility of 72% and expected dividend yield of zero.

In July 2013, in exchange for their agreement to extend the original due date from August 15, 2013 to December 31, 2013, the Company issued five-year fully vested warrants to purchase 220,000 shares of Company common stock at an exercise price of $.60 per share to the note holders. The fair values of the warrants at the time of issuance, determined by management to be $52,500 in the aggregate, were recorded as a debt discount and were amortized to interest expense over the extended term of the notes.

F - 18

In December 2013, the Company repaid $100,000 principal amount of its tenant improvement secured loans together with interest due thereon of approximately $15,238 to three note holders, one of whom is an officer of the Company, and entered into extension agreements with respect to the remaining outstanding balance of $100,000. In exchange for an extension of the due date of the notes through March 31, 2014, the Company issued the note holders fully vested five-year warrants to purchase an aggregate of 115,240 shares of the Company’s common stock at an exercise price of $.60 per share. The fair value of the warrants at the time of issuance, determined by management to be approximately $27,700 in the aggregate, was recorded as additional debt discount and amortized to interest expense over the term of the extension. On April 1, 2014, the Company entered into further extension agreements with respect to the loans. In exchange for an extension of the due date of the notes through September 30, 2014, the Company issued the note holders fully vested five-year warrants to purchase an aggregate of 239,353 shares of the Company’s common stock at an exercise price of $.60 per share. The fair value of the warrants at the time of issuance, determined by management to be $53,200 in the aggregate, was recorded as additional debt discount and was amortized to interest expense over the term of the extension. On October 1, 2014, the Company entered into further extension agreements with respect to the loans, extending the due date to December 31, 2014. The note holders agreed to the extension for no additional consideration. The outstanding balance of the tenant improvement secured loans was $100,000 at December 31, 2014 and December 31, 2013.

Amortization of the debt discount related to the tenant improvement secured loan was $80,916 for the twelve months ended December 31, 2014 and $101,954 for the year ended December 31, 2013.

F - 19

Unsecured Promissory Notes

In August 2013, the Company issued $120,000 in unsecured promissory notes to three members of its Board of Directors, their families, associates or associated entities. The notes bear interest at 15% and were initially due on December 31, 2013. As additional consideration for the investors purchasing the notes, the Company issued the note holders fully vested five-year warrants to purchase an aggregate of 120,000 shares of the Company’s common stock at an exercise price of $.60 per share. The ~~relative~~ fair values of the warrants at the time of issuance, determined by management to be $22,800 in the aggregate, were recorded as a debt discount and were amortized to interest expense over the initial term of the notes. The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, strike price $.60, expected life of five years; risk free interest rate of 1.48%; volatility of 63% and expected dividend yield of zero. Amortization of the debt discount was $22,800 for the year ended December 31, 2013 and $0 for the year ended December 31, 2012.

In October 2013, the Company issued $200,000 in unsecured promissory notes to a 5% shareholder. The ~~notes~~note ~~bear~~bears interest at 15% and ~~were~~was initially due on December 31, 2013. As additional consideration for the ~~investors~~investor purchasing the ~~notes~~note, the Company issued the note ~~holders~~holder fully vested five-year warrants to purchase an aggregate of 200,000 shares of the Company’s common stock at an exercise price of $.60 per share. The ~~relative~~ fair values of the warrants at the time of issuance, determined by management to be $38,000 in the aggregate, were recorded as a debt discount and were amortized to interest expense over the initial term of the notes. The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, strike price $.60, expected life of five years; risk free interest rate of 1.48%; volatility of 63% and expected dividend yield of zero. Amortization of the debt discount was $38,000 for the year ended December 31, 2013 and $0 for the year ended December 31, 2012.

In December 2013, the Company repaid $20,000 principal amount of its unsecured promissory notes together with interest due thereon of approximately $1,159 to one note holder, an officer of the Company, and entered into extension agreements with respect to the remaining outstanding balance of unsecured promissory notes of $300,000. In exchange for an extension of the due date of the notes through March 31, 2014, the Company issued the note holders fully vested five-year warrants to purchase an aggregate of 310,893 shares of the Company’s common stock at an exercise price of $.60 per share. The fair value of the warrants at the time of issuance, determined by management to be $74,771 in the aggregate, was recorded as additional debt discount and ~~will be~~ was amortized to interest expense over the term of the extension. ~~The~~In ~~Company~~exchange ~~estimated~~for ~~the~~a ~~fair~~further ~~value~~extension of the ~~warrants~~due ~~issued~~date ~~based~~of the ~~upon~~notes through September 30, 2014, the ~~application~~Company ofissued the ~~Black-Scholes~~note ~~option~~holders ~~pricing~~fully ~~model~~vested ~~using~~five-year ~~the~~warrants ~~following~~to ~~assumptions:~~purchase an ~~value~~aggregate of 643,973 shares of the Company’s common ~~share~~stock at an exercise price of $.4960 per share. The fair value of the warrants at the time of issuance, ~~strike~~determined ~~price~~by management to be $~~.60~~143,000 ~~expected~~in ~~life~~the ofaggregate, ~~five~~was ~~years;~~recorded ~~risk~~as ~~free~~additional debt discount and was amortized to interest ~~rate~~expense over the term of the extension. On October 1, 2014, the Company entered into further extension agreements with respect to the loans, extending the due date to December 31, 2014.~~73%;~~ ~~volatility~~The ofnote ~~63%~~holders agreed ~~and~~to ~~expected~~the ~~dividend~~extension ~~yield~~for no additional consideration. In 2015, the maturity date of ~~zero~~the notes was extended to January 1, 2016. Amortization of the debt discount related to the ~~extension~~2013 unsecured promissory notes and their extensions was $0217,771 for the year ended December 31, 2014 and $60,800 for the year ended December 31, 2013.

In February, March, and April, 2014 the Company issued $950,000 of short-term unsecured promissory notes. The short-term unsecured promissory notes were issued to Board members and their affiliates, and certain parties who are already lenders or investors in the Company. The purpose of the offering was to provide immediate funds to support the opening of new clinics in Frisco and Ft. Worth, Texas and additional marketing while the Company works to complete a convertible debt offering. The notes matured on April 30, 2014, and bore interest at 15% per annum, and were planned to be repaid from the proceeds of a $2 million convertible debt offering. As additional consideration for the lenders, the Company agreed to issue equity to the lenders depending upon the date of repayment of the loan. In June 2014, the Company issued an additional $100,000 of the short-term unsecured promissory notes under similar terms, with the maturity and other target dates adjusted to reflect the later date of issuance. During 2014, the Company issued 2,000,000 shares of its common stock to the note holders as the payments became due. The Company recorded expense related to the issued shares at an estimated fair value of $0.40-$0.49 per share, which was charged to interest expense and costs of financing in the accompanying consolidated statements of operations. In December 2014, the Company entered into an amendment with all of the holders of these short-term unsecured promissory notes. Pursuant to the amendment, the holders agreed to extend the due date of the loan and extended the dates upon which interest to be paid in shares of Company common stock or as repayment premium would be due. Pursuant to the amended terms, the maturity date has been extended to January 1, 2016 when all principal and interest, including interest in the form of common stock, will be due. The Company also redeemed the 2,000,000 shares that had previously been issued to the holders. The Company recorded the redemption at an estimated fair value of $0.33 per share. The note holders earned four shares of common stock and a repayment premium equal to 100% of the principal amount on March 31, 2015 as the notes remained unpaid on that date. In the event that the notes are not repaid on the maturity date, the holders will be entitled to an additional one-quarter of one share of common stock and repayment premium equal to 10% for each dollar loaned to the Company.

At December 31, 2014 the balance of the these notes included in the accompanying consolidated balance sheets was approximately $3,119,000. The balance consists of the present value of the principal, of 4,200,000 shares of common stock at an estimated fair value of $0.33 per share, and of the repayment premium earned as of March 31, 2015. The discount from face value of approximately $639,000 will be charged to interest expense and costs of financing over the year remaining to maturity.

The short-term unsecured promissory notes remain unpaid as of the date hereof.

F - 20

From July to December 2014, the Company issued $813,156 in additional short-term notes to an officer and two significant shareholders. The notes are included in notes payable, current portion (net of unamortized discount) in the accompanying consolidated balance sheets. The notes bear interest at 15% per annum and are due on demand.

The following table sets forth the future maturities of the Company’s outstanding notes payable, net of unamortized discount:

	Year ended December 31,
	2014	$	716,531
2015			$	1,067,530
	2015		250,016
2016				1,688,001
	2016		5,440
2017				41,205
Total	~~Total~~	$	~~971,987~~$	2,796,736

F - 1821

NOTE 6. CONVERTIBLE PROMISSORY NOTES

Convertible promissory notes payable consist of the following at December 31:

	2013			2012
	2014			2013
Secured senior subordinated convertible promissory notes	$	892,500		$	~~592~~892,500
Senior subordinated convertible promissory notes		~~585~~685,000			-585,000
		1,477,500			592,500
		1,577,500			1,477,500
Less unamortized discount		(~~201~~36,~~125~~949	)		(~~139~~201,~~721~~125	)
Less current portion (net of unamortized discounts)		(~~947~~373,~~987~~051	)		-(947,987	)
	$	~~328~~1,~~388~~167,500		$	~~452~~328,~~779~~388

Secured Senior Subordinated Convertible Promissory Notes

InBetween May 2012, ~~August 2012, September 2012, October 2012~~ and January 2013, the Company issued $~~200~~892,~~000, $255,000, $50,000, $87,~~500 ~~and~~ ~~$300,000~~ of secured senior subordinated convertible promissory notes, respectively to two members of the Company’s Board of Directors, their associates or associated entities, and others. The notes are convertible at the option of the holder at any time during the term of the note into common stock of the Company at an initial conversion price of $.60 per share, subject to adjustment for stock splits or subdivisions. The notes bear interest at 12% per annum, ~~are~~ which interest is payable quarterly, and are due at maturity. The notes ~~mature~~matured in May 2014 or mature December 2015 (with respect to the $300,000 of notes issued in January 2013) and are secured by a first priority lien on the ownership interest of the Company in its wholly-owned subsidiary DRTHC I, LLC or DRTHC II, LLC (with respect to the notes issued in January 2013). The balance outstanding on the notes was $892,500 ~~and $592,500~~ at December 31, ~~2013~~2014 and December 31, ~~2012 respectively~~2013. As As additional consideration for the investors purchasing the notes, the Company issued the note holders five-year warrants to purchase an aggregate of 1,115,625 shares of the Company’s common stock at an exercise price of $.75 per share. The fair values of the warrants at the time of issuance, determined by management to be $217,225 in the aggregate, were recorded as a debt discount and amortized to interest expense over the initial term of the notes. The notes also contained a beneficial conversion feature determined by management to be $45,066 in the aggregate which was recorded as a debt discount which was amortized to interest expense over the initial term of the notes. In May 2014, the Company entered into agreements with holders of $492,500 of the notes to extend the term to December 31, 2014. The Company issued the extending holders five year fully vested warrants to purchase 985,000 shares of common stock at a purchase price of $.60 per share. The fair value of the warrants at the time of issuance, determined by management to be $217,500 in the aggregate, was recorded as a debt discount and was amortized to interest expense over the term of the extension. Amortization of the debt discount was $283,273 for the year ended December 31, 2014 and $129,282 for the year ended December 31, 2013. In 2015, the holders of $792,500 in principal amount of notes agreed to extend the maturity date to January 1, 2016. One holder of $100,000 in notes refused to extend the due date. The Company is working with the note holder on a plan of repayment.

~~The~~F relative fair values of the warrants at the time of issuance, determined by management to be $217,225 in the aggregate, were recorded as a debt discount and will be amortized to interest expense over the term of the notes. The Company estimated the fair value of the warrants issued based upon the application of the Black-~~Scholes~~ option pricing model using the following assumptions: value of common share of $.49, strike price $.75, expected life of five years; risk free interest rate of .52-.72%; volatility of 72% and expected dividend yield of zero. The notes also contained a beneficial conversion feature determined by management to be $45,066 in the aggregate which was recorded as a debt discount and will be amortized to interest expense over the term of the notes. Amortization of the debt discount was $129,282 for the year ended December 31, 2013 and $39,570 for the year ended December 31, 2012.22

F - 19

Senior Subordinated Convertible Promissory Notes

InBetween May 2013, ~~June 2013~~ and July 2013, the Company issued $~~250~~485,000, ~~$200,000, and $35,000, respectively,~~ of senior subordinated convertible promissory notes to two members of the Company’s Board of Directors, two 5% shareholders, and others. The notes are convertible at ~~the~~ the option of the holder at any time during the term of the note into common stock of the Company at an initial conversion ~~price~~ price of $.65 per share, subject to adjustment for stock splits or subdivisions. The notes are mandatorily ~~convertible~~ convertible in the event of a Qualified Transaction (as defined in the notes) and the conversion price is adjustable to the lower of 75% of the price of a share of common stock sold in the Qualified Transaction or $.65. The notes bear interest at 7% per annum, are payable upon conversion or at maturity. The notes ~~mature~~matured November 1, 2014 and are unsecured. AsIn 2015, holders of $450,000 in principal amount of the notes agreed to extend the maturity date to January 1, 2016. The Company is seeking an extension with respect to the remaining notes. As additional consideration for the investors purchasing the notes, the Company issued the note holders fully vested three-year warrants to purchase an aggregate of 746,157 shares of the Company’s common stock at an exercise price equal to the lower of 120% of the conversion price or $.78 per share. The balance outstanding on the notes was $485,000 at December 31, 2014 and December 31, 2013. The fair values of the warrants at the time of issuance, determined by management to be $92,283 in the aggregate, were recorded as a debt discount and was amortized to interest expense over the initial term of the notes. Amortization of the debt discount was $91,408 for the year ended December 31, 2014 and $875 for the year ended December 31, 2013.

Between September 2013 and January 2014, the Company issued $125,000 of senior subordinated convertible promissory notes to investors. The ~~relative~~notes ~~fair~~are ~~values~~convertible at the option of the ~~warrants~~holder at ~~the~~any time during the term of ~~issuance,~~the ~~determined~~note byinto ~~management~~common tostock beof the Company at an initial conversion price of $92.65 per share,~~283~~ subject to adjustment for stock splits or subdivisions. The notes are mandatorily convertible in the ~~aggregate,~~event ~~were recorded~~of a Qualified Transaction (as adefined ~~debt~~in ~~discount~~the notes) and ~~will~~the beconversion ~~amortized~~price is adjustable to ~~interest~~the ~~expense~~lower ~~over~~of 75% of the ~~term~~price of a share of common stock sold in the Qualified Transaction or $.65. The notes bear interest at 7% per annum, payable upon conversion or at maturity. The ~~Company~~notes matured in March 2015 and are unsecured. ~~estimated~~As additional consideration for the ~~fair~~investor ~~value~~purchasing ofthe notes, the ~~warrants~~Company issued ~~based~~the ~~upon~~note ~~the~~holders ~~application~~fully vested three-year warrants to purchase an aggregate of 192,308 shares of the ~~Black-Scholes~~Company’s ~~option~~common ~~pricing~~stock ~~model~~at ~~using~~an exercise price equal to the lower of 120% of the ~~following~~conversion ~~assumptions:~~price ~~value~~or of$.78 ~~common~~per share. ofThe balance outstanding on the notes was $~~.49~~125,000 ~~strike~~at ~~price~~December 31, 2014 and $~~.78~~100,000 ~~expected~~at ~~life~~December of31, ~~three~~2013, ~~years;~~respectively. ~~risk~~The ~~free~~fair ~~interest rate~~values of ~~.58%;~~the ~~volatility~~warrants at the time of ~~63%~~issuance, determined by management to be approximately $22,000 in the aggregate, were recorded as a debt discount and ~~expected~~will ~~dividend~~be ~~yield~~amortized to interest expense over the initial term of ~~zero~~the notes. Amortization of the debt discount was $~~875~~16,409 for the year ended December 31, 2014 ~~2013~~ and $01,721 for the year ended December 31, ~~2012~~2013. The Company is seeking an extension of the maturity date from the holders.

In ~~September~~ ~~2013~~June 2014, the Company issued $5075,000 of senior subordinated convertible promissory notes ~~to an investor~~. The notes are convertible at the option of the holder at any time during the term of the note into common stock of the Company at an initial conversion price of $.65 per share, subject to adjustment for stock splits or subdivisions. The notes are mandatorily convertible in the event of a Qualified Transaction (as defined in the notes) and the conversion price is adjustable to the lower of 75% of the price of a share of common stock sold in the Qualified Transaction or $.65. The notes bear interest at 7% per annum, payable upon conversion or at maturity. The notes mature in ~~February~~November 2015 and are unsecured. As additional consideration for the investor purchasing the notes, the Company issued the note ~~holder~~holders fully vested three-year warrants to purchase an aggregate of 76115,~~923~~386 shares of the Company’s common stock at an exercise price equal to the lower of 120% of the conversion price or $.78 per share. The balance outstanding on the notes was $5075,000 at December 31, 2014 and $0 at December 31, 2013. The fair values of the warrants at the time of issuance, determined by management to be approximately $9,600 in the aggregate, were recorded as a debt discount and will be amortized to interest expense over the term of the notes. Amortization of the debt discount was $4,200 for the year ended December 31, 2014 and $0 for the year ended December 31, 2013.

~~The~~F relative fair values of the warrants at the time of issuance, determined by management to be $9,000 in the aggregate, were recorded as a debt discount and will be amortized to interest expense over the term of the notes. The Company estimated the fair value of the warrants issued based upon the application of the Black-~~Scholes~~ option pricing model using the following assumptions: value of common share of $.49, strike price $.78, expected life of five years; risk free interest rate of .63%; volatility of 63% and expected dividend yield of zero. Amortization of the debt discount was $1,566 for the year ended December 31, 2013 and $0 for the year ended December 31, 2012.23

~~In December 2013, the Company issued $50,000 of senior subordinated convertible promissory notes.~~ The ~~notes~~following ~~are~~table ~~convertible~~sets atforth the ~~option~~future ofmaturities ~~the holder at any time during the term~~ of the ~~note into common stock of the~~ Company’s ~~at an initial conversion price of $.65 per share, subject to adjustment for stock splits or subdivisions. The notes are mandatorily~~ convertible inpromissory ~~the event of a Qualified Transaction (as defined in the~~ notes) ~~and~~net ~~the conversion price is adjustable to the lower~~ of ~~75%~~unamortized ofdiscount ~~the price of a share of common stock sold in the Qualified Transaction or $.65. The notes bear interest~~ at 7% per annum, payable upon conversion or at maturity. The notes mature in March 2015 and are unsecured. As additional consideration for the investor purchasing the notes, the Company issued the note holder fully vested three-year warrants to purchase an aggregate of 76,923 shares of the Company’s common stock at an exercise price equal to the lower of 120% of the conversion price or $.78 per share. The balance outstanding on the notes was $50,000 at December 31, ~~2013.~~2014:

The relative fair values of the warrants at the time of issuance, determined by management to be $9,000 in the aggregate, were recorded as a debt discount and will be amortized to interest expense over the term of the notes. The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, strike price $.78, expected life of five years; risk free interest rate of .63%; volatility of 63% and expected dividend yield of zero. Amortization of the debt discount was $155 for the year ended December 31, 2013 and $0 for the year ended December 31, 2012.


Year ended
December 31,
2015	$	373,051
2016		1,167,500
Total	$	1,540,551

F - 20

The following table sets forth the future maturities of the Company’s convertible promissory notes net of unamortized discount at December 31, 2013:

Year ended December 31,
2014		947,987
2015		328,388
Total	$	1,276,375

NOTE 7. CAPITAL LEASE OBLIGATIONS (RELATED PARTY)

Capital lease obligations (related party) consisted of the following at December 31:

	2013			2012
	2014			2013
$199,610 capital lease obligation on equipment. The lease bears interest at 9.65%, is payable monthly in principal and interest installments of $2,704 and matures in May 2018.	$	5343,~~916~~630		$	~~134~~53,~~827~~916
$69,200 capital lease obligation on equipment. The lease bore interest at 14.95%, was payable monthly in principal and interest installments of $1,644 and matured in May 2013. In April, 2013, the Company purchased the assets from the related party lessor.		-			7,920
Total capital lease obligations		43,630			53,916
$57,750 capital lease obligation on equipment. The lease bore interest at 9.15%, was payable monthly in principal and interest installments of $1,203 and matured in May 2013. In April 2013, the Company purchased the assets from the related party lessor.		-			7,029
Less current portion		(11,323	)		(10,286	)
$72,375 capital lease obligation on equipment. The lease bore interest at 9.11%, was payable monthly in principal and interest installments of $2,123 and matured in April 2014. In April 2013, the Company purchased the assets from the related party lessor.		-			21,758
Long-term portion	$	32,307		$	43,630
Total capital lease obligations		53,916			171,534
Less current portion		(10,286	)		(50,574	)
Long-term portion	$	43,630		$	120,960

The future minimum capital lease payments are as follows for the years ending December 31:

2014	$	15,041
2015	$	15,041
2015		15,041
2016		15,041
2017		15,041
2018		6,267
Total minimum lease payments		6651,~~431~~390
Less amount representing interest		(127,~~515~~760	)
Present value of minimum lease payments		5343,~~916~~630
Less current portion		(1011,~~286~~323	)
Long-term portion	$	4332,~~630~~307

F - 2124

NOTE 8. RELATED PARTY TRANSACTIONS

Management Services Agreement

The Company and William Kirby D.O., Inc. operate under a management agreement entered into effective January 1, 2010, whereby the Company provides technical, management, administrative, marketing, support services and equipment to the sites where William Kirby D.O., Inc. provides or supervises tattoo removal services. The agreement covers four clinics in southern California operated by the Company. The Company had a $0 ~~and $189,484~~ receivable due from William Kirby D.O., Inc. at December 31, ~~2013~~2014 and December 31, ~~2012, respectively~~2013.

Pursuant to the Management Services Agreement, the Company provides certain non-medical management, administrative, marketing and support services to the clinics where William Kirby, D.O., Inc. provides or supervises laser tattoo and hair removal services, which such services include employment of all non-licensed administrative personnel including an on-site manager and receptionist for each site and all support personnel such as accounting, information technology, human resources, purchasing and maintenance. The Company also provides certain supplies, furniture and equipment used at the clinics. The Company is also responsible for identifying and leasing the clinic locations and paying all rent, utilities and maintenance costs related thereto. Under the Management Services Agreement, the Company also arranges third party marketing and advertising for the clinics.

Medical Director Agreement

Effective January 1, 2010, the Company entered into a Medical Director Agreement with William Kirby, D.O., Inc. and Dr. Kirby, under which the Company receives administrative, consultative and strategic services from William Kirby, D.O. The initial term of the agreement iswas for five years, toand beit ~~followed~~expired byeffective ~~automatic~~as ~~renewal terms~~ of ~~five~~December ~~years~~31, ~~each~~2014. The agreement ~~provides~~provided for an annual payment of $250,000 to William Kirby, D.O. for these services. The Company’s unpaid current obligation under the Medical Director Agreement was $20,833 and $0 at December 31, ~~2013~~2014 and ~~2012~~2013, respectively. The unpaid amounts are included in related party payables in the accompanying consolidated balance sheets.

Lease ~~Guarantees~~ Arrangements

~~William~~The ~~Kirby,~~IPL ~~D.O.,~~device ~~Inc.~~currently ~~was~~used ~~the named lessee under the lease for the clinic located~~ in ~~Encino,~~one ~~California. Dr.~~of ~~Kirby personally guaranteed~~ the ~~lessee~~Company’s ~~obligations~~clinics ~~under~~is ~~the~~owned ~~Beverly~~by ~~Hills,~~William ~~Encino and Irvine~~Kirby, ~~California leases~~D. ~~The Company and landlord amended the Beverly Hills~~O., ~~California lease in February 2013~~Inc. ~~The~~pursuant ~~amendment~~to ~~extended~~a ~~the~~financing ~~term~~agreement bywith ~~five~~a ~~years~~third ~~and~~party ~~released~~financing Drsource. In ~~Kirby’s guarantee obligations. The Encino lease was terminated as of February 28~~addition, ~~2013~~under ~~and~~ the ~~operations~~Management ~~moved~~Services ~~to a new location. On July 21~~Agreement, ~~2011,~~ the Company ~~transferred~~has ~~its operations from~~ the ~~clinic~~right, ~~located~~at inany ~~Irvine~~time, ~~California~~ to apurchase ~~clinic~~the ~~located~~equipment infrom ~~Santa Ana, California.~~ William Kirby, D.O., Inc. ~~was~~at ~~the~~a ~~named lessee~~purchase ~~under~~price ~~the~~of ~~lease for~~ the ~~clinic~~amount ~~located~~outstanding, inif ~~Irvine~~any, ~~California, and Dr. Kirby personally guaranteed the lessee’s obligations~~ under ~~such lease. The Company continues to occupy~~ the ~~space~~applicable infinancing ~~Irvine, where it operates a call center and maintains administrative offices~~agreement. The Company ~~(or~~has ~~one~~accounted offor ~~its~~this ~~wholly-owned~~as ~~subsidiaries)~~a iscapital ~~the~~lease ~~named lessee~~based ~~under~~on the ~~lease~~agreement ~~for all of its clinic leases~~terms.

Dr. Kirby also guaranteed certain of the Company’s equipment leases until they were refinanced in June 2008. The IPL devices currently used in three of the Company’s clinics are owned or leased by William Kirby, D.O., Inc. pursuant to various capitalized lease and/finance agreements with third party financing sources. In addition, under the Management Services Agreement, the Company has the right, at any time, to purchase the equipment from William Kirby, D.O., Inc. at a purchase price of the amount outstanding, if any, under the applicable financing agreement. The Company has accounted for these leases as capital leases based on the agreement terms.

Shareholders Agreement

Effective January 1, 2010, the Company entered into a Shareholders Agreement with William Kirby, D.O., Inc. and Dr. Kirby, pursuant to which, upon the occurrence of certain triggering events described below, Dr. Kirby is required to transfer his interest in William Kirby, D.O., Inc. to another licensed person or entity approved by the Company. Such triggering events include but are not limited to (i) the death or incapacity of Dr. Kirby, (ii) the loss of Dr. Kirby’s medical license, (iii) a breach of the obligations of William Kirby, D.O., Inc. and/or Dr. Kirby under the Amended and Restated Management Services Agreement or the Medical Director Agreement, (iv) the voluntary or involuntary transfer of Dr. Kirby’s interest in William Kirby, D.O., Inc., or (v) termination of the Amended and Restated Management Services Agreement in certain circumstances.

F - 2225

NOTE 9. EQUITY

Common Stock

In March 2012, the Company sold 606,610 shares of common stock in a private placement for aggregate gross proceeds of $297,240. Of the shares sold, 337,428 were sold to members of the Company’s management or board of directors and other Company affiliates, representing gross proceeds of $165,340. In July 2012, the Company sold 1,580,613 shares of common stock in a private placement for aggregate gross proceeds of $774,500. In August 2012, the Company sold 444,693 shares of common stock in a private placement for aggregate gross proceeds of $217,899. In September 2012, the Company sold 266,225 shares of common stock in a private placement for aggregate gross proceeds of $130,450. In October 2012, the Company sold 597,960 shares of common stock in a private placement for aggregate gross proceeds of $293,001 and issued 87,930 shares of common stock in exchange for services.

In January 2013, the Company issued 35,700 shares of common stock to an employee pursuant to the exercise of a non-qualified stock option. The Company received gross proceeds of approximately $17,500 in connection with the option exercise. In March 2013, the Company sold 136,365 shares of common stock in a private placement for aggregate gross proceeds of approximately $75,000 and issued 423,061 shares of common stock valued at $.49 per share in exchange for services provided to the Company including an aggregate of 270,000 shares of common stock issued to the Company’s three independent directors as compensation for serving in such capacity and 153,061 shares issued to a consultant in connection with brand development.

In April 2013, the Company sold 90,910 shares of common stock in a private placement for aggregate gross proceeds of approximately $50,000. In May 2013, the Company issued 145,455 shares of common stock valued at $.49 per share in exchange for consulting services provided to the Company.

In December 2013, the Company issued 13,636 shares of common stock valued at $.49 per share in exchange for consulting services provided to the Company and issued 125,000 shares of common stock to a lender in connection with a line of credit. Also in December 2013, the Company issued 5,300 shares of its common stock to non-executive employees as additional compensation.

In February through June, the Company entered into a series of short-term unsecured promissory notes pursuant to which the note holders would be entitled to equity in the form of warrants or common stock as of certain dates in the event that the note remained unpaid. Holders of the notes earned 475,000 shares of common stock in the second quarter of 2014 and 525,000 shares of common stock in the third quarter of 2014 and 1,000,000 shares of common stock in the fourth quarter or 2014. In December 2014, the Company entered into an amendment with all of the holders of its short-term unsecured promissory notes. Pursuant to the amendment, the holders agreed to extend the due date of the loan and extended the dates upon which interest to be paid in shares of Company common stock or as repayment premium would be due. Pursuant to the amended terms, the maturity date has been extended to January 1, 2016 when all principal and interest, including interest in the form of common stock, will be due. The Company also redeemed the 2,000,000 shares that had previously been issued to the holders. The note holders earned four shares of common stock and a repayment premium equal to 100% of the principal amount on March 31, 2015 as the notes remained unpaid on that date. In the event that the notes are not repaid on the maturity date, the holders will be entitled to an additional one-quarter of one share of common stock and repayment premium equal to 10% for each dollar loaned to the Company.

In July 2014, the Company issued 10,500 shares of common stock valued at $.49 per share to a vendor in exchange for a reduction in fees.

In each month from August through December 2014, the Company repurchased 10,000 shares of common stock from a lender at a purchase price of $.49 per share as required pursuant to an amendment in the credit agreement. The Company accounted for the repurchase of shares using the constructive retirement method as the Company’s state of incorporation does not recognize treasury shares.

Stock Options

In April 2011, the Company’s board of directors adopted the Dr. Tattoff, Inc. Long-Term Incentive Plan for the purpose of granting incentive awards, including equity awards such as stock options or restricted stock, to certain officers, employees, directors, consultants and other service providers of our Company, to provide such recipients with additional incentives to enhance the value of our Company and encourage stock ownership. Under the Long-Term Incentive Plan, we can grant incentive and nonqualified options to purchase shares of our common stock, stock appreciation rights, other stock-based awards, which are settled in either cash or shares of our common stock and are determined by reference to shares of our stock (such as grants of restricted common stock, grants of rights to receive stock in the future or dividend equivalent rights) and cash performance awards, which are settled in cash and are not determined by reference to shares of our common stock.

In ~~March~~January ~~2012~~2013, the Company granted 6261,~~500~~225 ~~non-qualified~~incentive stock options to an ~~employee~~executive officer as part of ~~William~~his ~~Kirby,~~compensation ~~D.O.~~package, ~~Inc.,~~ vesting over ~~four~~twelve ~~years~~months with an exercise price of $.49. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock option approximated $1817,~~000~~300 on its issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.49; expected life of five years; risk-free interest rate of 10.1967%; volatility of 7273%; and expected dividend yield of zero.

In May 2012, two members of the Board of Directors each exercised an option to purchase 10,714 shares of Company common stock at a purchase price of $.3687 per share. The Company received aggregate proceeds of $7,900.

F - 23

In July 2012, the Company granted 35,700 non-qualified stock options to a consultant, vesting over four months with an exercise price of $.49. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock option approximated $12,200 on its issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.49; expected life of five years; risk-free interest rate of 0.60%; volatility of 73%; and expected dividend yield of zero.

In September 2012, the Company granted 25,000 incentive stock options to an employee, vesting over five years with an exercise price of $.49. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock option approximated $7,300 on its issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.49; expected life of five years; risk-free interest rate of 0.67%; volatility of 73%; and expected dividend yield of zero.

In November 2012, the Company granted 5,000 non-qualified options to a consultant, vesting over five years with an exercise price of $.49. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock option approximated $1,500 on its issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.49; expected life of five years; risk-free interest rate of 0.63%; volatility of 73%; and expected dividend yield of zero.

In November 2012, the Company granted 21,824 incentive options to employees of the Company and 10,337 non-qualified options to employees of William Kirby, D.O., Inc., vesting immediately with an exercise price of $.49. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock options approximated $9,400 on their issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.49; expected life of five years; risk-free interest rate of 0.63%; volatility of 73%; and expected dividend yield of zero.

In January 2013, the Company granted 61,225 incentive stock options to an employee as part of his compensation package, vesting over twelve months with an exercise price of $.49. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock option approximated $17,300 on its issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.49; expected life of five years; risk-free interest rate of 0.67%; volatility of 73%; and expected dividend yield of zero.

In March 2013, the Company granted 24,041 incentive options to executive officers, 13,264 incentive options to other employees of the Company and 6,517 non-qualified options to employees of William Kirby, D.O., Inc., vesting immediately with an exercise price of $.49 as consideration for their agreement to defer compensation. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock options approximated $14,000 on their issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.49; expected life of five years; risk-free interest rate of 0.63%; volatility of 73%; and expected dividend yield of zero. Also in March 2013, the Company granted 20,000 non-qualified options to each of the three independent members of its Board of Directors, vesting immediately and 45,000 options to each of the three independent members of its Board of Directors vesting 50% immediately and 25% on each the first and second anniversary of the grant date, with an exercise price of $.49 per share as compensation for serving on the Company’s Board of Directors. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock options approximated $52,000 on their issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.49; expected life of five years; risk-free interest rate of 0.63%; volatility of 73%; and expected dividend yield of zero. Also in March 2013, the Company granted 10,000 non-qualified options to each of five members of its medical advisory board, with 25% vesting immediately and 25% vesting on each of the first, second and third anniversary of the grant date with an exercise price of $.49 per share. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock options approximated $13,400 on their issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.49; expected life of five years; risk-free interest rate of 0.63%; volatility of 73%; and expected dividend yield of zero. Also in March 2013, the Company granted 10,000 non-qualified options to each of five members of its medical advisory board, vesting 25% on each of the first through fourth anniversary of the grant date with an exercise price of $.55 per share. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock options approximated $13,400 on their issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.49; expected life of five years; risk-free interest rate of 0.63%; volatility of 73%; and expected dividend yield of zero.

F - 24

In June 2013, the Company granted 212,413 incentive stock options to an employee as part of his compensation package, vesting over a four year period with an exercise price of $.55. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock option approximated $53,200 on its issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.55, expected life of five years; risk-free interest rate of 1.07%; volatility of 64%; and expected dividend yield of zero.

In June 2013, the Company granted 10,000 non-qualified options to a new member of its medical advisory board, vesting 25% on each of the first through fourth anniversary of the grant date with an exercise price of $.55 per share. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock options approximated $2,503 on their issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.55, expected life of five years; risk-free interest rate of 1.07%; volatility of 64%; and expected dividend yield of zero.

In July 2013, the Company granted 112,727 incentive options to two employees as part of their compensation packages, vesting over a four year period with an exercise price of $.55. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock options approximated $28,100 on the issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.55, expected life of five years; risk-free interest rate of 1.42%; volatility of 63%; and expected dividend yield of zero.

In October 2013, the Company granted 7,327 incentive options to executive officers, 2,513 incentive options to other employees of the Company and 6,088 non-qualified options to William Kirby, D.O., vesting immediately with an exercise price of $.55 as consideration for their agreement to defer compensation. As determined by management using the Black-Scholes option-pricing model, the estimated fair value of the aforementioned stock options approximated $3,900 on their issuance date. Such estimate was based on the following assumptions: value of one common share of $0.49; strike price of $0.55; expected life of five years; risk-free interest rate of 1.41%; volatility of 63%; and expected dividend yield of zero.

The Company recognized compensation expense of approximately $136,000 in 2013 and $71,000 in 2012 related to the options and grants, which is included in general and administrative expenses in the accompanying consolidated statements of operations.

The following table summarizes stock option activity for the year ended December 31, 2013:

	Number of Options			Weighted Average Exercise Price per Share		Weighted Average Grant-Date Fair Value per Share
Outstanding at December 31, 2012		1,048,351		$	.39	$	.39
Granted		750,845			.52		.44
Exercised		(35,700	)		.49		.49
Forfeited or Expired		(223,094	)		.38		.38
Outstanding at December 31, 2013		1,540,402		$	.45	$	.44
Exercisable at December 31, 2013		753,609		$	.44	$	.43
Vested and expected to vest at December 31, 2013		1,540,402		$	.45	$	.44

F - 25

The aggregate intrinsic value of options exercised during the twelve months ended December 31, 2013 was $0. The aggregate intrinsic value of outstanding options was approximately $62,000 at December 31, 2013.

Warrants

In connection with the sale of common stock in a private placement in March 2012, the Company issued fully vested five-year warrants to purchase 303,305 shares of the Company’s common stock at a purchase price of $.595 per share. The warrants expire on April 2, 2017. Warrants to purchase 168,714 shares were issued to members of management or board of directors and their affiliates in connection with their participation in the private placement. The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, expected life of five years; risk free interest rate of 1.03%; volatility of 70% and expected dividend yield of zero. The net proceeds on the sale of common stock were allocated between the estimated fair value of the warrants at issuance of $79,500 and the common stock sold in the offering. The Company has analyzed these warrants and determined them to be equity instruments. Accordingly, the estimated fair value of the warrants was recognized as “additional paid-in capital” on the accompanying consolidated balance sheets.

In connection with issuance of the secured senior subordinated convertible notes in a private placement in May 2012, the Company issued fully vested five-year warrants to purchase 250,000 shares of the Company’s common stock at a purchase price of $.75 per share. The warrants expire on May 31, 2017. Warrants to purchase 250,000 shares were issued to members of management or board of directors and their affiliates in connection with their participation in the private placement. The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, strike price $.75, expected life of five years; risk free interest rate of .72%; volatility of 72% and expected dividend yield of zero. The net proceeds on the issuance of the convertible notes were allocated between the estimated fair value of the warrants at issuance of $60,100 and the convertible notes issues in the offering. The Company has analyzed these warrants and determined them to be equity instruments. Accordingly, the estimated fair value of the warrants was recognized as “additional paid-in capital” on the accompanying consolidated balance sheets.

In connection with the sale of common stock in a private placement in July 2012, the Company issued fully vested five-year warrants to purchase 790,307 shares of the Company’s common stock at a purchase price of $.595 per share. The warrants expire on July 31, 2017. The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, expected life of five years; risk free interest rate of .60%; volatility of 72% and expected dividend yield of zero. The net proceeds on the sale of common stock were allocated between the estimated fair value of the warrants at issuance of $210,800 and the common stock sold in the offering. The Company has analyzed these warrants and determined them to be equity instruments. Accordingly, the estimated fair value of the warrants was recognized as “additional paid-in capital” on the accompanying consolidated balance sheets.

In connection with the sale of common stock in a private placement in August 2012, the Company issued fully vested five-year warrants to purchase 222,346 shares of the Company’s common stock at a purchase price of $.595 per share. The warrants expire on August 31, 2017. The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, expected life of five years; risk free interest rate of .59%; volatility of 72% and expected dividend yield of zero. The net proceeds on the sale of common stock were allocated between the estimated fair value of the warrants at issuance of $59,300 and the common stock sold in the offering. The Company has analyzed these warrants and determined them to be equity instruments. Accordingly, the estimated fair value of the warrants was recognized as “additional paid-in capital” on the accompanying consolidated balance sheets.

F - 26

In ~~connection~~March 2013, the Company granted 24,041 incentive options to executive officers, 13,264 incentive options to other employees of the Company and 6,517 non-qualified options to employees of William Kirby, D.O., Inc., vesting immediately with ~~issuance~~an exercise price of $.49 as consideration for their agreement to defer compensation. As determined by management using the ~~secured~~Black-Scholes ~~senior~~option-pricing ~~subordinated~~model, ~~convertible~~the ~~notes~~estimated infair avalue ~~private~~of ~~placement~~the aforementioned stock options approximated $14,000 on their issuance date. Also in ~~August~~March ~~2012~~2013, the Company ~~issued~~granted ~~fully~~20,000 ~~vested five~~non-~~year~~qualified ~~warrants~~options to ~~purchase~~each ~~318~~of the three independent members of its Board of Directors,~~750~~ ~~shares~~vesting immediately and 45,000 options to each of the ~~Company’s~~three ~~common~~independent ~~stock~~members atof aits ~~purchase~~Board of Directors vesting 50% immediately and 25% on each the first and second anniversary of the grant date, with an exercise price of $.7549 per share. ~~The~~as ~~warrants~~compensation ~~expire~~for serving on ~~August~~the ~~31,~~Company’s ~~2017~~Board of Directors. As ~~The~~determined ~~Company~~by ~~estimated~~management using the Black-Scholes option-pricing model, the estimated fair value of the ~~warrants~~aforementioned ~~issued~~stock ~~based~~options ~~upon~~approximated $52,000 on their issuance date. Also in March 2013, the ~~application~~Company granted 10,000 non-qualified options to each of five members of its medical advisory board, with 25% vesting immediately and 25% vesting on each of the first, second and third anniversary of the grant date with an exercise price of $.49 per share. As determined by management using the Black-Scholes option -pricing model, ~~using~~ the ~~following~~estimated ~~assumptions:~~fair value of ~~common~~the ~~share~~aforementioned ofstock options approximated $~~.49~~13,400 ~~strike~~on ~~price~~their $issuance date.75 Also in March 2013, ~~expected~~the ~~life~~Company granted 10,000 non-qualified options to each of five ~~years;~~members ~~risk~~of ~~free~~its ~~interest~~medical ~~rate~~advisory ofboard, ~~.51~~vesting 25%; ~~volatility~~on each of ~~72%~~the ~~and~~first ~~expected~~through ~~dividend~~fourth ~~yield~~anniversary of ~~zero.~~the ~~The~~grant ~~net~~date ~~proceeds~~with onan ~~the~~exercise ~~issuance~~price of ~~the~~$.55 ~~convertible~~per ~~notes~~share. As ~~were~~determined ~~allocated~~by ~~between~~management using the Black-Scholes option-pricing model, the estimated fair value of the ~~warrants~~aforementioned atstock ~~issuance~~options ofapproximated $5813,~~650~~400 ~~and~~on their issuance date. All of the ~~convertible~~estimates ~~notes~~of ~~issues~~the invalues of the ~~offering.~~options ~~The~~granted ~~Company~~during ~~has~~March ~~analyzed~~2013 ~~these~~were ~~warrants~~based ~~and~~on ~~determined~~the ~~them~~following toassumptions: bevalue ~~equity~~of ~~instruments.~~one ~~Accordingly,~~common ~~the~~share ~~estimated~~of ~~fair~~$0.49; ~~value~~strike price of ~~the~~$0.49; ~~warrants~~expected ~~was~~life ~~recognized~~of asfive ~~“additional~~years; ~~paid~~risk-infree ~~capital”~~interest onrate ~~the~~of ~~accompanying~~0.63%; ~~consolidated~~volatility ~~balance~~of ~~sheets~~73%; and expected dividend yield of zero.

In ~~August~~June ~~2012~~2013, the Company ~~issued~~granted ~~fully~~212,413 ~~vested~~incentive ~~five-year~~stock ~~warrants~~options to ~~purchase~~an ~~400,000~~employee ~~shares~~as part of ~~the~~his ~~Company’s~~compensation ~~common~~package, ~~stock~~vesting atover a ~~purchase~~four year period with an exercise price of $.4955. As ~~per~~determined ~~share~~by inmanagement ~~exchange~~using ~~for~~the ~~consulting~~Black-Scholes ~~services~~option-pricing tomodel, bethe ~~delivered~~estimated ~~over~~fair avalue ~~twelve~~of ~~month~~the ~~period. The~~aforementioned ~~warrants~~stock ~~expire~~option approximated $53,200 on ~~August~~its ~~31,~~issuance ~~2017~~date. ~~The~~Also, ~~Company~~in ~~estimated~~June 2013, the ~~fair~~Company ~~value~~granted 10,000 non-qualified options to a new member of ~~the~~its ~~warrants~~medical ~~issued~~advisory ~~based~~board, ~~upon~~vesting ~~the~~25% ~~application~~on each of the ~~Black-Scholes~~first ~~option~~through ~~pricing~~fourth ~~model~~anniversary ~~using~~of the ~~following~~grant ~~assumptions:~~date ~~value~~with ofan ~~common~~exercise ~~share~~price of $.~~49,~~55 ~~expected~~per ~~life~~share. As ofdetermined ~~five~~by ~~years;~~management ~~risk~~using ~~free~~the ~~interest~~Black-Scholes ~~rate~~option-pricing ofmodel, ~~.62%;~~the ~~volatility~~estimated fair value of ~~72%~~the ~~and~~aforementioned ~~expected~~stock ~~dividend~~options ~~yield~~approximated of$2,503 ~~zero~~on their issuance date. ~~The~~All ~~Company~~of ~~has~~the ~~analyzed~~estimates ~~these~~of ~~warrants~~the ~~and~~values ~~determined~~of ~~them~~the tooptions begranted ~~equity~~during ~~instruments.~~June ~~Accordingly,~~2013 were based on the ~~estimated~~following ~~fair~~assumptions: value of ~~the~~one ~~warrants~~common atshare ~~issuance~~ of $~~114,800~~0.49; ~~was~~strike ~~recognized~~price asof ~~“additional~~$0.55, ~~paid-in~~expected ~~capital”~~life onof ~~the~~five ~~accompanying~~years; ~~consolidated~~risk-free ~~balance~~interest ~~sheets~~rate ~~and~~of ~~the~~1.07%; ~~consulting~~volatility ~~expense~~of ~~included~~64%; inand ~~general~~expected ~~and~~dividend ~~administrative~~yield ~~expense~~of zero.

In ~~connection~~July ~~with~~2013, the ~~sale~~Company ofgranted ~~common~~112,727 ~~stock~~incentive inoptions ato ~~private~~two ~~placement~~executive inofficers ~~September~~as ~~2012,~~part ~~the~~of ~~Company~~their ~~issued~~compensation ~~fully vested five-year warrants to purchase 133~~packages,~~113~~ ~~shares~~vesting ofover ~~the~~a ~~Company’s~~four ~~common~~year ~~stock~~period atwith aan ~~purchase~~exercise price of $.~~595 per share~~55. ~~The~~ ~~warrants~~As ~~expire~~determined onby ~~September~~management ~~30,~~using ~~2017. The~~the ~~Company~~Black-Scholes ~~estimated~~option-pricing model, the estimated fair value of the ~~warrants~~aforementioned ~~issued~~stock ~~based~~options ~~upon~~approximated ~~the~~$28,100 ~~application~~on of the ~~Black-Scholes~~issuance ~~option~~date. ~~pricing~~Such ~~model~~estimate ~~using~~was based on the following assumptions: value of one common share of $0.49; strike price of $0.55, expected life of five years; risk -free interest rate of 1.6242%; volatility of 7263%; and expected dividend yield of zero. The net proceeds on the sale of common stock were allocated between the estimated fair value of the warrants at issuance of $35,500 and the common stock sold in the offering. The Company has analyzed these warrants and determined them to be equity instruments. Accordingly, the estimated fair value of the warrants was recognized as “additional paid-in capital” on the accompanying consolidated balance sheets.

In ~~connection~~October ~~with~~2013, ~~issuance~~the ofCompany ~~the~~granted ~~secured~~7,327 ~~senior~~incentive ~~subordinated~~options ~~convertible~~to ~~notes~~executive inofficers, a2,513 ~~private~~incentive ~~placement~~options into ~~September~~other ~~2012,~~employees of the Company ~~issued~~and ~~fully~~6,088 ~~vested five~~non-~~year~~qualified ~~warrants~~options to aWilliam ~~member~~Kirby, ofD.O., ~~its~~vesting ~~board~~immediately ofwith ~~directors~~an toexercise ~~purchase~~price ~~62,500 shares~~ of ~~the~~$.55 ~~Company’s~~as ~~common~~consideration ~~stock~~for attheir aagreement ~~purchase~~to ~~price~~defer ~~of $~~compensation.75 As ~~per~~determined ~~share.~~by ~~The~~management ~~warrants~~using ~~expire~~the onBlack-Scholes ~~September~~option-pricing 30model, ~~2017.~~the ~~The Company~~ estimated ~~the~~ fair value of the ~~warrants~~aforementioned ~~issued~~stock ~~based~~options ~~upon~~approximated ~~the~~$3,900 ~~application~~on oftheir ~~the~~issuance ~~Black-Scholes~~date. Such ~~option~~estimate ~~pricing~~was ~~model~~based ~~using~~on the following assumptions: value of one common share of $0.49,; strike price of $0.~~75,~~55; expected life of five years; risk -free interest rate of 1.6241%; volatility of 7263%; and expected dividend yield of zero. The net proceeds on the issuance of the convertible notes were allocated between the estimated fair value of the warrants at issuance of $9,350 and the convertible notes issues in the offering. The Company has analyzed these warrants and determined them to be equity instruments. Accordingly, the estimated fair value of the warrants was recognized as “additional paid-in capital” on the accompanying consolidated balance sheets.

In ~~connection~~February ~~with~~2014, the ~~sale~~Company ofgranted ~~common~~54,545 incentive stock inoptions ato ~~private~~an ~~placement~~executive ~~and~~officer ~~the~~as ~~issuance~~part of ~~common~~his ~~stock~~compensation inpackage ~~exchange~~vesting ~~for~~over ~~services~~twelve inmonths ~~October~~with ~~2012,~~an ~~the~~exercise ~~Company issued fully vested five-year warrants to purchase 340,037 shares of the Company’s common stock at a purchase~~ price of $.~~595 per share~~55. ~~The~~As ~~warrants~~determined ~~expire~~by onmanagement ~~October~~using ~~30,~~the ~~2017. The~~Black-Scholes ~~Company~~option-pricing ~~estimated~~model, the estimated fair value of the ~~warrants~~aforementioned ~~issued~~stock ~~based~~option ~~upon~~approximated ~~the~~$13,200 ~~application~~on ofits ~~the~~issuance ~~Black-Scholes~~date. Such ~~option~~estimate ~~pricing~~was ~~model~~based ~~using~~on the following assumptions: value of one common share of $0.49,; strike price of $0.55; expected life of five years; risk -free interest rate of 1.5957%; volatility of 7361%; and expected dividend yield of zero. The net proceeds on the sale of common stock were allocated between the estimated fair value of the warrants at issuance of $92,600 and the common stock sold in the offering. The Company has analyzed these warrants and determined them to be equity instruments. Accordingly, the estimated fair value of the warrants was recognized as “additional paid-in capital” on the accompanying consolidated balance sheets.

InThe ~~connection with issuance of the secured senior subordinated convertible notes in a private placement in October 2012, the~~ Company ~~issued~~recognized ~~fully~~compensation ~~vested~~expense ~~five-year warrants to purchase 109,275 shares~~ of ~~the~~approximately ~~Company’s common stock at a purchase price of~~ $~~.75 per share. The warrants expire on October 30~~69,000 ~~2017.~~in ~~The Company estimated~~ the ~~fair~~year ~~value~~ended ofDecember ~~the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49~~31, ~~strike~~2014 ~~price~~and $~~.75~~136,000 ~~expected~~for ~~life of five years; risk free interest rate of .72%; volatility of 72% and expected dividend yield of zero. The net proceeds on~~ the ~~issuance~~year ofended ~~the~~December ~~convertible~~31, ~~notes~~2013 ~~were~~related ~~allocated~~to ~~between~~ the ~~estimated~~options ~~fair~~and ~~value of the warrants at issuance of $20~~grants,~~125~~ ~~and~~which ~~the~~is ~~convertible~~included ~~notes issues~~ in ~~the~~general ~~offering. The Company has analyzed these warrants~~ and ~~determined~~administrative ~~them~~expenses ~~to be equity instruments. Accordingly, the estimated fair value of the warrants was recognized as “additional paid-~~in ~~capital” on~~ the accompanying consolidated ~~balance~~statements ~~sheets~~of operations.

F - 27

InThe ~~November~~following ~~2012,~~table ~~the~~summarizes ~~Company issued fully vested five-year warrants to a third party to purchase 20,000 shares of the Company’s common~~ stock atoption aactivity ~~purchase price of $.49 per share. The warrants were issued in exchange~~ for ~~services and expire on November 12, 2017. The Company estimated~~ the ~~fair~~year ~~value~~ended ofDecember ~~the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49~~31, expected life of five years; risk free interest rate of .63%; volatility of 73% and expected dividend yield of zero. The Company has analyzed these warrants and determined them to be equity instruments. Accordingly, the estimated fair value at issuance of $5,800 was recognized as “consulting services” and is included within “general and administrative” expenses on the accompanying consolidated statements of operations and “additional paid-in capital” on the accompanying consolidated balance sheets.2014:

In January 2013, the Company issued five-year warrants to purchase 30,613 shares of the Company’s common stock at a purchase price of $.595 per share to an employee as part of his compensation package. The warrants vest on a monthly basis through January 1, 2014 at which time the warrant will be fully vested. The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, expected life of five years; risk free interest rate of .62%; volatility of 72% and expected dividend yield of zero. The Company has analyzed these warrants and determined them to be equity instruments. Accordingly the estimated fair value at issuance of $8,200 was recognized as “compensation expense” and is included within “general and administrative” expenses on the consolidated statements of operations and “additional paid-in capital” on the consolidated balance sheets.


						Weighted
						Average
				Weighted		Grant-Date
	Number			Average Exercise		Fair Value
	of Options			Price per Share		per Share
Outstanding at December 31, 2013		1,549,230		$	.45	$	.44

Granted		54,545			.55		.49
Exercised		-			-		-
Forfeited or Expired		(49,869	)		.39		.39
Outstanding at December 31, 2014		1,553,906		$	.46	$	.44

Exercisable at December 31, 2014		1,119,679		$	.45	$	.43

Vested and expected to vest at December 31, 2014		1,553,906		$	.46	$	.44

In connection with issuance of the secured senior subordinated convertible notes in a private placement in January 2013, the Company issued fully vested five-year warrants to purchase 375,000 shares of the Company’s common stock at a purchase price of $.75 per share as additional consideration to the investors, including 250,000 warrant shares to two members of the Company’s Board of Directors. The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, strike price $.75, expected life of five years; risk free interest rate of .88%; volatility of 72% and expected dividend yield of zero. The net proceeds on the issuance of the convertible notes were allocated between the estimated fair value of the warrants at issuance of $89,500 and the convertible notes issued in the offering. The Company has analyzed these warrants and determined them to be equity instruments. Accordingly, the estimated fair value of the warrants was recognized as “additional paid-in capital” on the consolidated balance sheets.

In connection with issuance of the tenant improvement secured loan in February 2013, the Company issued fully vested five-year warrants to purchase 218,750 shares of the Company’s common stock at a purchase price of $.60 per share as additional consideration to the investors, including 62,500 warrant shares to members of the Company’s Board of Directors and management. The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, strike price $.75, expected life of five years; risk free interest rate of .88%; volatility of 72% and expected dividend yield of zero. The net proceeds on the issuance of the tenant improvement secured loan were allocated between the estimated fair value of the warrants at issuance of $65,700 and the notes issued in the offering. The Company has analyzed these warrants and determined them to be equity instruments. Accordingly, the estimated fair value of the warrants was recognized as “additional paid-in capital” on the consolidated balance sheets.

In March 2013, the Company issued fully vested five-year warrants to purchase 76,530 shares of the Company’s common stock at a purchase price of $.595 per share to a service provider as additional consideration for services provided. The warrant expires on January 15, 2018. The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, expected life of five years; risk free interest rate of .62%; volatility of 72% and expected dividend yield of zero. The Company has analyzed these warrants and determined them to be equity instruments. The estimated fair value at issuance of $20,500 was recognized as “consulting expense” and is included within “general and administrative” expenses on the consolidated statements of operations and “additional paid-in capital” on the consolidated balance sheets.

F - 28

In connection with the sale of common stock in a private placement in March 2013, the Company issued fully vested five-year warrants to purchase 102,274 shares of the Company’s common stock at a purchase price of $.65 per share as additional consideration to the investors. The ~~warrants~~aggregate ~~expire~~intrinsic ~~on March 12, 2018. The Company estimated the fair~~ value of ~~the~~options ~~warrants~~exercised ~~issued~~during ~~based upon~~ the ~~application~~twelve ofmonths ~~the~~ended ~~Black-Scholes~~December ~~option~~31, ~~pricing~~2014 ~~model~~was ~~using the following assumptions: value of common share of~~ $0.~~49,~~ ~~expected life of five years; risk free interest rate of .88%; volatility of 72% and expected dividend yield of zero.~~ The ~~net~~aggregate ~~proceeds~~intrinsic ~~on the sale of common stock were allocated between the estimated fair~~ value of ~~the~~outstanding ~~warrants~~options atwas ~~issuance~~approximately of $2621,000 ~~and~~at ~~the~~December ~~common stock sold in the offering. The Company has analyzed these warrants and determined them to be equity instruments. Accordingly~~31, ~~the estimated fair value of the warrants was recognized as “additional paid-in capital” on the consolidated balance sheets~~2014.

In connection with the sale of common stock in a private placement in April 2013, the Company issued fully vested five-year warrants to purchase 68,183 shares of the Company’s common stock at a purchase price of $.65 per share as additional consideration to the investors. The warrants expire on April 11, 2018. The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, expected life of five years; risk free interest rate of .74%; volatility of 64% and expected dividend yield of zero. The net proceeds on the sale of common stock were allocated between the estimated fair value of the warrants at issuance of $15,600 and the common stock sold in the offering. The Company has analyzed these warrants and determined them to be equity instruments. Accordingly, the estimated fair value of the warrants was recognized as “additional paid-in capital” on the consolidated balance sheets.Warrants

InThe ~~May~~Company issued a number of warrants in 2013 and 2014 related to various transactions. In each case, the Company ~~issued~~estimated ~~five-year~~the ~~warrants,~~fair ~~vesting~~value ~~over~~of ~~one~~the ~~year,~~warrants toissued ~~purchase~~based ~~34,090~~upon ~~shares~~the application of the Black-Scholes option pricing model. During 2013, the Company’s ~~common~~used ~~stock~~the atfollowing aassumptions: ~~purchase~~value ~~price~~of common share of $.6549, ~~per~~expected ~~share~~life toof athree ~~service~~or ~~provider~~five asyears ~~additional~~depending ~~consideration~~on ~~for~~the ~~services~~term ~~provided. The~~of the warrant; ~~expires~~risk onfree ~~May~~interest ~~16,~~rate ~~2018. The~~of ~~Company~~between ~~estimated~~.58% ~~the~~and ~~fair~~1.73%; ~~value~~volatility of ~~the~~63-72% ~~warrants~~and ~~issued~~expected ~~based~~dividend ~~upon~~yield ~~the~~of ~~application~~zero. During of2014, the ~~Black-Scholes~~Company ~~option~~used ~~pricing model using~~ the following assumptions: value of common share of $.49, expected life of three or five years depending on the term of the warrant; risk free interest rate of between .7986% and 1.73%; volatility ofbetween 6446% and 61% and expected dividend yield of zero. ~~The~~Unless indicated otherwise, the Company has analyzed these warrants and determined them to be equity instruments. ~~The~~ Accordingly, the estimated fair value ~~at issuance~~ of ~~$7,811~~the warrants was recognized as “~~consulting expense” and is included within “general and administrative” expenses on the consolidated statements of operations and “~~additional paid-in capital” on the accompanying consolidated balance sheets.

In ~~connection~~January ~~with issuance of the senior subordinated convertible notes in a private placement in May, June and July~~ 2013, the Company issued ~~fully vested~~ five-year warrants to purchase ~~186~~30,~~537~~613 shares of the Company’s common stock at a purchase price of $.78595 per share ~~as additional consideration~~ to ~~the~~an ~~investors. In~~employee ~~the~~as ~~event~~part ~~that the convertible note is converted, the number~~ of ~~shares~~his ~~issuable~~compensation ~~under the warrant will be adjusted to 25% of the number of conversion shares and the strike price adjusted to 120% of the conversion price~~package. The ~~Company estimated the fair value of the~~ warrants ~~issued~~vested ~~based~~on ~~upon~~a ~~the~~monthly ~~application~~basis ofthrough ~~the~~January ~~Black-Scholes option pricing model using the following assumptions: value of common share of $.49~~1, ~~strike price $~~2014.~~78, expected life of five years; risk free interest rate of 1.07%; volatility of 64% and expected dividend yield of zero.~~ The ~~net proceeds on the issuance of the convertible notes were allocated between the~~ estimated fair value ~~of the warrants~~ at issuance of $368,~~250~~200 ~~and the convertible notes issued in the offering. The Company has analyzed these warrants and determined them to be debt instruments. Accordingly, the estimated fair value of the warrants~~ was recognized as “~~warrant~~compensation ~~liability~~expense” onand ~~the consolidated~~is ~~balance~~included ~~sheets.~~within ~~The~~“general ~~warrants were exchanged in December 2013~~ and ~~had~~administrative” noexpenses ~~value~~on atthe consolidated ~~December~~statements ~~31,~~of ~~2013~~operations.

In connection with ~~the~~ issuance of ~~unsecured~~the ~~promissory~~secured senior subordinated convertible notes in ~~August~~a private placement in January 2013, the Company issued fully vested five-year warrants to purchase ~~120~~375,000 shares of the Company’s common stock at a purchase price of $.6075 per share as additional consideration to the ~~note~~investors, ~~holders.~~including ~~The warrants expire on August 13~~250,000 ~~2018.~~warrant ~~The~~shares ~~Company~~to two ~~estimated~~members ~~the fair value~~ of the ~~warrants~~Company’s ~~issued~~Board ~~based upon the application~~ of ~~the Black-Scholes option pricing model using the following assumptions: value of common share of $~~Directors.~~49, strike price $.60, expected life of five years; risk free interest rate of 1.48%; volatility of 63% and expected dividend yield of zero.~~ The net proceeds on the ~~unsecured~~issuance ~~promissory~~of the convertible notes were allocated between the estimated fair value of the warrants at issuance of $2889,~~700~~500 and the convertible notes issued~~. The~~ ~~Company has analyzed these warrants and determined them to be equity instruments. Accordingly, the estimated fair value of the warrants was recognized as “additional paid-~~in ~~capital” on~~ the ~~consolidated balance sheets~~offering.

In connection with issuance and subsequent extension of the maturity date of the tenant improvement secured loan initially made in February 2013, the Company issued fully vested five-year warrants to purchase 585,240 shares of the Company’s common stock at a purchase price of $.60 per share as additional consideration to the investors, including 146,310 warrant shares to members of the Company’s Board of Directors and management. The net proceeds on the issuance of the tenant improvement secured loan were allocated between the estimated fair value of the warrants at issuance of approximately $145,900 and the notes issued in the offering.

In connection with the sale of common stock in a private placement in March and April 2013, the Company issued fully vested five-year warrants to purchase 170,457 shares of the Company’s common stock at a purchase price of $.65 per share as additional consideration to the investors. The net proceeds on the sale of common stock were allocated between the estimated fair value of the warrants at issuance of $41,600 and the common stock sold in the offering.

F - 29

In ~~July~~May 2013, the Company issued five-year warrants, vesting over one year, to purchase 8434,~~545~~090 shares of the Company’s common stock at a purchase price of $.65 per share to ~~two employees as part of their compensation package. The warrants vest on~~ a ~~monthly~~service ~~basis~~provider ~~through~~as ~~July~~additional ~~2014~~consideration atfor ~~which~~services ~~time the warrant will be fully vested~~provided. The ~~Company~~ estimated ~~the~~ fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, expected life of five years; risk free interest rate of 1.41%; volatility of 63% and expected dividend yield of zero. The Company has analyzed these warrants and determined them to be equity instruments. Accordingly, the estimated fair value at issuance of approximately $197,~~400~~800 was recognized as “~~compensation~~consulting expense” and is included within “general and administrative” expenses on the consolidated statements of operations ~~and “additional paid-in capital” on the consolidated balance sheets~~.

In connection with ~~the~~ issuance of the senior subordinated convertible notes in a private placement in ~~September~~May, June and July 2013, the Company issued fully vested ~~three~~five-year warrants to purchase 76186,~~923~~537 shares of the Company’s common stock at a purchase price of $.78 per share as additional consideration to the ~~investor~~investors. In the event that the convertible note is converted, the number of shares issuable under the warrant will be adjusted to 25% of the number of conversion shares and the strike price adjusted to 120% of the conversion price. The ~~Company estimated the fair value of the~~ warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, strike price $.78, expected life of three years; risk free interest rate of .63%; volatility of 63% and expected dividend yield of zero. The net proceeds on the issuance of the convertible notes were ~~allocated~~exchanged ~~between the estimated fair value of the warrants at issuance of $10,900 and the convertible notes issued~~ in ~~the~~December ~~offering. The~~2013 ~~Company~~for ~~has analyzed these~~ warrants ~~and~~with ~~determined~~different ~~them~~terms ~~to be debt instruments. Accordingly, the estimated fair value of the warrants was recognized~~ as ~~“warrant~~described ~~liability” on the consolidated balance sheets~~below. ~~The Company determined the fair value of the warrant liability to be $10,200 at December 31, 2013.~~

In connection with the issuance and subsequent extension of the maturity date of unsecured promissory notes originally issued in August and October 2013, the Company issued ~~fully vested~~ five-year warrants to purchase ~~450~~630,~~000~~893 shares of the Company’s common stock at a purchase price of $1.0060 per share inas ~~exchange~~additional ~~for~~consideration ~~consulting services~~ to bethe ~~delivered~~note ~~over~~holders, aincluding ~~twelve month period. The warrants expire on October 1~~97,174 ~~2018. The~~shares ~~Company estimated the fair value of the warrants~~ issued ~~based~~to ~~upon~~members ~~the application~~ of the ~~Black-Scholes~~Company’s ~~option~~Board ~~pricing model using the following assumptions: value~~ of ~~common~~Directors ~~share of $.49, expected life of five years; risk free interest rate of 1.41%; volatility of 63%~~ and ~~expected dividend yield of zero~~management. The ~~Company~~net ~~has~~proceeds ~~analyzed~~on ~~these~~the ~~warrants~~unsecured ~~and~~promissory ~~determined~~notes ~~them~~were toallocated bebetween ~~equity instruments. Accordingly,~~ the estimated fair value of the warrants at issuance of approximately $80141,~~300~~500 ~~was recognized as “additional paid-in capital” on the accompanying consolidated balance sheets~~ and the ~~consulting~~notes ~~expense included in general and administrative expense~~issued.

In ~~connection~~July ~~with the issuance of unsecured promissory notes in October~~ 2013, the Company issued ~~fully vested~~ five-year warrants to purchase ~~200~~84,~~000~~545 shares of the Company’s common stock at a purchase price of $.6065 per share ~~as additional consideration~~ to ~~the~~two ~~note~~employees ~~holder.~~as ~~The~~part ~~warrants~~of ~~expire~~their oncompensation ~~October 31, 2018~~package. The ~~Company estimated the fair value of the~~ warrants ~~issued~~vest ~~based~~on ~~upon~~a ~~the~~monthly ~~application~~basis ofthrough ~~the~~July ~~Black-Scholes~~2014 ~~option~~at ~~pricing~~which ~~model~~time ~~using~~ the ~~following~~warrant ~~assumptions:~~will ~~value~~be offully ~~common share of $~~vested.~~49, strike price $.60, expected life of five years; risk free interest rate of 1.30%; volatility of 63% and expected dividend yield of zero.~~ The ~~net proceeds on the unsecured promissory notes were allocated between the~~ estimated fair value ~~of the warrants~~ at issuance of $3819,~~000~~400 ~~and~~was ~~the~~recognized ~~notes~~as ~~issued. The~~“compensation ~~Company~~expense” ~~has analyzed these warrants~~ and ~~determined~~is ~~them~~included towithin ~~be equity instruments. Accordingly, the estimated fair value of the warrants was recognized as~~ “~~additional~~general ~~paid-in~~and ~~capital~~administrative” expenses on the consolidated ~~balance~~statements ~~sheets~~of operations.

In ~~December~~connection with the issuance of senior subordinated convertible notes in a private placement from September 2013 to January 2014, the Company issued fully vested three-year warrants to purchase 39153,~~000~~846 shares of the Company’s common stock at a purchase price of $.78 per share inas ~~exchange~~additional ~~for~~consideration ~~services related~~ to the ~~Company’s~~investors. In ~~new~~the ~~revolving~~event ~~loan~~that ~~facility.~~the ~~The~~convertible ~~warrants~~note ~~expire~~is onconverted, ~~December~~the 2,number ~~2016. The~~of ~~Company~~shares ~~estimated~~issuable under the ~~fair~~warrant ~~value~~will ofbe ~~the~~adjusted ~~warrants~~to ~~issued~~100% ~~based~~of ~~upon~~ the ~~application~~number of conversion shares and the ~~Black-Scholes~~strike ~~option~~price ~~pricing~~adjusted ~~model~~to ~~using~~120% of the ~~following~~conversion ~~assumptions:~~price. ~~value~~The ofnet ~~common~~proceeds ~~share~~on the issuance of ~~$.49,~~the ~~expected~~convertible ~~life~~notes ofwere ~~three~~allocated ~~years;~~between ~~risk~~the ~~free~~estimated ~~interest~~fair ~~rate~~value of ~~.58%;~~the ~~volatility~~warrants at issuance of ~~63%~~approximately $25,800 and ~~expected~~the ~~dividend~~convertible ~~yield~~notes ofissued ~~zero~~in the offering. The Company has analyzed these warrants and determined them to be debt instruments. Accordingly, the estimated fair value of the warrants was recognized as “warrant liability” on the consolidated balance sheets ~~and the expense will be amortized over the term of the revolving loan and included in interest expense~~. The Company determined the fair value of the warrant liability to be approximately $4,~~300~~100 at ~~issuance and $5,400 at~~ December 31, ~~2013~~2014.

In October 2013 the Company issued fully vested five-year warrants to purchase 450,000 shares of the Company’s common stock at a purchase price of $1.00 per share in exchange for consulting services to be delivered over a twelve month period. The estimated fair value of the warrants at issuance of $80,300 was recognized as consulting expense included in general and administrative expense on the consolidated statements of operations. Of these warrants, 225,000 were cancelled in February 2014.

In December 2013 the Company issued fully vested three-year warrants to purchase 39,000 shares of the Company’s common stock at a purchase price of $.78 per share in exchange for services related to the Company’s new revolving loan facility. The Company has analyzed these warrants and determined them to be debt instruments. Accordingly, the estimated fair value of the warrants was recognized as “warrant liability” on the consolidated balance sheets and the expense will be amortized over the term of the revolving loan and included in interest expense. The Company determined the fair value of the warrant liability to be $4,300 at issuance and $900 at December 31, 2014.

F - 30

In December 2013, the Company exchanged 186,537 warrants that had been issued in connection with the issuance of the senior subordinated convertible notes in a private placement infrom May, ~~June~~to ~~and~~ July 2013 with new warrants. The number of shares of common stock that can be purchased by the warrant holder was increased to 746,157 and the term of the warrant was decreased from five to three years. In the event that the convertible note is converted, the number of shares issuable under the warrant will be adjusted to 25100% of the number of conversion shares and the strike price adjusted to 120% of the conversion price. The Company estimated the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49, strike price $.78, expected life of two and one half years; risk free interest rate of .58%; volatility of 63% and expected dividend yield of zero. The net proceeds on the issuance of the convertible notes were allocated between the estimated fair value of the warrants at issuance of $91,400 and the convertible notes issued in the offering. The Company has analyzed these warrants and determined them to be debt instruments. Accordingly, the estimated fair value of the warrants was recognized as “warrant liability” on the consolidated balance sheets. The Company determined the fair value of the warrant liability to be approximately $13,100 and $91,400 at December 31, 2014 and December 31, 2013, respectively.

In ~~December~~February ~~2013~~2014, the Company issued ~~fully vested~~ five-year warrants to purchase ~~115~~27,~~240~~273 shares of the Company’s common stock at a purchase price of $.6065 per share into ~~exchange for~~ an ~~extension~~employee onas ~~the~~part ~~due date~~ of ~~the~~his ~~Company’s~~compensation ~~tenant improvement secured loan~~package. The warrants ~~expire~~vested on ~~December~~a ~~31,~~monthly ~~2018. The~~basis ~~Company~~through ~~estimated~~January ~~the fair value of the warrants issued based upon the application of the Black-Scholes option pricing model using the following assumptions: value of common share of $.49~~1, ~~expected life of five years; risk free interest rate of 1~~2015.~~73%; volatility of 63% and expected dividend yield of zero.~~ The ~~Company has analyzed these warrants and determined them to be equity instruments. Accordingly, the~~ estimated fair value ~~of the warrants~~ at issuance of $276,~~700~~100 was recognized as “~~additional~~compensation ~~paid-in capital~~expense” onand ~~the~~is ~~accompanying~~included ~~consolidated~~within ~~balance~~“general ~~sheets~~ and ~~the~~administrative” ~~expense~~expenses ~~will~~on ~~be included in interest expense over~~ the consolidated ~~term~~statements of ~~the loan extension~~operations.

In ~~December~~April ~~2013~~2014, the Company issued the holders of $100,000 of its Tenant Improvement Secured Loans five year fully vested warrants to purchase ~~310~~239,~~893~~353 shares of the Company’s common stock at a purchase price of $.60 per share in exchange for antheir ~~extension~~agreement onto extend the due date ofto ~~the Company’s unsecured promissory notes. The warrants expire on~~ December 31, ~~2018~~2014. The ~~Company estimated the~~ fair value of the warrants ~~issued~~at ~~based upon~~ the ~~application~~time of ~~the Black-Scholes option pricing model using the following assumptions: value of common share of $.49~~issuance, ~~expected life of five years; risk free interest rate of 1.73%; volatility of 63% and expected dividend yield of zero. The Company has analyzed these warrants and~~ determined ~~them~~by management to be ~~equity instruments. Accordingly~~$53,200 ~~the~~in ~~estimated fair value of~~ the ~~warrants at issuance of $74~~aggregate,~~800~~ was ~~recognized~~recorded as ~~“additional~~a ~~paid-in~~debt ~~capital”~~discount ~~on the accompanying consolidated balance sheets~~ and ~~the~~amortized ~~expense~~to ~~will be included in~~ interest expense over the term of the ~~note extensions~~extension.

In ~~connection~~April ~~with~~2014, the ~~issuance~~Company ofissued ~~senior~~the ~~subordinated~~holders ~~convertible~~of ~~notes~~$300,000 inof aits ~~private~~unsecured ~~placement~~promissory innotes ~~December~~five ~~2013,~~year ~~the Company issued~~ fully vested ~~three year~~ warrants to purchase 76643,~~923~~973 shares of the Company’s common stock at a purchase price of $.7860 per share asin ~~additional~~exchange ~~consideration~~for totheir ~~the~~agreement ~~investor. In the event that the convertible note is converted, the number of shares issuable under the warrant will be adjusted~~ to ~~100%~~extend of the ~~number~~due ofdate ~~conversion shares and the strike price adjusted~~ to ~~120%~~September of30, ~~the conversion price~~2014. The ~~Company estimated the~~ fair value of the warrants ~~issued~~at ~~based upon~~ the ~~application~~time of ~~the Black-Scholes option pricing model using the following assumptions: value of common share of $.49~~issuance, ~~strike~~determined ~~price~~by ~~$.78,~~management ~~expected~~to ~~life~~be of three years; risk free interest rate of .63%; volatility of 63% and expected dividend yield of zero. The net proceeds on the issuance of the convertible notes were allocated between the estimated fair value of the warrants at issuance of $10143,~~900~~000 ~~and the convertible notes issued~~ in the ~~offering. The Company has analyzed these warrants and determined them to be debt instruments. Accordingly~~aggregate, ~~the estimated fair value of the warrants~~ was ~~recognized~~recorded as ~~“warrant~~a ~~liability”~~debt ondiscount ~~the consolidated~~and ~~balance~~amortized ~~sheets.~~to ~~The~~interest ~~Company~~expense ~~determined~~over the ~~fair~~term ~~value~~ of the ~~warrant liability to be $10,900 at December 31, 2013~~extension.

In May 2014, the Company issued the holders of $492,500 of its Secured Senior Subordinated Convertible Promissory Notes five year fully vested warrants to purchase 985,000 shares of the Company’s common stock at a purchase price of $.60 per share in exchange for their agreement to extend the due date to December 31, 2014. The fair value of the warrants at the time of issuance, determined by management to be $217,500 in the aggregate, was recorded as a debt discount and amortized to interest expense over the term of the extension.

In connection with the issuance of senior subordinated convertible notes in a private placement in June 2014, the Company issued fully vested three-year warrants to purchase 115,386 shares of the Company’s common stock at a purchase price of $.78 per share as additional consideration to the investors. In the event that the convertible note is converted, the number of shares issuable under the warrant will be adjusted to 100% of the number of conversion shares and the strike price adjusted to 120% of the conversion price. The net proceeds on the issuance of the convertible notes were allocated between the estimated fair value of the warrants at issuance of approximately $9,600 and the convertible notes issued in the offering. The Company has analyzed these warrants and determined them to be debt instruments. Accordingly, the estimated fair value of the warrants was recognized as “warrant liability” on the consolidated balance sheets. The Company determined the fair value of the warrant liability to be approximately $6,200 at December 31, 2014.

F - 31

The following tables summarize the warrant activity:

	Shares			Weighted Average Exercise Price			Weighted Average Remaining Contractual Life (in years)
					Weighted
Outstanding at January 1, 2012		269,558		$		1.28		2.9
					Average		Weighted Average
Granted		2,949,633				.62		4.6
					Exercise		Remaining Contractual
Exercised		-				-		-
	Shares				Price		Life (in years)
Expired or cancelled		(68,757	)			2.13		-
Outstanding at January 1, 2013		3,150,434			$	.64		4.5
Exercisable at December 31, 2012		3,150,434		$		.64		4.5
Granted		3,562,914				.73		4.0
Exercised		-				-		-
Expired or cancelled		(204,933	)			.93		-
Exercisable at December 31, 2013		6,508,415		$	$	.62		3.8
Granted		2,049,447				.61		4.7
Exercised		-				-		-
Expired or cancelled		(225,000	)			1.00		-
Exercisable at December 31, 2014		8,332,862			$	.65		3.1

Warrants Outstanding and Exercisable
Number of Shares Under Warrants		Range of Exercise Prices		Expiration Date		Weighted Average Exercise Price
										Weighted
128,840		$	.37	2015		$	.37
				Range of						Average
915,651			.59-.78	2016			.77
	Number of Shares			Exercise				Expiration		Exercise
2,949,633			.49-.75	2017			.62
	Under Warrants			Prices				Date		Price
2,514,291			.59-1.00	2018			.71
	128,840			$	.37				2015	$	.37
6,508,415		$	.37-1.00			$	.62
	915,651				.59-.78				2016		.77
	3,103,481				.49-.78				2017		.63
	2,289,291				.60-1.00				2018		.68
	1,895,599				.60-.65				2019		.60
	8,332,862			$	.37-1.00					$	.65

NOTE 10. COMMITMENTS AND CONTINGENCIES

Legal Contingencies

From time to time, the Company is involved in legal matters which arise in the normal course of business. Management believes that the final resolution of such matters will not have a material adverse effect on the Company’s financial position or results of operations.

Operating Leases

The Company leases ~~its~~al ~~Irvine,~~of ~~California office from William Kirby, D.O., Inc., a related party. The Company leases~~ its clinics from unrelated third parties, which expire through 2020. Lease agreements, in addition to base rentals, generally are subject to annual escalation provisions that range from 3% to 4% and options to renew ranging from 3 years to 5 years.

The aggregate minimum future payments required on the operating leases are as follows for the years ending December 31:

2014	$	635,811
2015	$	625,613
2015		665,821
2016		574,981
2016		678,707
2017		464,847
2017		501,659
2018		193,741
2018		213,531
2019		99,631
Thereafter		~~148~~52,~~873~~480
	$	2,~~844~~011,~~402~~293

F - 32

Rent expense relating to related party leases for the years ended December 31, ~~2013~~2014 and December 31, ~~2012~~2013 approximated $4211,000 and $~~198~~42,000, respectively. Rent expense related to third party leases for the years ended December 31, ~~2013~~2014 and December 31, ~~2012~~2013 approximated $~~586~~639,000 and $~~239~~586,000, respectively.

NOTE 11. INCOME TAXES

The Company accounts for income taxes under the provisions of ASC 740, which requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns.

The components of the provision for income taxes for the years ended December 31, ~~2013~~2014 and ~~2012~~2013 is comprised of the following:

	2013		2012
	2014		2013
Current
Federal	$	–-	$	–-
State		~~800~~3,863		800
		800		800
		3,863		800
Deferred
Federal		–-		–-
State		–-		–-
Total	$	~~800~~3,863	$	800

The difference between income taxes at statutory rates and the amount presented in the consolidated financial statements is a result of the following for the years ended December 31, ~~2013~~2014 and ~~2012~~2013:

	2013			2012
	2014			2013
Computed expected income tax benefit at federal statutory rates		34%	%		34%	%
Addition to (reduction in) income taxes resulting from:
State income taxes, net of federal benefit		6%	%		6%	%
Other		-%	%		-%	%
Valuation allowance		(40%	%)		(40%	%)
Total		0%	%		0%	%

Deferred taxes arise because of temporary differences in the book and tax bases of certain assets and liabilities. Significant components of deferred taxes at December 31, ~~2013~~2014 and ~~2012~~2013 are set forth below:

	2013			2012
	2014			2013
Net operating loss carryforwards	$	45,~~286~~900,000		$	34,~~150~~286,000
Other		~~708~~1,668,000			~~209~~708,000
Less valuation allowance		(47,~~994~~568,000	)		(34,~~359~~994,000	)
Net deferred tax assets	$	–		$	–

The Company has federal tax net operating loss carryforwards of approximately $913,~~300~~200,000 and $69,200,000, at December 31, ~~2013~~2014 and December 31, ~~2012~~2013, respectively, both of which will begin expiring in ~~2028~~2030. The Company has California state tax net operating loss carryforwards of approximately $810,~~000~~900,000 and $56,~~500~~900,000, at December 31, ~~2013~~2014 and December 31, ~~2012~~2013, respectively, which will begin expiring in ~~2028~~2029. The amount of net operating loss carry forward that can be used in any one year may be limited by significant changes in ownership as defined by section 382 of the Internal Revenue Code and similar state tax laws.

F - 33

In assessing the realizability of deferred tax assets, management considered whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Based upon the Company’s history of continuing operating losses, realization of its deferred tax assets does not meet the “more likely than not” criteria under ASC 740. Accordingly, the Company has recorded a 100% valuation allowance to offset the net deferred tax assets at December 31, ~~2013~~2014 and ~~2012~~2013. For the years ended December 31, ~~2013~~2014 and ~~2012~~2013, the Company’s change in valuation allowance was approximately $12,~~635~~570,000 and $1,~~081~~635,000, respectively.

The Company will recognize interest and penalties related to unrecognized tax benefits and penalties as income tax expense. As of December 31, ~~2013~~2014, the Company has not recognized liabilities for penalties and interest as the Company does not have liabilities for unrecognized tax benefits. The Company’s income tax returns are subject to examination by the taxing authorities, generally 3three years for federal and 4four years for state (California).

NOTE 12. SUBSEQUENT EVENTS

Subsequent events have been evaluated through the date on which these financial statements have been issued.

In March ~~February 2014~~2015, the Company ~~closed~~and holders of its ~~clinic~~various indebt ~~Sugar~~instruments ~~Land,~~agreed ~~Texas~~to ~~due~~amend the terms of the agreements to ~~poor~~extend ~~financial~~the due ~~performance~~date of both principal and ~~directed~~interest ~~its~~until ~~Sugar~~January ~~Land~~1, ~~patients~~2016. Holders agreeing to the ~~Company’s~~amendment ~~location~~will ~~near~~exchange ~~the~~any ~~Houston~~warrants ~~Galleria.~~that they Inhold ~~March~~with ~~2014,~~respect to the ~~Company~~debt ~~opened~~instrument afor ~~new~~shares ~~location~~of infully ~~Frisco~~paid, ~~Texas,~~non- aassessable ~~suburb~~common stock of ~~Dallas. The~~the Company ~~relocated~~at ~~substantially~~an ~~all~~exchange rate of ~~the~~0.4 ~~equipment~~shares ~~from~~of ~~the~~common ~~Sugar~~stock ~~Land~~for ~~location~~each towarrant ~~other~~share ~~locations~~exchanged. ~~and~~Holders isrepresenting ~~presently~~$100,000 ~~negotiating~~of ~~with~~ the ~~landlord~~Company’s secured oftenant ~~the~~improvement ~~Sugar~~loans, ~~Land~~$1,350,000 ~~clinic~~of toits ~~terminate~~unsecured ~~the~~notes, ~~lease~~and or$1,167,500 ~~find~~of aits ~~tenant~~convertible tonotes ~~sublease~~have ~~the~~entered ~~space~~into such amendment.

F - 34

SIGNATURES

Pursuant to the requirements of Sections 13 or 15(d) 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.

	DR. TATTOFF, INC.

	By:	/s/ John P. Keefe
		John P. Keefe
		Chief Executive Officer

Date: April ~~March 31~~15, ~~2014~~2015

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and in the capacities on the date indicated.

	Signatures		Title		~~Date~~	Date
PRINCIPAL EXECUTIVE OFFICER
/s/ John P. Keefe		Chief Executive Officer		~~March 31, 2014~~	April 15, 2015
John P. Keefe
PRINCIPAL FINANCIAL OFFICER
/s/ Mark A. Edwards		Chief Financial Officer		~~March 31, 2014~~	April 15, 2015
Mark A. Edwards
DIRECTORS
/s/ Eugene Bauer		Chairman of the Board		March 31, 2014
		Chairman of the Board			April 15, 2015
Eugene Bauer
/s/ Eugene Bauer
/s/ Gene Burleson		Director		March 31, 2014
Eugene Bauer
Gene Burleson
/s/ Gene Burleson		Director			April 15, 2015
/s/ Joel Kanter		Director		March 31, 2014
Gene Burleson
Joel Kanter
/s/ Joel Kanter		Director			April 15, 2015
/s/ William Kirby		Director		March 31, 2014
Joel Kanter
William Kirby
/s/ John P. Keefe		Director			April 15, 2015
/s/ John P. Keefe		Director		March 31, 2014
John P. Keefe
John P. Keefe

Filing Compare · DR. TATTOFF, INC.