NOTE

— SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations and Continuance of Operations

Skyline Medical Inc. (the "Company") was incorporated under the laws of the State of Minnesota in

2002.

Effective

August 6, 2013,

the Company changed its name to Skyline Medical Inc. As of

June 30, 2017,

the registrant had

6,189,428

shares of common stock, par value

$.01

per share, outstanding, adjusted for a

-for-

reverse stock split effective

October 27, 2016.

In this Report, all numbers of shares and per share amounts, as appropriate, have been stated to reflect the reverse stock split. Pursuant to an Agreement and Plan of Merger dated effective

December 16, 2013,

the Company merged with and into a Delaware corporation with the same name that was its wholly-owned subsidiary, with such Delaware corporation as the surviving corporation of the merger. The Company has developed an environmentally safe system for the collection and disposal of infectious fluids that result from surgical procedures and post-operative care. The Company also makes ongoing sales of our proprietary cleaning fluid and filters to users of our systems. In

April 2009,

the Company received

510

(k) clearance from the FDA to authorize the Company to market and sell its STREAMWAY® SYSTEM products.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has suffered recurring losses from operations and had a stockholders’ deficit until

August 31, 2015

whereupon the Company closed its public offering of units consisting of common stock, Series B Convertible Preferred Stock and Series A Warrants (the “Units”). There remains though, substantial doubt about its ability to continue as a going concern. The financial statements do

not

include any adjustments that might result from the outcome of this uncertainty.

Since inception to

June 30, 2017,

the Company raised approximately

$27,765,934

in equity, inclusive of

$2,055,000

from a private placement of Series A Convertible Preferred Stock,

$13,555,003

from the public offering of Units completed in

2015,

$1,739,770

from a registered direct offering completed in

2016,

$3,421,188

from the public offering of Units completed in the

first

quarter of

2017,

$358,312

from the underwriter exercising their option to purchase up to

175,000

additional shares of common stock and to acquire additional warrants to purchase up to

35,000

additional shares of common stock, and

$5,685,000

in debt financing. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources.”

Recent Accounting Developments

May 2014,

the Financial Accounting Standards Board (“FASB”) issued ASU

2014

09,

Revenue from Contracts with Customers

and created a new topic in the FASB Accounting Standards Codification ("ASC"), Topic

606,

and has since amended the standard with ASU

2015

14,

“Revenue from Contracts with Customers: Principal versus Agent Considerations (Reporting Revenue Gross versus Net),”

ASU

2016

10,

“Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing,”

and ASU

2016

12,

“Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients.”

These new standards provide a single comprehensive revenue recognition framework for all entities and supersede nearly all existing U.S. GAAP revenue recognition guidance, including industry-specific guidance. The core principle of the revenue model is that an entity should recognize revenue in a manner that depicts the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The standard is designed to create greater comparability for financial statement users across industries and also requires enhanced disclosures. The amendments are effective for annual reporting periods beginning after

December 15, 2017,

including interim periods within that reporting period. Early application is

not

permitted. The FASB allows

two

adoption methods under ASC

606.

We currently plan to adopt the standard using the “modified retrospective method.” Under that method, we will apply the rules to all contracts existing as of

January 1, 2018,

recognizing in the beginning retained earnings an adjustment for the cumulative effect of the change and providing additional disclosure comparing results to previous accounting standards. Upon initial evaluation, we believe the requirements of this standard will

not

result in a significant change to our results.

June 2014,

the FASB issued ASU

2014

12,

"Compensation - Stock Compensation"

providing explicit guidance on how to account for share-based payments granted to employees in which the terms of the award provide that a performance target that affects vesting could be achieved after the requisite service period. The amendments in this update are effective.

August 2014,

the FASB issued ASU

2014

15,

Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern

. The new standard requires management to assess an entity’s ability to continue as a going concern, and to provide related footnote disclosures in certain circumstances. The standard is effective for public entities for annual and interim periods beginning after

December 15, 2016,

with early adoption permitted. We implemented in the

first

quarter of

2017.

April 2015,

the FASB issued ASU

2015

03,

Simplifying the Presentation of Debt Issuance Costs

. Debt issuance costs related to a recognized debt liability will be presented on the balance sheet as a direct deduction from the debt liability, similar to the presentation of debt discounts, rather than as an asset. Amortization of these costs will continue to be reported as interest expense. ASU

2015

is effective.

July 2015,

the FASB issued ASU

No.

2015

, Inventory (Topic

330

): Simplifying the Measurement of Inventory

, requiring that inventory be measured at the lower of cost and net realizable value. Net realizable value is defined as estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective within annual periods beginning on or after

December

15,

2016,

including interim periods within that reporting period. This ASU is implemented.

November 2015,

the FASB issued ASU

2015

17,

“Income Taxes (Topic

740

)”

providing guidance on the balance sheet classification of deferred taxes. The guidance requires that deferred tax assets and liabilities to be classified as noncurrent in the Balance Sheet. The guidance is effective for fiscal years beginning after

December 15, 2016

and for interim periods within those fiscal years, with early adoption permitted. This ASU is implemented.

January 2016,

the FASB issued ASU

No.

2016

01,

“Financial Instruments-Overall (Subtopic

825

): Recognition and Measurement of Financial Assets and Financial Liabilities”

(“ASU

2016

01”

). The standard changes how entities measure certain equity investments and present changes in the fair value of financial liabilities measured under the fair value option that are attributable to their own credit. Under the new guidance, entities will be required to measure equity investments that do

not

result in consolidation and are

not

accounted for under the equity method at fair value and recognize any changes in fair value in net income unless the investments qualify for the new practicability exception. The standard is effective for fiscal years beginning after

December 15, 2017,

including interim periods within those fiscal years. The Company does

not

believe that the adoption of this guidance will have a material impact on the Company’s financial statements and disclosures.

February 2016,

the FASB issued ASU

No.

2016

02,

“

Leases (Topic

842

)

” (“ASU

2016

02”

), which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. The standard states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. The standard is effective for fiscal years and interim periods within those fiscal years beginning after

December 15, 2018.

Early adoption is permitted. We are currently evaluating the timing of our adoption and the impact that the updated standard will have on our financial statements.

March 2016,

the FASB issued ASU

No.

2016

09,

“

Compensation - Stock Compensation (Topic

718

): Improvements to Employee Share-Based Payment Accountin

g” (“ASU

2016

09”

). ASU

2016

simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The standard is effective for fiscal years and interim periods within those fiscal years beginning after

December 15, 2016.

Early adoption is permitted. This ASU is implemented.

During

August 2016,

the FASB issued ASU

No.

2016

15,

“Statement of Cash Flows (Topic

230

): Classification of Certain Cash Receipts and Cash Payments”,

to address diversity in how certain cash receipts and cash payments are presented and classified in the statements of cash flows. The amendments are effective for public business entities for fiscal years beginning after

December 15, 2017,

and interim periods within those fiscal years. The amendments should be applied using a retrospective transition method to each period presented. If retrospective application is impractical for some of the issues addressed by the update, the amendments for those issues would be applied prospectively as of the earliest date practicable. Early adoption is permitted, including adoption in an interim period. The Company does

not

expect the adoption of ASU

2016

to have a material impact on its financial statements.

We reviewed all other significant newly issued accounting pronouncements and determined they are either

not

applicable to our business or that

material effect is expected on our financial position and results of our operations.

Valuation of Intangible Assets

We review identifiable intangible assets for impairment in accordance with ASC

350

— Intangibles —Goodwill and Other, whenever events or changes in circumstances indicate the carrying amount

may

not

be recoverable. Our intangible assets are currently solely the costs of obtaining trademarks and patents. Events or changes in circumstances that indicate the carrying amount

may

not

be recoverable include, but are

not

limited to, a significant change in the medical device marketplace and a significant adverse change in the business climate in which we operate. If such events or changes in circumstances are present, the undiscounted cash flows method is used to determine whether the intangible asset is impaired. Cash flows would include the estimated terminal value of the asset and exclude any interest charges. If the carrying value of the asset exceeds the undiscounted cash flows over the estimated remaining life of the asset, the asset is considered impaired, and the impairment is measured by reducing the carrying value of the asset to its fair value using the discounted cash flows method. The discount rate utilized is based on management’s best estimate of the related risks and return at the time the impairment assessment is made.

Accounting Policies and Estimates

The presentation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 period. Actual results could differ from those estimates.

Presentation of Taxes Collected from Customers

Sales taxes are imposed on the Company’s sales to nonexempt customers. The Company collects the taxes from customers and remits the entire amounts to the governmental authorities. The Company’s accounting policy is to exclude the taxes collected and remitted from revenues and expenses.

Shipping and Handling

Shipping and handling charges billed to customers are recorded as revenue. Shipping and handling costs are recorded within cost of goods sold on the statement of operations.

Advertising

Advertising costs are expensed as incurred. Advertising expenses were

$17,409

and

$21,680

in the

three

and

six

months ended

June 30, 2017

and were

$42,665

and

$46,662

in the

three

and

six

months ended

June 30, 2016,

respectively.

Research and Development

Research and development costs are charged to operations as incurred. Research and development expenses were

$69,987

and

$154,459

in the

three

and

six

months ended

June 30, 2017

and were

$100,234

and

$222,395

in the

three

and

six

months ended

June 30, 2016,

respectively.

Revenue Recognition

The Company recognizes revenue in accordance with the SEC’s Staff Accounting Bulletin Topic

Revenue Recognition and ASC

605

-Revenue Recognition.

Revenue is recognized when persuasive evidence of an arrangement exists, delivery has occurred, the fee is fixed and determinable and collectability is probable. Delivery is considered to have occurred upon either shipment of the product or arrival at its destination based on the shipping terms of the transaction. The Company’s standard terms specify that shipment is FOB Skyline and the Company will, therefore, recognize revenue upon shipment in most cases. This revenue recognition policy applies to shipments of the STREAMWAY SYSTEM units as well as shipments of filters and fluids. When these conditions are satisfied, the Company recognizes gross product revenue, which is the price it charges generally to its customers for a particular product. Under the Company’s standard terms and conditions, there is

provision for installation or acceptance of the product to take place prior to the obligation of the customer. The customer’s right of return is limited only to the Company’s standard

one

-year warranty whereby the Company replaces or repairs, at its option, and it would be rare that the STREAMWAY SYSTEM unit or significant quantities of cleaning solution or filters

may

be returned. Additionally, since the Company buys the STREAMWAY SYSTEM units, cleaning solution and filters from “turnkey” suppliers, the Company would have the right to replacements from the suppliers if this situation should occur.

Cash Equivalents

The Company considers all highly liquid debt instruments with a maturity of

three

months or less when purchased to be cash equivalents. Cash equivalents are stated at cost, which approximates fair value.

Certificates of Deposit

Short-term interest bearing investments are those with maturities of less than

one

year but greater than

three

months when purchased. Certificates with maturity dates beyond

one

year are classified as noncurrent assets. These investments are readily convertible to cash and are stated at cost plus accrued interest, which approximates fair value.

Investment Securities

Readily marketable investments in debt and equity securities are classified as available-for-sale and are reported at fair value with unrealized gains and losses recorded in other comprehensive income. Unrealized gains are charged to earnings when an incline in fair value above the cost basis is determined to be other-than-temporary. Realized gains and losses on dispositions are based on the net proceeds and the adjusted book value of the securities sold, using the specific identification method.

Fair Value Measurements

Under generally accepted accounting principles as outlined in the Financial Accounting Standards Board’s

Accounting Standards Codification

(ASC)

820,

fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The accounting standards ASC

820

establishes a

three

-level fair value hierarchy that prioritizes information used in developing assumptions when pricing an asset or liability as follows:

Level

– Observable inputs such as quoted prices in active markets;

Level

– Inputs other than quoted prices in active markets, that are observable either directly or indirectly; and

Level

– Unobservable inputs where there is little or

market data, which requires the reporting entity to develop its own assumptions.

The Company uses observable market data, when available, in making fair value measurements. Fair value measurements are classified according to the lowest level input that is significant to the valuation.

The fair value of the Company’s investment securities was determined based on Level

inputs.

Receivables

Receivables are reported at the amount the Company expects to collect on balances outstanding. The Company provides for probable uncollectible amounts through charges to earnings and credits to the valuation based on management’s assessment of the current status of individual accounts, changes to the valuation allowance have

not

been material to the financial statements.

Inventories

Inventories are stated at the lower of cost or market, with cost determined on a

first

-in,

first

-out basis. Inventory balances are as follows:

	June 30, 2017		December 31, 2016

Finished goods	$	28,923	$	38,201
Raw materials		161,833		165,812
Work-In-Process		51,448		68,195
Total	$	242,204	$	272,208

Property and Equipment

Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of property and equipment is computed using the straight-line method over the estimated useful lives of the respective assets. Estimated useful asset life by classification is as follows:

	Years
Computers and office equipment		3	-	7
Leasehold improvements			5
Manufacturing tooling		3	-	7
Demo Equipment			3

The Company’s investment in Fixed Assets consists of the following:

	June 30, 2017		December 31, 2016
Computers and office equipment	$	177,641	$	164,318
Leasehold improvements		25,635		25,635
Manufacturing tooling		107,955		103,204
Demo equipment		43,798		23,236
Total		355,029		316,393
Less: Accumulated depreciation		245,100		214,897
Total Fixed Assets, Net	$	109,929	$	101,496

Upon retirement or sale, the cost and related accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations. Maintenance and repairs are charged to operations as incurred.

Depreciation expense was

$14,519

and

$30,204

in the

three

and

six

months ended

June 30, 2017,

and was

$19,212

and

$38,420

for the

three

and

six

months ended

June 30, 2016,

respectively.

Intangible Assets

Intangible assets consist of trademarks and patent costs. Amortization expense was

$2,902

and

$5,790

in the

three

and

six

months ended

June 30, 2017,

and was

$1,878

and

$3,710

in the

three

and

six

months ended

June 30, 2016,

respectively. The assets are reviewed for impairment annually, and impairment losses, if any, are charged to operations when identified.

Income Taxes

The Company accounts for income taxes in accordance with ASC

740

- Income Taxes (“ASC

740”

). Under ASC

740,

deferred tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and net operating loss and credit carryforwards using enacted tax rates in effect for the year in which the differences are expected to impact taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized.

There is

income tax provision in the accompanying statements of operations due to the cumulative operating losses that indicate a

100%

valuation allowance for the deferred tax assets and state income taxes is appropriate.

The Company reviews income tax positions expected to be taken in income tax returns to determine if there are any income tax uncertainties. The Company recognizes tax benefits from uncertain tax positions only if it is more likely than

not

that the tax positions will be sustained on examination by taxing authorities, based on technical merits of the positions. The Company has identified

income tax uncertainties.

Tax years subsequent to

2013

remain open to examination by federal and state tax authorities.

Summary of Significant Accounting Policies

March 2016,

the FASB issued ASU

2016

09,

“improvements to Employee Share-Based Payment Accounting,” which requires companies to recognize additional tax benefits or expenses related to the vesting or settlement of employee share based awards as income tax provision or benefit in the income statement in the reporting period in which they occur. In addition, ASU

2016

requires that all tax related cash flows resulting from share-based payments, including the excess tax benefits related to settlement of stock-based awards, be classified as cash flows from operating activities in the statement of cash flows. The new standard is effective for annual reporting periods beginning after

December 15, 2016,

with early adoption permitted. The Company did

not

elect to early adopt ASU

2016

09,

but rather adopted the guidance in the

first

quarter of

2017.

The adoption of ASU

2016

required

retrospective adjustments to the financial statements. In addition, there was

material cumulative-effect adjustment to retained earnings, nor did the adoption impact the tax provision for the prior or current quarter.

Income Tax Balance Sheet Classification

November 2015,

the FASB issued ASU

2015

17,

“Income Taxes (Topic

740

)” providing guidance on the balance sheet classification of deferred taxes. The guidance requires that deferred tax assets and liabilities to be classified as noncurrent in the Balance Sheet. The guidance is effective for fiscal years beginning after

December 15, 2016

with early adoption permitted. The Company adopted ASU

2015

in the

first

quarter of

2017

on a prospective basis and therefore prior periods were

not

retrospectively adjusted.

Patents and Intellectual Property

January

25th,

2014,

the Company filed a non-provisional PCT Application

No.

PCT/US2014/013081

claiming priority from the U.S. Provisional Patent Application, number

61756763

which was filed

one

year earlier on

January

25th,

2013.

The Patent Cooperation Treaty (“PCT”) allows an applicant to file a single patent application to seek patent protection for an invention simultaneously in each of the

148

countries of the PCT, including the United States. By filing this single “international” patent application through the PCT, it is easier and more cost effective than filing separate applications directly with each national or regional patent office in which patent protection is desired.

Our PCT patent application is for the enhanced model of the surgical fluid waste management system. We obtained a favorable International Search Report from the PCT searching authority indicating that the claims in our PCT application are patentable (i.e., novel and non-obvious) over the cited prior art. A feature claimed in the PCT application is the ability to maintain continuous suction to the surgical field while measuring, recording and evacuating fluid to the facilities sewer drainage system. This provides for continuous operation of the STREAMWAY System unit in suctioning waste fluids, which means that suction is

not

interrupted during a surgical operation, for example, to empty a fluid collection container or otherwise dispose of the collected fluid.

The Company holds the following granted patents in the United States and a pending application in the United States on its earlier models:

US7469727,

US8123731

and U.S. Publication

No.

US20090216205

(collectively, the “Patents”). These Patents will begin to expire on

August 8, 2023.

July 2015,

Skyline Medical filed an international patent application for its fluid waste collection system and received a favorable determination by the International Searching Authority finding that all of the claims satisfy the requirements for novelty, inventive step and industrial applicability. Skyline anticipates that the favorable International Search Report will result in allowance of its other various national applications.

Credit Risk

Financial instruments which potentially subject the Company to concentrations of credit risk consist principally of cash. The Company places its cash with high credit quality financial institutions and, by policy, generally limits the amount of credit exposure to any

one

financial institution. The Company has a credit risk concentration because of depositing

$0.9

million of funds in excess of insurance limits in a single bank.

Product Warranty Costs

In the

three

and

six

months ending

June 30, 2017,

the Company incurred approximately

$668

and

$5,012

in current warranty costs and incurred

$1,092

and

$30,981

in warranty costs for the

three

and

six

months ending

June 30, 2016,

respectively.

Segments

The Company operates in

two

segments for the sale of its medical device and consumable products. Predominantly most of the Company’s assets, revenues, and expenses for the

three

and

six

months ending

June 30, 2017

and for

2016

in entirety were located at or derived from operations in the United States. The Company completed its

first

sale outside of the United States, in Canada, in

March 2017.

Risks and Uncertainties

The Company is subject to risks common to companies in the medical device industry, including, but

not

limited to, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, and compliance with regulations of the FDA and other governmental agencies.

Interim Financial Statements

The Company has prepared the unaudited interim financial statements and related unaudited financial information in the footnotes in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial statements. These interim financial statements reflect all adjustments consisting of normal recurring accruals, which, in the opinion of management, are necessary to present fairly the Company’s financial position, the results of its operations and its cash flows for the interim periods. These interim financial statements should be read in conjunction with the annual financial statements and the notes thereto contained in the Form

-K filed with the SEC on

March 15, 2017.

The nature of the Company’s business is such that the results of any interim period

may

not

be indicative of the results to be expected for the entire year.