Overview of Current Operations
We are a publicly-traded distributor of life-saving prescription drugs and diagnostics to several channels in the healthcare industry, a Wi-Fi PDA technology provider to the lodging and satellite media industries, and a developer of patent-pending technologies for e-health and EMR applications that we employ to leverage and add value to our prescription drug and diagnostics business. Our proprietary ResidenceWare, MD@Hand and Satelink technologies manage critical data, enhance productivity and e-commerce, and facilitate communication with applications in the healthcare, apartment, hotel/motel and satellite rebroadcast industries. We have recently focused our business attention towards providing prescription drugs and medical diagnostics through several medical distribution channels.
During the next 12 months we plan to continue to focus our efforts on the following primary businesses:
· Providing medical communication devices based on networks of personal digital assistants (PDA). These products are believed to provide benefits of on demand medical information to private practice physicians, licensed medical service providers such as diagnostic testing laboratories, and medical insurers;
· The distribution of medical diagnostic products primarily aimed at institutions that service patients with diabetic and asthma related diseases and ailments. Our current market focus for these products is the long term care sector of the larger healthcare market, however we plan to expand into additional sectors where we can service certain chronic ambulatory disease states;
· The distribution and fulfillment of prescriptions for ethical pharmaceuticals primarily aimed at the indigent and uninsured sectors of the greater medical service markets. Our first market focus for these products will be those state Medicaid and Federally chartered clinics (and initiatives) where funding for pharmaceutical fulfillment enterprises exists;
· Building electronic commerce networks based on personal digital assistants (PDA) to the hotels, motels and single building, multi-unit apartment buildings with a desire to offer local advertising and electronic services to their tenants/guests; and
· Enter the cable and wireless communication industries and media enterprises with networks of personal digital assistant (PDA) technologies that link field-based installation and repair personnel with central offices for the exchange of customer order and subscription information.
We have completed the second full year of operation of our prescription drug and diabetes diagnostics. Our experiences point to a business that displays certain seasonal trends. In each of the last two operating years our order intake was concentrated in the first five months of the calendar year and then again in the last two months of the calendar year. One explanation is that these months correspond with the beginning of a prescription drug plan year where new prescription drug cards are distributed by insurers to their insured in January along with new plan formularies (price schedules). This in turn trends to influence "stocking up" buying/ordering behavior on the part of the insured.
Results of Operations for the fiscal years ended December 31, 2007 and 2006.
The following table summarizes selected items from the statement of operations at December 31, 2007 compared to December 31, 2006.
Gross Profit 408,496 34,028 374,468 1,100 %
Gross Profit Percentage of Sales 6 % 0.18 % 5.82 %
Our revenue for the fiscal year ended December 31, 2007 was $6,254,278 compared to revenue of $19,220,265 in the fiscal year ended December 31, 2006. This resulted in a decrease in revenue of $12,965,987, or 67%, from the same period a year ago. The decrease in revenue over the fiscal year ended December 31, 2006 was a result of our market focus towards the direct sale of diabetic test strips into several prescription drug channels and our efforts to increase our gross profit margin.
Cost of sales / Gross profit percentage of sales
Our cost of sales for the fiscal year ended December 31, 2007 was $5,845,782, a decrease of $13,340,455, or 70% from $19,186,237 for the fiscal year ended December 31, 2006. The decrease in the cost of sales in the current period was a direct result of our decreased sales during the year and an increase in retail market sales. In addition, pursuant to supplier agreements, we were to receive volume rebates on bulk purchases totaling $564,107. At December 31, 2006 we had not received payment on the accrued rebates and had doubt as to future collectibility therefore we wrote down the amount due at December 31, 2006.
Gross profit as a percentage of sales increased from 0.18% for the fiscal year ended December 31, 2006 to 0.18% for the fiscal year ended December 31, 2006. The increase in gross profit margin was caused by a change in our product mix whereby we increased our sales levels in the retail verses wholesale markets, which historically have a lower profit margin.
General and Administrative Expenses
General and administrative expenses for the fiscal year ended December 31, 2007 were $270,317, a decrease of $367,146, or 58%, from $637,463 for the fiscal year ended December 31, 2006. The decrease in general and administrative expenses was due over all overhead decrease from the decline in sales revenue.
Consulting services for the fiscal year ended December 31, 2007 were $728,438, an increase of $158,695, or 28%, from $569,743 for the fiscal year ended December 31, 2006. The increase in consulting services was due to our decreased sales limiting our ability to maintain internal staff.
Payroll expenses for the fiscal year ended December 31, 2007 were $342,777, a decrease of $143,150, or 29%, from $485,627 for the fiscal year ended December 31, 2006. The decrease was due to the elimination full time employees who were replaced be regional part-time and at-will specialists.
Professional fees for the fiscal year ended December 31, 2007 were $148,079, a decrease of $444,889, or 78%, from $592,968 for the fiscal year ended December 31, 2006. The decrease in professional fees was due to the elimination of previous legal fees required in connection with litigation surrounding the Ronald Kelly, etal and Investor Relations Services, Inc. matters.
Depreciation for the fiscal year ended December 31, 2007 was $46,726, a decrease of $1,301 from $48,027 for the fiscal year ended December 31, 2006. The decrease in depreciation is the expected result of asset reaching there expected useful lives.
Total expenses for the fiscal year ended December 31, 2007 were $1,536,337, a decrease of $797,791, or 34%, from $2,334,128 for the fiscal year ended December 31, 2006. The decrease in total expenses was primarily due to a reduction in general and administrative expenses and professional fees.
Net Operating Loss
Net operating loss for the fiscal year ended December 31, 2007 was $1,127,841, versus a net operating loss of $2,300,100 for the fiscal year ended December 31, 2006, a change of net operating loss of $1,172,259. The decrease in net operating loss for the year ended December 31, 2007 was primarily attributable to the decrease in overall expenses due to our limited sales activity during the year ended December 31, 2007.
Financing costs for the fiscal year ended December 31, 2007 were $45,429, a decrease of $203,979, or 82%, from $249,408 for the fiscal year ended December 31, 2006. During the year ended December 31, 2006, we paid various penalties related to our financing activities. In 2007 we did not experience the same penalties and were able to minimize our financing costs.
Interest expense for the fiscal year ended December 31, 2007 was $236,509, an increase of $31,207, or 15%, from $205,302 for the fiscal year ended December 31, 2006. The increase in interest expense was the result of changes in interest rates during the year.
Net loss for the fiscal year ended December 31, 2007 was $1,409,779, a decrease of $1,345,031, or 49%, from $2,754,810 for the fiscal year ended December 31, 2006. The decrease in net loss was the result of our overall decrease in professional fees and general and administrative expenses during the year.
Liquidity and Capital Resources
A critical component of our operating plan impacting our continued existence is the ability to obtain additional capital through additional equity and/or debt financing. We do not anticipate generating sufficient positive internal operating cash flow until such time as we can deliver our product to market, complete additional financial service company acquisitions and generate substantial revenues, which may take the next few years to fully realize. In the event we cannot obtain the necessary capital to pursue our strategic plan, we may have to cease or significantly curtail our operations. This would materially impact our ability to continue operations.
The following table summarizes our current assets, liabilities and working capital at December 31, 2007 compared to December 31, 2006.
December 31, December 31, Increase / (Decrease)
Internal and External Sources of Liquidity
MAG Entities Agreement
On February 7, 2005, we entered into agreements with Mercator Momentum Fund, LP and Monarch Pointe Fund, Ltd. (collectively, the "Purchasers") and Mercator Advisory Group, LLC ("MAG"). Under the terms of the agreement, we agreed to issue and sell to the Purchasers, and the Purchasers agreed to purchase from the Company, 20,000 shares of Series "C" Convertible Preferred Stock at $100.00 per share. During the year ended December 31, 2007 MAG converted 2,140 shares of their Series "C" preferred into 1,370,761 shares of our restricted common stock.
Additionally, we issued the following warrants: 103,125 warrants to purchase share of our common stock at $1.60 per share and 103,125 warrants to purchase shares of our common stock at $2.40 to Mercator Momentum Fund, LP; 209,375 warrants to purchase shares of our common stock at $1.60 per share and 209,375 warrants to purchase shares of our common stock at $2.40 per share to Monarch Pointe Fund, Ltd.; and 312,500 warrants to purchase shares of our common stock at $1.60 per share and 312,500 warrants to purchase shares of our common stock at $2.40 per share to MAG. All of the warrants expire on February 7, 2008.
Pinnacle Investment Partners, LP Promissory Note
On March 24, 2004, we entered into a Secured Convertible Promissory Note with Pinnacle Investment Partners, LP for the principal amount of $700,000 with an interest rate of 12% per annum. The note was secured by 212,500 shares of our common stock. Pinnacle may, at its option, at any time from time to time, elect to convert some or all of the then-outstanding principal of the Note into shares of our common stock at a conversion price of $0.08 per share, unless such conversion would result in Pinnacle being deemed the "beneficial owner" of 4.99% or more of the then-outstanding common shares within the meaning of Rule 13d-3 of the Securities Exchange Act of 1934, as amended. In the event we fail to pay any installment or principal or interest when due, the interest rate will then accrue at a rate of 24% per annum on the unpaid balance until the payment default is cured.
On February 10, 2005, we entered into a Note Extension Agreement with Pinnacle Investment Partners, LP. Subject to the terms of the new agreement; on March 24, 2005, Pinnacle agreed to pay us $340,000 and (2) pay to Pinnacle's designee, CJR Capital, LLC, $60,000 towards Pinnacle's due diligence and legal expenses related to this new agreement. This new agreement has the following consequences: (1) the principal amount due under the Note automatically increases by $400,000 to $1,100,000; (2) the Maturity Date of the newly revised Note was extended to April 24, 2006; and (3) the conversion price for those shares that underlie the Note was changed to $2.00.
On July 1, 2006, we entered into a fourth Note Extension Agreement with Pinnacle
Investment Partners, LP. Subject to the terms of the new agreement Pinnacle
agreed to pay us $35,000 and pay to Pinnacle's designee, CJR Capital, LLC,
$35,000 towards Pinnacle's due diligence and legal expenses related to the new
agreement. The new agreement has the following consequences: (1) the principal
amount due under the Note automatically increases from $1,010,309 to $1,100,000;
(2) the Maturity Date of the newly revised Note was extended to December 24, 2006; and (3) the conversion price for those shares that underlie the Note was changed to $0.30.
In addition to the above, we agreed: (1) to deliver to Pinnacle's counsel an additional 2,000,000 shares of our common stock (over and above current escrow holdings) as additional escrow security, (2) issue 150,000 shares of our common stock to Pinnacle in consideration for their willingness to enter into the extension agreement; and (3) upon receipt of any properly crafted Seller's Representation Letter, deliver to Pinnacle an opinion of counsel to the effect that commencing July 1, 2006 , Pinnacle may sell under Rule 144 promulgated under the Securities Act of 1933, as amended, shares surrendered to Pinnacle in accordance with this agreement, on condition that (1) Pinnacle uses the proceeds to pay down the indebtedness under the Note as of immediately prior to effectiveness of this agreement and (2) ceases to sell any of those Shares once that indebtedness has been paid off in full. On August 3, 2006, we were informed through media outlets and the printed press that the principals of Pinnacle Investment Partners, LP had been charged with several financial crimes and that the fund had been frozen and its officers remanded. Since August 3, 2006, the Company has not had contact with any of the Pinnacle fund management or attorney in fact. We have not delivered the shares called for under the July 1, 2006 extension after being advised by the fund management to "stand still."
Promissory Notes with Dennis Cantor and Novex International
On May 23, 2006, we entered into a promissory note with Dennis Cantor and Novex International for the principal amount of $255,000. Pursuant to the note we promised to pay Dennis Cantor and Novex International the sum of $255,000 together with interest at a rate of one half of one percent (0.5%) every ten days beginning on May 23, 2006 and running through the maturity date of June 30, 2006. In the case of a default in payment of principal, all overdue amounts under the note shall bear a penalty obligation at a rate of twelve percent (12%) per annum accruing from the maturity date. On July 1, 2006, we extended the note to July 31, 2006. We have made principal payments of $125,000 through the year ended December 31, 2007. As of December 31, 2007, the remaining principal balance was $130,000 and we are currently negotiating a revised payment schedule.
Convertible Loan Payment Agreement
On July 17, 2006, we entered into a convertible loan payment agreement with Wayne G. Knapp wherein Mr. Knapp agreed to loan the Company the sum of $200,000. The loan is for 120 days. On October 17, 2006, we renewed the note. On January 17, 2007, the parties verbally agreed to a renewal that expires on May 16, 2007. The note accrues monthly interest at a rate of 1.50% and the interest is payable quarterly in cash. The total amount owing pursuant to the agreement, was convertible at the option of Mr. Knapp at any time from July 17, 2006 until November 30, 2006, at the strike price equal to $0.32 per share or 90% of the final bid price of our common stock on the day prior to conversion with a floor price of $0.10 per share. We renewed Mr. Knapp's conversion option on January 17, 2007. We also issued Mr. Knapp a warrant to purchase 50,000 shares of our common stock at $0.32 per share through December 31, 2008. Mr. Knapp exercised his option on March 30, 2007.
Centurion Credit Resources
On November 17, 2007, we entered into an agreement with Centurion Credit Resources, LLC to secure a $1,000,000 revolving credit facility that is geared specifically to our business. This facility, offered to us at market credit rates. Terms of the credit facility allow us to increase the available credit in increments of $250,000 as our business grows. We drew down on this credit line for the first time on November 30, 2007 and have subsequently accomplished seventeen additional draw downs through December 31, 2008 and twenty two additional draw downs through March 28, 2008. We believe that this facility will adequately finance our at home diabetes diagnostics business through revenues rates of $7.5 million per quarter, and with the added credit increments offered, through $12.5 million per quarter. We are also entertaining additional proposed credit facilities.
Cash Flow. Since inception, we have primarily financed our cash flow requirements through the issuance of common stock, the issuance of notes and sales generated income. With the growth of our current business in 2006 we may, during our normal course of business, experience net negative cash flows from operations, pending receipt of revenue which often are delayed as a result of the nature of the healthcare industry. Further, we may be required to obtain financing to fund operations through additional common stock offerings and bank or other debt borrowings, to the extent available, or to obtain additional financing to the extent necessary to augment our available working capital.
Satisfaction of our cash obligations for the next 12 months.
As of December 31, 2007, our cash balance was $4,353. Our plan for satisfying our cash requirements for the next twelve months is through additional equity, third party financing, and/or debt financing. We anticipate sales-generated income during that same period of time, but do not anticipate generating sufficient amounts of positive cash flow to meet our working capital requirements. Consequently, we intend to make appropriate plans to insure sources of additional capital in the future to fund growth and expansion through additional equity or debt financing or credit facilities.
As we expand operational activities, we may continue to experience net negative cash flows from operations, pending receipt of sales or development fees, and will be required to obtain additional financing to fund operations through common stock offerings and debt borrowings to the extent necessary to provide working capital. We received a substantial number of sales orders and refill orders beginning in mid-September 2006 which we could not fill. It was not until the company entered into the agreement with Centurion Credit Resources, LLC that the company could fill orders for patients and customers on a continuous basis. Until the Centurion credit line was put in place we managed to keep a small portion of our distribution activities going when our limited resources allowed us.
Although we recorded an operating profit in the period ending March 31, 2006, we have incurred additional operating losses for the remainder of 2006 and in each quarter in 2007. Given our recent operating history, predictions of future operating results difficult to ascertain. The recent addition of a credit line has helped but we have found it increasingly difficult to transact commerce in the very cash intensive prescription drug industry. Thus, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of commercial viability, particularly companies in new and rapidly evolving technology markets. Such risks include, but are not limited to, an evolving and unpredictable business model and the management of growth. To address these risks we must, among other things, implement and successfully execute our business and marketing strategy, continue to develop and upgrade technology and products, respond to competitive developments, and continue to attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.
Expected purchase or sale of plant and significant equipment.
We do not anticipate the purchase or sale of any plant or significant equipment; as such items are not required by us at this time.
The financial statements included in this filing have been prepared in conformity with generally accepted accounting principles that contemplate the continuance of the Company as a going concern. The Company's cash position is currently inadequate to pay all of the costs associated with testing, production and marketing of products. Management intends to use borrowings and security sales to mitigate the effects of its cash position, however no assurance can be given that debt or equity financing, if and when required will be available. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and classification of liabilities that might be necessary should the Company be unable to continue existence.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
Revenue Recognition: The Company recognizes revenue on multi-deliverables in compliance with the requirements of EITF 00-21. As previously disclosed, the Company recognizes revenue based on contractual milestones achieved pursuant to terms outlined in each individual contract. Typical milestones would include completion of installation and functionality testing of hardware and/or software in the prescribed environment. Upon effective use, the client is invoiced, and the Company recognizes revenue. In addition, the company's business model assumes several types of follow-on sales, such as paid advertising and additional hardware/software sales. Paid advertising consists of commercial use of the Company's Residence Ware message management system whereby each company advertising on the Residence Ware pay a fee to the Company based on each sale generated through the advertisements. All revenue generated through the on-line adverting is recognized upon receipt of payment per SOP 97-2. Aftermarket sales and services are recognized upon shipment of product or completion of services
Stock-based Compensation: In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 123 (revised 2004) "Share-Based Payment" ("SFAS 123R), which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123R is similar to the approach described in Statement 123. However, Statement 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
Recent Accounting Developments
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159 allows the company to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. SFAS 159 is effective for fiscal years beginning after November 15, 2007. The adoption of SFAS 159 is not expected to have a material impact on our financial position, results of operation or cash flows.
In December 2007, the FASB issued SFAS No. 160, "Non-controlling Interests in Consolidated Financial Statements". This statement amends ARB 51 to establish accounting and reporting standards for the non-controlling (minority) interest in a subsidiary and for the de-consolidation of a subsidiary. It clarifies that a non-controlling interest in a subsidiary is equity in the consolidated financial statements. SFAS No. 160 is effective for fiscal years and interim . . .