U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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Form 10-QSB
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 2005.
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT
For the transition period from N/A to N/A
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Commission File No. 0-25474
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MEDCOM USA, INCORPORATED
(Name of small business issuer as specified in its charter)
DELAWARE 65-0287558
State of Incorporation IRS Employer Identification No.
7975 NORTH HAYDEN ROAD, SUITE D-333
SCOTTSDALE, AZ 85258
(Address of principal executive offices)
(480) 675-8865
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 [X] No [_]
The number of shares of the issuer's common equity outstanding as of
November 11, 2005 was 59,519,936 shares of common stock.
Transitional Small Business Disclosure Format (check one):
Yes [_] No [X]
1
MEDCOM USA, INC.
INDEX TO FORM 10-QSB FILING
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheet
As of September 30, 2005 . . . . . . . . . . . . . . . . . 3
Statements of Operations
For the Three Months Ended September 30, 2005
and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows
For the Three Months Ended September 30, 2005
and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to the Financial Statements. . . . . . . . . . . . . . 6 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . .10 - 15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 3. Control and Procedures . . . . . . . . . . . . . . . . . . . . . . . 15
Item 6. Exhibits and Reports on Form 8-K
CERTIFICATIONS
Exhibit 31 - Management Certification. . . . . . . . . . . . . . . . 16
Exhibit 32 - Sarbanes-Oxley Act. . . . . . . . . . . . . . . . . . . 17
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MEDCOM USA, INC.
BALANCE SHEET (UNAUDITED)
AS OF SEPTEMBER 30, 2005
ASSETS:
CURRENT ASSETS
Cash $ 113,556
Accounts receivable, net of allowance of $21,074 655,869
Prepaid expenses and other current assets 74,977
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Total current assets 844,402
PROCESSING TERMINALS, net 2,830,942
PROPERTY AND EQUIPMENT, net 385,662
Licensing Contracts - LT 1,800,793
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TOTAL ASSETS $ 5,861,798
=============
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 259,394
Accrued expenses and other liabilities 460,960
Dividend payable 23,750
Notes from Affiliates 322,741
Deferred revenue - current portion 2,186,588
Capital lease obligations - current portion 2,311,288
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Total current liabilities 5,564,721
CAPITAL LEASE OBLIGATIONS - long-term portion 3,493,808
DEFERRED REVENUE 2,282,040
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Total liabilities 11,340,569
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STOCKHOLDERS' EQUITY:
Convertible preferred stock, Series A $.001 par value, 52,900 shares
designated, 4,250 issued and outstanding 4
Convertible preferred stock, Series D $.01 par value, 50,000 shares
designated, 2,850 issued and outstanding 29
Common stock, $.0001 par value, 80,000,000 shares authorized,
51,924,665 issued and 51,737,678 outstanding 7,622
Subscriptions receivable (20,000)
Treasury stock (37,397)
Paid in capital 76,989,164
Accumulated deficit (82,418,194)
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Total stockholders' equity (5,478,771)
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,861,798
=============
See the accompanying notes to these unaudited financial statements.
3
MEDCOM USA, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
Three Months Ended
2005 2004
--------------------------
REVENUES:
Terminal sales $ 96,604 $ 156,366
Service 721,510 428,703
Licensing Fees 1,290,216 286,403
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2,108,330 871,472
COST OF DELIVERABLES: 1,368,583 179,850
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GROSS PROFIT 739,747 691,622
--------------------------
OPERATING EXPENSES:
General and administrative 1,834,977 933,075
Sales and marketing 141,332 292,299
Professional and consulting fees - 110,400
Royalties - 26,621
Depreciation and amortization 583,275 362,389
--------------------------
Total operating expenses 2,559,585 1,724,784
--------------------------
OPERATING LOSS (1,819,838) (1,033,162)
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OTHER (INCOME) AND EXPENSES
Interest expense 77,906 200,102
Other income (49,139) (9,402)
Loss on disposal of assets - 25,016
--------------------------
Total other expense 28,767 215,716
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NET LOSS (1,848,605) (1,248,878)
==========================
NET LOSS PER SHARE:
Basic: $ (0.03) $ (0.03)
==========================
Diluted: $ (0.03) $ (0.03)
==========================
Weighted Average Common Shares Outstanding
Basic 58,090,470 49,812,487
==========================
Diluted 58,090,470 49,812,487
==========================
See the accompanying notes to these unaudited financial statements.
4
MEDCOM USA, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2005 AND 2004
2005 2004
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(1,848,605) $(1,248,878)
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 583,275 362,389
Issuance of common stock as compensation for services 698,505 96,400
Loss on disposal of assets - 25,016
Changes in assets and liabilities:
Trade accounts receivable (23,327) (193,034)
Inventories - 112,109
Prepaid and other current assets (27,641) 17,649
Other assets - (70,000)
Accounts payable and accrued liabilities (404,096) 35,115
Deferred revenue (332,392) (286,403)
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Net cash (used) in operating activities: (1,354,280) (1,149,637)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment - (116,187)
Net repayments of advances to affiliate - 635,599
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Net cash (used) and provided by investing activities: - 519,412
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on capital leases (365,700) (359,684)
Net repayments of (advances) to Affiliate (411,634)
Proceeds from sale of common stock 879,749 623,450
Proceeds from leasing transaction 1,355,215 361,032
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Net cash provided by financing activities 1,457,630 624,798
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INCREASE (DECREASE) IN CASH 103,350 (5,427)
CASH, BEGINNING OF PERIOD 10,207 86,621
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CASH, END OF PERIOD $ 113,556 $ 81,194
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 77,000 $ 212,582
============ ============
Income taxes paid - -
============ ============
Terminals capitalized under sales/leaseback transactions $ - $ 334,671
============ ============
Terminals returned and placed back into inventory at net
capitalized cost $ - $ 55,625
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See the accompanying notes to these unaudited financial statements
5
MEDCOM USA, INC.
NOTES TO FINANCIAL STATEMENTS PERIODS ENDED SEPTEMBER 30, 2005 AND 2004
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements represent the financial position
of MedCom USA, Inc. ("Company") as of September 30, 2005 and includes results
of operations of the Company for the three months ended September 30, 2005 and
2004 and cash flows for the three months ended September 30, 2005 and 2004.
These statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and the instructions for
Form 10-QSB. Accordingly, they do not include all the information and footnotes
required by generally accepted accounting principles ("GAAP") for complete
financial statements. In the opinion of management, all adjustments to these
unaudited financial statements necessary for a fair presentation of the results
for the interim period presented have been made. The results for the three
months ended September 30, 2005 and 2004 may not necessarily be indicative of
the results for the entire fiscal year. These financial statements should be
read in conjunction with the Company's Form 10-KSB for the fiscal year ended
June 30, 2005, including specifically the financial statements and notes to such
financial statements contained therein.
Accounting Policies and 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. A summary of significant accounting policies are
detailed in notes to the financial statements which are an integral component of
this filing.
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include all short-term liquid investments that are
readily convertible to known amounts of cash and have original maturities of
three months or less. At times cash deposits may exceed government insured
limits.
Concentration of Credit Risk
----------------------------
The Company maintains its operating cash balances in banks in Islandia, New
York, and in Scottsdale, Arizona. The Federal Depository Insurance Corporation
(FDIC) insures accounts at each institution up to $100,000. The Company has
entered into agreements with Tesia-PCI. The agreements entered into by and
between the Company and Tesia-PCI represents of a major customer of the Company.
Inventories
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For the period ending September 30, 2004, inventories were carried at the lower
of cost or market on a first-in first-out basis. The Company purchases hardware
from its supplier and records inventory at its original cost. Inventory
terminals are at times returned by customers, and if these units have been sold
and repurchased under sale-leaseback transactions, the Company records the
returned inventory units at the amortized capitalized cost under the
sale-leaseback arrangements. The capitalized costs under the sale-leaseback
transactions are substantially greater than the original purchase price from the
supplier. Due technological changes terminal are
6
no longer an integral component in the generation of revenue. Accordingly
effective July 1, 2005 terminals are expensed rather than capitalized as
inventory terminals that have a nominal individual value. For the period ending
September 30, 2005 the Company adopted a new method of accounting and no longer
carries inventory "See Revenue Recognition"
Property and Equipment
----------------------
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is recorded on a straight-line basis over the estimated useful
lives of the assets ranging from 3 to 5 years. The Company's leaseback
transactions of processing terminals to healthcare providers are generally for a
period of 48 to 60 months. Depreciation expense for the leased terminal assets
are on the straight-line method over the term of the lease in amounts necessary
to reduce the carrying amount of the terminal asset. Estimated and actual
residual values are reviewed on a regular basis to determine that depreciation
amounts are appropriate.
Property & Equipment 825,651.64
Accumulated Depreciation (439,990.02)
------------
Net Property & Equipment 385,661.62
Assets Held under Capital Leases
--------------------------------
Assets held under capital leases are recorded at the lower of the net present
value of the minimum lease payments or the fair value of the leased asset at the
inception of the lease. Amortization expense is computed using the straight-line
method over the shorter of the estimated useful lives of the assets or the
period of the related lease. Effective July 1, 2005, the Company has adopted a
new method of accounting and will discontinue the capitalization of terminal
Assets. (See "Revenue Recognition")
Amortization of Leasehold Improvements
--------------------------------------
Amortization of leasehold improvements is computed using the straight-line
method over the shorter of the remaining lease term or the estimated useful
lives of the improvements. All leasehold improvements have been fully amortized
as of September 30, 2005.
Revenue Recognition
-------------------
The Company recognized income on monthly service and transaction fees it charges
to customers in the month in which the service is provided. Prior to July 1,
2005, income on sale-leaseback transactions is deferred and recognized over the
term of the leaseback. Management has determined that the sale-leaseback
transactions are capital leases.
The terminals are capitalized at the value determined by the lessor on the basis
of the cash flow under the terms of the sale and service agreements with the
customers are as follows.
Terminal Assets 6,197,320.00
Accumulated Amortization (3,366,378.48)
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Net Terminal Assets 2,830,941.52
The Company has since upgraded its technology to address its core revenue model
that is the sale of medical software. In recognition of the change in revenue
generation the Company has adopted a new accounting method effective July 1,
2005, in accordance with SOP 97-2 and EITF 00-21, which they believe better
matches revenue and expenses.
7
SOP 97-2 applies to all entities that license, sell, lease, or market computer
software. It also applies to "hosting" arrangements in which the customer has
the option to take possession of the software. Hosting arrangements occur when
end users do not take possession of the software but rather the software resides
on the vendor's or a third party's hardware, and the customer accesses and uses
the software on an as-needed basis over the Internet or some other connection.
It does not, however, apply to revenue earned on products containing software
incidental to the product as a whole or to hosting arrangements that do not give
the customer the option of taking possession of the software.
SOP 97-2 provides that revenue should be recognized in accordance with contract
accounting when the arrangement requires significant production, modification,
or customization of the software. When the arrangement does not entail such
requirements, revenue should be recognized when persuasive evidence of an
agreement exists, delivery has occurred, the vendor's price is fixed or
determinable, and collectibility is probable.
The largest part of revenues stems from vendors' license fees associated with
software. The Company has recognized revenue from license fees when the software
was shipped to the customer. The amount and timing of revenue recognition is
complicated, however, by multiple-element arrangements that provide for multiple
software deliverables [e.g., software products, upgrades or enhancements,
postcontract customer support (PCS), or other services]. In hosting arrangements
that are within the scope of SOP 97-2, multiple elements might include specified
or unspecified upgrade rights, in addition to the software product and the
hosting service. The software provider often charges a single fee that must be
allocated to the products delivered in the present and in the future.
In an arrangement with multiple deliverables, EITF 00-21 requires that the
delivered items be considered a separate unit of accounting if the delivered
items have value to the customer on a stand-alone basis, if there is objective
and reliable evidence of the fair value of the undelivered items, and if the
arrangement includes a general right of return for the delivered item, or if
delivery or performance of the undelivered items is considered probable and
substantially in the control of the vendor. EITF 00-21 requires allocation of
the vendor's fee to the various elements based on each element's stand-alone
value.
In general, both SOP 97-2 and EITF 00-21 require allocating revenue to all of
the elements of a multiple-deliverable arrangement using the relative fair value
method, where objective and reliable evidence of fair value is present for all
the products contained in the group.
Management has established Vendor-Specific Objective Evidence ("VSOE") for
access fee, equipment, provider enrollment fee, EDI connectivity fee,
Payer/Provider fee, benefit verification fee, referral transfer fee, service
authorization fee, claim status, training, support, program upgrades, carrier
editions, and customized reports. Revenue is accordingly allocated and
recognized based on the value of deliverables.
Income Taxes
------------
Management evaluates the probability of the utilization of the deferred income
tax assets. The Company has estimated a $23,652,000 deferred income tax asset
at September 30, 2005. Of that amount, $20,281,000 related to net operating
loss carry-forwards at September 30, 2005. Management determined that because
the Company has not yet generated taxable income it was not appropriate to
recognize a deferred income tax asset related to the net operating loss
carry-forward. Therefore, a fully deferred income tax asset is offset by an
equal valuation allowance.
If the Company begins to generate taxable income, management may determine that
all of the deferred income tax asset may be recognized. Recognition of the
asset could increase after tax income in the future. Federal Net
8
operating loss carryforwards of $51,189,000 expire from 2011 to 2023. State net
operating loss carryforwards of $29,603,000 expire from 2005 to 2008. During
the year ended June 30, 2005, the Company reduced the deferred income tax asset
related to net operating loss carryforwards by $3,484,000 resulting from the
expiration of such carryforwards. The future utilization of the net operating
losses is uncertain. The valuation allowance on the deferred income tax asset
was decreased by $1,648,702 in the year ended June 30, 2005, resulting primarily
to the expiration of net operating loss carryforwards.
Fair Value of Financial Instruments
-----------------------------------
Financial instruments consist primarily of accounts receivable, and obligations
under accounts payable, accrued expenses, capital lease obligations and notes
payable. The carrying amounts of accounts receivable, accounts payable, accrued
expenses and notes payable approximate fair value because of the short maturity
of those instruments. The carrying value of the Company's capital lease
arrangements approximates fair value because the instruments were valued at the
cost of the equipment at the time the Company entered into the arrangements. The
Company has applied certain assumptions in estimating these fair values. The use
of different assumptions or methodologies may have a material effect on the
estimates of fair values.
Net Loss Per Share
------------------
Net loss per share is calculated using the weighted average number of shares of
common stock outstanding during the year. The Company has adopted the provisions
of Statement of Financial Accounting Standards No. 128, Earnings Per Share.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
This may 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.
Stock-Based Compensation
------------------------
Statements of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, ("SFAS 123") established accounting and disclosure requirements
using a fair-value based method of accounting for stock-based employee
compensation. In accordance with SFAS 123, the Company has elected to continue
accounting for stock based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees."
Intangible Assets
-----------------
Goodwill was recognized in the Company's acquisition of Medcard. Since that
time, the Company has divested of all other business segments. Management had
impaired the assets in total since there was not sufficient evidence that the
Company will generate operating income and operating cash flows. The technology
of the company has changed that the asset no longer has value.
Impairment of Assets
--------------------
The Company performs an assessment of impairment of long-lived assets
periodically whenever there is an indication that the carrying amount of the
asset may not be recoverable. Recoverability of these assets is determined by
comparing the forecasted undiscounted cash flows generated by those assets to
the assets' net
9
carrying value. The amount of impairment loss, if any, is measured as the
difference between the net book value of the assets and the estimated fair value
of the related assets.
2. Subscriptions Receivable
The Company is obligated to issue shares of its common stock for those that have
subscribed for stock, however final payment has not been received. As of
September 30, 2005, the amount of subscribed stock is $20,000 and is shown as
"Subscriptions Receivable" in the Company's Balance Sheet.
3. Common Stock Transactions
During the three months ended September 30, 2005, the Company issued 1,156,999
shares of common stock for net cash proceeds of $591,750. Additionally, the
Company granted 167,040 common shares as consideration for services. The
Company issued 12,997 shares of common stock for the exercise of cashless
warrants granted in a prior private placement. The Company issued 518,468
common stock in consideration of services and compensation.
There were no options granted in the end of the period of September 30, 2005 and
all options previously granted have been fully vested and therefore there is no
pro forma effects for the year ended Common stock warrants issued in the year
ended September 30, 2005 consist of the following:
Number Exercise
of Price
Warrants ---------
--------------
628,991 $ 4.00
678,400 $ 1.00
390,400 $ 2.75
94,400 $ 3.00
148,999 $ 4.00
20,000 $ 4.50
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1,961,190
==============
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This portion of this Quarterly Report on Form 10-Q, includes statements that
constitute "forward-looking statements." These forward-looking statements are
often characterized by the terms "may," "believes," "projects," "expects," or
"anticipates," and do not reflect historical facts. Specific forward-looking
statements contained in this portion of the Quarterly Report include, but are
not limited to our ability to manage growth, involvement in litigation,
competition in the health electronic transaction processing, ongoing contractual
relationships, dependence upon key personnel, changes in customer demand for
product and services, and the adoption of new, or changes in, accounting
policies, practices and estimates and the application of such policies,
practices, and estimates, and federal and state governmental regulation,
specifically in the areas of electronic transaction processing in the health
care industries.
Forward-looking statements involve risks, uncertainties and other factors, which
may cause our actual results, performance or achievements to be materially
different from those expressed or implied by such forward-looking statements.
Factors and risks that could affect our results and achievements and cause them
to materially differ from those contained in the forward-looking statements
include those identified in the section
10
titled "Risk Factors" in the Company's Annual Report on Form 10-KSB for the year
ended June 30, 2005, as well as other factors that we are currently unable to
identify or quantify, but that may exist in the future.
In addition, the foregoing factors may affect generally our business, results of
operations and financial position. Forward-looking statements speak only as of
the date the statement was made. We do not undertake and specifically decline
any obligation to update any forward-looking statements.
OVERVIEW
MedCom USA, Inc.(the "Company") a Delaware corporation was formed in August 1991
under the name Sims Communications, Inc. The Company's primary business was
providing telecommunications services. In 1996 the Company introduced four
programs to broaden the Company's product and service mix: (a) cellular
telephone activation, (b) sale of prepaid calling cards, (c) sale of long
distance telephone service and (d) rental of cellular telephones using an
overnight courier service. With the exception of the sale of prepaid calling
cards, these four programs were discontinued in December 1997. During the
fiscal year of 1998, the Company diversified its operations and moved into the
area of medical information processing.
The Company changed its name to MedCom USA, Inc. in October 1999. During the
fiscal years of 1999 and continuing through 2000, the Company directed its
efforts in medical information processing. As of September 30, 2005, the Company
currently operates the Medcard System (Medcard) that is deployed through a
point-of-sale terminal or personal computer offering electronic transaction
processing, as well as insurance eligibility verification. The Company has
aggressively focused on its primary operations in Electronic Data Interchange
(EDI) and core business in electronic Medical Transaction Processing.
MEDICAL TRANSACTION PROCESSING
------------------------------
MEDCARD SYSTEM
The Company provides innovative technology-based solutions for the healthcare
industries that enable users to efficiently collect, use, analyze and
disseminate data from payers, health care providers and patients. The Medcard
System currently operates through a point-of-sale terminal or a personal
computer. The point-of-sale terminals are purchased from Hypercom Corporation
(Hypercom). The Medcard System also operates a PC version and an on-line
version. The Company is in the process of assessing the feasibility of offering
a service bundled package that would have the capability of processing unlimited
claims and eligibility verification for monthly service fees.
FINANCIAL SERVICES
The Company's credit card center and check services, provides the healthcare
industry a combination of services designed to improve collection and approvals
of credit/debit card payments along with the added benefit and convenience of
personal check guarantee from financial institutions.
Flex-pay is an accounts receivable management program that allows a provider to
swipe a patient's credit card and store the patient's signature in the
terminals, and bill the patient's card at a later date when it is determined
what services rendered were not covered by the patient's insurance. Also, an
easy-pay option is offered which allows patient's the added benefit and
convenience of a one-time payment option or a recurring installment payments
that will be processed on a specified date determined by the provider and
patient. These options insure providers that payments are timely processed with
the features of electronic accounts receivable management. These services are
all deployed thorough point-of-sale terminals or a personal computer. Using
11
the MedCard system, medical providers are relieved of many of the problems
associated with billings and account management, and results in lower
administrative documentation and costs.
PATIENT ELIGIBILITY
The MedCard System is also an electronic processing system that consolidates
insurance eligibility verification, processes medical claims, and monitors
referrals. The MedCard System allows a patient's primary care physician to
request approval from the patient's insurance carrier or managed care plan for a
referral to a secondary physician or specialist. The secondary physician or
specialist can use the MedCard system to verify referrals are approved by the
patient's insurance carrier. The MedCard system's referral capabilities reduce
documentation and administrative costs which results in increased productivity
and greater patient information for the specialist, as well as a written record
of the referral authorization.
The MedCard System can record and track encounters between patients and health
care providers for performance evaluation and maintenance of records. After
examining a patient the physician enters a patient's name, procedure code and
diagnostic code at a nearby terminal. This information is then uploaded to
MedCom's computer network, processed and transmitted back to the provider
formatted in both summary and/or detailed reports, and as a result healthcare
providers' reimbursements are accelerated and account receivables are reduced.
The average time it takes the healthcare providers to collect payments from
insurance carriers and plans decreases from an average of 89 days to 7-21 days.
Health care providers will benefit from a 100% paperless claim processing
system.
As of June 30, 2005 the MedCard system was able to retrieve on-line eligibility
and authorization information from approximately 150 medical insurance companies
and electronically process and submit billings for its healthcare providers to
over 1,700 companies. These insurance providers include CIGNA, Prudential,
Oxford Health Plan, United Health Plans, Blue Cross, Medicaid, Aetna, Blue
Cross/Blue Shield, and Prudential.
PATENT
The Company has the ability to market and sell licensing opportunities for the
MedCom proprietary patented technology for Activating Phone card and Gift Card
at retail. The patent covers the technology and process for taking a card with
magnetic strip or other data capture mechanism and activating the card by
downloading a determined monetary value onto the card for use at a later date
for different types of transactions. This process can be utilized for prepaid
phone cards, gift cards, and affinity cards. New View Technologies, which was
acquired by MedCom USA, developed the patent and all patents were assigned.
COMPETITION
Competing health insurance claims processing and/or benefit verification systems
include WebMD (HLTH), NDCHealth (NDC), and Per-se Technologies (PSTI). There
are similar companies that compete with the Company with respect to its
financial transaction processing services performed by the MedCard system.
These companies compete with the Company directly or to some degree. Many of
these competitors are better capitalized than the Company, and maintain a
significant market share in their respective industries.
TECHNICAL SUPPORT ASSISTANCE
The Company offers multiple training options for its products and services and
is easily accessed at www.Medcard.com. The online E-learning tools enable
---------------
health care professionals and health providers an opportunity to familiarize
themselves with the Health Insurance Portability and Accountability Act (HIPAA)
12
and also the mandates and compliance issues. Onsite training and
teleconferencing, and technical support assistance are also features offered to
health care providers. Also, a 24-hour terminal replacement program and system
upgrades are offered.
MARKETING STRATEGY
Medcard's marketing plan is built around a strategy of expanding its sales
capacity by using experienced external Independent Sales Organizations (ISO) and
putting less reliance on an internal sales force. Medcom has set-up these
Independent Sales Organizations (ISOs) to market and distribute the Medcard
System throughout the U.S. Currently, there are 16 active ISOs promoting the
Medcard system, with an average ISO that contains approximately 10-20 sales
people, some selling the Medcard System exclusively. Financial service
companies comprise an important sales channel that views the healthcare industry
as an important growth opportunity. Only 6% of all healthcare payments are made
with a credit card today, although according to a recent survey 55% of all
consumers would prefer to pay doctor and hospital visits by credit/debit card.
SERVICE AGREEMENTS
During December 1998, the Company entered into a service agreement with WebMD
Envoy. This agreement encompasses the process of Electronic Data Interchange
(EDI) and related services. The services provided are complimentary to the
Company's core business, and accomplishes transaction processing services that
allows healthcare providers and payers to process medical transactions quickly
and accurately, and results in reduced administrative costs and an increase in
healthcare reimbursements to healthcare providers.
During January 2002, the Company has entered into a service agreement with
MedUnite. This alliance will encompass the utilization of proprietary
technologies and will enhance the existing network of healthcare constituents.
Strategically both companies share the same vision of transforming the
healthcare transactions systems affecting how healthcare providers, health
plans, and other groups transacting business with one another by significantly
reducing claim and payment processing time, and reducing healthcare
administrative costs.
During February 2004, the Company entered into a service agreement with CDS
Capital. This agreement will enable eligible healthcare providers utilizing the
Medcom terminals to finance their accounts receivables. Health care providers
using the Medcom terminal to secure patient eligibility and process claims will
now be able to receive regular payments for a large percentage of claims
processed from the previous week. This financial management service will
decrease the time and costs associated with accounts receivable collections.
During June 2005, the Company entered into a service agreement with Tesia-PCI.
This agreement to replace and service and support at a minimum of 1,500 POS
terminals inclusive of eligibly, claims processing, credit card processing for
Tesia's dental providers.
PROCESSING TERMINAL LEASING AGREEMENTS
The Company has entered into leasing agreements for the purpose of leasing
contracts. The Company has pledged and granted for collateral in connection
with the lease agreements one million restricted common shares. These common
shares would be surrendered upon default of the leasing agreements. This pledge
and granting of security interest was executed on January 2002.
The Company has arranged its terms with this credit facility as an equipment
lessor whereby the Company sells terminals to the lessor when it has obtained a
service contract with a provider. Under these agreements, the Company is
leasing back the processing terminals from the lessor and in turn leases them to
the purchaser for a
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period of 48 to 60 months however; the customer may terminate the agreement
after 12 months. The Company is accounting for the transactions as
sale-leasebacks. The leases with the customers are inclusive with the monthly
service contracts and are effectively accounted for as operating leases. Gains
on terminal sales under sale-leaseback transactions are deferred and are being
amortized to income in proportion to amortization of the assets, generally over
the term of the lease with the credit facility generally for a period of 48 to
60 months. At September 30, 2005, the remaining deferred revenue of $2,282,040
in the Company's Balance Sheet. For the three months ended September 30, 2005,
the total interest expense incurred by the Company under these leases was
$77,906.
REVENUES
Revenues from the Medcard system are generated through the sale of terminals,
and processing insurance eligibility/verification, insurance claims, and
financial transaction processing. The Company receives a fixed amount per
terminal, and also receives fees for each transaction processed through the
Medcard System. Revenue sources include fees for financial transactions
processed through the terminal, fees for collection of receivables if the
Company provides billing services, fees associated with reimbursements made by
insurance carriers for submitting claims that are processed electronically, fees
for using the system's referral program and, fees for processing uploaded data.
The Company also markets a complete billing service using the Medcard System for
hospitals and large practice groups. The Company receives a percentage of the
billing amount collected under these arrangements.
The Company has adopted a new method of accounting and revenue recognition in
accordance with SOP 97-2 and EITF 00-21 (See "Revenue Recognition")
ADDITIONAL INFORMATION
Medcom files reports and other materials with the Securities and Exchange
Commission. These documents may be inspected and copied at the Commission's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. You
can obtain information on the operation of the Public Reference Room by calling
the Commission at 1-800-SEC-0330. You can also get copies of documents that the
Company files with the Commission through the Commission's Internet site at
www.sec.gov.
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RESULTS OF OPERATIONS
Revenues for the quarter ended September 30, 2005 increased to $2,108,330 as
compared to the quarter ended September 30, 2004 of $871,472. This increase in
revenue is directly the result of changes in the Company's strategic direction
in core operations. The Company continues to aggressively pursue and devote its
resources and focus its direction in electronic transaction processing. The
increase in income relates to the implementation of the change in accounting
method that was adopted a new method accounting. The prior accounting method
was in accordance of SAFS 13 implementation of the sale lease back method. The
company adopted and accounting method in accordance with SOP 97-2 and EITF 00-21
which applies to entities that sell computer software.
Cost of sales for the quarter ended September 30, 2005 increased to $1,368,583
as compared to quarter ended September 30, 2004 of $179,850. Increase in the
volume of sales has directly increased the volume of transaction processing and
as a result has increased the total costs of processing transactions. The
company adopted a method of accounting that provided a better matching of income
and expenses and is in accordance to SOP 97-2 and EITF 00-21. The company in
the past generated sales for the sale of medical terminal and the company
developed proprietary software that can be sold through a portal system which
rendered the medical terminals sales not the core revenue model for the Company.
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General and administrative expenses for quarter ended September 30, 2005
increased to $1,834,977 as compared to quarter ended September 30, 2004 of
$933,075. This increase is attributed to the Company's hiring of additional
employees as growth has occurred in the area of providing technical support for
our products and services in relation to increases in sales. The Company issued
stock for services in the amount of $591,000 which increased the overall General
and Administrative expenses. The Company also combined professional fees with
general and administrative expenses to better report financial position.
Selling expenses for the quarter ended September 30, 2005 decreased to $141,332
as compared to quarter ended September 30, 2004 of $141,332. This decrease is
primarily the result of the decrease in marketing efforts and includes
commissions paid to external sales personnel to market the Company's products
and services. The Company has begun a campaign to increase internal sales force
in 5 separate states to maintain the integrity of the product proprietary
technology. The Company's increases in General and Administrative costs reflect
this new Corporate Campaign.
Interest expense for the quarter ended September 30, 2005 decreased to $77,906
as compared to September 30, 2004 of $200,102. This decrease is a result of
payments made and interest income recognized from the note receivable made to
the affiliate. Further the Company has been accelerating payments to Ladco one
of its financing arrangement. The payments to Ladco represent a high interest
rate and it has been a Company initiative to reduce the Ladco debt. Interest
Income for the quarter ended September 30, 2005 increased to $49,139 as compared
to September 30, 2004 of $9,402. The increase in interest income is a result of
the implementation of the new accounting method that better considers interest
earned on the lease contracts in accordance with SOP 97-2 and EITF 00-21.
Depreciation and Amortization for the quarter ended September 30, 2005 increased
to $583,275 as compared to September 30, 2004 of $362,389. This increase is a
result of accelerated depreciation of terminal assets. The accelerated
retirement of those assets is a result of the change in accounting method that
better reflects the change in company revenue generation model.
No tax benefit was recorded on the expected operating loss for the quarter ended
September 30, 2005 as required by Statement of Financial Accounting Standards
No. 109, Accounting for Income Taxes. For the quarter ended we do not expect to
realize a deferred tax asset and it is uncertain, therefore we have provided a
100% valuation of the tax benefit and assets until we are certain to experience
net profits in the future to fully realize the tax benefit and tax assets.
Net loss for the quarter ended September 30, 2005 was ($1,848,605) compared net
loss for the quarter ended September 30, 2004 of ($1,248,878).
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the three months ended September 30, 2005,
was ($1,354,280) as compared to cash used in operating activities for the three
months ended September 30, 2004 of ($1,149,637). Overall sales have increased
in the areas of direct sales along with sales-leaseback transactions. The
increase in cash used in operating activities was a result in the change in
accounting method to better match income and expenses and further related to the
decrease in accounts payables and decrease in deferred revenue.
Cash used for investing activities for the three months ended September 30, 2004
was $519,412. There has been terminal equipment that has been transacted as
sales-leaseback transactions and terminal software upgrade expenses that have
been incurred.
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Cash provided by financing activities was $1,457,630 for the three months ended
September 30, 2005 compared to cash provided by financing activities for the
three months ended September 30, 2004 of $624,798. The Company has increased
the amount of transacted sales in connection with its terminal equipment though
direct sales, and as a result has decreased sales and the related financing
through its credit facility. The Company increased proceeds from capital leases
by $1,355,215, collected $879,749 in proceeds from the sale of common stock and
repaid capital leases facilities by $365,700. The Company repaid its affiliate
$411,634.
SOURCES OF CAPITAL
The Company has secured an arrangement with a third party leasing company to
provide funds upon the execution of a rental and service agreement with a
customer. Generally, the health care provider customer will enter into an
agreement with the Company to rent a terminal and subscribe to the transaction
processing and insurance verification service. At that time, the Company will
sell the terminal associated with the service contract to the lessor and then
leaseback that terminal. The leasing transactions provide for funding to the
Company to cover its cost of the terminal, placement of the terminal with the
customer and a profit margin. The Company is generally required to pay the
lease rentals to the lessor from 48 to 60 months. The source of funds for those
repayments is the rental payments from the health care provider customer. The
Sources of Capital come from the companies of Ladco and Leeco who is our main
provider of financing for the Company.
OTHER CONSIDERATIONS
There are numerous factors that affect our business and the results of its
operations. Sources of these factors include general economic and business
conditions, federal and state regulation of business activities, the level of
demand for the Company's product or services, the level and intensity of
competition in the medical transaction processing industry and the pricing
pressures that may result, the Company's ability to develop new services based
on new or evolving technology and the market's acceptance of those new services,
the Company's ability to timely and effectively manage periodic product
transitions, the services, customer and geographic sales mix of any particular
period, and the ability to continue to improve infrastructure including
personnel and systems, to keep pace with the growth in its overall business
activities.
FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this Form 10-QSB contains
express or implied forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Exchange Act. The Company
intends that such forward-looking statements be subject to the safe harbors
created thereby. The Company may make written or oral forward-looking statements
from time to time in filings with the SEC, in press releases, or otherwise. The
words "believes," "expects," "anticipates," "intends," "forecasts," "project,"
"plans," "estimates" and similar expressions identify forward-looking
statements. Such statements reflect the current views with respect to future
events and financial performance or operations and are only as of the date the
statements are made. Forward-looking statements involve risks and uncertainties
and readers are cautioned not to place undue reliance on forward-looking
statements. The Company's actual results may differ materially from such
statements. Factors that cause or contribute to such differences include, but
are not limited to, those discussed elsewhere in this Form 10-QSB, as well as
those discussed in Form 10-KSB which is incorporated by reference in this Form
10-QSB.
Management believes that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the results contemplated in such
forward-looking statements will be realized. The inclusion of such
forward-looking information should not be regarded, as a representation that the
future events, plans, or expectations contemplated will be achieved. The Company
undertakes no obligation to publicly update, review, or revise any
forward-looking statements to
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reflect any change in expectations or any change in events, conditions, or
circumstances on which any such statements are based. Our filings with the
Securities Exchange Commission, including the Form 10-KSB, and may be accessed
at the SEC's web site, www.sec.gov.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Medcom is involved in various legal proceedings and claims as described in
our Form 10-KSB for the year ended June 30, 2005. No material developments
occurred in any of these proceedings during the quarter ended September 30,
2005. The costs and results associated with these legal proceedings could be
significant and could affect the results of future operations.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed with an objective of ensuring
that information required to be disclosed in our periodic reports filed with the
Securities and Exchange Commission, such as this Quarterly Report on Form 10-Q,
is recorded, processed, summarized and reported within the time periods
specified by the Securities and Exchange Commission. Disclosure controls are
also designed with an objective of ensuring that such information is accumulated
and communicated to our management, including our chief executive officer, in
order to allow timely consideration regarding required disclosures.
The evaluation of our disclosure controls by our principal executive officer
included a review of the controls' objectives and design, the operation of the
controls, and the effect of the controls on the information presented in this
Quarterly Report. Our management, including our chief executive officer, does
not expect that disclosure controls can or will prevent or detect all errors and
all fraud, if any. A control system, no matter how well designed and operated,
can provide only reasonable, not absolute, assurance that the objectives of the
control system are met. Also, projections of any evaluation of the disclosure
controls and procedures to future periods are subject to the risk that the
disclosure controls and procedures may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may
deteriorate.
Based on their review and evaluation as of the end of the period covered by this
Form 10-Q, and subject to the inherent limitations all as described above, our
principal executive officer have concluded that our disclosure controls and
procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities
Exchange Act of 1934) are effective as of the end of the period covered by this
report. They are not aware of any significant changes in our disclosure controls
or in other factors that could significantly affect these controls subsequent to
the date of their evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses. During the period covered by
this Form 10-Q, there have not been any changes in our internal control over
financial reporting that have materially affected, or that are reasonably likely
to materially affect, our internal control over financial reporting.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
Changes in Registrant's Certifying Accountant.
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SIGNATURES
In accordance with Section 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, there unto duly authorized.
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