15-May-2007
Quarterly Report
OVERVIEW AND OUTLOOK
We are a 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.
The company continues to exploit is business prospects. We have added additional supply channels to our distribution operations, we have recently added additional product lines and are now servicing parallel markets. However, the company's working capital reserves have been depleted and we have been forced for the last ten months to delay fulfillment of many sales orders.
Results of Operations for the Three Months Ended March 31, 2007 and 2006.
The following table summarizes selected items from the statement of operations for the three months ended March 31, 2007 compared to March 31, 2006.
INCOME: |
Revenue
Our revenue for the three months ended March 31, 2007 was $1,083,282, compared to revenue of $7,466,921 in the three months ended March 31, 2006. This resulted in a decrease in revenue of $6,383,639, or 85%, from the same period a year ago. The decrease in revenue was
Cost of sales / Gross profit percentage of sales
Our cost of sales for the three months ended March 31, 2007 was $888,652, a decrease of $5,919,168, or 87% from $6,807,820 for the three months ended March 31, 2006. The decrease in the cost of sales in the current period was a direct result of our decrease in sales. We lack sufficient operating capital required for the pre-purchase of goods and we have experienced additional competition in the overall market place, we have focused on managing the productivity of our current market share through our profit margins.
Gross profit as a percentage of sales increased from 9% for the months ended March 31, 2006 to 18% for the three months ended March 31, 2007. The increase in gross profit margin was caused by our ability to manage our purchasing in order to achieve increased spread in our retail pricing.
EXPENSES: |
Net income (loss) $ (403,185) $ 39,764 442,949 1,114%
General and Administrative
Our general and administrative expenses relate to the operation and leasing costs of our corporate office and warehouse. General and administrative expenses for the three months ended March 31, 2007 were $102,557 compared to $128,369 for the three months ended March 31, 2006, a slight decrease of $25,812. We anticipate our general and administrative expenses to remain fairly constant with the operational structure currently in place.
Payroll Expenses
Consulting Expense
Our consulting expense consists of prescription drug specialists, financial consultants and marketing professionals. Consulting expense totaled $258,267 and $74,325 for the three months ended March 31, 2007 and 2006, respectively. The increase of $183,942 was primarily the result of additional marketing and prescription drug consulting required due to our decrease in staffing.
Professional Fees
Our professional fees include fees paid to our accountants and attorneys. Our professional fees for the three months ended March 31, 2007 were $24,490 compared to professional fees of $65,885 for the three months ended March 31, 2006, a decrease of $33,395 or 63%. Our need for extensive outside professional assistance has declined as the Company has matured. We anticipate the continued need for services provided by attorneys and accountants for general corporate governance and regulatory compliance.
Depreciation and Amortization
Our depreciation and amortization expense was $11,745 for the three months ended March 31, 2007 compared to $107,917 for the three months ended March 31, 2006. The decrease of $96,172 was directly attributable to the full accretion of amortizable loan fees. We anticipate our depreciation expense to remain consistent with our current period expense until further capital expenditures are required.
Total Operating Expenses
Total operating expenses for the three months ended March 31, 2007 were $450,294 compared to $540,064 for the three months ended March 31, 2006. The decrease in total operating expenses was mainly a result of management's efforts to control overhead costs. During the prior year, we experienced non-recurring costs required to support the commencement of significant operations.
Net Operating Income (Loss)
Our net operating loss for the three months ended March 31, 2006 was $255,664 compared to a net operating income of $119,037 for the three months ended March 31, 2006. Net operating income (loss) is the result of revenue minus total expenses. Our net loss is directly attributable to our decreased sales revenue during the period ended March 31, 2007.
Interest expense was $56,705 for the three months ended March 31, 2007 compared to $79,273 for the three months ended March 31, 2006.
Net income (loss)
Our net loss from operations was $403,185 for the three months ended March 31, 2007 compared to net income of $39,764 for the three months ended March 31, 2006. We expect to improve our results of operations through the attainment of sufficient working capital and through our focus in acquiring additional sales and distribution partners and greater profit margins.
Operation Plan
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.
Seasonality
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. One explanation is that seasonality corresponds with the beginning of a prescription drug plan
Liquidity and Capital Resources |
Internal and External Sources of Liquidity
On November 7, 2006, we entered into a preliminary agreement with Northern Healthcare Capital, LLC to secure a $2,000,000 revolving credit facility that is geared specifically to our business. This facility, offered to us at market credit rates, is subject to verification of certain representations and warranties and usual and customary closing details. Terms of the credit facility allow us to increase the available credit in increments of $250,000 as our business grows. This agreement has been placed on hold due to our lack of sufficient working capital required by financing facilities of this nature. We are also entertaining additional proposed credit facilities that include working capital lines that augment the asset based facilities.
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 (total investment of $2,000,000, all of which was received as of February 22, 2005). As of March 31, 2007, the Purchasers have converted 1,000 Series "C" Preferred stock into 470,761 shares of our 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.
The number of shares the Purchasers wish to convert and those warrant shares that any of the Purchasers and MAG may acquire at any time are subject so that the aggregate number of shares of common stock of which such Purchasers and MAG and all persons affiliated with the Purchasers and MAG have beneficial ownership (calculated pursuant to Rule 13d-3 of the Securities Exchange Act of 1934, as amended) remains less than ten percent of our then outstanding common stock.
MAG Entities Agreement
On August 25, 2005, we formalized an agreement with Mercator Momentum Fund, LP, Monarch Pointe Fund, Ltd., and M.A.G., Capital, LLC, (collectively, the "MAG entities") with respect to the registration default under Paragraph 8 of that certain Subscription Agreement dated February 7, 2005 by and between the parties (the "Subscription Agreement"). In consideration for the payment of the aggregate sum of $10,000 cash plus execution of the Secured Promissory Notes and Security Agreement attached as exhibits to the 8-K filed on October 21, 2005, the MAG entities agreed to waive the liquidated damages provision of Paragraph 10 with respect to any additional liquidated damages which may accrue after August 23, 2005, with the understanding that such waiver shall not be deemed a waiver of any other rights to which the MAG entities may have at law or equity.
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 $6.40 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 September 24, 2004, the Pinnacle Note was extended by the parties by virtue of a renewal and settlement agreement through January 24, 2005, and under certain conditions until
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.
In addition to the above, we agreed: (1) to deliver to Pinnacle's counsel an
additional 1,037,500 shares of our common stock as additional escrow security,
(2) issue to Pinnacle's designee, CJR Capital, LLC, 50,000 shares of our common
stock towards Pinnacle's due diligence and legal expenses related to the
revision of the Note; (3) issue to Pinnacle 112,500 shares of instaCare's common
stock as a loan re-initiation fee; and (4) upon receipt of any properly crafted
Seller's Representation Letter, deliver to Pinnacle an opinion of counsel to the
effect that commencing March 24, 2005, 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. We have recorded a financing
expense in the amount of $227,500, the fair market value of the underlying
shares. All of the shares required under the Note were delivered.
On October 24, 2005, we extended the maturity date of the note from April 24, 2006 to June 25, 2006. In accordance with the note extension agreement dated October 5, 2005, Pinnacle sold and or converted for aggregate proceeds of $59,493 worth of shares and sold for aggregate proceeds of $130,198 worth of shares. Therefore prior to the July 1, 2006 note extension, the principal balance stood at $1,010,309.
On July 1, 2006, we entered into another 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.
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. Also, on July 3, 2006 we paid interest and fees of $6,542 and on August 16, 2006 made a $50,000 principal payment on the note. During the three months ended March 31, 2007 we made an additional principal payment of $25,000. As of March 31, 2007, the remaining principal balance was $130,000.
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 warrant on March 22, 2007 and on April 18, 2007 we issued the 50,000 shares to Mr. Knapp.
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 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 March 31, 2007, our cash balance was $1,922. 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. However, at this time we have depleted our cash resources and as a result we were unable to pre-pay certain diabetic test suppliers for approximately $5,400,000 in product to fill these orders, causing our customers to wait additional time to receive product from us. We have managed to keep some of our distribution activities going when our limited resources have allowed us.
We anticipate incurring operating losses until we build our capital base. Our recent operating history makes predictions of future operating results difficult to ascertain. In addition, since our cash position has fallen we are finding 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.
Going Concern
The financial statements included in this filing have been prepared in conformity with generally accepted accounting principles that contemplate the . . .