16-Nov-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. Our business attention is also focused towards providing prescription drugs and medical diagnostics through several medical distribution channels.
We continue to exploit our business prospects. However, our working capital reserves have continued to deplete and we are forced to continue to delay fulfillment of many sales orders. On October 31, 2007 we took steps to alleviate some of our capital needs by agreeing to terms with Centurion Capital Resources, LLC for a $1 million revolving line of credit specifically tailored to our business and for the fulfillment of many of our larger sales orders.
Results of Operations for the Three Months Ended September 30, 2007 and 2006.
The following table summarizes selected items from the statement of operations for the three months ended September 30, 2007 compared to September 30, 2006.
INCOME: |
Revenue
Our revenue for the three months ended September 30, 2007 was $1,585,538, compared to revenue of $2,173,594 in the three months ended September 30, 2006. This resulted in a decrease in revenue of $588,056, or 27%, from the same period a year ago. The decrease in
Cost of sales / Gross profit percentage of sales
Our cost of sales for the three months ended September 30, 2007 was $1,327,518, a decrease of $791,170, or 37% from $2,118,688 for the three months ended September 30, 2006. The decrease in the cost of sales in the current period was a direct result of our decrease in sales. We currently lack sufficient operating capital required for the pre-purchase of goods to manage our medical diagnostics business and we have experienced additional competition in the overall market place. We have focused on managing the productivity of our current market share through increasing our profit margins.
Gross profit as a percentage of sales increased from 3% for the months ended September 30, 2006 to 16% for the three months ended September 30, 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: |
General and Administrative
Our general and administrative expenses relate to the operation and leasing costs of our corporate office and warehouse facilities. General and administrative expenses for the three months ended September 30, 2007 were $48,820 compared to $195,605 for the three months ended September 30, 2006, a decrease of $146,785. Our decrease is primarily due to a reduction
Payroll Expenses
Our payroll expense consists primarily of management and employee salaries. Payroll expense for the three months ended September 30, 2007 was $74,358 compared to Payroll expense of $117,103 for the three months ended September 30, 2006. Due to our decline in revenues over the previous period, management has focused on controlling payroll expenses through staff eliminations and salary reductions. We anticipate the reduction as being temporary, increasing over the next quarter as revenues increase and become sufficient to support additional staff and increased executive compensation.
Consulting Expense
Our consulting expense for the three months ended September 30, 2007 was $225,597 and consisted of equity based compensation issued to prescription drug specialists. During the same period in 2006, our consultants provided marketing and financial services, business development expertise and medical consulting services. In 2006, we paid a total of $198,455 in the form of shares and options for consulting services. We anticipate a continued need for the services of various consultants and expect the cost for those services to remain comparable to our historical payments.
Professional Fees
Our professional fees include fees paid to our accountants and attorneys. Our professional fees for the three months ended September 30, 2007 were $1,680 compared to professional fees of $22,511 for the three months ended September 30, 2006, a decrease of $20,831 or 93%. The decrease was the result of the cancellation of a service agreement previously accrued in the amount of $25,000. We will continue to seek the services of outside professionals for general corporate governance and regulatory compliance and anticipate stable costs for these services in the future.
Depreciation and Amortization
Our depreciation and amortization expense was $11,618 for the three months ended September 30, 2007 compared to $15,128 for the three months ended September 30, 2006. The decrease of $3,500 is attributable to the full depreciation of aged assets. 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 September 30, 2007 were $362,073 compared to $570,262 for the three months ended September 30, 2006. The decrease in total operating expenses of $208,189 was mainly a result of staff eliminations, reductions in insurance
Net Operating (Loss)
Our net operating loss for the three months ended September 30, 2007 was $104,053 compared to a net operating loss of $515,356 for the three months ended September 30, 2006. Our decrease in net loss of $411,303 is the result of an increase in our gross profit margin and a decrease in operating expenses over the same previous period.
Interest Expense
Interest expense was $56,293 for the three months ended September 30, 2007 compared to $116,713 for the three months ended September 30, 2006.
Net (loss)
Our net loss from operations decreased $505,558 to $163,551 for the three months ended September 30, 2007 compared to net loss of $669,109 for the three months ended September 30, 2006. We expect continued improvements in our operational results through ongoing efforts to increase distribution and sales channels and control over day to day operating expenses by management.
Results of Operations for the Nine Months Ended September 30, 2007 and 2006.
The following table summarizes selected items from the statement of operations for the nine months ended September 30, 2007 compared to September 30, 2006.
INCOME: |
Revenue
Our revenue for the nine months ended September 30, 2007 was $3,705,669, compared to revenue of $18,649,567 in the nine months ended September 30, 2006. This resulted in a decrease in revenue of $14,943,898, or 80%, from the same period a year ago. The decrease in
Cost of sales / Gross profit percentage of sales
Our cost of sales for the nine months ended September 30, 2007 was $3,124,822, a decrease of $14,643,393, or 82% from $17,768,215 for the nine months ended September 30, 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 5% for the nine months ended September 30, 2006 to 16% for the nine months ended September 30, 2007. The increase in gross profit margin was caused by our ability to manage our purchasing and balance our wholesale market more efficiently with our retail markets which inherently provide an opportunity to achieve greater gross profit margins.
EXPENSES: |
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 nine months ended September 30, 2007 were $230,345 compared to $470,046 for the nine months ended September 30, 2006, a decrease of $239,701. During the nine months ending September 30, 2007, we experienced decreases in our licensing, insurance and warehousing costs which account for the
Payroll Expenses
Our payroll expense consists primarily of management and employee salaries. Payroll expense for the nine months ended September 30, 2007 was $162,256 compared to payroll expense of $468,338 for the nine months ended September 30, 2006, a decrease of $306,082 or 65%. The decrease in payroll expenses is the direct result of our decline in revenue. As a result we have made significant changes to compensation levels and the number of full time personnel on staff. Management continues to focus on controlling payroll expenses until such time as sufficient revenues are generated to support increases in compensation structures and additional personnel.
Consulting Expense
Our consulting expense consists of prescription drug specialists, financial consultants and marketing professionals. Consulting expense totaled $603,674 and $324,103 for the nine months ended September 30, 2007 and 2006, respectively. The increase of $279,571 was the result of additional 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 nine months ended September 30, 2007 were $83,656 compared to professional fees of $216,011 for the nine months ended September 30, 2006, a decrease of $132,355 or 61%. During 2006, we had incurred additional non-recurring legal fees in connection with our July 2005, complaint against Ronald Kelly, Linda R. Kelly, Kimberly Kelly, and Kelly Company World Group, Inc. Though we foresee the continued need for services provided by attorneys and accountants for general corporate governance and regulatory compliance, we do not anticipate extraordinary professional fees arising as a result of our general course of operations.
Depreciation and Amortization
Our depreciation and amortization expense was $35,108 for the nine months ended September 30, 2007 compared to $162,625 for the nine months ended September 30, 2006. The decrease of $127,517 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 nine months ended September 30, 2007 were $1,115,039 compared to $1,662,583 for the nine months ended September 30, 2006. The decrease in total operating expenses was mainly a result of management's efforts to control overhead costs.
Net Operating (Loss)
Our net operating loss for the nine months ended September 30, 2007 was $534,192 compared to a net operating loss of $781,231 for the nine months ended September 30, 2006. Net operating income (loss) is the result of revenue minus total expenses. Our net loss increase year to year is directly attributable to our decreased sales revenue during the period ended September 30, 2007.
Interest Expense
Interest expense was $168,786 for the nine months ended September 30, 2007 compared to $300,010 for the nine months ended September 30, 2006.
Net (loss)
Our net loss from operations was $717,306 for the nine months ended September 30, 2007 compared to net loss of $1,213,281 for the nine months ended September 30, 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:
• 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;
• 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;
Seasonality
We have completed two full years of operation of our prescription drug and diabetes diagnostics. We have recently added wound care and ostomy care products during the quarter just ended. Our experiences point to businesses that display certain seasonal trends. One explanation is that seasonality corresponds with the beginning of a prescription drug plan year where new prescription drug cards are distributed by insurers to their insureds along with new plan formularies (price schedules). This in turn tends to influence "stocking up" buying/ordering behavior on the part of the insured.
Liquidity and Capital Resources |
Internal and External Sources of Liquidity
On October 31, 2007, we entered into a preliminary agreement and agreed to terms with Centurion Capital Resources, LLC of NY, ("Centurion") to secure a $1,000,000 revolving credit facility that is geared specifically to our business. This facility, which includes the use of a trustee bank account controlled by the Company, and profit sharing terms payable in cash from proceeds and securities, is offered to us at market credit rates. We are in the process of closing this facility and expect to be using the facility in November 2007. The credit facility is anticipated to allow us to increase the available credit as our business grows. Even though the agreement with Centurion is expected to meet a majority of our external capital needs, we continue to seek additional proposed credit facilities that include working capital lines.
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 was geared specifically to our business. This facility, also offered to us at market credit rates, was subject to verification of certain representations and warranties and usual and customary closing details. The credit facility would have allowed us to increase the available credit in increments of $250,000 as our business grew but also required the company to put certain of its own capital at risk. This agreement was placed on hold in April 2008 due to our lack of sufficient working capital required.
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,
Holders of series "C" convertible stock shall not have the right to vote on matters that come before the stockholders. Series "C" convertible preferred stock may be converted, the number of shares into which one share of Series "C" Preferred Stock shall be convertible shall be determined by dividing the Series "C" Purchase price by the existing conversion price which shall be equal to eighty percent of the market price rounded to the nearest thousandth, not to exceed $1.60 per share. Series "C" convertible stock shall rank senior to common stock in the event of liquidation. Holders' of Series "C" convertible stock shall be entitled to a mandatory monthly dividend equal to the share price multiplied by the prime interest rate plus five tenths percent. Series "C" convertible stock shall have a redemptions price of $100 per share, subject to adjustments resulting from stock splits, recapitalization, or share combination.
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. The MAG entities have begun discussions with us to convert the secured promissory note into shares of our common stock. However, as of the date of this filing no definitive agreements have been reached.
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 March 24, 2005. We met those conditions by executing the definitive agreement to acquire CareGeneration, Inc. As a condition of renewal we were required to provide additional security of 25,000 shares of our common stock, and Pinnacle was provided with a new election to convert some or all of the then-outstanding principal of the Note into shares of our common stock at a conversion price of $3.60 per share. In addition, it was agreed that if we completed a merger or similar transaction prior to January 24, 2005; the Note would automatically be extended through March 24, 2005 with additional security due.
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 . . .