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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, 2006.
[ ] 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
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
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The number of shares of the issuer's common equity outstanding as of
November 12, 2006 was 79,539,273 shares of common stock.
Transitional Small Business Disclosure Format (check one):
Yes No X
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1
MEDCOM USA, INC.
INDEX TO FORM 10-QSB FILING
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2006
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheet
As of September 30, 2006 . . . . . . . . . . . . . . . 3
Statements of Operations
For the Three months ended September 30, 2006
and 2005 . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows
For the Three months ended September 30, 2006
and 2005 . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to the Financial Statements. . . . . . . . . . . . . 6 - 12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations. . . . . . . . . . . . . . . . . . . 12 - 18
Item 3. Control and Procedures . . . . . . . . . . . . . . . . . . . . 18-19
PART II
OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . 20
Item 6. Exhibits and Reports on Form 8-K
CERTIFICATIONS
Exhibit 31 - Management certification. . . . . . . . . . . . . 20-21
Exhibit 32 - Sarbanes-Oxley Act. . . . . . . . . . . . . . . . 22
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MEDCOM USA, INC.
BALANCE SHEET (UNAUDITED)
AS OF SEPTEMBER 30, 2006
Audited
September 30, 2006 June 30, 2006
ASSETS:
CURRENT ASSETS
Cash $ 62,865 $ 1,148
Licensing Contracts - ST 992,397 792,739
Prepaid expenses and other current assets 188,500 207,591
-------------------- --------------------
Total current assets 1,243,762 1,001,478
PROCESSING TERMINALS, net 315,410 776,942
PROPERTY AND EQUIPMENT, net 627,994 530,335
Licensing Contracts - LT 1,021,418 1,341,627
Other Assets 81,031 30,757
-------------------- --------------------
TOTAL ASSETS $ 3,289,613 $ 3,681,139
==================== ====================
LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 169,114 $ 252,214
Accrued expenses and other liabilities 226,774 638,094
Dividend payable 23,750 23,750
Deferred revenue - current portion 856,296 758,629
Licensing obligations - current portion 1,977,999 1,722,541
-------------------- --------------------
Total current liabilities 3,253,932 3,395,227
Notes from Affiliates - 794,625
LICENSING OBLIGATIONS - long-term portion 2,918,864 3,602,773
DEFERRED REVENUE 2,086,524 2,723,911
-------------------- --------------------
Total liabilities 8,259,320 10,516,536
-------------------- --------------------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, Series A $.001par value, 52,900 shares
designated, 4,250 issued and outstanding 4 4
Convertible preferred stock, Series D $.01par value, 50,000 shares -
designated, 2,850 issued and outstanding 29 29
Common stock, $.0001 par value, 80,000,000 shares authorized,
65,557,072 issued and 60,743,480 outstanding 7,954 7,032
Treasury stock (37,397) (37,397)
Paid in capital 82,431,026 80,108,536
Accumulated deficit (87,371,323) (86,913,601)
-------------------- --------------------
Total stockholders' equity (4,969,707) (6,835,397)
-------------------- --------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,289,613 $ 3,681,139
==================== ====================
See the accompanying notes to these unaudited financial statements.
3
MEDCOM USA, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE AND THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
Three Months Ended
2006 2005
--------------------------
REVENUES:
Terminal sales $ 26,423 $ 96,604
Service 921,344 721,510
Licensing Fees 653,424 1,290,216
--------------------------
1,601,191 2,108,330
COST OF DELIVERABLES: 554,571 1,368,583
--------------------------
GROSS PROFIT 1,046,620 739,747
--------------------------
OPERATING EXPENSES:
General and administrative 973,082 1,834,977
Sales and marketing 30,153 141,332
Depreciation and amortization 442,158 583,275
--------------------------
Total operating expenses 1,445,393 2,559,585
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OPERATING LOSS (398,772) (1,819,838)
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OTHER (INCOME) AND EXPENSES
Interest expense 98,101 77,906
Interest Income (103,603) (49,139)
Legal Settlement 39,600
Impairment of Assets 27,040
--------------------------
Total other expense 61,138 28,767
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NET LOSS (459,910) (1,848,605)
--------------------------
NET LOSS PER SHARE:
Basic: $ (0.01) $ (0.03)
==========================
Diluted: $ (0.01) $ (0.03)
==========================
Weighted Average Common Shares Outstanding
Basic 75,151,497 58,090,470
==========================
Diluted 75,151,497 58,090,470
==========================
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, 2006 AND 2005
2006 2005
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (459,910) $(1,848,605)
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 442,158 583,275
Issuance of common stock as compensation for services 151,632 698,505
Impairment of assets 13,100 -
Changes in assets and liabilities:
Licensing and Leasing Contracts 120,552 (23,327)
Prepaid and other current assets 19,091 (27,641)
Other assets 50,274 -
Accounts payable and accrued liabilities (238,961) (404,096)
Deferred revenue (893,441) (332,392)
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Net cash (used) in operating activities: (795,505) (1,354,280)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (133,580) -
Net repayments of advances to affiliate - -
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Net cash (used) and provided by investing activities: (133,580) -
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on capital leases (683,909) (365,700)
Net repayments of (advances) to Affiliate (858,000) (411,634)
Proceeds from sale of common stock 2,178,991 879,749
Proceeds from licensing and leasing transaction 353,721 1,355,215
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Net cash provided by financing activities 990,802 1,457,630
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INCREASE (DECREASE) IN CASH 61,717 103,350
CASH, BEGINNING OF PERIOD 1,148 10,207
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CASH, END OF PERIOD $ 62,865 $ 113,556
=========== ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 98,000 $ 77,000
Income taxes paid - -
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See the accompanying notes to these unaudited financial statements
5
MEDCOM USA, INC.
NOTES TO FINANCIAL STATEMENTS THREE MONTHS ENDED SEPTEMBER 30, 2006 AND 2005
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements represent the financial position
of MedCom USA, Inc. ("Company") as of September 30, 2006 and includes results
of operations of the Company for the three months ended September 30, 2006 and
2005 and cash flows for the three months ended September 30, 2006 and 2005.
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, 2006 and 2005 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, 2006, 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.
Financial instruments that potentially subject the Company to concentrations of
credit risk are primarily trade accounts receivable. The trade accounts
receivable are due primarily from small business customers in numerous
geographical locations throughout the United States.
The Company estimates and provides an allowance for uncollectible accounts
receivable.
For the years ended June 30, 2006, the company executed a contract with a major
vendor TESIA-PCI, whereby the Company would deliver 1500 units over the period
presented. The agreement allowed the minimum billing of $28.50 per month per
unit in a pool based on a 15 cent transaction fee. The
6
Company has experienced that the average billing per unit is greater than the
minimum with an average billing per unit of approximately $35 per unit. During
the year ended June 30, 2006 only a portion of the units were installed and the
remaining units will be installed over the subsequent periods.
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. The Company realized $1,156,000 from Tesia-PCI during the period
ended June 30, 2006.
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 949,500
Accumulated Depreciation (321,506)
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Net Property & Equipment 627,994
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 adopted a new
method of accounting anddiscontinued 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, 2006.
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. Income on
sale-leaseback transactions, prior to July 1, 2005, was deferred and recognized
over the term of the leaseback. Management determined that the sale-leaseback
transactions were capital leases.
The terminals were 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
Accumulated Amortization (5,881,910)
-----------
Net Terminal Assets 315,410
7
The Company has since upgraded its technology to address its core revenue model
that is the sale of medical software. In recognition of the changes in
technology and certain modifications to its licensing agreements 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.
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. VSOE relates the method of
accounting under SOP 97-2 and EITF 00-21.
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, 2006. Of that amount, $22,244,282 related to net operating
loss carry-forwards at September 30, 2006. Management determined that because
the Company has not yet generated taxable income it was not appropriate to
recognize a deferred income tax asset
8
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 operating loss
carryforwards of $52,226,446 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 state portion of 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 state 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.
VENDOR-SPECIFIC OBJECTIVE EVIDENCE:
The Company has nonsoftware and software deliverables which have a specific cost
per customer. The costs of the deliverables are valued at on historical cost
and usage. The company delivers the following VSOE:
Recurring charges - Provider enrollment, EDI Connectivity, Payer/Provider,
Benefit Verification - Govt Billings, Referral Transfers - Govt billing, Benefit
Verification - Commercial, Referral Transfer - Commercial, Claim Status, Service
Authorization, Maintenance, Training, Support, Program Upgrades, Carrier
Editions, and Customized Reports. Many of these deliverables are delivered
electronically. The company assessed its prior electronic costs and estimated
that these costs average between 80 cents to $1.25 per terminal per month.
Management decided to use the average cost of $1.00 to value these deliverables.
One time charges - The company provides non-software deliverables and has valued
these costs based on the average of purchasing the hardware for outside third
parties. The non-software deliverables are the Billing terminal which cost $400
per terminal, pin pads which cost $100, check reader which cost $100, Reader
Printers
9
which cost $100, and Portal Wedge costs $100. The Company has further estimated
the cost per terminal to upgrade and update the software to be in compliance
with the health care industry estimates the per terminal and portal cost at
$250.
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
-----------------
During the period of year ended June 30, 2005, goodwill was recognized in the
Company's acquisition of MedCom. 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.
The Company adopted Statement of Financial Accounting Standard ("SFAS") No. 142,
Goodwill and Other Intangible Assets, effective July 1, 2002. As a result, the
Company discontinued amortization of goodwill, and instead annually evaluates
the carrying value of goodwill for impairment, in accordance with the provisions
of SFAS No. 142. Due to material continued operating losses, the Company
determined that its carrying value of goodwill was impaired at June 30, 2005.
On the basis of that determination in the year ended June 30, 2005 to write off
the full remaining carrying value at June 30, 2005.
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 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. COMMON STOCK TRANSACTIONS
DURING SEPTEMBER 30, 2006 AND 2005:
QUARTER ENDED STOCK ISSUED CASH RECEIVED STOCK ISSUED STOCK ISSUED FOR
FOR CASH FOR SERVICES Warrents Exercised
September 30, 2005 1,156,999 591,750 685,508 12,997
-------------------------------------------------------------
Total Issued 1,156,999 591,750 685,508 12,997
September 30, 2006 7,384,373 2,178,990.50 1,837,331 -
-------------------------------------------------------------
Total Issued 7,384,373 2,178,990.50 1,837,331 -
During the year ended September 30, 2006, the Company issued 7,384,373 shares of
its common stock for $2,178,990.50. The shares were issued to third parties in a
private placement of the Company's common stock. The shares were sold throughout
the quarter ended September 30, 2006, ranging from $.75 per share at the
10
beginning of the period to $.25 per share at the end of the period. Commissions
of approximately $858,000 are recorded as a charge in additional paid in capital
as direct costs associated with the raising of equity capital.
The Company has issued shares of its common stock as consideration to
consultants for services rendered. The value of those shares is determined based
on the trading value of the stock at the dates on which the agreements were into
for the services. During the year ended September 30, 2006, the Company granted
to consultants, 1,837,331 shares of common stock valued between $.75 - $.25. The
value of these shares were expensed and or capitalized during the year.. The
Company issues common stock for services to vendors and consultants in lieu of
cash. The Company values those issuances at fair value in accordance SFAS 143
and SAB 107. The company values the issuance at the same value that common stock
is sold for cash in a private placement that the company is completing
There were no options granted in the end of the period of September 30, 2006 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 quarter
ended September 30, 2006 consist of the following:
Number Expiration
of Exercise of
Warrants Price Warrants
--------- ---------
678,400 $ 1.00 6/30/2007
390,400 $ 2.75 6/30/2007
94,400 $ 3.00 6/30/2008
148,999 $ 4.00 7/30/2008
20,000 $ 4.50 9/30/2008
---------
1,332,199
=========
3. RELATED PARTY TRANSACTIONS
The Company's president and chairman is a significant shareholder of the
Company. This individual controls another entity that is also a significant
shareholder of the Company. During the year ended June 30, 2002, the Company
moved its administrative offices into space occupied by this related entity that
is a significant shareholder of the Company of American Nortel Communications,
Inc. The Company shares office space and management and administrative personnel
with this related entity. Certain of the Company's personnel perform functions
for the related entity but there was no allocation of personnel related expenses
to the related entity in the years ended September 30, 2006 and 2005.
The Company frequently receives advances and advances funds to an entity
controlled by the Company's president and which is a significant shareholder of
the Company. The balance due to this affiliate at June 30, 2006 was $794,625
and in the three months ended September 30, 2006 the Company repaid the
president $858,000 to pay off the balance due. The advances are generally short
term.
4. COMMITMENTS AND CONTINGENCIES
Interim Financial Statements
Management has made adjustments in the fourth quarter ended June 30, 2006. The
adjustments are precipitated by a recently detected control weakness between
operations and funding. Certain material financial transactions were
consistently recorded during the year based on documentation submitted to a
lender to obtain funding. The documentation varied with the agreement terms as
understood and documented by operations. The adjustments resulted in reducing
year to date revenues by $954,000. They also resulted in the reduction of
11
receivables for approximately $1,300,000. Management is taking a proactive
action in address these issues. Management has taken proactive action to
improve document control by commencing a program to centralize and coordinate
critical documentation. The financial statements do not include provision for
any costs that may be incurred resulting from these adjustments.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
This portion of this Quarterly Report on Form 10-QSB, 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 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 and cellular telephone activation, the other 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 this time frame, the Company
operates the MedCom System (MedCom) that is deployed through a point-of-service
terminal or internet based web portal. The system offers electronic transaction
processing for healthcare and financial services, including but not limited to:
insurance eligibility verification, electronic referrals, credit, debit and
claims processing.
HEALTHCARE TRANSACTION PROCESSING
---------------------------------
12
MEDCOM 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 MedCom
System currently operates through a point-of-service terminal or web based
portal application. The point-of- service terminals are purchased from Hypercom
Corporation (Hypercom). The MedCom System also operates a web based IP version
known as the medcomconnect.com web portal. . The Company offers a service
bundled package that has the capability of processing unlimited claims and
eligibility verification for a fixed monthly service fee.
The Company's "portal" system encourages customers to process their medical
claims through a web-based internet portal. Many customers purchase the terminal
for the front office and the portal system for the back office to take advantage
of the ease of both products. The data processed through the portal is secured
through a third party ASP (Application Service Provider)
FINANCIAL TRANSACTION SERVICES
------------------------------
The Company's revenue cycle management services, provides the healthcare
industry a combination of solutions designed to improve collection at the point
of service. The system also affords healthcare providers the added benefit of
accepting payment through credit, debit, healthcare savings accounts (HSA) and
check services. These financial processes are all processed through third party
financial institutions.
Patient Easy-Pay is an accounts receivable management program that allows a
provider to swipe a patient's credit card and store the patient's signature on
file. When the patient portion of the bill is determined, at a later date,
Patient Easy-Pay allows the healthcare provider to bill the patient's credit
card with a pre-determined amount not to exceed the amount which is not covered
by the patient's insurance. Another Patient Easy Pay option is a recurring
installment payment program 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-service terminals or the MedComConnect web portal. Using the MedCom
system, healthcare 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 MedCom System is also an electronic processing system that simplifies the
process of insurance eligibility verification, processes medical claims, and
monitors referrals. The MedCom 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 MedCom system to verify that referrals are approved by
the patient's insurance carrier. The MedCom 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 MedCom System can record and track claims 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 or web portal. This information is then
transmitted to MedCom's secure network, through IP or dial-up, then, processed
and transmitted to the appropriate insurance payer for payment directly to the
healthcare provider. These results in healthcare providers' reimbursements being
accelerated and outstanding account receivables are reduced. The average time
it takes the healthcare
13
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 MedCom system expanded on-line eligibility and benefit
information from approximately 450 medical insurance companies and plans.
Included in this group is the newly activated Medicare Part A & B eligibility
for all 50 states. This gives us access to over 42 million lives. The system
also electronically processes and submits claims for its healthcare providers to
over 1,700 companies. These insurance payers include but are not limited to:
CIGNA, Oxford Health Plan, United Healthcare, Blue Cross plans throughout the
U.S., Medicaid, Aetna, Humana, to name a few.
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.
The Company has formed a new wholly owned subsidiary; Card Activations
Technology, Inc. for the purpose of spinning off the Company's holdings in its
proprietary patented technology for the gift and phone cards.
COMPETITION
Competing health insurance claims processing and/or benefit verification systems
include Emdeon Business Services (HLTH), Medical Manager, Spot Check 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
MedCom 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.MedComUSA.com. 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
MedCom has broadened marketing strategy to reduce cost and increase efficiency.
The Company has employed a telesales strategy, where as there is less dependence
on individual sales personnel. The Company just completed its final phase of its
portal software development which has broadened the sales model to both a
terminal and portal sale. The company has entered into telesales agreements
which have implemented the new marketing strategy. The completion of the portal
will increase sales to hospitals which results in multiple sales. In addition,
the portal has become popular for individual doctors, dentist, and other
healthcare professionals which often results in a single or possibly multiple
sales. The Company has focused its sales to hospitals as a growing revenue
source.
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In the past the Company built its marketing around a strategy of expanding its
sales capacity by using experienced external Independent Sales Organizations
(ISO's) and putting less reliance on an internal sales force. MedCom has set-up
these Independent Sales Organizations (ISO's) to market and distribute the
MedCom System throughout the U.S. In addition to regional ISO's which represent
approximately 100+ sales people, the Company has signed an agreement with Abanco
International and Business Payment Systems' (BPS) Innerview division and is in
the midst of training 200+ sales people in 15 cities around the country.
Initial sales have already begun to result from these relationships. Financial
service companies comprise an important sales channel that views the healthcare
industry as an important growth opportunity. Only 18% 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.
MedCom has been expanding its position with Hospitals. Working closely with
Hospital consultants and targeted seminars. The Company, with its new web based
portal product and Medicare access, is becoming an increasingly valuable tool
for the outpatient and faculty practice areas of hospitals. By expanding the
solutions for Patient Access in the hospitals, MedCom has the opportunity of
selling multiple systems through a single source. While the ISO groups focus on
individual doctors, dentists and clinics, our hospital team is focusing on
multiple unit sales opportunities with hospitals around the country.
SERVICE AGREEMENTS
During December 1998, the Company entered into a service agreement with Emdeon
Business Services (formally WebMD Envoy). This agreement encompasses the
process of Electronic Data Interchange (EDI) transactions 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 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 arranged its terms with this credit facility as an equipment lessor
whereby the Company sold terminals to the lessor when it has obtained a service
contract with a provider. Under these agreements, the Company leased back the
processing terminals from the lessor and in turn leased them to the purchaser
for a period of 48 months however; the customer could terminate the agreement
after 12 months. The Company accounted 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 months.
REVENUES
15
During the prior periods very few customers terminated there agreements prior to
the expiration of the underlying lease. Additionally, Effective July 1, 2005 the
Company modified the licensing agreement to make them noncancellable for the
term of the underlying licensing agreement. Accordingly, management believes
that application of a new method of accounting and revenue recognition more
appropriately accomplishes the matching of revenues and cost of licenses entered
into after July 1, 2005.
Revenues from the MedCom system are generated through the sale of the web based
portal software, POS terminals, and processing insurance benefit
eligibility/verification, insurance claims, and financial transaction
processing. The Company receives a fixed amount per web portal and POS terminal,
and also receives fees for each transaction processed through the MedCom System.
Revenue sources include fees for financial transactions processed through the
software portal and software 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.
Due to changes in technology and certain modification to the licenses
agreements, 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")
CARD ACTIVATION TECHNOLOGIES, INC.
The Company has formed a new wholly owned subsidiary, Card Activation
Technologies, Inc. for the purpose of spinning off the Company's holdings in its
proprietary patented technology for the gift and phone cards.
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.
-----------
RESULTS OF OPERATIONS
Revenues for the quarter ended September 30, 2006 decreased to $1,601,191 as
compared to quarter ended September 30, 2005 of $2,108,330. This decrease in
revenue is directly the result of the spike in revenues from the larger vendor
contracts with Tesia that continued through out the first and second quarter.
The company has changes in the Company's strategic direction in core operations.
This included discontinuing declining or unprofitable business sectors. The
Company continues to aggressively pursue and devote its resources and focus its
direction in electronic transaction processing. The Company's agreement with its
credit facility in connection with the sale of terminals and portal transactions
therewith, the Company must defer revenue gains on the sale of the terminals and
portal software.
Cost of deliverables for the quarter ended September 30, 2006 decreased to
$554,571 as compared to quarter ended September 30, 2005 of $1,368,583. The
decrease in cost of deliverables is directly related to the spike in revenue
from the sale of large volume and our major vendor Tesia during the first and
second quarter of our prior fiscal year end. The company has developed the
MedComConnect portal package that will decrease the cost of deliverables as the
company focuses on the sale of the portal software which rendered the medical
terminals sales no longer the core revenue model for the Company.
16
Selling expenses for the quarter ended September 30, 2006 decreased to $30,153
as compared to quarter ended September 30, 2005 of $141,332. This decrease is
primarily the result of marketing efforts and includes commissions paid to
internal sales personnel to market the Company's products and services. The
Company is currently assessing if it will continue with its outside independent
sales organizations. Presently the company is increasing is sales team and will
increase sales in various target states. The company has introduced the
telesales marketing strategy for less expensive sales force and more effective
in the future.
General and administrative expenses for the quarter ended September 30, 2006
decreased to $973,082 as compared to quarter ended September 30, 2005 of
$1,834,977. This decrease is attributed to the Company's reduction of workforce
in their New York operations as the company has streamlined overall employee
use. That is the company has implemented and advanced its in-house software to
perform many of the services the prior employees were performing. The decrease
is related to settling outstanding litigation which resulted decrease in legal
fees. The company does not expect additional expense related to this expense in
the future. This decrease is attributed to the Company's change in marketing
strategy to telesales rather than individual sales personal. The telesales
personal still will require technical support for our products and services in
relation to increases in sales. The Company issued stock for services in the
amount of $151,632 which increased the overall General and Administrative
expenses. The services rendered for the stock included software development,
royalties expenses, legal and professional, and consulting services by vendors.
Vendors that will accept stock for services reduces the burden of cash flow
maintained.
Interest expense for the quarter ended September 30, 2006 increased to $98,101
as compared to quarter ended September 30, 2005 of $77,906. This increase is a
result of increased sales volume and terminal and software portal sales
transactions with the Company's credit facility. Also, expenses were incurred
and paid on notes the Company has outstanding. Further the Company has been
accelerating payments to Ladco one of its financing arrangements. 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,
2006 increased to $103,603 as compared to quarter ended September 30, 2005 of
$49,139. The increase is due to the high rate of return on the income from our
license agreements.
The company incurred $39,600 in the settlement of litigation from Fiscal 2005.
The company impaired its assets in the amount of $27,040.
The loss for the quarter ended September 30, 2006 decreased to ($459,910) as
compared to quarter ended September 30, 2005 of ($1,848,605). The increase is
due to the reduction in sales force and reduction in operations in our New York
facility.
No tax benefit was recorded on the expected operating loss for the quarter ended
September 30, 2006 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.
LIQUIDITY AND CAPITAL RESOURCES
The Company's operating requirements have been funded primarily on its sale of
licensing agreements with hospitals and medical professional and sales of the
Company's common stock. During the quarter ended September 30, 2006, the
Company's net proceeds from the sale of the terminals and software portals were
$1,601,191. The company received $2,178,991in proceeds from the sale of common
stock. The Company believes that the cash flows from its monthly service and
transaction fees are inadequate to repay the capital obligations and has relied
upon the sale of common stock through a private place to sustain its operations.
17
Cash provided (used) in operating activities for the quarter ended September 30,
2006 was ($795,505) compared to ($1,354,280) for quarter ended September 30,
2005. The Company's focus on core operations results in a higher accounts
receivable. The Company receives payments from customers automatically through
electronic fund transfers. Collection cycles are generally less than thirty
days. The company has grown its operations to reduce the deficit cash flow
positions.
Cash used in investing activities was $133,580 for the quarter ended September
30, 2006, compared to $0 for quarter ended September 30, 2005. Streamlining
operations and capital budget curtailment practices promoted a reduction in
equipment purchases for the Company. However, the company continues to employ
software development teams that are upgrading the existing proprietary software
in our terminal and portal licensing agreement sold.
Cash provided by financing activities was $990,802 the quarter ended September
30, 2006, as compared to $1,457,630 for quarter ended September 30, 2005.
Financing activities primarily consisted of proceeds from the sale of the
terminal and software portal transactions through our licensing agreements with
hospitals and medical and dental professionals. The company does not have
adequate cash flows to satisfy its obligations although have improved cash flow
and anticipates have adequate cash flows in the upcoming fiscal period.
The Company has used funds advanced from an affiliated entity that is controlled
by the Company's chairman and chief executive officer. As of June 30, 2006 the
Company maintained a note payable from this entity for the amount of $794,626
including accrued interest. However in the quarter ended September 30, 2006 the
company was able to repay the remaining obligation in the amount of $858,000.
The company has funding agreements with LeeCo Financial Service Inc. and Ladco
Financial Group who provide exclusive funding for the License agreement between
the Company and Customer. The funding groups accept contracts and adopt the
same terms and conditions that the Company and Customer have agreed. In prior
years Ladco required to personally guarantee the customer agreements which were
a financial burden to the company. In fiscal 2006, the company no longer sought
funding through Ladco and has consistently sought the funding of LeeCo. LeeCo
does not require personal guarantees of customer agreements other then hospital
agreements. LeeCo requires the company to personally guarantee the hospital
agreements due to the size and volume of transaction with the terminal and web
portals.
The company expects increased cash flow from its existing accounts receivables,
transaction processing, benefit claims processing, direct terminal sales, and
credit card processing. The increase in cash flow is directly related to the
increase in sales through our telesales. Further we anticipate increase income
from our Tesia-PC contracts that have a higher volume of credit card processing
in which we receive a minimum of $28.50 per month on all transactions with a 15
cent per transaction fee.
The company is looking at expanding its market and look for acquisition that
complement the existing revenue model.
On September 14, 2006 the company renegotiated the Ladco debt. Further the
company would be able to pay the remaining balance of the note for 39 months at
$99,500 payments per month until paid in full. Under the renegotiated note the
note matures on October 2009.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
18
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-QSB, 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.
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
19
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 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.
------------
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, 2006. No material developments occurred
in any of these proceedings during the quarter ended September 30, 2006. The
costs and results associated with these legal proceedings could be significant
and could affect the results of future operations.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
REPORTS ON FORM 8-K
None
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.
Registrant Medcom USA Incorporated
Date: November 13, 2006 By: /s/ William P. Williams
-------------------------------------------
William P. Williams
Chairman, President Chief Executive Officer
(Principle Executive Officer, Principle
Financial Officer)
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