UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED JUNE 30, 2007
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
Commission File Number: 0-25474
MEDCOM USA, INCORPORATED
(Name of small business issuer as specified in its charter)
DELAWARE 65-0287558
State of Incorporation IRS Employer Identification No.
I
7975 NORTH HAYDEN ROAD, SUITE D-333, SCOTTSDALE, AZ 85258
(Address of principal executive offices)
Registrant's telephone number, including Area Code: (480) 675-8865
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $.0001 PAR VALUE
Check whether the Registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 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
--- ---
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of the Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [X]
Registrant''s revenues for the most recent fiscal year were $ 6,000,258
The aggregate market value of the common stock held by non-affiliates computed
based on the closing price of such stock on September 19, 2007, was
approximately $23,040,000.
PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Except for historical information contained herein, the following discussion
contains forward-looking statements that involve risks and uncertainties. Such
forward-looking statements include, but are not limited to, statements regarding
future events and the Company''s plans and expectations. Actual results could
differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
elsewhere in this Form 10-KSB or incorporated herein by reference, including
those set forth in Management''s Discussion and Analysis or Plan of Operation.
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 redirected 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. From March 31, 2001 through 2005, the
Company operated the Medcom System (""Medcom"") that is deployed through a
point-of-sale terminal or web portal offering electronic transaction processing,
as well as insurance eligibility verification. Since 2005, the Company has
aggressively focused on its primary operations in Electronic Data Interchange
(EDI) and core business in Electronic Medical Transaction Processing.
MEDICAL TRANSACTION PROCESSING
------------------------------
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-sale terminal or web portal. The
point-of-sale terminals are purchased from Hypercom Corporation (Hypercom). The
Company business plan consists of offering a service bundled package that would
have the capability of processing unlimited claims and eligibility verification
for monthly service fees.
The Company''s a ""web portal"" encourages customers to process their medical
claims through an online 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.
FINANCIAL SERVICES
The Company''s credit card center and check services, provides the healthcare
industry a combination of services designed to improve collection and approvals
of credit/debit card payments along with the added benefit and convenience of
personal check guarantee from financial institutions.
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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 in the
terminals, and bill the patient''s card at a later date when it is determined
what services rendered were not covered by the patient''s insurance. Also,
Easy- Pay allows patient''s the added benefit and convenience of a one-time
payment option or a recurring installment payments that will be processed on a
specified date determined by the provider and patient. These options insure
providers that payments are timely processed with the features of electronic
accounts receivable management. These services are all deployed thorough
point-of-sale terminals or web portal. Using the MedCom system, medical
providers are relieved of many of the problems associated with billings and
account management, and results in lower administrative documentation and costs.
PATIENT ELIGIBILITY
The MedCom System is also an electronic processing system that consolidates
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 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 encounters between patients and health
care providers for performance evaluation and maintenance of records. After
examining a patient the physician enters a patient''s name, procedure code and
diagnostic code at a nearby terminal. This information is then uploaded to
MedCom''s computer network, processed and transmitted back to the provider
formatted in both summary and/or detailed reports, and as a result healthcare
providers'' reimbursements are accelerated and account receivables are reduced.
In managements'' opinion, the average time it takes the healthcare providers to
collect payments from insurance carriers and plans decreases from an average of
89 days to 7-21 days. Health care providers will benefit from a 100% paperless
claim processing system.
Presently, the MedCom system was able to retrieve on-line eligibility and
authorization 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 providers include CIGNA,
Prudential, Oxford Health Plan, United Health Plans, Blue Cross, Medicaid,
Aetna, Blue Cross/Blue Shield, and Prudential.
COMPETITION
Competing health insurance claims processing and/or benefit verification systems
include WebMD (HLTH), NDC Health (NDC), and Per-se Technologies (PSTI). There
are similar companies that compete with the Company with respect to its
financial transaction processing services performed by the 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
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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 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.
In the past the Company built its marketing around a strategy of expanding its
sales capacity by using experienced external Independent Sales Organizations
(ISO) and putting less reliance on an internal sales force. MedCom has set-up
these Independent Sales Organizations (ISOs) to market and distribute the MedCom
System throughout the U.S. Financial service companies comprise an important
sales channel that views the healthcare industry as an important growth
opportunity.Also6% 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 and working closely with
Hospital consultants and targeted seminars. The Company, with its new
Onlinewebportal product and Medicare access, is becoming an increasingly
valuable tool for the outpatient and faculty practice areas of hospitals. 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 June 2005, the Company entered into a service agreement with TESIA-PCI,
Inc. 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.
PATENT
Card Activation Technologies Inc. (""Card"") is a Delaware corporation
headquartered in Chicago, Illinois that owns proprietary patented payment
transaction technology used for electronic activation of phone, gift and
affinity cards. Medcom owns 60,000,000 shares of common stock of Card which
represents 41% of the issued and outstanding shares of Card.
The patent was transferred to Card by MedCom on the formation of Card and in
exchange for 146,770,504 shares of Common Stock.
Card is a development stage company that was incorporated in August 2006 in
order to own and license, the assigned patent which covers payment transaction
technology and the process for taking a card with a magnetic strip or other data
capture mechanism and processing transactions or activating the card. This
process is
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utilized for prepaid phone cards, gift cards, and debit-styled cards. As of the
date of this report, Card has entered into a license agreement with McDonald''s
Corporation. Card has one principal asset, the patented payment transaction
technology assigned from MedCom, and one full time and one part-time employee.
Card does not expect to commence full scale operations or generate additional
revenues until late 2007. Since incorporation, Card has not made any significant
purchases or sale of assets, nor has Card been involved in any mergers,
acquisitions or consolidations. Card has filed four lawsuits to enforce its
patented technology and has sent license agreement requests to a number of
companies in order to obtain license agreements with entities that Card believes
are infringing its patent.
Card has the ability to market and sell licensing opportunities for the patented
technology of processing debit-styled transactions, including processing
transactions with debit, phone and gift cards and also activating and adding
value to those debit-styled cards. New View Technologies, which was acquired by
MedCom USA, developed the patent and all patents were ultimately assigned to
Card.
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 100 F Street, N.E., Washington, D.C., 20549. You can
obtain information on the operation of the Public Reference Room by calling the
Commission at 1-800-SEC-0330. You can also get copies of documents that the
Company files with the Commission through the Commission''s Internet site at
www.sec.gov.
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EMPLOYEES
As of fiscal year end June 30, 2007, the Company had 23 employees of which
approximately 23 are full-time equivalent employees.
ITEM 2. DESCRIPTION OF PROPERTY.
As of fiscal year end June 30, 2007 and 2006, the Company maintains its
corporate executive offices in Scottsdale, Arizona. The Company leases 1,317
square feet of office space for approximately $32,000 annually. The Company
entered into a three-year lease in May 2002 for the Scottsdale facility. The
Company also maintains an office in Irvine, California, for executive office
space for approximately $1,300 a month to month basis. The Company also leases
5,906 square feet of office space in Islandia, New York, for approximately
$104,389 annually; the lease expires March 31, 2008.
Rental Leases on a Monthly Basis:
Scottsdale Irvine Islandia Total
2007 $ 2,666 $ 1,300 8,699 12,665
2008 $ 2,666 $ 1,300 8,699. 12,665
Expires March 31, 2008
2007 $ 2,666 $ 1,300
ITEM 3. LEGAL PROCEEDINGS
The Company is also involved in various claims and legal actions arising in the
ordinary course of business. In the opinion of management, except as discussed
above, the ultimate disposition of these matters will not have a material
adverse effect on the Company's financial position, results of operations, or
liquidity.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Company submitted no matters to a vote of its security holders during the
fiscal year ended June 30, 2007 and 2006.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MedCom common stock is traded in the over-the-counter market, and quoted in the
National Association of Securities Dealers Inter-dealer Quotation System
(""Electronic Bulletin Board) and can be accessed on the Internet at
www.otcbb.com under the symbol "EMED."
-------------
At June 30, 2007, there were 92,772,860 shares of common stock of MedCom
outstanding and there were approximately 681 shareholders of record of the
Company''s common stock.
The following table sets forth for the periods indicated the high and low bid
quotations for MedCom''s common stock. These quotations represent inter-dealer
quotations, without adjustment for retail markup, markdown or commission and may
not represent actual transactions.
PERIODS HIGH LOW
FISCAL YEAR 2007
First Quarter (July - September 2006) $ .43 $.37
Second Quarter (October - December 2006) $ .46 $.45
Third Quarter (January - March 2007) $ .46 $.45
Fourth Quarter (April - June 2007) $ .43 $.37
FISCAL YEAR 2006
First Quarter (July - September 2005) $ 1.26 $.98
Second Quarter (October - December 2005) $ .78 $.65
Third Quarter (January - March 2006) $ .55 $.25
Fourth Quarter (April - June 2006) $ .65 $.25
MedCom has never paid dividends on any of its common stock shares. MedCom does
not anticipate paying dividends at any time in the foreseeable future and any
profits will be reinvested in MedCom''s business. MedCom''s Transfer Agent and
Registrar for the common stock is Corporate Stock Transfer located in Denver,
Colorado.
SALE OF UNREGISTERED SECURITIES
QUARTER ENDED
STOCK ISSUED STOCK ISSUED STOCK ISSUED FOR
FOR CASH CASH RECEIVED FOR SERVICES WARRENTS EXERCISED
September 30, 2005 1,156,999 $ 591,750 685,508 12,997
December 31, 2005 950,000 $ 380,000 811,500 -
March 31, 2006 1,584,788 $ 590,949 2,665,848 -
June 30, 2006 2,860,861 $ 832,592 1,924,636
--------------------------------------------------------------
Year Ended June 30, 2006 6,552,648 $ 2,395,291 6,087,492 12,997
September 30, 2006 7,384,373 $ 2,178,991 1,837,331 -
December 31, 2006 2,579,331 $ 1,273,333 4,726,870 -
March 31, 2007 2,659,000 $ 1,302,000 866,530 -
June 30, 2007 2,201,856 $ 768,651 200,000
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Year Ended June 30, 2007 14,824,560 $ 5,522,975 7,630,731 -
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During the year ended June 30, 2006, the Company issued 6,552,648 shares of its
common stock for $2,395,291. The shares were issued to third parties in a
private placement of the Company''s common stock. The shares were sold
throughout the year ended June 30, 2006, ranging from $1.00 per share at the
beginning of the year to $.25 per share at the end of the year. Commissions of
approximately $147,455 are recorded as a charge in additional paid in capital as
direct costs associated with the raising of equity capital. The offer and sale
of such shares of our common stock were effected in reliance on the exemptions
for sales of securities not involving a public offering, as set forth in Rule
506 promulgated under the Securities Act and in Section 4(2) of the Securities
Act, based on the following: (a) the investors confirmed to us that they were
""accredited investors,"" as defined in Rule 501 of Regulation D promulgated
under the Securities Act and had such background, education and experience in
financial and business matters as to be able to evaluate the merits and risks of
an investment in the securities; (b) there was no public offering or general
solicitation with respect to the offering; (c) the investors were provided with
certain disclosure materials and all other information requested with respect to
our company; (d) the investors acknowledged that all securities being purchased
were ""restricted securities"" for purposes of the Securities Act, and agreed to
transfer such securities only in a transaction registered under the Securities
Act or exempt from registration under the Securities Act; and (e) a legend was
placed on the certificates representing each such security stating that it was
restricted and could only be transferred if subsequent registered under the
Securities Act or transferred in a transaction exempt from registration under
the Securities Act.
The Company has issued shares of its common stock as consideration to
consultants for the fair value of the 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 and the value of services
rendered. During the year ended June 30, 2006, the Company granted to
consultants, 6,087,492 shares of common stock valued in the aggregate at
$2,395,370 with a strike price range of $.50 to $1.50 strike price. The stock
issued for services includes $247,167 of the royalty buyout provision. The
value of these shares was expensed during the year. The Company exercised the
royalty buyout provision to reduce the royalty payments to 20% of all sales in
June 30, 2006. The offer and sale of such shares of our common stock were
effected in reliance on the exemptions for sales of securities not involving a
public offering, as set forth in Rule 506 promulgated under the Securities Act
and in Section 4(2) of the Securities Act. A legend was placed on the
certificates representing each such security stating that it was restricted and
could only be transferred if subsequent registered under the Securities Act or
transferred in a transaction exempt from registration under the Securities Act.
The Company issued 12,997 shares of its common stock under a notice of
conversion of common stock warrants as they were cash less warrants. There was
not paymen for the exercise of the warrants.
During the year ended June 30, 2007, the Company issued 14,824,560 shares of its
common stock for $5,522,975. The shares were issued to third parties in a
private placement of the Company''s common stock. The shares were sold
throughout the year ended June 30, 2007, ranging from $.75 per share at the
beginning of the year to $.25 per share at the end of the year. Commissions of
approximately $1,350,078 are recorded as a charge in additional paid in capital
as direct costs associated with the raising of equity capital. The offer and
sale of such shares of our common stock were effected in reliance on the
exemptions for sales of securities not involving a public offering, as set forth
in Rule 506 promulgated under the Securities Act and in Section 4(2) of the
Securities Act, based on the following: (a) the investors confirmed to us that
they were ""accredited investors,"" as defined in Rule 501 of Regulation D
promulgated under the Securities Act and had such background, education and
experience in financial and business matters as to be able to evaluate the
merits and risks of an investment in the securities; (b) there was no public
offering or general solicitation with respect to the offering; (c) the investors
were provided with certain disclosure materials and all other information
requested with respect to our company; (d) the investors acknowledged that all
securities being purchased were ""restricted securities"" for purposes of the
Securities Act, and agreed to transfer such securities only in a transaction
registered under the Securities Act or exempt from registration under the
Securities Act; and (e) a legend was placed on the certificates representing
each such security stating that it was restricted and could only be transferred
if
7
subsequent registered under the Securities Act or transferred in a transaction
exempt from registration under the Securities Act.
The Company has issued shares of its common stock as consideration to
consultants for the fair value of the services rendered. The value of those
shares was determined based on the trading value of the stock at the dates on
which the agreements were entered into for the services. During the year ended
June 30, 2007, the Company granted to consultants and paid out obligations of
7,630,731 shares of common stock valued in the aggregate at $3,900,137 with a
strike price range of $.35 to $.75. The Company recorded as a charge in
additional paid in capital an obligation buyout for the Royalty arrangement with
Dream Technology in the amount of $4,050,480. The offer and sale of such shares
of our common stock were effected in reliance on the exemptions for sales of
securities not involving a public offering, as set forth in Rule 506 promulgated
under the Securities Act and in Section 4(2) of the Securities Act. A legend was
placed on the certificates representing each such security stating that it was
restricted and could only be transferred if subsequent registered under the
Securities Act or transferred in a transaction exempt from registration under
the Securities Act.
STOCK SPLITS
Share data in this report have been adjusted to reflect the following stock
splits relating to the Company's common stock: June 1995: 2-for-1 forward split,
February 1996: 1-for-10 reverse split, February 1998: 1-for-4 reverse split, May
2001: 1-for-5 reverse split.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
Management''s discussion and analysis contains statements that are
forward-looking and involve risks and uncertainties. Several factors could
cause actual results to differ materially from those described in such
forward-looking statements. This includes the Company''s 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.
The following financial data should be read in conjunction with the consolidated
financial statements of MedCom USA and related notes and other financial
information appearing elsewhere in this report.
CRITICAL ACCOUNTING POLICIES
Stock Based Compensation
In December 2004, the FASB issued a revision of SFAS No. 123 ("SFAS No. 123(R)")
that requires compensation costs related to share-based payment transactions to
be recognized in the statement of operations. With limited exceptions, the
amount of compensation cost will be measured based on the grant-date fair value
of the equity or liability instruments issued. In addition, liability awards
will be re-measured each reporting period. Compensation cost will be recognized
over the period that an employee provides service in exchange for the award.
SFAS No. 123(R) replaces SFAS No. 123 and is effective as of the beginning of
January 1, 2006. Based on the number of shares and awards outstanding as of
December 31, 2005 (and without giving effect to any awards which may be granted
in 2006), we do not expect our adoption of SFAS No. 123(R) in January 2006 to
have a material impact on the financial statements.
8
FSP FAS 123(R)-5 was issued on October 10, 2006. The FSP provides that
instruments that were originally issued as employee compensation and then
modified, and that modification is made to the terms of the instrument solely to
reflect an equity restructuring that occurs when the holders are no longer
employees, then no change in the recognition or the measurement (due to a change
in classification) of those instruments will result if both of the following
conditions are met: (a). There is no increase in fair value of the award (or the
ratio of intrinsic value to the exercise price of the award is preserved, that
is, the holder is made whole), or the antidilution provision is not added to the
terms of the award in contemplation of an equity restructuring; and (b). All
holders of the same class of equity instruments (for example, stock options) are
treated in the same manner. The provisions in this FSP shall be applied in the
first reporting period beginning after the date the FSP is posted to the FASB
website. The Company has adopted SP FAS 123(R)-5 but it did not have a material
impact on its consolidated results of operations and financial condition.
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. Our management periodically
evaluates the estimates and judgments made. Management bases its estimates and
judgments on historical experience and on various factors that are believed to
be reasonable under the circumstances. Actual results may differ from these
estimates as a result of different assumptions or conditions. 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.
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 based on historical
cost, usage and delivered charges. The company delivers the following VSOE:
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. These deliverables are delivered electronically therefore
the average cost is $1.02 per delivery. The company assessed its prior
electronic costs these costs average between 80 cents to $1.25 per customers.
Management decided to use the average cost of $1.02 to value these deliverables.
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 terminal which cost $394 per terminal, pin
pads which cost $100, check reader which cost $100, Reader Printers which cost
$100, and Portal Wedge costs $100. The Company has further cost per terminal to
upgrade and update the software to be in compliance with the health care
industry which the per terminal and portal costs are $250.
Revenues
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A sales staff meets with a dental or medical professional. During that initial
meeting a demo is displayed so the professional has first had knowledge of the
software and is use. At the time of the meeting a noncancellable licensing
agreement is executed along with a service agreement. The license agreement
indicates the life of the agreement if the customer wants check readers, pin
pads, portal wedge, etc. with the software. These units allow the professional
swipe a credit card and medical card for the software to read.
The professional executes the licensing agreement which states the terms for a
period of 24 - 60 month agreements, number of portal/units needed, at which
location the portals will be used, the monthly licensing amount, (which varies
per contract) type of contract whether dental or medical, the amount of the
gateway access fee usually $24.95 per month which includes provider enrollment,
EDI connectivity, a the monthly maintenance charges that are billed when used as
commercial benefit verification, Referral transactions, claims status, service
authorizations, maintenance, training, support, programs upgrades, carrier
additions, and customized reports. The professional then provides Medcom a
voided check or credit card number to automatically withdraw or charge the
licensing fee and gateway access fees on a monthly basis. Also those automatic
withdrawals include the maintenance charges based upon usage. The professional
also agrees to allow Medcom to provide merchant services for Visa/MasterCard.
Medcom further agrees that the monthly fees charged for gateway access and
licensing fees will commence with in 10 day so of the execution of the
noncancellable agreements.
Medcom has substantial upfront expenses such as commission, royalties, software
portal, and the software deliverables and pays those costs at the execution of
the contract. The company accumulates the entire contract of licensing and
gateway access fees and record as the licenses and gateway access fees
receivables. The company recognizes revenue in accordance with SOP 97-2 when
the software is delivered to the professional and recognizes the remaining
portion of the contract over the life of the contract. The company recognizes
the revenue of the contract at the time of the deliverables and execution of the
contract since the company has substantial costs upfront at the time of
delivery. The remaining portion is recognized monthly in accordance the
agreement. The company further accrues the prepaid licensing expense, accrued
deliverables
The company continues to recognized transaction fees as they receive them. The
company collects other fees base upon usage of the software and are not fixed
fees such as gateway access and licensing fees and are part of the deliverables
such as 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. The company calls these fees transaction fees
and are not fixed a determinable and therefore are not accrued but are
recognized when used by the customer.
The company enters into a long term debt and long term receivable for the life
of the license agreement which is non cancelable agreement. The company
collects the monthly licensing and gateway access fees every 30 days over the
life of the contract. The company does not collect the entire contract within
30 days but over the terms of the agreement therefore records deferred revenue
for the portion of the contract that is recognized over the contract.
The company finances the licensing fees agreement while the gateway access fees
are received over the life of the contract. The license fees are finance
through Ladco in prior periods and in fiscal 2006 and 2007 through LeeCo. The
company as a standard finances the agreements through LeeCo through the term of
the contract.
Revenues from the MedCom system are generated through the sale of the portal
software, software terminals,
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and processing insurance benefit eligibility/verification, insurance claims, and
financial transaction processing. The Company receives a fixed amount per
software portal and software 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. The Company
also markets a complete billing service using the MedCom System for hospitals
and large practice groups. The Company receives a percentage of the billing
amount collected under these arrangements.
The Company has adopted the Securities and Exchange Commission''s Staff
Accounting Bulletin (SAB) No. 104, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements.
Statement of Operations Data
----------------------------
Years Ended June 30, Years Ended June 30,
----------------------------------------------
2007 2006
--------------------- ----------------------
Revenues $ 4,004,899 $ 6,000,258
Cost of Deliverables (1,461,228) (3,578,345)
Operating and Other Expenses (5,097,282) (9,519,611)
Net Loss $ (2,553,611) $ (7,097,698)
Balance Sheet Data:
Years Ended June 30, Years Ended June 30,
----------------------------------------------
2007 2006
--------------------- ----------------------
Current Assets $ 1,013,600 $ 896,479
Total Assets 2,125,107 3,576,140
Current Liabilities 3,341,144 4,248,854
Non Current Liabilities 4,909,562 6,921,107
Total Liabilities 8,250,706 11,170,681
Working Capital (Deficit) (2,327,544) (3,352,375)
Shareholders'Equity (Deficit) $ (6,125,599) $ (7,594,541)
--------------------------------------------------------------------------------
The Company has declared no common stock dividends since its inception.
FISCAL 2006 OPERATIONS
-----------------------
General. The Company utilizes the MedCom System that is deployed through a
processing terminal, PC software, or online processing, and offers electronic
transaction processing to the health care industries. During fiscal 2006 and
2007, MedCom USA continues to focus on its primary operations and core business
in medical transaction processing.
11
RESULTS OF OPERATIONS
FISCAL YEAR END JUNE 30, 2007, COMPARED TO FISCAL YEAR END JUNE 30, 2006
Revenues for Fiscal 2007 decreased to $4,004,899 from $6,000,257 during Fiscal
2006 as 67% reduction. This decrease in revenue is directly the result of
changes in the Company's strategic direction in core operations. This included
discontinuing declining or unprofitable and business sectors. The Company
continues to aggressively pursue and devote its resources and focus its
direction in electronic medical transaction processing. The Company''s
agreement with its credit facility in connection with the licensing of terminals
and portal transactions therewith, the Company must defer revenue on licensing
agreement of the terminals and portal software. The decline in revenues is
directly related in 2006 the Company executed large licensing agreements with
large hospital groups such as Mount Sinai, St. Vincent, Beth Israel, and
Continuum Partners. The large hospital groups that licensed our portals
licensed at a minimum of 35 portal systems per group. In the case of St.
Vincent our portal system is used exclusively by all of their hospital
facilities. However, in 2007 the Company was licensing more individual doctor
and dental groups that were directly related to our decrease in revenues.
The Company further refocused is sales to large practice management groups to
sell multiple web portals and further have expanded its exposure and future
sales with a large dental group. In year ended 2007 the negotiations and
relationship with the practice management and dental groups were being fostered
and the company will not realize those efforts until fiscal year 2008.
Cost of deliverables for the quarter ended fiscal 2007 decreased to $1,461,229
as compared to fiscal 2006 of $3,578,345 a 41% reduction. 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. The decrease in cost of deliverables is directly related to the
decrease in revenues from the two fiscal years. Also the decrease is related to
the decrease then elimination of 25% royalty payments to third parities. This
accomplished by the company''s election to buy out the option of paying
royalties to Dream Technologies by issuance of common stock to the parties to
eliminate all future royalty payments. Further the company no longer pays
commission on future revenues from its noncancellable licensing agreements.
Commissions are paid at inception of the licensing agreement at a 10% rate and
there are no future payments on residuals revenues from gateway access fees and
licensing fees. The company paid the future royalty obligation and commitment
and is no longer obligated to pay royalties now and in the future. In the prior
period comparative there was a spike in costs with TESIA a larger vendor
contract.
Selling expenses for the fiscal 2007 decreased to $209,998 as compared to fiscal
2006 of $602,269 a 34% reduction. 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 has introduced the
telesales marketing strategy for less expensive sales force and more effective
in the future. The company has been focused on the practice management and
large dental groups and should see the results of their efforts in fourth
quarter.
General and administrative expenses for the fiscal 2007 decreased to $3,578,039
as compared to fiscal 2006 of $5,357,144 a 67% reduction. 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 manually. 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.
12
Interest expense for fiscal 2007 decreased to $885,189 as compared to fiscal
2006 of $1,405,015 a 63% reduction. This decrease is a result of renegotiation
of the Company''s credit facility with Ladco who was charge a higher interest
rate. Also, expenses were incurred and paid on notes the Company has
outstanding with LeeCo. Further the Company''s renegotiation has reduced the
accrual of interest below 3% until paid in full in 2009. We have also have been
paying down the LeeCo obligation which has grown from the increase in financing
through LeeCo Financial Inc. The payments to Ladco represented a high interest
rate and it has been a Company initiative to reduce the Ladco debt to zero.
Interest income for fiscal 2007 decreased to $395,050 as compared to fiscal 2006
of $485,559. The decrease is due to the reduction in current sales of the portal
software from our license agreements. The licensing agreements are
noncancellable licensing of our portal software in which we capitalize the
receivable and liability related to the life of the licensing agreement. The
accrual of these licensing agreements results in interest income.
The loss for fiscal 2007 decreased to ($2,553,611) as compared to fiscal 2006 of
($7,097,698). The decrease is due to the reduction in revenue, sales force,
royalty expense, commissions, and reduction in operations in our New York
facility.
No tax benefit was recorded on the expected operating loss for fiscal 2007 and
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, medical, and dental professionals and sales
of the Company''s common stock. During the fiscal 2007, the Company''s net
proceeds from the licensing of the Company''s software portals were $1,505,166
as compared to fiscal 2006 of $1,571,068. The company received $5,522,975 as
compared to fiscal 2006 of $2,395,291 in 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.
Cash (used) operating activities for the fiscal year 2007 was ($3,846,787)
compared to ($2,763,523) for fiscal year 2006. The Company''s focus on core
operations results in an increase in licenses 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 begin to reduce the deficit cash flow positions. However the
company is still operating in a deficit. The company reduced its expenses by
exercising a put option to buyout the royalty payments to third parties in the
amount of $4,050,480 which was paid in common stock of the company. The company
issued common stock valued at for fiscal 2007 of $3,900,137 as compared to
$2,395,291 in fiscal 2006. The increase in stock issued for services related to
stock issued for the royalty buyout option. The company had depreciation
expenses for fiscal 2007 of $2,663,748 as compared to fiscal 2006 of $991,690.
The reduction in deprecation is directly related to the write off of the
terminal asset capitalized in prior fiscal periods.
Cash used in investing activities was ($134,810) for fiscal 2007, compared to
$1,296,695 for fiscal 2006. 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
13
the existing proprietary software in our terminal and portal licensing agreement
sold. The company developed its portal software during fiscal 2006. Fiscal
2007 the chairman advanced funds of $489,626 as compared to $487,730 for fiscal
2006. The company advanced funds for fiscal 2007 of $49,541 as compared to
$13,100 in fiscal 2006 to Card Activation Technologies, Inc.
Cash provided by financing activities was $3,945,439 for fiscal 2007 as compared
to $1,518,959 for fiscal 2006. Financing activities primarily consisted of
proceeds from the licensing of our 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 received proceeds from the sale of common stock for
fiscal 2007 of $5,474,375 as compared to fiscal 2006 of $2,395,291. The company
decreased its licensing debt for fiscal 2007 of $840,742 as compared to
$946,613. The Company increase the cost of raising capital was $1,350,078 for
fiscal 2007 as compared to $2,395,291 for fiscal 2006 was due to the increase in
the amount of capital raised for fiscal 2007.
The Company has used funds advanced from an affiliated entity that is controlled
by the Company's chairman and chief executive officer. As of fiscal 2007 the
Company maintained a note payable from this entity for the amount of $305,000 as
compared to fiscal 2006 of $794,626 including accrued interest. However in the
quarter ended December 31, 2006 the company was able to repay the remaining
obligation in the amount of $826,197 and received advances again as of the end
of fiscal 2007. The Company owes the chairman $305,000.
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 Licensing. The funding groups accept contracts and adopt the
same terms and conditions that the Company and Licensing have agreed. In prior
years Ladco required to personally guarantee the licensing 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 licensing 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 services fees which
include transaction processing, benefit claims processing, direct terminal
sales, and credit card processing. The decrease in cost of deliverables is
directly related to the 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 fee per month on all transactions with a
15 cent per transaction fee in fiscal 2008.
The company is looking at expanding the market for its services and considering
prospective acquisitions that would complement the existing revenue model. The
company has investigated two possible acquisitions but until due diligence is
completed and negotiations have been completed we will continue to look for
possible new horizontal business mergers.
On September 14, 2006 the company renegotiated the Ladco debt. The company
agreed to pay penalties and late fees of $268,585.73 in exchange the
renegotiated balance would only carry an interest rate of 3% reduced from 26% in
the original note. The Company originally owed $3,015,063 and renegotiated the
balance to $3,880,500 which included the accrued penalties and late fees.
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. The Company has paid
$895,500,000 toward the unpaid
14
for fiscal 2007 and there is an outstanding balance of $2,985,000 of the Ladco
obligation.
LeeCo agreement adopts the agreement that the Company executes with the
customer. LeeCo collects all funds through ACH and is paid from those proceeds.
The excess of those proceeds are collected by the company. LeeCo holds as
collateral all the proceeds from the customer leases, access fees and all cash
collections and is secured from all assets of the company.
The licensing agreement is executed between the professional and the Medcom.
During the course of the agreement the company ACH''s the accounts of the
professionals and LeeCo collects the fees and reduces the liability for the
licensing fees collected and returns any excess transaction fees to the Company.
The professional does not finance their agreement with LeeCo, the company
finances the agreement. LeeCo is not a related party of the company. The
financing of the licensing agreement is calculated as part of our revenue
recognition process as the monthly collection of the licensing fee is recorded
against the outstanding balance. Revenue is not recognized in excess of the
cash received from our financing of the likening agreement in accordance with
SAB 101. The guarantees that are provided in connection with the hospital
agreements have not changed our revenue recognition process except the accrual
of the interest expense related to the unpaid balances.
In accordance with AICPA TPA 5100.58 - 5100.64
The company has a fixed and determinable licensing fee and gateway access fees.
The company has all customer agreements over a period of 24 -60 months. This
period the company updates software, and provides various transaction fees
outlined as deliverables. The company receives payments through out the term of
the agreement. The company incurs upfront expenses in the initial software
installation that is outlined in the deliverables and continues to service the
customer with the remaining deliverables through out the terms of the contract.
Revenue is recognized when the customer pays the ongoing payment through out the
term of the contract. Revenue is recognized at the initial installation based
upon the cost of deliverables at the time of installation.
The customer does not arrange any financing of the software. The company has
recourse in the financing arrangement. The company recognizes revenue upon
delivery of the software and over the term of the agreement based up on the
deliverables delivered under the terms of the agreement.
The company participates in the financing of the customers'' term contract. The
company recognizes revenues to the extent of the expenses paid upfront for the
deliverables and then recognizes revenue over the term of the contract. The
company defers any revenue of the contract and recognizes that deferred revenue
over the remaining term of the contract.
The company has a fixed and determinable licensing arrangement as the company
enforces all licensing agreements as they are noncancellable, the company has
never altered the terms of the agreement with the original licensing agreement,
the company has incremental risk in this arrangement. The company recognizes
revenue over the terms of the agreement and further recognizes revenue based
upon the costs of deliverable that is required in the initial installation of
the software and continues to provide deliverables in accordance with the terms
of the agreement.
The company has a standard practice to enter into a financing arrangement with
LeeCo and does not provide a concession which makes it fixed and determinable
licensing arrangement. Medcom has incremental risk in the financing arrangement
with LeeCo and thus has fixed and determinable licensing arrangement.
15
OTHER CONSIDERATIONS
There are numerous factors that affect the 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 product services, the level and intensity of competition in the
healthcare electronic transaction processing industry, and the 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 our ability to continue to
improve our infrastructure including personnel and systems to keep pace with the
Company''s anticipated rapid growth.
16
ITEM 7. FINANCIAL STATEMENTS
MEDCOM USA, INC.
TABLE OF CONTENTS PAGE
------------------------------------------------------------------------------- ----
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: F-2
Jewett Schwartz Wolfe & Associates
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheet at June 30, 2007 and 2006 F-3
Consolidated Statements of Operations for the years ended
June 30, 2007 and 2006 F-4
Consolidated Statements of Stockholders'' Equity for the years ended
June 30, 2007 and 2006 F-5
Consolidated Statements of Cash Flows for the years ended
June 30, 2007 and 2006 F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS F-7
17
JEWETT, SCHARTZ, WOLFE & ASSOCIATES
CERTIFIED PUBLIC ACCOUNTANTS
================================================================================
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
MEDCOM USA INCORPORATED
We have audited the accompanying consolidated balance sheet of Medcom USA
Incorporated and Subsidiaries as of June 30, 2007 and 2006, and the related
consolidated statements of operations, changes in shareholders' deficiency and
cash flows for the year then ended. These consolidated financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
consolidated financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provided a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of MedCom USA
Incorporated, Inc and Subsidiaries, as of June 30, 2007 and 2006, and the
results of their operations and their cash flows for the period then ended in
conformity with accounting principles generally accepted in the United States of
America.
These consolidated financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has operating and liquidity
concerns, has incurred an accumulated deficit of approximately $90,226,356
through the period ended June 30, 2007, and current liabilities exceeded current
assets by approximately $2,327,543 at June 30, 2007. These conditions raise
substantial doubt about the Company's ability to continue as a going concern.
Management's plans as to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
the amounts and classification of liabilities that may result from the outcome
of these uncertainties.
As further discussed in Note 14 to the financial statements, the Company had
error corrections that resulted in a retroactive restatement impacting this
previously issued financial statements for fiscal 2006. The result of the
retroactive restatement had no effect on the previously issued independent
registered public accountants'' report on these financial statements.
JEWETT, SCHWARTZ, WOLFE & ASSOCIATES
Hollywood, Florida
September 14, 2007 and September 14, 2007 with respect to note 14
2514 HOLLYWOOD BOULEVARD, SUITE 508 HOLLYWOOD, FLORIDA 33020 TELEPHONE (954)
922-5885 FAX (954) 922-5957
MEMBER - AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS FLORIDA INSTITUTE
OF CERTIFIED PUBLIC ACCOUNTANTS
PRIVATE COMPANIES PRACTICE SECTION OF THE AICPA REGISTERED WITH THE PUBLIC
COMPANY ACCOUNTING OVERSIGHT BOARD OF THE SEC
18
MEDCOM USA, INC.
CONSOLIDATED BALANCES SHEETS
FOR YEARS ENDED JUNE 30, 2007 AND 2006
---------------------------------------------------------------------------------------
ASSETS:
2007 2006
------------- -------------
CURRENT ASSETS
Cash $ 26,210 $ 62,338
Licensing contracts - current portion, net 790,250 626,550
Prepaid expenses and other current assets 197,140 207,591
------------- -------------
Total current assets 1,013,600 896,479
PROCESSING TERMINALS, net - 776,942
PROPERTY AND EQUIPMENT, net 483,986 530,335
Licensing contracts - long-term portion. net 547,223 1,341,627
Note receivable affiliates 62,641 13,100
Other assets 17,657 17,657
------------- -------------
TOTAL ASSETS $ 2,125,107 $ 3,576,140
============= =============
LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
CURRENT LIABILITIES:
Accounts payable $ 123,156 $ 252,214
Accrued expenses and other liabilities 54,442 697,094
Dividend payable 23,750 23,750
Notes from afiliates 305,000 794,626
Deferred revenue - current portion 498,972 758,629
Licensing obligations - current portion 2,335,824 1,722,541
------------- -------------
Total current liabilities 3,341,144 4,248,854
Licensing obligations - long-term portion 3,357,175 4,197,917
Deferred Revenue 1,552,387 2,723,910
------------- -------------
Total liabilities 8,250,706 11,170,681
------------- -------------
STOCKHOLDERS' DEFICIENCY:
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, 175,000,000 shares authorized,
92,772,860 and 70,317,569 issued and outstanding as of 9,278 7,032
June 30, 2007 and 2006, respectively
Treasury stock (37,397) (37,397)
Paid-in capital 84,128,843 80,108,536
Accumulated deficit (90,226,356) (87,672,745)
------------- -------------
Total stockholders' deficiency (6,125,599) (7,594,541)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 2,125,107 $ 3,576,140
============= =============
The accompanying notes are an integral part of these consolidated financial statements.
19
MEDCOM USA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEARS ENDED JUNE 30, 2007 AND JUNE 30, 2006
-------------------------------------------------------------------------------------------------------------------
2007 2006
------------ ------------
REVENUES:
Terminal sales $ 41,681 $ 275,351
Service 2,458,052 4,153,839
Licensing fees 1,505,166 1,571,068
------------ ------------
4,004,899 6,000,258
COST OF DELIVERABLES: 1,461,229 3,578,345
------------ ------------
GROSS PROFIT 2,543,670 2,421,913
------------ ------------
OPERATING EXPENSES:
General and administrative expenses 3,578,039 5,357,144
Sales and marketing expenses 209,998 602,269
Depreciation and amortization 770,505 2,663,748
------------ ------------
Total operating expenses 4,558,542 8,623,161
------------ ------------
OPERATING LOSS (2,014,872) (6,201,248)
------------ ------------
OTHER (INCOME) AND EXPENSES
Interest expense 885,189 1,405,015
Interest Income (395,050) (485,559)
Legal settlement 48,600 -
Gain on extinguishment of debt - (76,208)
Impairment of assets - 53,202
------------ ------------
Total other expense 538,739 896,450
------------ ------------
LOSS BEFORE INCOME TAXES (2,553,611) (7,097,698)
INCOME TAX BENEFIT - -
------------ ------------
NET LOSS $(2,553,611) $(7,097,698)
============ ============
NET LOSS PER SHARE:
Basic and diluted: $ (0.03) $ (0.11)
============ ============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted: 84,729,836 62,821,854
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
20
MEDCOM USA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
--------------------------------------------------------------------------------
\----------- PREFERED STOCK -----------\
COMMON STOCK PREFERRED A & B PREFERRED D PAID-IN TREASURY ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFICIT TOTAL
---------- ------- --------- ------- ------ ------- ------------ ---------- ------------- ------------
JUNE 30,
2005 57,664,432 $ 5,767 4,250 $ 4 2,850 $ 29 $75,700,765 $ (37,397) $(80,575,047) $(4,905,879)
Common stock
issued for cash 6,552,648 655 - - - - 2,394,636 - - 2,395,291
Common stock
for
compensation 6,087,492 609 - - - - 2,394,761 - - 2,395,370
Exercise of
cashless
warrents 12,997 1 - - - - 12,996 - - 12,997
Cost of royalty
obligation
buy out - - - - - - (247,167) - - (247,167)
Cost of raising
capital - - - - - - (147,455) - - (147,455)
Net loss - - - - - - - - (7,097,698) (7,097,698)
---------- ------- --------- ------- ------ ------- ------------ ---------- ------------- ------------
JUNE 30,
2006 70,317,569 $ 7,032 4,250 $ 4 2,850 $ 29 $80,108,536 $ (37,397) $(87,672,745) $(7,594,541)
========== ======= ========= ======= ====== ======= ============ ========== ============= ============
The accompanying notes are an integral part of these consolidated financial statements.
21
MEDCOM USA, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIENCY
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006 - CONTINUED
-------------------------------------------------------------
\ ----------- PREFERED STOCK -----------\
COMMON STOCK PREFERRED A & B PREFERRED D PAID-IN TREASURY ACCUMULATED
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL STOCK DEFICIT TOTAL
---------- ------- ------ ------- ------ ------- ------------ --------- ------------- ------------
JUNE 30,
2006 70,317,569 $7,032 4,250 $4 2,850 $29 $80,108,536 $(37,397) $(87,672,745) $(7,594,542)
Common stock
issued for cash 14,824,560 1,483 - - - - 5,521,491 - - 5,522,975
Common stock
issued for
services 7,630,731 763 - - - - 3,899,374 - - 3,900,137
Cost of raising
capital - - - - - - (1,350,078) - - (1,350,078)
Cost of royalty
obligation
buyout - - - - - - (2,723,546) - - (2,723,546)
Cost of put
royalty obligation
buyout - - - - - - (1,326,934) - - (1,326,934)
Net loss - - - - - - - - (2,553,611) (2,553,611)
---------- ------- ------ ------- ------ ------- ------------ --------- ------------- ------------
JUNE 30,
2007 92,772,860 $ 9,278 4,250 $ 4 2,850 $ 29 $84,128,843 $(37,397) $(90,226,356) $(6,125,599)
========== ======= ====== ======= ====== ======= ============ ========= ------------- ------------
The accompanying notes are an integral part of these consolidated financial statements.
22
MEDCOM USA, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED JUNE 30, 2007 AND 2006
-------------------------------------------------------------------------------------------------------------------
2007 2006
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,553,611) $(7,097,698)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 991,690 2,663,748
Issuance of stock as consideration for services 3,900,137 2,395,291
Costs of royalty options obligation buyout (2,723,546) (247,167)
Cost of put royalty option obligation buyout (1,326,934) -
Allowance for doubtful accounts 57,948 166,189
Exercise of warrants - 12,997
Gain on extinguishment of debt - 76,208
Impariment of assets - 53,202
Allowance for sales returns - (82,424)
Changes in operating assets and liablities:
Prepaid and other current assets 10,451 (58,503)
Accounts payable (129,058) (244,528)
Accrued expenses and other liabilities (642,652) 1,088,678
Deferred revenue (1,431,182) (1,489,516)
------------ ------------
Net cash used in operating activities (3,846,757) (2,763,523)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchasing of equipment (168,399) -
Licensing contracts - current portion (221,648) (782,649)
Licensing contracts - long-term portion 794,404 1,604,714
Note receivable affiliates (49,541) (13,100)
Notes from affiliates (489,626) 487,730
------------ ------------
Nett cash (used in) provided by investing activities (134,810) 1,296,695
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Licensing obligation - current portion 613,284 (176,886)
Licensing obligation - long-term portion (840,742) (551,991)
Cost of raising capital (1,350,078) (147,455)
Proceeds from sale of common stock 5,522,975 2,395,291
--------------------------
Net cash provided by financing activities 3,945,439 1,518,959
------------ ------------
(DECREASE) INCREASE IN CASH (36,128) 52,131
CASH, BEGINNING OF YEAR 62,338 10,207
------------ ------------
CASH, END OF YEAR $ 26,210 $ 62,338
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
2007 2006
------------ ------------
Interest paid $ 533,493 $ 889,790
============ ============
The accompanying notes are an integral part of these consolidated financial statements.
23
MEDCOM USA, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEAR ENDED JUNE 30, 2007AND 2006
--------------------------------------------------------------------------------
NOTE 1 - BACKGROUND
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) sales of prepaid calling cards, (c) sales of long
distance telephone service and (d) rental of cellular telephones using an
overnight courier service. With the exception of the sale of prepaid calling
cards, these four programs were discontinued in December 1997. During the
fiscal year of 1998, the Company redirected its operations and moved into the
area of medical information processing.
The Company changed its name to MedCom USA, Inc. in October 1999. During fiscal
year 1999 and continuing through 2000, the Company directed its efforts in
medical information processing. From March 31, 2001 through 2005, the Company
operated the MedCom System (MedCom) that deploys through a point-of-sale
terminal or personal computer offering electronic transaction processing, as
well as insurance eligibility verification. At the end of fiscal 2005 the
Company deployed web portal software that functioned in a similar capacity of
the terminal point-of-sale system. Since 2005 the Company has continued to
focus on the continual maintenance and upgrade of the web portal software. The
Company has aggressively focused on its primary operations in Electronic Data
Interchange (EDI) and core business in Electronic Medical Transaction
Processing.
NOTE 2 - GOING CONCERN
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America which
contemplate continuation of the Company as a going concern. However, the
Company has year end losses from operations and had minimal revenues from
operations in 2007 and 2006. During the year ended June 30, 2007 and 2006 the
Company incurred net loss of $2,553,611 and $7,097,698, respectively. Further,
the Company has inadequate working capital to maintain or develop its
operations, and is dependent upon funds from private investors and the support
of certain stockholders.
These factors raise substantial doubt about the ability of the Company to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of these uncertainties. In this
regard, Management is planning to raise any necessary additional funds through
loans and additional sales of its common stock. There is no assurance that the
Company will be successful in raising additional capital.
NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company prepares its financial statements in accordance with accounting
principles generally accepted in the United States of America. Significant
accounting policies are as follows:
Principles of Consolidation
-----------------------------
The accompanying financial statements represent the consolidated financial
position and results of operations of the Company and include the accounts and
results of operations of the Company and its wholly owned subsidiaries. The
accompanying financial statements include only the active entity of MedCom USA,
Inc. The Company has several inactive subsidiaries.
Use of Estimates
----------------
24
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
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. These estimates and assumptions also affect the
reported amounts of revenues, costs and expenses during the reporting period.
Management evaluates these estimates and assumptions on a regular basis. Actual
results could differ from those estimates.
The primary management estimates included in these financial statements are the
impairment reserves applied to various long-lived assets, allowance for doubtful
accounts for gateway access fees and licensing fees, and the fair value of its
stock tendered in various non-monetary transactions.
Reclassification
----------------
Certain prior period amounts have been reclassified to conform to current year
presentations.
Advertising Cost
-----------------
All advertising costs are to expensed as incurred. Advertising expense for the
year ended June 30, 2007 and 2006 were approximately $7,400 and $15,000,
respectively.
Cash and Cash Equivalents
-------------------------
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents. At June 30, 2007 and 2006, cash
and cash equivalents include cash on hand and cash in the bank.
Property and Equipment
----------------------
Property and equipment is recorded at cost and depreciated over the estimated
useful lives of the assets using principally the straight-line method. When
items are retired or otherwise disposed of, income is charged or credited for
the difference between net book value and proceeds realized thereon. Ordinary
maintenance and repairs are charged to expense as incurred, and replacements and
betterments are capitalized. The range of estimated useful lives used to
calculated depreciation for principal items of property and equipment are as
follow:
Depreciation/
Amortization
Asset Category Period
------------------ -------------
Computer Equipment 3 Years
Terminal Software 3 Years
Network Platform 3 Years
Office equipment 5 Years
Income Taxes
-------------
Deferred income taxes are provided based on the provisions of Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS No.
109"), to reflect the tax effect of differences in the recognition of revenues
and expenses between financial reporting and income tax purposes based on the
enacted tax laws in effect at June 30, 2007 and 2006, respectively.
Net Loss Per Share
---------------------
Basic earnings per share is computed in accordance with FASB No. 128 Earnings
Per Share, by dividing net income (loss) available to common shareholders by the
weighted average number of common shares outstanding during the
25
reporting period. Diluted earnings per share reflects the potential dilution
that could occur if stock options and other commitments to issue common stock
were exercised or equity awards vest resulting in the issuance of common stock
that could share in the earnings of the Company. As of June 30, 2007 and 2006,
there were no potential dilutive instruments that could result in share
dilution.
Fair Value of Financial Instruments
---------------------------------------
The fair value of a financial instrument is the amount at which the instrument
could be exchanged in a current transaction between willing parties other than
in a forced sale or liquidation.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value:
Cash and cash equivalents, licensing receivable, prepaid expenses, other assets,
and accounts payable, income tax payable, and other current liabilities carrying
amounts approximate fair value due to their most maturities.
Stock-Based Compensation
-------------------------
Statements of Financial Accounting Standards ("SFAS No.") No. 123, Accounting
for Stock-Based Compensation, ("SFAS No. 123") established accounting and
disclosure requirements using a fair-value based method of accounting for
stock-based employee compensation. In accordance with SFAS No. 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."
The Company accounts for stock awards issued to nonemployees in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue
No. 96-18 Accounting for Equity Instruments that are Issued to Other Than
Employees for Acquiring, or in Conjunction with Selling Goods or Services.
Under SFAS No. 123 and EITF 96-18, stock awards to nonemployees are accounted
for at their fair value as determined under Black-Scholes option pricing model.
In December 2004, the FASB issued a revision of SFAS No. 123 ("SFAS No. 123(R)")
that requires compensation costs related to share-based payment transactions to
be recognized in the statement of operations. With limited exceptions, the
amount of compensation cost will be measured based on the grant-date fair value
of the equity or liability instruments issued. In addition, liability awards
will be re-measured each reporting period. Compensation cost will be recognized
over the period that an employee provides service in exchange for the award.
SFAS No. 123(R) replaces SFAS No. 123 and is effective as of the beginning of
January 1, 2006. Based on the number of shares and awards outstanding as of
December 31, 2005 (and without giving effect to any awards which may be granted
in 2006), we do not expect our adoption of SFAS No. 123(R) in January 2006 to
have a material impact on the financial statements.
Financial Statement Position ("FSP") FAS No. 123(R)-5 was issued on October 10,
2006. The FSP provides that instruments that were originally issued as employee
compensation and then modified, and that modification is made to the terms of
the instrument solely to reflect an equity restructuring that occurs when the
holders are no longer employees, then no change in the recognition or the
measurement (due to a change in classification) of those instruments will result
if both of the following conditions are met: (a). There is no increase in fair
value of the award (or the ratio of intrinsic value to the exercise price of the
award is preserved, that is, the holder is made whole), or the antidilution
provision is not added to the terms of the award in contemplation of an equity
restructuring; and (b). All holders of the same class of equity instruments (for
example, stock options) are treated in the same manner. The provisions in this
FSP shall be applied in the first reporting period beginning after the date the
FSP is posted to the FASB website. The Company has adopted SP FAS No. 123(R)-5
but it did not have a material impact on its consolidated results of operations
and financial
26
condition.
Goodwill and Other Intangible Assets
----------------------------------------
The Company adopted Statement of Financial Accounting Standard (""SFAS No."")
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 and other intangible assets for
impairment, in accordance with the provisions of SFAS No. 142. There was no
impairment of goodwill or other intangible assets in fiscal 2006 and 2007.
Impairment of Long-Lived Assets
----------------------------------
In accordance with SFAS No. 144, long-lived assets, such as property, plant, and
equipment, and purchased intangibles, are reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Goodwill and other intangible assets are tested for
impairment annually. Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is
recognized by the amount by which the carrying amount of the asset exceeds the
fair value of the asset. There were no events or changes in circumstances that
necessitated a review of impairment of long lived assets.
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, 2007 and 2006, the Company had a major vendor
TESIA-PCI for which a contract was executed specifying that the Company would
deliver 1500 unit over the period of 2007 and 2006. The agreement allowed the
minimum billing of $28.50 per month per unit in a pool based on a 15 cent
transaction fee. The average billing per unit experienced was greater than the
minimum during fiscal 2007 and 2006.
The Company has entered into agreements with TESIA-PCI. The agreements entered
into by and between the Company and TESIA-PCI represents a major licensor of the
Company. The Company realized $614,794 in year ended June 30, 2007 as compared
to $1,156,000 from TESIA-PCI during the year ended June 30, 2006 in deferred
revenue.
Revenue Recognition
--------------------
Statement of Position ("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
27
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 allows for revenue to 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 recognizes revenue from license fees when the software is
shipped to the customer. The amount and timing of revenue recognition is based
on the multiple-element arrangements that provide for multiple software
deliverables [e.g., software products, upgrades or enhancements, post contract
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 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 relative fair value of 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 fees, EDI connectivity fees,
Payer/Provider fees, benefit verification fees, referral transfer fees, service
authorization fees, claim status, training, support, program upgrades, carrier
editions, and customized reports. Revenue is accordingly allocated and
recognized based on the value of deliverables.
The Company has substantial upfront expenses such as commission, royalties,
software portal, and the software deliverables and pays those costs at the
execution of the contract. The company accumulates the entire contract of
licensing and gateway access fees and record as the licenses and gateway access
fees receivables. The company recognizes revenue in accordance with SOP 97-2
when the software is delivered to the professional and recognizes the remaining
portion of the contract over the life of the contract. The company recognizes
the revenue of the contract at the time of the deliverables and execution of the
contract since the company has substantial costs upfront at the time of
delivery. The remaining portion is recognized monthly in accordance the
agreement. The company further accrues the prepaid licensing expense, accrued
deliverables
The Company has adopted the Securities and Exchange Commission''s Staff
Accounting Bulletin (SAB) No. 104, which provides guidance on the recognition,
presentation and disclosure of revenue in financial statements.
Recent Accounting Pronouncements
----------------------------------
Recent accounting pronouncements that the Company has adopted or will be
required to adopt in the future are summarized below.
28
In May 2005, the Financial Accounting Standards Board (FASB) issued SFAS No. No.
154, "Accounting Changes and Error Corrections" (SFAS No. 154), which replaces
Accounting Principles Board (APB) Opinion No. 20, "Accounting Changes," and SFAS
No. 3, "Reporting Accounting Changes in Interim Financial Statements - An
Amendment of APB Opinion No. 28." SFAS No. 154 provides guidance on the
accounting for and reporting of accounting changes and error corrections, and it
establishes retrospective application, or the latest practicable date, as the
required method for reporting a change in accounting principle and the reporting
of a correction of an error. SFAS No. 154 is effective for accounting changes
and corrections of errors made in fiscal years beginning after December 15,
2005. Early adoption was permissible for fiscal year beginning after June 30,
2005. The Company has elected to early adopt SFAS No. 154. The implementation
of SFAS No. 154 resulted in a retroactive restatement impacting the financial
statements for fiscal 2005 as noted in Note 14.
In September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" (SFAS
No. 157). SFAS No. 157 provides guidance for using fair value to measure assets
and liabilities. SFAS No. 157 addresses the requests from investors for expanded
disclosure about the extent to which companies measure assets and liabilities at
fair value, the information used to measure fair value and the effect of fair
value measurements on earnings. SFAS No. 157 applies whenever other standards
require (or permit) assets or liabilities to be measured at fair value, and does
not expand the use of fair value in any new circumstances. SFAS No. 157 is
effective for financial statements issued for fiscal years beginning after
November 15, 2007 and will be adopted by the Company in the first quarter of
fiscal year 2009. The Company is unable at this time to determine the effect
that its adoption of SFAS No. 157 will have on its consolidated results of
operations and financial condition.
In July 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes, an interpretation of FASB Statement No. 109" (FIN
48). FIN 48 clarifies the accounting for uncertainty in income taxes by
prescribing the recognition threshold a tax position is required to meet before
being recognized in the financial statements. It also provides guidance on
derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. The cumulative effects, if any, of applying
FIN 48 will be recorded as an adjustment to retained earnings as of the
beginning of the period of adoption. FIN 48 is effective for fiscal years
beginning after December 15, 2006, and the Company is required to adopt it in
the first quarter of fiscal year 2008. The Company is currently evaluating the
effect that the adoption of FIN 48 will have on its consolidated results of
operations and financial condition and is not currently in a position to
determine such effects, if any.
In June 2006, the FASB ratified Emerging Issues Task Force (EITF) Issue No. 063
(EITF 06-3), "How Taxes Collected from Customers and Remitted to Governmental
Authorities Should Be Presented in the Income Statement (That Is, Gross versus
Net Presentation). EITF 063 applies to any tax assessed by a governmental
authority that is directly imposed on a revenue producing transaction between a
seller and a customer. EITF 063 allows companies to present taxes either gross
within revenue and expense or net. If taxes subject to this issue are
significant, a company is required to disclose its accounting policy for
presenting taxes and the amount of such taxes that are recognized on a gross
basis. The Company currently presents such taxes net. EITF 063 is required to be
adopted during the first quarter of fiscal year 2008. These taxes are currently
not material to the Company''s consolidated financial statements.
In September 2006, the SEC issued Staff Accounting Bulletin No. 108,
"Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements" (SAB 108). SAB 108 provides
guidance on the consideration of the effects of prior year misstatements in
quantifying current year misstatements for the purpose of a materiality
assessment. SAB 108 establishes an approach that requires quantification of
financial statement errors based on the effects of each on a company's balance
sheet and statement of operations and the related financial statement
disclosures. Early application of the guidance in SAB 108 is encouraged in any
report for an interim period of the first fiscal year ending after November 15,
2006, and will be adopted by the Company in the first quarter of fiscal year
2007. The Company does not expect the adoption of SAB
29
108 to have a material impact on its consolidated results of operations and
financial condition.
Financial Statement Position FAS 123(R)-5 was issued on October 10, 2006. The
FSP provides that instruments that were originally issued as employee
compensation and then modified, and if that modification is made to the terms
of the instrument solely to reflect an equity restructuring that occurs when
the holders are no longer employees, then no change in the recognition or the
measurement (due to a change in classification) of those instruments will
result if both of the following conditions are met: (a). There is no increase in
fair value of the award (or the ratio of intrinsic value to the exercise price
of the award is preserved, that is, the holder is made whole), or the
antidilution provision is not added to the terms of the award in contemplation
of an equity restructuring; and (b). All holders of the same class of equity
instruments (for example, stock options) are treated in the same manner. The
provisions in this FSP shall be applied in the first reporting period beginning
after the date the FSP is posted to the FASB website. The Company does not
expect the adoption of FSPs FAS 123(R)-5 to have a material impact on its
consolidated results of operations and financial condition. The statements was
adopted July 1, 2006.
NOTE 4 - LICENSING RECEIVABLE
The Company''s license receivable current portion, net at June 30, 2007 and 2006
consisted of the following:
2007 2006
---------- ----------
Licensing Contracts $ 929,406 $ 792,739
Less: Allowance for Doubtful Accounts (139,156) (166,189)
---------- ----------
Licensing Contracts - Net $ 790,250 $ 626,550
========== ==========
The Company estimated uncollectible accounts balances and provides an allowance
for such estimates. The allowance for doubtful accounts at June 30, 2007 and
2006 consist of an estimate for potentially uncollectible accounts in the MedCom
division.
Monthly the Company ACH''s these payments directly from the customers'' account
to ensure timely payment. The current customer agreement requires customer sign
up of ACH authorization of these fees and other deliverables. All licensing
agreements are noncancellable and range from a 24 - 60 month licensing
arrangement.
NOTE 5 - ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in the allowance for possible licensing receivables losses as of June
30:
2007 2006
-------- --------
Balance at beginning of year $166,189 $113,093
Additions 57,948 109,642
Write-off 84,981 56,546
-------- --------
Balance at end of year $139,156 $166,189
======== ========
NOTE 6 - PROPERTY AND EQUIPMENT
Property and equipment, net at June 30, consist of the following:
Years 2007 2006
----- ---------- -----------
Computer Equipment 3 $ - $ 176,484
Terminal Software 3 - 402,371
Network Platform 3 807,833 639,437
---------- -----------
Total property and equipment 807,833 1,218,292
---------- -----------
Less: accumulated depreciation (323,847) (687,957)
---------- -----------
$ 483,986 $ 530,335
========== ===========
30
The depreciation expense for the years ended June 30, 2007 and 2006 was $770,505
and $2,663,748, respectively.
In June 30, 2005 the Company capitalizes the value of the point of sale
terminals that are sold under capital sale-leaseback transactions. The
terminals are purchased from third party vendors and are recorded as inventory
at that time. The Company enters into sale and service agreements with its
customers at which time the terminal is programmed with the Company''s
proprietary software and installed with the customer. Many of those terminals
were the basis for the sale-leaseback transactions. The terminals are
capitalized at the value determined by the lessor on the basis of the cash flow
under the terms of the sale and service agreements with the customers. As of
June 30, 2006 there were remaining terminal assets as follows:
2007 2006
---------- ------------
Terminal Assets $ - $ 6,197,320
Accumulated Depreciation - (5,420,378)
---------- ------------
Net Terminal Assets $ - $ 776,942
========== ============
The Company occupies premises under a non-cancelable operating lease expiring on
2008. At June 30, 2007, the approximate future minimum rental commitments under
this lease are as follows:
2008: $ 170,000
2009: 63,192
2010: 7,148
----------
Total $ 240,340
==========
Total rental payments under the lease agreement totaled $200,881 and $227,160
for the years ended in June 30, 2007 and 2006, respectively.
NOTE 7 - NOTE PAYABLE
Notes payable comprise the following:
2007 2006
----------------------
LeeCo agreement adopts the agreement that the
Company executes with the customer. LeeCo
collects all funds through ACH and is paid from
those proceeds. The excess of those proceeds are
collected by the company. LeeCo holds as
collateral all the proceeds from the customer leases,
access fees and all cash collections and is secured
from all assets of the company. $2,419,784 $2,606,558
31
Ladco agreement adopts the agreement that the
Company executes with the customer. Ladco
collects all funds through ACH and is paid from
those proceeds. The excess of those proceeds are
collected by the company. Ladco holds as collateral
all the proceeds from the customer leases, access
fees and all cash collections and is secured from all
assets of the company. 2,985,000 3,305,935
Total LeeCo and Ladco debt 5,404,784 5,912,493
Plus long-term portion of accrued deliverable 847,052 1,148,614
Less interest 558,837 1,140,649
----------------------
Total long-term note payable 5,692,999 5,920,458
Less current portion 2,335,824 1,722,541
----------------------
Long-term portion of note payable $3,357,175 $4,197,917
======================
On September 14, 2006 the Company renegotiates the Ladco debt in order to 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 now matures on
October 2009.
NOTE 8 - STOCKHOLDER''S DEFICIT
DURING THE YEAR ENDED JUNE 30, 2007 AND 2006:
During the year ended June 30, 2006, the Company issued 6,552,648 shares of its
common stock for $2,395,291. The shares were issued to third parties in a
private placement of the Company''s common stock. The shares were sold
throughout the year ended June 30, 2006, ranging from $1.00 per share at the
beginning of the year to $.25 per share at the end of the year. Commissions of
approximately $147,455 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 the fair value of the services rendered. The value of the shares
was determined based on the trading value of the stock at the dates on which the
agreements were entered into for the services and value of the services
rendered. During the year ended June 30, 2006, the Company granted to
consultants, 6,087,492 shares of common stock valued in the aggregate at
$2,395,370 with a strike price range of $.50 to $1.50. The value of these shares
was expensed during the year. The stock issued for services includes $247,167 of
the royalty buyout provision. The Company exercised the royalty buyout provision
to reduce the royalty payments to 20% of all sales in June 30, 2006.
During the year ended June 30, 2006, the Company issued 12,997 shares of its
common stock under a notice of conversion of common stock warrants. There was
no payment for the exercise of the warrants as they were cashless warrants and
the net amount issued was 12,997.
During the year ended June 30, 2007, the Company issued 14,824,560 shares of its
common stock for $5,522,975. The shares were issued to third parties in a
private placement of the Company''s common stock. The shares were sold
throughout the year ended June 30, 2007, ranging from $.75 per share at the
beginning of the year to $.25 per share at the end of the year. Commissions of
approximately $1,350,078 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 the fair value of the services rendered. The value of those
shares was determined based on the trading value of the stock at the dates on
which the agreements were entered into for the services. During the year ended
June 30, 2007, the Company granted to consultants and paid out obligations of
7,630,731 shares of common stock valued in the aggregate at $3,900,137 with a
strike price range of $.35 to $.75. The Company recorded as a charge in
additional paid in capital an obligation buyout
32
for the Royalty arrangement with Dream Technology in the amount of $4,050,480.
In connection with the original licensing and subsequent acquisition of MedCom,
the Company entered into a royalty agreement with the original Licensor. The
royalty provisions of the license agreement remained in effect after the
purchase. This agreement was amended in the year ended June 30, 2002. The
Company will pay the Licensor 20% of the first $1,000,000 of qualified monthly
revenues, less direct costs, generated by the licensed software and 10% of net
monthly revenue in excess of $1,000,000. The buyout of this agreement included
all past, present, and future royalty arrangements to the original licensor. As
of December 31, 2006 no further royalty obligations have been charged to
additional paid in capital or charged to expense as the royalty obligation was
fully satisfied.
STOCK ISSUED STOCK ISSUED STOCK ISSUED FOR
QUARTER ENDED FOR CASH CASH RECEIVED FOR SERVICES WARRENTS EXERCISED
September 30, 2005 1,156,999 $ 591,750 685,508 12,997
December 31, 2005 950,000 $ 380,000 811,500 -
March 31, 2006 1,584,788 $ 590,949 2,665,848 -
June 30, 2006 2,860,861 $ 832,592 1,924,636
--------------------------------------------------------------
Year Ended June 30, 2006 6,552,648 $ 2,395,291 6,087,492 12,997
September 30, 2006 7,384,373 $ 2,178,991 1,837,331 -
December 31, 2006 2,579,331 $ 1,273,333 4,726,870 -
March 31, 2007 2,659,000 $ 1,302,000 866,530 -
June 30, 2007 2,201,856 $ 768,651 200,000
--------------------------------------------------------------
Year Ended June 30, 2007 14,824,560 $ 5,522,975 7,630,731 -
Preferred Stock
The Company is authorized to issue up to 300,000 shares of $.001 par value
Preferred Stock. The Board of Directors has the authority to divide the
Preferred Stock into series and, within the certain limitations, to set the
relevant terms of such series created.
In April 1995, the Company established the Series A Preferred Stock and
authorized the issuance of up to 50,000 shares. Each share of series A Preferred
Stock is entitled to a dividend at the rate of $1.60 per share when, and if
declared by the Board of Directors. Dividends not declared are not cumulative.
Additionally, each share of Series A Preferred Stock is convertible into .20
shares of the Company's Common Stock at any time after July 1, 1999. A total of
850 shares of common stock may be issued upon the conversion of the shares of
Series A preferred stock outstanding as of June 30, 2000. Upon any liquidation
or dissolution of the Company, each outstanding share of Series A Preferred
Stock is entitled to distribution of $20 per share prior to any distribution to
the holders of the Company's common stock. As of June 30, 2000, the Company has
4,250 shares of Series A Preferred Stock issued and outstanding.
In April 2000, the Company established the Series D Preferred stock and
authorized the issuance of up to 2,900 shares. The Company issued 494 shares
related to a business acquisition of and 2,356 shares for the acquisition of
related intellectual property.
Each share of Series D preferred stock is entitled to a dividend at the rate of
$0.04 per share and has a stated value of $1,000 per share. Dividends on all
Series D preferred stock begin to accrue and accumulate from the date of
issuance. Additionally, each share of Series D preferred stock is convertible
into 40.49 shares of common stock for a total of 576,923 shares at the option of
the stockholders. Upon liquidation or dissolution of the Company, each
outstanding share of Series D preferred stock is entitled to a distribution of
the stated amount per share prior to any distribution to the shareholders of the
Company's common stock. The Company can convert the Series D preferred
33
stock into shares of common stock using the same conversion ratio at any time
after April 15, 2001 so long as the bid price of the Company's common stock
exceeds $4.94 per share and the shares of common stock issuable upon the
conversion of the Series D preferred stock are either covered by an effective
registration statement or are eligible for sale pursuant to rule 144 of the
Securities and Exchange Commission. Each share of Series D preferred stock is
entitled to vote in all matters submitted to the Company's shareholders on an
"as converted" basis.
The Company has not declared dividends on the preferred stock for the years
ended June 30, 2007 and 2006. At June 30, 2007, there was an accumulated
undeclared and unpaid dividend on the Series D preferred stock of $342,000.
Total accrued, but unpaid dividends related to the Series D preferred stock was
$23,750 at June 30, 2007.
NOTE 9 - INCOME TAXES
The provision (benefit) for income taxes from continued operations for the years
ended June 30, 2007 and 2006 consist of the following:
--------------------------
2007 2006
--------------------------
Current:
Federal $ (817,100) $(2,271,200)
State (204,300) (567,800)
------------ ------------
(1,021,400) (2,839,000)
Deferred:
Federal 817,100 2,271,200
State 204,300 567,800
------------ ------------
1,021,400 2,839,000
Benefit from the operating
loss carryforward - -
------------ ------------
(Benefit) provision for income taxes, net $ - $ -
============ ============
The difference between income tax expense computed by applying the federal
statutory corporate tax rate and actual income tax expense is as follows:
June 30,
------------
2007 2006
----- -----
Statutory federal income tax rate 34.0% 34.0%
State income taxes and other 8.9% 8.9%
----- -----
Effective tax rate 42.9% 42.9%
===== =====
Deferred income taxes result from temporary differences in the recognition of
income and expenses for the financial reporting purposes and for tax purposes.
The tax effect of these temporary differences representing deferred tax asset
and liabilities result principally from the following:
June 30,
----------------------------
2007 2006
------------- -------------
Allowance for contract losses $ 139,157 $ 166,188
Net operating loss carryforward 94,300,000 91,800,000
Valuation allowance (94,439,157) (91,966,188)
------------- -------------
Deferred income tax asset $ - $ -
============= =============
34
The Company has a net operating loss carryforward of approximately $94,300,000
available to offset future taxable income through 2028.
During the year ended June 30, 2007, the Company reduced the state portion of
the deferred income tax asset related to net operating loss carryforward by
$3,884,000 resulting from the expiration of the net operating loss carry
forward. The valuation allowance on the deferred income tax asset was decreased
by $2,853,000 in the year ended June 30, 2006, resulting primarily from the
expiration of state net operating loss carryforwards.
NOTE 10 - COMMITMENTS AND CONTINGENCIES
Licensing Agreements
In prior periods customers could arrange to have the purchase of the Company''s
terminals financed through the financial institution. The Company had an
agreement with financial institution Ladco to guarantee varying amounts
associated with the financial institution''s arrangements with the customers.
Subsequent to June 30, 2005, the Company entered into a new master contract with
the financial institution that limits the recourse to the Company to the first
payment under the customer''s contract. The amount of such payment would not
exceed $100.
In year ended June 30, 2005 the Company renegotiated the customer contracts that
included the language that the leases entered into by the customers were
non-cancelable under the term of the agreement. The Company further gave
incentive to existing customers to enter into the new contract and many
customers renewed. The company has refinanced their financing agreement with
Ladco to reduce the unpaid balance to zero by October 2009.
NOTE 11 - NET LOSS PER SHARE
Net loss per share is calculated using the weighted average number of shares of
common stock outstanding during the year. Preferred stock dividends are
subtracted from the net income to determine the amount available to common
shareholders. Preferred stock convertible to 115,396 common shares and options
and warrants exercisable into 517,991 shares of common stock were not considered
in the calculation for diluted earnings per share for the year ended June 30,
2007 and 2006 respectively because the effect of their inclusion would be
anti-dilutive.
NOTE 12 - RELATED PARTY TRANSACTIONS
The Company''s president and chairman is a significant shareholder and is its
sole officer and director of the Company. The chairman controls American Nortel
Communications, Inc. which 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. 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 June 30, 2007 and 2006.
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 to cover short-term cash flow deficiencies. During the year ended
June 30, 2006, the chairman advanced $758,629 to the Company and received
repayments of that advance in December 2006. In June 30, 2007 the chairman
advanced $305,000. The balance due to this affiliate at June 30, 2007 was
$305,000 and $758,629 for year ended June 30, 2007 and 2006 respectively. The
advances are generally short term in nature with an interest rate of 9%. The
advances of $305,000 still remain outstanding as of September
35
2007.
The Company paid management fees of $450,000 to Wilcom, Inc., an entity owned by
the Company''s president.
NOTE 13 - STOCK BASED COMPENSATION
The Company issues stock options from time to time to executives, key employees
and members of the Board of Directors. The Company has adopted the
disclosure-only provisions of Statement of Financial Accounting Standards No.
123, "Accounting for Stock-Based Compensation," and continues to account for
stock based compensation using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees". Accordingly, no compensation cost has been recognized for the stock
options granted to employees.
In December 2004, the FASB issued a revision of SFAS No. 123 ("SFAS No. 123(R)")
that requires compensation costs related to share-based payment transactions to
be recognized in the statement of operations. With limited exceptions, the
amount of compensation cost will be measured based on the grant-date fair value
of the equity or liability instruments issued. In addition, liability awards
will be re-measured each reporting period. Compensation cost will be recognized
over the period that an employee provides service in exchange for the award.
SFAS No. 123(R) replaces SFAS No. 123 and is effective as of the beginning of
January 1, 2006. Based on the number of shares and awards outstanding as of
December 31, 2005 (and without giving effect to any awards which may be granted
in 2006), we do not expect our adoption of SFAS No. 123(R) in January 2006 to
have a material impact on the financial statements.
Financial Statement Position (""FSP"") FAS No. 123(R)-5 was issued on October
10, 2006. The FSP provides that instruments that were originally issued as
employee compensation and then modified, and that modification is made to the
terms of the instrument solely to reflect an equity restructuring that occurs
when the holders are no longer employees, then no change in the recognition or
the measurement (due to a change in classification) of those instruments will
result if both of the following conditions are met: (a). There is no increase in
fair value of the award (or the ratio of intrinsic value to the exercise price
of the award is preserved, that is, the holder is made whole), or the
antidilution provision is not added to the terms of the award in contemplation
of an equity restructuring; and (b). All holders of the same class of equity
instruments (for example, stock options) are treated in the same manner. The
provisions in this FSP shall be applied in the first reporting period beginning
after the date the FSP is posted to the FASB website. The Company has adopted SP
FAS No. 123(R)-5 but it did not have a material impact on its consolidated
results of operations and financial condition.
There were no options granted in the year ended June 30, 2007 and 2006 and all
options previously granted have been fully vested and therefore there is no pro
forma effect for the year then ended. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model.
The Company grants options under several stock option plans. The Company's
Incentive Stock Option Plans, Non-Qualified Stock Option Plans and Stock Bonus
Plans are collectively referred to as the "Plans". The following sets forth
certain information as of June 30, 2007 and 2006 concerning the stock options
and stock bonuses granted by the Company pursuant to the Plans. Each option
represents the right to purchase one share of the Company's Common Stock.
All options awarded are fully vested, no options were exercised, and all options
have expired.
36
Total shares
reserved Remaining
under the options under
plan the plan
---------------------------
1998 Incentive Stock Option Plan 1,500,000 400,167
2000 Incentive Stock Option Plan 1,000,000 925,150
2000 Non-Qualified Stock Option Plan 2,000,000 1,820,575
1999 Stock Bonus Plan 900,000 833,250
2000 Stock Bonus Plan 500,000 500,000
Common stock warrants outstanding at year ended June 30, 2007 consist of the
following:
Number of Exercise Expiration of
Warrants Price Warrants
517,991 $ 1.25 January 7, 2008
All remaining warrants of 517,991 expire January 7, 2008.
The Company accounts for stock awards issued to nonemployees in accordance with
the provisions of SFAS No. 123 and Emerging Issues Task Force ("EITF") Issue No.
96-18 Accounting for Equity Instruments that are Issued to Other Than Employees
for Acquiring, or in Conjunction with Selling Goods or Services. Under SFAS No.
123 and EITF 96-18, stock awards to nonemployees are accounted for at their fair
value as determined under Black-Scholes option pricing model.
NOTE 14 - CORRECTION OF AN ERROR
In 2006, the Company had effort corrections of $759,144 composed of the
adjustment to the refinancing of the Ladco long term debt and penalty totaling
$592,955 and to the allowance for doubtful account of $166,189. The Company
voided $61,190 of expired checks and duplicated expenses that are no longer
valid.
The effects of these error corrections on the financial statements resulted in a
retroactive restatement impacting the financial statements for fiscal 2006 as
follows:
2006 2006 2006
As Originally As Effect of
Assets Reported Adjusted Change
---------------------- -------------------------------------------
Total Assets $ 3,681,139 $ 3,576,140 $ (104,999)
---------------------- ===========================================
Liabilities
----------------------
Total Liabilitites $ 10,516,537 $ 11,170,681 $ (654,144)
---------------------- ===========================================
Stockholders' Equity
----------------------
Accumulated deficit $ (86,913,601) $(87,672,745) $ 759,144
===========================================
Operating expenses $ (7,831,816) $ (8,623,161) $ 791,345
===========================================
Other expenses $ 928,654 $ 896,450 $ (32,201)
===========================================
Net loss $ (6,338,554) $ (7,097,698) $ 759,144
===========================================
Net loss per share $ (0.10) $ (0.11) 0.01
-------------------------------------------
* * * * * *
37
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
In February 7, 2007 our prior auditor resigned and the Company engaged the firm
of Jewett, Schwartz, Wolfe & Associates.
We have had no disagreements on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedures with
any of our accountants for the year ended June 30, 2007 and 2006.
We have not had any other changes in nor have we had any disagreements, whether
or not resolved, with our accountants on accounting and financial disclosures
during our two recent interim periods December 31, 2006, March 31, 2007, and
through September 25, 2007.
ITEM 4.01 CHANGES IN REGISTRANT'S CERTIFYING ACCOUNTANT.
On February 7, 2007, Jewett, Schwartz, Wolfe & Associates ("JSW") was appointed
as the independent auditor for the Medcom USA Inc. (the "Company") commencing
with the year ending June 30, 2007, and SE Clark & Company P.C. ("Clark") were
dismissed as the independent auditors for the Company as of February 7, 2007.
The decision to change auditors was approved by the audit committee of the
Company''s Board of Directors on February 7, 2007.
The report of Clark on the financial statements for either of the one most
recent completed fiscal years did not contain any adverse opinion or disclaimer
of opinion or was qualified or modified as to uncertainty, audit scope or
accounting principles, except for the following:
"The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the accumulation of losses and shortage of capital raise
substantial doubt about its ability to continue as a going concern. Management's
plans concerning these matters are also described in Note1. The financial
statements do not include any adjustments relating to the recoverability and
classification of asset carrying amounts or the amount and classification of
liabilities that might result should the Company be unable to continue as a
going concern.
During the Company's one most recent interim quarter September 30, 2006, annual
report June 30, 2006, and three prior interim quarters September 30, 2005,
December 31, 2005, and March 31, 2006, there were no disagreements with Clark on
any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which disagreement, if not resolved
to the satisfaction of Clark, would have caused it to make reference to the
subject matter of the disagreements in connection with its report with respect
to the financial statements of the Company.
During the Company's one most recent interim quarter September 30, 2006, annual
report June 30, 2006, and three prior interim quarters September 30, 2005,
December 31, 2005, and March 31, 2006,, there were no "reportable events" as
such term is described in Item 304(a)(1)(v) of Regulation S-B under the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), with respect
to the Company.
During the Company's one most recent interim quarter September 30, 2006, annual
report June 30, 2006, and three prior interim quarters September 30, 2005,
December 31, 2005, and March 31, 2006,, the Company did not consult with JSW
with respect to the Company regarding (i) the application of accounting
principles to a specified transaction, either completed or proposed, or the type
of audit opinion that might be rendered on the Company's
38
financial statements, (ii) any matter that was either the subject of a
disagreement (as defined in Item 304(a)(1)(iv) of Regulation S-B under the
Exchange Act and the related instructions to Item 304 of Regulation S-B) or a
"reportable event" (as such term is described in Item 304(a)(1)(v) of Regulation
S-B), or (iii) any of the matters or events set forth in Item 304(a)(2)(i) and
(ii) of Regulation S-B.
The Company has furnished a copy of this Report to Clark and requested them to
furnish the Company with a letter addressed to the Securities and Exchange
Commission stating whether it agrees with the statements made by the Company
herein in response to Item 304(a) of Regulation S-K and, if not, stating the
respects in which it does not agree. Clark''s response is filed as an exhibit to
this Current Report on Form 8-K. The response includes a comment on the December
31, 2006 filing reviewed by JSW of which Clark disagrees with JSW, management,
and prior counsel, regarding the disclosures made as a result of a change in
estimate.
ITEM 8A. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
Disclosure controls and procedures are designed with an objective of ensuring
that information required to be disclosed in our periodic reports filed with the
Securities and Exchange Commission, such as this Annual Report on Form 10-KSB,
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
Annual 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.
As of the end of the period covered by this report, we carried out an
evaluation, under the supervision and with the participation of our management,
including our Chief Executive Officer and Principle Financial Officer, of the
effectiveness of our disclosure controls and procedures, as defined in Rules
13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934 as of the end of
the period covered by this report. Based on that evaluation, our Chief Executive
Officer and Principle Financial Officer have concluded that our disclosure
controls and procedures as of June 30, 2006 and 2007 were effective to ensure
that information required to be disclosed by us in reports that we file or
submit under the Securities Exchange Act of 1934 is recorded, processed,
summarized and reported within the time periods specified in the Securities and
Exchange Commission''s rules and forms. There have been no material changes in
our internal controls over financial reporting or in other factors that could
materially affect, or are reasonably likely to affect, our internal controls
over financial reporting during the years ended June 30, 2006 and 2007. There
have not been any significant changes in the Company''s critical accounting
policies identified since the Company filed its Form 10-KSB as of June 30, 2006
and 2007.
ITEM 8B. OTHER INFORMATION
None
39
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
DIRECTOR AND EXECUTIVE OFFICER
Mr. William P. Williams as of August 2001 accepted the position of Chief
Executive Officer and sole Director of the Company. Information representing
Mr. Williams is set forth below:
William P. Williams 54 Chairman, President, Chief Executive Officer, and
Chief Financial Officer
The chief executive officer and sole director and officer of the Company will
hold office until additional members or officers are duly elected and qualified.
The background and principal occupations of the sole officer and director of the
Company is as follows:
William P. Williams has been the Chairman, Chief Executive Officer, of Medcom
USA since August 2001. He is also currently Chief Executive Officer and Chairman
of the Board for American Nortel Communications, Inc., a publicly traded company
located in Scottsdale, Arizona, which is in the business of long-distance
telephone service domestically, as well as internationally. From 1983 to 1995,
he was President and Chairman of the Board of Shelton Financial, Inc., a
financial factoring firm headquartered in San Antonio, Texas. Mr. Williams has
a Bachelor of Arts and a Master of Business Administration in Finance from
Baylor University.
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT 9.A. DIRECTORS AND EXECUTIVE
OFFICERS, PROMOTERS, AND CONTROL PERSONS:
The Company is aware that all filings of Form 4 and 5 required of Section 16(a)
of the Exchange Act of Directors, Officers or holders of 10% of the Company's
shares have not been timely and the Company has instituted procedures to ensure
compliance in the future.
ITEM 10. EXECUTIVE COMPENSATION
General. Mr. William P. Williams serves as the Company''s sole-director and
chief executive officer. Pursuant to a Management Services Agreement executed
and approved by the Company Mr. Williams was compensated approximately $450,000
for management fees, and other sources or forms of compensation was not paid or
collected for Fiscal year ended 2007 and 2006.
SUMMARY COMPENSATION TABLE
The following table sets forth the cash compensation paid by the Company to its
Chief Executive Officer and to all other executive officers for services
rendered from July 1, 2005 through June 30, 2007. Currently, William P. Williams
is the Chairman, Chief Executive Officer, President and Principle Financial
Officer.
40
2007 AND 2006 SUMMARY COMPENSATION TABLE
CHANGE
IN
PENSION
VALUE
AND
NON- NONQUALIFIED
SECURITIES EQUITY DEFERRED
RESTRICTED UNDERLYING INCENTIVE COMPENS ALL OTHER
NAME AND STOCK OPTION PLAN ATION COMPENS
PRINCIPAL AWARDS AWARDS COMPENSATION EARNINGS ATION TOTAL
POSITION YEAR SALARY ($) BONUS ($) ($) ($) ($) ($) ($) ($)
------------ ---- ---------- --------- ----------- ----------- ------------- ------------- ---------- --------
William P
Williams (1) 2007 450000. 0 0 0 0 0 0 450,000
2006 450,000 0 0 0 0 0 0 450,000
(1) Compensation for Mr. Williams included consulting fees.
OPTION EXERCISES AND STOCK VESTED TABLE
OPTION AWARDS STOCK AWARDS
------------------------------- -------------------------------------
NUMBER OF
SHARES NUMBER OF
ACQUIRED ON VALUE REALIZED SHARES VALUE REALIZED
EXERCISE ON EXERCISE ACQUIRED ON VESTING ON VESTING
NAME (#) ($) (#) ($)
William P. Williams 0 0 0 0
PENSION BENEFITS TABLE
PLAN NAME NUMBER OF YEARS PRESENT VALUE PAYMENTS DURING
CREDITED OF ACCUMULATED LAST
SERVICE BENEFIT FISCAL YEAR
NAME (#) ($) ($)
------------------- ---------- ---------------- --------------- ----------------
William P. Williams (1) 0 0 0
EXECUTIVE REGISTRANT AGGREGATE AGGREGATE
CONTRIBUTIONS CONTRIBUTIONS EARNINGS BALANCE AT
IN LAST IN LAST IN LAST AGGREGATE LAST
FISCAL FISCAL FISCAL WITHDRAWALS / FISCAL
YEAR YEAR YEAR DISTRIBUTIONS YEAR-END
NAME ($) ($) ($) ($) ($)
William P. Williams 0 0 0 0 0
41
NAME FEES STOCK OPTION NON- CHANGE ALL OTHER TOTAL
EARNED AWARDS AWARDS EQUITY IN COMPENS ($)
OR ($) ($) INCENTIVE PENSION ATION
PAID IN PLAN VALUE ($)
CASH COMPENS AND
($) ATION NONQUALIF
($) IED
DEFERRED
COMPENS
ATION
EARNINGS
($)
William P. Williams $ 0- 0 $ 0- 0 0 0 $ 0-
NAME YEAR PERQUISITES TAX INSURANCE COMPANY SEVERANCE CHANGE IN TOTAL
AND OTHER REIMBURSEMENTS PREMIUMS CONTRIBUTIONS PAYMENTS CONTROL ($)
PERSONAL ($) ($) TO / ACCRUALS PAYMENTS
BENEFITS RETIREMENT ($) / ACCRUALS
($) AND 401(K) ($)
PLANS
($)
William P. Williams 2007 & 2006 0 0 0 0 0 0 0
NAME YEAR PERSONAL FINANCIAL CLUB DUES EXECUTIVE TOTAL
USE OF PLANNING/ RELOCATION PERQUISITES
COMPANY LEGAL FEES AND
CAR/PARKING OTHER
PERSONAL
BENEFITS
William P. Williams 2007 & 2006 0 0 0 0 0
NAME BENEFIT BEFORE AFTER VOLUNTARY DEATH DISABILITY CHANGE
CHARGE IN CHANGE TERMINATION IN
CONTROL IN CONTROL
TERMINATION W/O CONTROL
CAUSE OR TERMINATION W/O
FOR GOOD CAUSE OR
REASON FOR GOOD
REASON
William P. Williams Severance (1) 0 0 0 0 0
(1) Mr. Williams's employment agreement provides payment of salary for all
months of unemployment which might remain under his employment contract which
was signed on July 2002.
42
COMPENSATION OF DIRECTORS
Mr. Williams is the sole directors of the Company and is not compensated for
those services.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The
following table sets forth certain information regarding beneficial ownership of
the common stock as of June 30, 2007 and September 25, 2007, by (i) each person
who is known by the Company to own beneficially more than 5% of the any classes
of outstanding Stock, (ii) each director of the Company, (iii) each of the Chief
Executive Officers and the two (2) most highly compensated executive officers
who earned in excess of $100,000 for all services in all capacities
(collectively, the ""Named Executive Officers"") and (iv) all directors and
executive officers of the Company as a group.
The number and percentage of shares beneficially owned is determined in
accordance with Rule 13d-3 and 13d-5 of the Exchange Act, and the information is
not necessarily indicative of beneficial ownership for any other purpose and is
based on 27,810,446 shares beneficially owned as of June 30, 2007. We believe
that each individual or entity named has sole investment and voting power with
respect to the securities indicated as beneficially owned by them, subject to
community property laws, where applicable, except where otherwise noted. Unless
otherwise stated, the address of each person; 7975 North Hayden Rd, Suite D333,
Scottsdale, AZ 85253.
Name and Address Shares Owned (1) Common Stock
------------------------------ ---------------- -------------
American Nortel Communications 20,582,562 22%
7975 North Hayden Road #D-333
Scottsdale, Arizona 85258
William P. Williams 7,227,884 8%
7975 North Hayden Road #D-333
Scottsdale, Arizona 85258
(1) Wilcom Inc., Williams Family Trust, and Bill Williams have beneficial
ownership of the above stock.
CHANGES IN CONTROL
We are not aware of any arrangements that may result in a change in control of
the Company.
DESCRIPTION OF SECURITIES
GENERAL
Our authorized capital stock consists of 175,000,000 shares of common stock, par
value $ .0001.
43
COMMON STOCK
The shares of our common stock presently outstanding, and any shares of our
common stock issues upon exercise of stock options and/or warrants, will be
fully paid and non-assessable. Each holder of common stock is entitled to one
vote for each share owned on all matters voted upon by shareholders, and a
majority vote is required for all actions to be taken by shareholders. In the
event we liquidate, dissolve or wind-up our operations, the holders of the
common stock are entitled to share equally and ratably in our assets, if any,
remaining after the payment of all our debts and liabilities and the liquidation
preference of any shares of preferred stock that may then be outstanding. The
common stock has no preemptive rights, no cumulative voting rights, and no
redemption, sinking fund, or conversion provisions. Since the holders of common
stock do not have cumulative voting rights, holders of more than 50% of the
outstanding shares can elect all of our Directors, and the holders of the
remaining shares by themselves cannot elect any Directors. Holders of common
stock are entitled to receive dividends, if and when declared by the Board of
Directors, out of funds legally available for such purpose, subject to the
dividend and liquidation rights of any preferred stock that may then be
outstanding.
PREFERRED STOCK
The Company is authorized to issue up to 300,000 shares of $.001 par value
Preferred Stock. The Board of Directors has the authority to divide the
Preferred Stock into series and, within the certain limitations, to set the
relevant terms of such series created.
In April 1995, the Company established the Series A Preferred Stock and
authorized the issuance of up to 50,000 shares. Each share of series A Preferred
Stock is entitled to a dividend at the rate of $1.60 per share when, and if
declared by the Board of Directors. Dividends not declared are not cumulative.
Additionally, each share of Series A Preferred Stock is convertible into .20
shares of the Company's Common Stock at any time after July 1, 1999. A total of
850 shares of common stock may be issued upon the conversion of the shares of
Series A preferred stock outstanding as of June 30, 2000. Upon any liquidation
or dissolution of the Company, each outstanding share of Series A Preferred
Stock is entitled to distribution of $20 per share prior to any distribution to
the holders of the Company's common stock. As of June 30, 2000, the Company has
4,250 shares of Series A Preferred Stock issued and outstanding.
In April 2000, the Company established the Series D Preferred stock and
authorized the issuance of up to 2,900 shares. The Company issued 494 shares
related to a business acquisition of and 2,356 shares for the acquisition of
related intellectual property.
Each share of Series D preferred stock is entitled to a dividend at the rate of
$0.04 per share and has a stated value of $1,000 per share. Dividends on all
Series D preferred stock begin to accrue and accumulate from the date of
issuance. Additionally, each share of Series D preferred stock is convertible
into 40.49 shares of common stock for a total of 576,923 shares at the option of
the stockholders. Upon liquidation or dissolution of the Company, each
outstanding share of Series D preferred stock is entitled to a distribution of
the stated amount per share prior to any distribution to the shareholders of the
Company's common stock. The Company can convert the Series D preferred stock
into shares of common stock using the same conversion ratio at any time after
April 15, 2001 so long as the bid price of the Company's common stock exceeds
$4.94 per share and the shares of common stock issuable upon the conversion of
the Series D preferred stock are either covered by an effective registration
statement or are eligible for sale pursuant to rule 144 of the Securities and
Exchange Commission. Each share of Series D preferred stock is entitled to vote
in all matters submitted to the Company's shareholders on an "as converted"
basis.
44
DIVIDEND POLICY
We have never declared any cash dividends on our common stock. We currently
intend to retain future earnings, if any, to finance the expansion of our
business. As a result, we do not anticipate paying any cash dividends in the
foreseeable future.
OPTIONS AND WARRANTS:
As of June 30, 2007 there were no options and 517,991 warrants outstanding to
acquire shares of the Company''s common stock outstanding. The Company will not
be issuing warrants in any future offering.
CONVERTIBLE SECURITIES
At June 30, 2007 we have no convertible securities.
AMENDMENT OF OUR BYLAWS
Our bylaws may be adopted, amended or repealed by the affirmative vote of a
majority of our outstanding shares. Subject to applicable law, our bylaws also
may be adopted, amended or repealed by our board of directors.
TRANSFER AGENT
On June 30, 2007, the Company engaged Corporate Stock Transfer to serve in the
capacity of transfer agent. Their mailing address and telephone number Corporate
Stock Transfer, 3200 Cherry Creek Drive South, Suite 430. Denver, CO 80209 -
Phone is (303) 282-4800.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDPENDENCE.
During the year ended June 30, 2006, our chairman advanced $758,629 to the
Company and received repayments of that advance in December 2006. In June 30,
2007 our chairman advanced $305,000. The balance due to this affiliate at June
30, 2007 was $305,000 and $758,629 for year ended June 30, 2007 and 2006
respectively. The advances are generally short term in nature with an interest
rate of 9%. The advances of $305,000 still remain outstanding.
The affiliated entity frequently advances funds to the Company, which is also a
significant shareholder of the Company.
ITEM 13. EXHIBITS AND REPORTS.
EXHIBITS
--------
3.1 Articles of Incorporation (2)
3.2 Amendments to Articles of Incorporation - Fourth Article (2)
3.3 Amendment to Articles of Incorporation - Name Change (2)
45
10.18 Amendment to License Agreement - Dream Technologies, LLC (1)
--------------------------------------------------------------------------------
(1). Incorporated by reference to the same exhibit filed with Amendment No. 5 to
the Company''s Registration Statement on Form S-3 (Commission File No.
333-71179)
(2). Incorporated by reference to the same exhibit filed with the Company''s
Annual Report on Form 10-KSB for the year ending June 30, 2001.
REPORTS ON FORM 8-K
-------------------
8-K filed for change in principle auditor in February 7, 2007
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
------------------------------------------------
AUDIT FEES. The aggregate fees billed by S.E. Clark & Company, PC. for
professional services rendered for the audit of the Company''s annual financial
statements for the fiscal years ended June 30, 2006 approximated $41,000. The
aggregate fees billed by S.E.Clark & Company, PC for the review of the financial
statements included in the Company''s Forms 10-QSB for fiscal years 2006
approximated $11,000 and for 2007 $ 5,000. The aggregate fees billed by Jewett,
Schwartz, Wolfe & Associates for professional services rendered for the audit of
the Company''s annual financial statements for fiscal years ended June 30, 2006
and 2007 approximated $55,000. The aggregate fees billed by Jewett, Schwartz,
Wolfe & Associates for the review of the financial statements included in the
Company''s Forms 10-QSB for fiscal year 2007 approximated $9,000.
AUDIT-RELATED FEES. The aggregate fees billed by S. E. Clark & Company, PC and
Jewett, Schwartz, Wolfe & Associates for assurance and related services that are
reasonably related to the performance of the audit or review of the Company''s
financial statements for the fiscal years ended June 30, 2007 and 2006, and that
are not disclosed in the paragraph captioned ""Audit Fees"" above, were $0 and
$0, respectively.
TAX FEES. The aggregate fees billed by S.E. Clark & Company and Jewett Schwartz
Wolfe & Associates for professional services rendered for tax compliance, tax
advice and tax planning for the fiscal year ended June 30, 2007 and 2006 were
$0.
ALL OTHER FEES. The aggregate fees billed by S.E. Clark & Company and Jewett
Schwartz Wolfe & Associates for products and services, other than the services
described in the paragraphs ""Audit Fees,"" ""Audit-Related Fees,"" and ""Tax
Fees"" above for the fiscal years ended June 30, 2007 and 2006 approximated
$6,000.
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ITEM 15: SIGNATURES
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
Date: September 28, 2007 Medcom USA Incorporated
By: /s/ William P. Williams
----------------------------------------
William P. Williams
Chairman, President Chief Executive
Officer (Principle Executive Officer)
Date: September 28, 2007 By: /s/ William P. Williams
----------------------------------------
William P. Williams
Principle Financial Officer
47