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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2007.
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT
For the transition period from N/A to N/A
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Commission File No. 0-25474
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MEDCOM USA, INCORPORATED
(Name of small business issuer as specified in its charter)
DELAWARE 65-0287558
State of Incorporation IRS Employer Identification No.
7975 NORTH HAYDEN ROAD, SUITE D-333
SCOTTSDALE, AZ 85258
(Address of principal executive offices)
(480) 675-8865
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes No X
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The number of shares of the issuer's common equity outstanding as of
November 3, 2007 was 94,620,217 shares of common stock.
Transitional Small Business Disclosure Format (check one):
Yes No X
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1
MEDCOM USA INCORPORATED
INDEX TO FORM 10-QSB FILING
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Condensed Consolidated Balance Sheet
As of September 30, 2007. . . . . . . . . . . . . . .. . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations
For the Three months ended September 30, 2007
and 2006. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows
For the Three months ended September 30, 2007
and 2006. . . . . . . . . . . . . . . . . . . . .. . . . . . . . . . . . . . 5
Notes to Condensed Financial Statements. . . . . . . . . . . . . . . . . . . . 6-12
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . .. . . . . . . . . 12-18
Item 3. Control and Procedures.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18-19
PART II
OTHER INFORMATION
Item 1. Legal Proceedings. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 2. Changes in Securities and Small Business Issuer Purchases of Equity Securities . 20
Item 3. Defaults upon Senior Securities. . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 4. Submission of Matters to a Vote of Security Holders. . . . . . . . . . . . . . . 20
Item 5. Other Information. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Item 5. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
CERTIFICATIONS
Exhibit 31 - Management certification . . . . . . . . . . . . . . . . . . . . . . . . 20-24
Exhibit 32 - Sarbanes-Oxley Act . . . . . . . . . . . . . . . . . . . . . . . . . . . 20-24
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MEDCOM USA, INC.
CONDENSED CONSOLIDATED BALANCES SHEETS
AS OF SEPTEMBER 30, 2007
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ASSETS:
2007
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CURRENT ASSETS
Cash $ 91,318
Licensing contracts - current portion, net 909,151
Prepaid expenses and other current assets 240,390
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Total current assets 1,240,859
PROPERTY AND EQUIPMENT, net 456,813
Licensing contracts - long-term portion. net 391,284
Note receivable affiliates 62,641
Other assets 17,657
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TOTAL ASSETS $ 2,169,254
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LIABILITIES AND STOCKHOLDERS' DEFICIENCY:
CURRENT LIABILITIES:
Accounts payable $ 197,831
Accrued expenses and other liabilities 52,619
Dividend payable 23,750
Notes from affiliates 450,000
Deferred revenue - current portion 498,970
Licensing obligations - current portion 2,332,768
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Total current liabilities 3,555,938
Licensing obligations - long-term portion 3,011,173
Deferred Revenue 1,135,944
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Total liabilities 7,703,055
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STOCKHOLDERS' DEFICIENCY:
Convertible preferred stock, series A $.001par value, 52,900 shares
designated, 4,250 issued and outstanding 4
Convertible preferred stock, series D $.01par value, 50,000 shares
designated, 2,850 issued and outstanding 29
Common stock, $.0001 par value, 175,000,000 shares authorized,
94,620,217 issued and outstanding as of September 30, 2007 9,463
Treasury stock (37,397)
Paid-in capital 84,883,309
Accumulated deficit (90,389,209)
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Total stockholders' deficiency (5,533,801)
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TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIENCY $ 2,169,254
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The accompanying notes are an integral part of these condensed consolidated
financial statements.
3
MEDCOM USA, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
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2007 2006
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REVENUES:
Terminal sales $ - $ 26,423
Service 663,571 921,344
Licensing fees 273,485 653,424
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937,056 1,601,191
COST OF DELIVERABLES: 331,606 554,571
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GROSS PROFIT 605,450 1,046,620
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OPERATING EXPENSES:
General and administrative expenses 620,931 973,082
Sales and marketing expenses 16,800 30,153
Depreciation and amortization - 442,158
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Total operating expenses 637,731 1,445,393
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OPERATING LOSS (32,281) (398,773)
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OTHER (INCOME) AND EXPENSES
Interest expense 199,419 98,101
Interest Income (68,847) (103,603)
Legal settlement - 39,600
Impairment of assets - 27,040
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Total other expense 130,572 61,138
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LOSS BEFORE INCOME TAXES (162,853) (459,911)
INCOME TAX BENEFIT - -
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NET LOSS $ (162,853) $ (459,911)
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NET LOSS PER SHARE:
Basic and diluted: $ (0.00) $ (0.01)
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WEIGHTED AVERAGE COMMON SHARES OUTSTANDING:
Basic and diluted: 93,871,358 75,151,497
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The accompanying notes are an integral part of these condensed consolidated
financial statements
4
MEDCOM USA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2007 AND 2006
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2007 2006
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(162,853) $ (459,910)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 55,296 442,158
Issuance of stock as consideration for services - 151,632
Allowance for doubtful accounts - -
Impairment of assets - 13,100
Changes in operating assets and liabilities:
Prepaid and other current assets (43,251) 69,364
Accounts payable 74,676 (238,961)
Accrued expenses and other liabilities (1,822) -
Deferred revenue (461,444) (893,441)
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Net cash provided by (used in) operating (539,398) (916,058)
activities ---------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchasing of equipment (28,123) (133,580)
Licensing contracts - current portion (118,900) 120,552
Licensing contracts - long-term portion 155,937 353,721
Notes from affiliates 145,000 (858,000)
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Net cash provided by (used in) investing 153,914 (517,307)
activities ---------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Licensing obligation - current portion (3,057) (258,963)
Licensing obligation - long-term portion (301,002) (424,946)
Cost of raising capital (48,350) -
Proceeds from sale of common stock 803,001 2,178,991
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Net cash provided by financing activities 450,592 1,495,082
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(DECREASE) INCREASE IN CASH 65,108 61,717
CASH, BEGINNING OF YEAR 26,210 1,148
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CASH, END OF YEAR $ 91,318 $ 62,865
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SUPPLEMENTAL CASH FLOW INFORMATION:
2007 2006
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Interest paid $ 199,419 $ 98,000
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The accompanying notes are an integral part of these condensed consolidated
financial statements
5
MEDCOM USA INCORPORATED
NOTES TO CONDENSED FINANCIAL STATEMENTS THREE MONTHS ENDED SEPTEMBER 30, 2007
AND 2006
1. BASIS OF PRESENTATION
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. The Company changed its name to MedCom USA, Inc. in October 1999.
During the fiscal years of 1999 and continuing through present, the Company
directed it efforts in medical information processing.
2. GOING CONCERN
The accompanying condensed 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 the three months ended September 30, 2007. During three months ended
September 30, 2007 the Company incurred a net loss of $162,853 and has an
accumulated deficit of $90,389,209. 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 condensed financial statements do not include
any adjustments that might result from the outcome of these uncertainties. In
this regard, Management is proposing 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.
3. INTERIM FINANCIAL STATEMENTS
The accompanying interim unaudited condensed financial information has been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with accounting principles generally
accepted in the United States of America have been condensed or omitted pursuant
to such rules and regulations, although management believes that the disclosures
are adequate to make the information presented not misleading. In the opinion of
management, all adjustments, consisting only of normal recurring adjustments,
necessary to present fairly the financial position of the Company as of
September 30, 2007 and the related operating results and cash flows for the
interim period presented have been made. The results of operations of such
interim periods are not necessarily indicative of the results of the full fiscal
year. For further information,refer to the financial statements and footnotes
thereto included in the Company's 10-KSB and Annual Report for the fiscal year
ended June 30, 2007.
6
4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Summarized below are the significant accounting policies of MedCom USA, Inc.
("we," "MedCom," or the "Company"). Unless otherwise indicated, amounts provided
in these notes to the financial statements pertain to continuing operations.
Revenue Recognition
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Statement of Position Software Revenue Recognition ("SOP") 97-2 applies to all
entities that license, sell, lease, or market computer software. It also applies
to "hosting" arrangements in which the customer has the option to take
possession of the software. Hosting arrangements occur when end users do not
take possession of the software but rather the software resides on the vendor's
or a third party's hardware, and the customer accesses and uses the software on
an as-needed basis over the Internet or some other connection. It does not,
however, apply to revenue earned on products containing software incidental to
the product as a whole or to hosting arrangements that do not give the customer
the option of taking possession of the software.
SOP 97-2 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, Emerging Issues Task Force Revenue
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 records it 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
7
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 with the agreement. The Company further accrues the
prepaid licensing expense, accrued deliverables under the fixed and determinable
licensing arrangement.
The Company has adopted the Securities and Exchange Commission's Staff
Accounting Bulletin (SAB) No. 104, Revenue Recognition, which provides guidance
on the recognition, presentation and disclosure of revenue in financial
statements.
5. EQUITY
During three months ended September 30, 2007 and 2006:
QUARTER ENDED STOCK ISSUED CASH RECEIVED STOCK ISSUED STOCK ISSUED FOR
FOR CASH FOR SERVICES Warrents Exercised
September 30, 2006 7,384,373 $ 2,178,991 1,837,331 -
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Total Issued 7,384,373 $ 2,178,991 1,837,331 -
September 30, 2007 1,847,357 $ 803,001 - -
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Total Issued 1,847,357 $ 803,001 - -
During the period ended September 30, 2006, the Company issued 7,384,373 shares
of its common stock for $2,178,991. The shares were issued to third parties in a
private placement of the Company's common stock. The shares were sold throughout
the quarter ended September 30, 2006, ranging from $.75 per share at the
beginning of the period to $.25 per share at the end of the period. Commissions
of approximately $350,000 were recorded as a charge in additional paid in
capital as direct costs associated with the raising of equity capital.
In the past, 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 entered into for the services and the value of
services rendered. During the period ended September 30, 2006, the Company
granted to consultants, 1,837,331 shares of common stock valued between $.75 -
$.25. The value of these shares issued were expensed during the year.
In September 30, 2007 the Company issued 1,847,357 shares of its common stock
for $803,001. The shares were issued to third parties in a private placement of
the Company's common stock. The shares were sold throughout the quarter ended
September 30, 2007, ranging from $.35 per share at the beginning of the period
to $.48 per share at the end of the period. Commissions of approximately $48,350
are recorded as a charge in additional paid in capital as direct costs
associated with the raising of equity capital.
In the past, the Company issues common stock for services to vendors and
consultants in lieu of cash.
8
6. 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 three months ended September 30, 2007 and 2006.
The Company frequently receives advances, and advances funds to an entity
controlled by the Company's president, which is a significant shareholder of the
Company to cover short-term cash flow deficiencies. In the three months ended
June 30, 2007 the chairman advanced $305,000. In the three months ended
September 30, 2007 the chairman advanced $145,000. The balance due to this
affiliate three months ended September 30, 2007 and 2006 was $450,000 and
$794,626 respectively. The advances are generally short term in nature with an
interest rate of 9%. The advances of $450,000 still remain outstanding as of
September 2007.
The Company paid management fees of $450,000 to Wilcom, Inc., an entity owned by
the Company's president.
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis contains various "forward looking
statements" within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, regarding future events or the future financial performance of
the Company that involve risks and uncertainties. Certain statements included in
this Form 10-QSB, including, without limitation, statements related to
anticipated cash flow sources and uses, and words including but not limited to
"anticipates", "believes", "plans", "expects", "future" and similar statements
or expressions, identify forward looking statements. Any forward-looking
statements herein are subject to certain risks and uncertainties in the
Company's business, including but not limited to, reliance on key customers and
competition in its markets, market demand, product performance, technological
developments, maintenance of relationships with key suppliers, difficulties of
hiring or retaining key personnel and any changes in current accounting rules,
all of which may be beyond the control of the Company. The Company adopted at
management's discretion, the most conservative recognition of revenue based on
the most astringent guidelines of the SEC in terms of recognition of software
licenses and recurring revenue. Management will elect additional changes to
revenue recognition to comply with the most conservative SEC recognition on a
forward going accrual basis as the model is replicated with other similar
markets (i.e. SBDC). The Company's actual results could differ materially from
those anticipated in these forward-looking statements as a result of certain
factors, including those set forth therein.
Forward-looking statements involve risks, uncertainties and other factors, which
may cause our actual results, performance or achievements to be materially
different from those expressed or implied by such forward-looking statements.
Factors and risks that could affect our results and achievements and cause them
to materially differ from those contained in the forward-looking statements
include those identified in the section titled "Risk Factors" in the Company's
Annual Report on Form 10-KSB for the year ended June 30, 2007, as well as other
factors that we are currently unable to identify or quantify, but that may exist
in the future.
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In addition, the foregoing factors may affect generally our business, results of
operations and financial position. Forward-looking statements speak only as of
the date the statement was made. We do not undertake and specifically decline
any obligation to update any forward-looking statements.
OVERVIEW
MedCom USA, Inc. (the "Company") a Delaware corporation was formed in August
1991 under the name Sims Communications, Inc. The Company's primary business
was providing telecommunications services. In 1996 the Company introduced four
programs to broaden the Company's product and service mix: (a) cellular
telephone activation, (b) sale of prepaid calling cards, (c) sale of long
distance telephone service and (d) rental of cellular telephones using an
overnight courier service. With the exception of the sale of prepaid calling
cards and cellular telephone activation, the other programs were discontinued in
December 1997.
The Company changed its name to MedCom USA, Inc. in October 1999. During the
fiscal years of 1999 and continuing through present, the Company directed its
efforts in medical information processing.
HEALTHCARE 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 "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 TRANSACTION SERVICES
------------------------------
The Company's credit card center and check services provides 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.
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.
10
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.
11
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.
The Company offers multiple training options for its products and services and
is easily accessed at www.MedComUSA.com. Onsite training and teleconferencing,
-----------------
and technical support assistance are also features offered to health care
providers. Also, a 24-hour terminal replacement program and system upgrades are
offered.
MARKETING STRATEGY
MedCom has broadened marketing strategy to reduce cost and increase efficiency.
The Company has employed telesales strategy to decrease dependency 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. Also 6% of all healthcare payments are made with a credit card
today. However, 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 Online
web portal 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 was to replace and service and support at a minimum, 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
12
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 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 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.
REVENUES
A sales staff meets with a dental or medical professionals. During that initial
meeting a demo is displayed so the professional has first hand knowledge of the
software and its 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
to 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
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substantial costs upfront at the time of delivery. The remaining portion is
recognized monthly in accordance with the agreement. The Company further accrues
the prepaid licensing expense, accrued deliverables under the fixed and
determinable licensing arrangement.
The Company continues to recognize transaction fees as they receive them. The
Company collects other fees based upon usage of the software and are not fixed
fee 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,
they are not a fixed or determinable 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 financed
through Ladco in prior periods and in fiscal 2006 and 2007 through LeeCo. The
Company as a standard financing the agreement through LeeCo through the term of
the contract.
Revenues from the MedCom system are generated through the sale of the portal
software, software terminals, 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.
ADDITIONAL INFORMATION
MedCom files reports and other materials with the Securities and Exchange
Commission. These documents may be inspected and copied at the Commission's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. You
can obtain information on the operation of the Public Reference Room by calling
the Commission at 1-800-SEC-0330. You can also get copies of documents that the
Company files with the Commission through the Commission's Internet site at
www.sec.gov.
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RESULTS OF OPERATIONS
Revenues for the three months ended September 30, 2007 decreased to $937,056
from $1,601,191 during 2006 as 56% reduction. This decrease in revenue is
directly the result of changes in the Company's strategic direction in core
operations. The Company continues to aggressively pursue and devote its
resources and focus its direction in electronic 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
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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 September 30, 2007 the Company was licensing to more
individual doctor and dental groups that were directly related to our decrease
in revenues.
The Company further refocused its 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. The Company is negotiating and developing
relationships with the practice management and dental groups and the Company
will not realize those efforts until fiscal year 2008.
Cost of deliverables for the quarter ended September 30, 2007 decreased to
$331,606 as compared to 2006 of $554,571 a 60% 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 quarter ended September 30, 2007. Also the
decrease is related to the decrease then elimination of 25% royalty payments to
third parities. 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 quarter ended September 30, 2007 decreased to $16,800
as compared to 2006 of $30,153, a 56% 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.
General and administrative expenses for the quarter ended September 30, 2007
decreased to $620,931 as compared to 2006 of $973,082 a 64% 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.
Interest expense for quarter ended September 30, 2007 increased to $199,419 as
compared to 2006 of $98,101 a 49% increase. This increase is a result of
renegotiation of the Company's credit facility with Ladco who charged a higher
interest rate but required a penalty payment. 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 quarter ended September 30,
2007 decreased to $68,847 as compared to 2006 of $103,603. 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 quarter ended September 30, 2007 decreased to ($162,853) as
compared to 2006 of ($459,911). The decrease is due to the reduction in
revenue, sales force, royalty expense, commissions, and reduction in operations
in our New York facility.
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No tax benefit was recorded on the expected operating loss for September 30,
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 quarter ended September 30, 2007, the
Company's net proceeds from the licensing of the Company's software portals were
$273,485 as compared to 2006 of $653,424. The Company received $803,001 as
compared to 2006 of $2,178,991 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 quarter ended September 30, 2007 was
($539,398) compared to ($916,058) for 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 of the monthly noncancellable licenses are generally paid
monthly. 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. The Company issued common stock valued at for
quarter ended September 30, 2006 of $151,632. The Company had depreciation and
amortization expenses for quarter ended September 30, 2007 of $55,296 as
compared to 2006 of $442,158. The reduction in deprecation is directly related
to the write off of the terminal asset capitalized in prior fiscal periods.
Cash provided by (used in) investing activities was $153,914 for quarter ended
September 30, 2007, compared to (517,307) for 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 the existing proprietary software in our terminal and
portal licensing agreement sold. The quarter ended September 30, 2007 the
chairman advanced funds of $145,000 as compared to $0 for 2006.
Cash provided by financing activities was $450,592 for quarter ended September
30, 2007 as compared to $1,495,082 for 2006. Financing activities primarily
consisted of proceeds from the increase in the financing of our licensing
agreement through LeeCo. 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 quarter ended September 30, 2007 of $803,001
as compared to 2006 of $2,178,991. The Company decreased its licensing debt for
quarter ended September 30, 2007 of $304,059 as compared to $683,909. The
Company decrease the cost of raising capital was $48,350 for quarter ended
September 30, 2007 as compared to $0 for 2006.
The Company has used funds advanced from an affiliated entity that is controlled
by the Company's chairman and chief executive officer. As of quarter ended
September 30, 2007 the Company maintained a note payable from this entity for
the amount of $450,000 as compared to fiscal 2006 of $794,626 including accrued
interest.
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
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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.
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.
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.
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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.
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.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
a) Evaluation of Disclosure Controls and Procedures.
Under the supervision and with the participation of our management, including
our Chief Executive Officer and Principal Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as such term is defined in Rule 13a-15(e) under the Securities
Exchange Act of 1934 (the "Exchange Act"). Disclosure controls and procedures
are the controls and other procedures that we designed to ensure that we record,
process, summarize and report in a timely manner the information we must
disclose in reports that we file with or submit to the Securities and Exchange
Commission under the Exchange Act. Based on this evaluation, our Chief Executive
Officer and our Principal Financial Officer concluded that our disclosure
controls and procedures were effective as of the end of the period covered by
this report.
Disclosure controls and procedures are controls and procedures that are designed
to ensure that information required to be disclosed in our reports filed or
submitted under the Securities Exchange Act is recorded, processed, summarized
and reported, within the time periods specified in the Securities and Exchange
Commission's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act is
accumulated and communicated to management, including our principal executive
officer and our principal financial officer, as appropriate, to allow timely
decisions regarding required disclosure.
b) Changes in Internal Control over Financial Reporting
During the Quarter ended September 30, 2007, there was no change in our internal
control over financial reporting (as such term is defined in Rule 13a-15(f)
under the Exchange Act) that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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OTHER CONSIDERATIONS
There are numerous factors that affect our business and the results of its
operations. Sources of these factors include general economic and business
conditions, federal and state regulation of business activities, the level of
demand for the Company's product or services, the level and intensity of
competition in the medical transaction processing industry and the pricing
pressures that may result, the Company's ability to develop new services based
on new or evolving technology and the market's acceptance of those new services,
the Company's ability to timely and effectively manage periodic product
transitions, the services, customer and geographic sales mix of any particular
period, and the ability to continue to improve infrastructure including
personnel and systems, to keep pace with the growth in its overall business
activities.
FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this Form 10-QSB contains
express or implied forward-looking statements within the meaning of Section 27A
of the Securities Act of 1933 and Section 21E of the Exchange Act. The Company
intends that such forward-looking statements be subject to the safe harbors
created thereby. The Company may make written or oral forward-looking statements
from time to time in filings with the SEC, in press releases, or otherwise. The
words "believes," "expects," "anticipates," "intends," "forecasts," "project,"
"plans," "estimates" and similar expressions identify forward-looking
statements. Such statements reflect the current views with respect to future
events and financial performance or operations and are only as of the date the
statements are made. Forward-looking statements involve risks and uncertainties
and readers are cautioned not to place undue reliance on forward-looking
statements. The Company's actual results may differ materially from such
statements. Factors that cause or contribute to such differences include, but
are not limited to, those discussed elsewhere in this Form 10-QSB, as well as
those discussed in Form 10-KSB which is incorporated by reference in this Form
10-QSB.
Management believes that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the results contemplated in such
forward-looking statements will be realized. The inclusion of such
forward-looking information should not be regarded, as a representation that the
future events, plans, or expectations contemplated will be achieved. The Company
undertakes no obligation to publicly update, review, or revise any
forward-looking statements to reflect any change in expectations or any change
in events, conditions, or circumstances on which any such statements are based.
Our filings with the Securities Exchange Commission, including the Form 10-KSB,
and may be accessed at the SEC's web site, www.sec.gov.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MedCom is involved in various legal proceedings and claims as described in our
Form 10-KSB for the year ended June 30, 2007. No material developments occurred
in any of these proceedings during the quarter ended September 30, 2007. The
costs and results associated with these legal proceedings could be significant
and could affect the results of future operations.
ITEM 2. CHANGES IN SECURITIES AND SMALL BUSINESS ISSUER PURCHASES OF EQUITY
SECURITIES
There were no changes in securities and small business issuer purchase of equity
securities during the period ended September 30, 2007.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
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There were no defaults upon senior securities during the period ended September
30, 2007.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the vote of securities holders during the
period ended September 30, 2007.
ITEM 5. OTHER INFORMATION
None
Exhibits
31.1 Certification of Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act.
32.1 Certification of Chief Executive Officer Pursuant to Section 906
of the Sarbanes-Oxley Act.
32.2 Certification of Chief Financial Officer Pursuant to Section 906
of the Sarbanes-Oxley Act.
SIGNATURES
Pursuant to the requirements of 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, thereunto duly authorized.
Registrant MedCom USA Incorporated
Date: November 13, 2007 By: /s/ William P. Williams
-------------------------------------
William P. Williams
Chairman, President Chief Executive
Officer (Principle Executive Officer,
Principle Financial Officer)
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