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U.S. Securities and Exchange Commission
Washington, D.C. 20549
____________________
FORM 10-QSB
____________________
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2004
[ ] Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act
For the transition period from N/A to N/A
____________________
Commission File No. 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.
7975 NORTH HAYDEN ROAD, SUITE C-260
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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The number of shares of the issuer's common equity outstanding as of April
29, 2004 was 47,870,405 shares of common stock.
Transitional Small Business Disclosure Format (check one):
Yes No X
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1
MEDCOM USA, INC.
INDEX TO FORM 10-QSB FILING
FOR THREE AND NINE MONTHS ENDED MARCH 31, 2004
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheet
As of March 31, 2004 . . . . . . . . . . . . . . . . .3
Statements of Operations
For the Three and Nine Months Ended March 31, 2004
and 2003 . . . . . . . . . . . . . . . . . . . . . . . . .4
Statements of Cash Flows
For the Nine Months Ended March 31, 2004
and 2003 . . . . . . . . . . . . . . . . . . . . . . . . .5
Notes to the Financial Statements . . . . . . . . . . . . .6 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . .10 - 15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . .15
Item 3. Control and Procedures . . . . . . . . . . . . . . . . . . . . . .15
CERTIFICATIONS
Exhibit 31 - Management Certification . . . . . . . . . . . . . . . . .16
Exhibit 32 - Sarbanes-Oxley Act . . . . . . . . . . . . . . . . . . . .17
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MEDCOM USA, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF MARCH 31, 2004
ASSETS
CURRENT ASSETS
Cash $ 88,085
Accounts receivable, net of allowance of $63,539 662,479
Accounts receivable - affiliate 1,112,333
Inventories 761,012
Prepaid expenses and other current assets 70,926
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Total current assets 2,694,835
PROCESSING TERMINALS, net of accum. deprec. $1,730,951 4,244,920
PROPERTY AND EQUIPMENT, net of accum. deprec. $1,236,079 272,007
GOODWILL, net of accumulated amortization of $322,575 436,423
OTHER ASSETS 17,657
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TOTAL ASSETS $ 7,665,842
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LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 1,331,858
Accrued expenses and other liabilities 753,845
Dividend payable 23,750
Notes payable - current 109,437
Deferred revenue - current portion 1,104,583
Capital lease obligations - current portion 1,455,385
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Total current liabilities 4,778,858
CAPITAL LEASE OBLIGATIONS - long-term portion 3,751,028
DEFERRED REVENUE 2,344,871
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Total liabilities 10,874,757
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STOCKHOLDERS' EQUITY:
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, $.001 par value, 80,000,000 shares authorized,
47,596,583 issued and 47,409,596 outstanding 4,859
Subscriptions receivable (806,016)
Paid in capital 70,678,470
Accumulated deficit (73,086,261)
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Total stockholders' equity (3,208,915)
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,665,842
=============
See the accompanying notes to these unaudited financial statements.
3
MEDCOM USA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE AND NINE MONTHS ENDED MARCH 31, 2004 AND 2003
Three Months Ended Nine Months Ended
2004 2003 2004 2003
-------------------------- --------------------------
REVENUES:
Terminal sales $ 571,566 $ 280,038 $ 856,442 $ 513,819
Service 618,846 398,978 1,756,733 1,033,965
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1,190,412 679,016 2,613,175 1,547,784
COST OF SALES AND SERVICE: 221,914 41,935 346,713 114,765
-------------------------- --------------------------
GROSS PROFIT 968,498 637,081 2,266,462 1,433,019
OPERATING EXPENSES:
General and administrative 987,350 755,919 2,542,575 2,211,834
Sales and marketing 535,189 237,348 1,110,032 722,873
Professional and consulting fees 334,300 16,100 544,300 43,500
Royalties 75,034 83,450 132,889 171,439
Depreciation and amortization 360,916 257,832 1,085,149 642,073
-------------------------- --------------------------
Total operating expenses 2,292,789 1,350,649 5,414,945 3,791,719
-------------------------- --------------------------
OPERATING LOSS (1,324,291) (713,568) (3,148,483) (2,358,700)
-------------------------- --------------------------
OTHER (INCOME) AND EXPENSES
Interest expense 234,320 125,140 703,726 243,122
Interest income (3,196) - (3,196) -
Other income - (194,823)
Other expense 586,641 586,641
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Total other (income) expense 817,765 125,140 1,092,348 243,122
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LOSS FROM CONTINUING OPERATIONS (2,142,056) (838,708) (4,240,831) (2,601,822)
NET LOSS (2,142,056) (838,708) (4,240,831) (2,601,822)
Preferred stock dividend - - - -
-------------------------- --------------------------
TOTAL NET COMPREHENSIVE LOSS $(2,142,056) $ (838,708) $(4,240,831) $(2,601,822)
========================== ==========================
NET LOSS PER SHARE:
Basic:
Continuing operations $ (0.05) $ (0.02) $ (0.11) $ (0.07)
Discontinued operations - - - -
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Total Basic $ (0.05) $ (0.02) $ (0.11) $ (0.07)
========================== ==========================
Diluted:
Continuing operations $ (0.05) $ (0.02) $ (0.11) $ (0.07)
Discontinued operations - - - -
-------------------------- --------------------------
Total Diluted $ (0.05) $ (0.02) $ (0.11) $ (0.07)
========================== ==========================
Weighted Average Common Shares Outstanding
Basic 41,557,994 36,979,865 38,899,486 36,946,288
========================== ==========================
Diluted 41,557,994 36,979,865 38,899,486 36,946,288
========================== ==========================
See the accompanying notes to these unaudited financial statements.
4
MEDCOM USA, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE NINE MONTHS ENDED MARCH 31, 2004 AND 2003
2004 2003
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(4,240,831) $(2,601,822)
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 1,085,148 642,074
Payment of expenses through the issuance of common stock 1,048,441 26,000
Allowance for sales returns 31,383 -
Changes in assets and liabilities:
Trade accounts receivable (472,867) (74,277)
Accounts receivable - affiliate - -
Inventories (219,631) (253,240)
Prepaid and other current assets (67,799) 3,623
Accounts payable and accrued liabilities (618,118) 354,361
Deferred revenue (766,644) (346,583)
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Net cash (used in) operating activities: (4,220,918) (2,249,864)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and software upgrades (137,575) (78,058)
Advances from affiliate 1,126,804 971,000
Advances to affiliate (2,240,461) (264,168)
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Net cash (used in) investing activities: (1,251,232) 628,774
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on capital leases (854,020) (392,684)
Proceeds from sale of common stock 4,770,002 -
Proceeds from capital sales-leaseback transactions 1,589,793 2,084,732
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Net cash provided by financing activities 5,505,775 1,692,048
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INCREASE (DECREASE) IN CASH 33,625 70,958
CASH, BEGINNING OF PERIOD 54,460 27,428
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CASH, END OF PERIOD $ 88,085 $ 98,386
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SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 555,896 $ 216,731
============ ============
Income taxes paid - -
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SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Terminals capitalized under sales/leaseback transactions $ 1,848,904 $ 2,400,548
============ ============
Repayment of payable to affiliate through the issuance of common stock $ 776,984 $ -
============ ============
See the accompanying notes to these unaudited financial statements.
5
MEDCOM USA, INC.
NOTES TO FINANCIAL STATEMENTS
INTERIM PERIODS ENDED MARCH 31, 2004
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements represent the financial
position of MedCom USA, Inc. ("Company") as of March 31, 2004 and includes
results of operations of the Company for the nine months ended March 31, 2004
and cash flows for the nine months ended March 31, 2004. These statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions for Form 10-QSB. Accordingly,
they do not include all the information and footnotes required by generally
accepted accounting principles ("GAAP") for complete financial statements. In
the opinion of management, all adjustments to these unaudited financial
statements necessary for a fair presentation of the results for the interim
period presented have been made. The results for the nine months ended March 31,
2004 may not necessarily be indicative of the results for the entire fiscal
year. These financial statements should be read in conjunction with the
Company's Form 10-KSB for the fiscal year ended June 30, 2003, including
specifically the financial statements and notes to such financial statements
contained therein.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company, and the methods of applying
those policies, which affect the determination of its financial position,
results of operations or cash flows are summarized below:
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include all short-term liquid investments that are
readily convertible to known amounts of cash and have original maturities of
three months or less. At times cash deposits may exceed government insured
limits.
Concentration of Credit Risk
----------------------------
The Company maintains its operating cash balances in banks in Islandia, New
York, and in Scottsdale, Arizona. The Federal Depository Insurance Corporation
(FDIC) insures accounts at each institution up to $100,000.
Inventories
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Inventories consist primarily of processing terminals that deploy the MedCard
system, and demonstration terminals and spare parts that are held for sale.
Inventories are stated at the lower of cost (first-in, first-out basis) or
market (net realizable value). Rapid technological change and new product
introductions and enhancements could result in excess or obsolete inventory. To
minimize this risk, the Company evaluates inventory levels and expected usage on
a periodic basis and records adjustments as required.
Property and Equipment
----------------------
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is recorded on a straight-line basis over the estimated useful
lives of the assets ranging from 3 to 5 years. The Company's leaseback
transactions of processing terminals to healthcare providers are generally for a
period of 48 to 60 months. Depreciation expense for the leased terminal assets
are on the straight-line method over the term of the lease in amounts necessary
to reduce the carrying amount of the terminal asset. Estimated and actual
6
residual values are reviewed on a regular basis to determine that depreciation
amounts are appropriate. Depreciation expense relating to leased terminal assets
was $298,734 for the three months ended March 31, 2004.
Assets Held under Capital Leases
--------------------------------
Assets held under capital leases are recorded at the lower of the net present
value of the minimum lease payments or the fair value of the leased asset at the
inception of the lease. Amortization expense is computed using the straight-line
method over the shorter of the estimated useful lives of the assets or the
period of the related lease.
Amortization of Leasehold Improvements
--------------------------------------
Amortization of leasehold improvements is computed using the straight-line
method over the shorter of the remaining lease term or the estimated useful
lives of the improvements.
Revenue Recognition
-------------------
Sales Revenues: The Company's sales revenues are derived from the sale of
processing terminals, computer equipment and other items and are recognized upon
shipment. Revenue from the licensing of equipment software is recognized upon
acceptance by the customer, if the licensing agreement includes such an
acceptance provision, otherwise it is recognized upon shipment.
Service Fee Revenues: Revenue related to the processing of insurance eligibility
verification and medical claim processing is recorded at the time the
transaction is completed. Financial transactions involve approvals of credit
card and debit card payments from the use of processing terminals or personal
computers and are recorded at the time the transactions are completed.
Deferred Gains on Sale Leasebacks: Gains related to processing terminal
equipment sales in the form of sale-leaseback transactions are amortized
generally over the lease term of 48 to 60 months and are recognized
proportionately over the lease term. Gains are initially realized when terminals
are sold to a third party that finances the terminals used by the Company's
customers through the sale leaseback with the Company. The Company purchases
the terminals from a supplier and when the Company enters into a service
agreement with a customer, the customer may rent the terminal from the Company.
When the customer rents the terminal, the Company generally will sell that
terminal to the third party leasing company and in turn leases-back that
terminal.
Comprehensive Income
--------------------
Comprehensive income consists of net income and other gains and losses affecting
shareholders' equity that, under generally accepted accounting principles are
excluded from net income.
Income Taxes
------------
The Company provides for income taxes based on the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, which,
among other things, requires that recognition of deferred income taxes be
measured by the provisions of enacted tax laws.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
7
bases. Deferred tax assets, including tax loss and credit carryforwards, and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities or a
change in tax rates is recognized as income in the period that includes the
enactment date. Deferred income tax expense represents the change during the
period in the deferred tax assets and deferred tax liabilities. The components
of the deferred tax assets and liabilities are individually classified as
current and non-current based on their characteristics.
Fair Value of Financial Instruments
-----------------------------------
Financial instruments consist primarily of accounts receivable, and obligations
under accounts payable, accrued expenses, capital lease obligations and notes
payable. The carrying amounts of accounts receivable, accounts payable, accrued
expenses and notes payable approximate fair value because of the short maturity
of those instruments. The carrying value of the Company's capital lease
arrangements approximates fair value because the instruments were valued at the
cost of the equipment at the time the Company entered into the arrangements. The
Company has applied certain assumptions in estimating these fair values. The use
of different assumptions or methodologies may have a material effect on the
estimates of fair values.
Net Loss Per Share
------------------
Net loss per share is calculated using the weighted average number of shares of
common stock outstanding during the year. The Company has adopted the provisions
of Statement of Financial Accounting Standards No. 128, Earnings Per Share.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
This may affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock-Based Compensation
------------------------
Statements of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, ("SFAS 123") established accounting and disclosure requirements
using a fair-value based method of accounting for stock-based employee
compensation. In accordance with SFAS 123, the Company has elected to continue
accounting for stock based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees."
Intangible Assets
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Intangible assets at March 31, 2004 consist of goodwill associated with the
Company's acquisition of MedCard, and the difference between the purchase price
of the acquired business and the fair value of the identifiable net assets.
Research and Development Expenditures
-------------------------------------
Research and development costs are expensed as incurred.
8
Impairment of Assets
--------------------
The Company performs an assessment of impairment of long-lived assets
periodically whenever there is an indication that the carrying amount of the
asset may not be recoverable. Recoverability of these assets is determined by
comparing the forecasted undiscounted cash flows generated by those assets to
the assets' net carrying value. The amount of impairment loss, if any, is
measured as the difference between the net book value of the assets and the
estimated fair value of the related assets.
3. TERMINALS AND SALE-LEASEBACK TRANSACTIONS
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 is then
installed with the customer. Many of those terminals are 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.
Terminals $5,975,871
Less accumulated amortization (1,730,951)
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Terminals, net $4,244,920
===========
During the three months ended March 31, 2004, the Company entered into capital
lease obligations under sale-leaseback transactions totaling $268,516. The
total gain realized on these transactions was $136,020 for the three months
ended March 31, 2004. As of March 31, 2004, of the total gain amount $4,546 was
recognized and $131,473 is deferred to future periods.
4. SUBSCRIPTIONS RECEIVABLE
The Company is obligated to issue shares of its common stock for those that have
subscribed for stock, however final payment has not been received. As of March
31, 2004, the amount of subscribed stock is $806,016 and is shown as
"Subscriptions Receivable" in the Company's Balance Sheet.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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-QSB (incorporated herein 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, these four programs were discontinued in December 1997. During the fiscal
year of 1998, the Company diversified its operations and moved into the area of
medical information processing.
The Company changed its name to MedCom USA, Inc. in October 1999. During
the fiscal years of 1999 and continuing through 2000, the Company directed its
efforts in medical information processing. As of December 31, 2003, the Company
currently operates the MedCard System (MedCard) that is deployed through a
point-of-sale terminal or personal computer offering electronic transaction
processing, as well as insurance eligibility verification. 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
------------------------------
MEDCARD SYSTEM
The Company provides innovative technology-based solutions for the
healthcare industry that enable users to efficiently collect, use, analyze and
disseminate data from payers, health care providers and patients. The MedCard
System currently operates through a point-of-sale terminal or a personal
computer. The point-of-sale terminals are purchased from Hypercom Corporation
(Hypercom). The MedCard System also operates in a PC version and an on-line
version. The Company is in the process of assessing the feasibility of offering
a service bundled package that would have the capability of processing unlimited
claims and eligibility verification for monthly service fees.
FINANCIAL SERVICES
The Company's credit card center and check services, provides the
healthcare industry an unprecedented 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.
Flex-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, an
easy-pay option is offered which 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
10
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 a personal computer. Using the
MedCard system, medical providers are relieved of the problems associated with
billings and account management, and results in lower administrative
documentation and costs.
PATIENT ELIGIBILITY
The MedCard System is also an electronic processing system that
consolidates insurance eligibility verification, processes medical claims, and
monitors referrals. The MedCard 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 MedCard system to verify that referrals are
approved by the patient's insurance carrier. The MedCard 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 MedCard 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.
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 to 21
days. Health care providers will benefit from a 100% paperless claim processing
system.
TECHNICAL SUPPORT ASSISTANCE
The Company offers multiple training options for its products and services
and is easily accessed at www.MedCard.com. The online E-learning tools enable
---------------
health care professionals and health providers an opportunity to familiarize
themselves with the Health Insurance Portability and Accountability Act (HIPAA)
and also the mandates and compliance issues. 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
MedCard's marketing plan is built 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 MedCard
System throughout the U.S. Currently, there are 16 active ISOs promoting the
MedCard system, with an average ISO that contains approximately 10-20 sales
people, some selling the MedCard System exclusively. Financial service
companies comprise an important sales channel that views the healthcare industry
as an important growth opportunity. Only 6% 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.
SERVICE AGREEMENTS
During December 1998, the Company entered into a service agreement with
WebMD Envoy. This agreement encompasses the process of Electronic Data
Interchange (EDI) and related services. The services provided are complimentary
to the Company's core business, and accomplishes transaction processing services
11
that allows healthcare providers and payers to process medical transactions
quickly and accurately, and results in reduced administrative costs and an
increase in healthcare reimbursements to healthcare providers.
During January 2002, the Company has entered into a service agreement with
MedUnite. This alliance will encompass the utilization of proprietary
technologies and will enhance the existing network of healthcare constituents.
Strategically both companies share the same vision of transforming the
healthcare transactions systems affecting how healthcare providers, health
plans, and other groups transacting business with one another by significantly
reducing claim and payment processing time, and reducing healthcare
administrative costs.
During February 2004, the Company entered into a service agreement with CDS
Capital. This agreement will enable eligible healthcare providers utilizing the
Medcom terminals to finance their accounts receivables. Health care providers
utilizing the Medcom terminal to secure patient eligibility and process claims
will now be able to receive regular payments for a large percentage of claims
processed from the previous week. This financial management service will
decrease the time and costs associated with accounts receivable collections.
PROCESSING TERMINAL LEASING AGREEMENTS
The Company has entered into leasing agreements with LADCO Financial Group
for the purpose of leasing processing terminals. The Company has pledged and
granted for collateral in connection with the lease agreements, one million
restricted common shares. These common shares would be surrendered upon default
of the leasing agreements. This pledge and granting of security interest was
executed on January 2002.
The Company has arranged its terms with this credit facility as an
equipment lessor whereby the Company sells terminals to the lessor when it has
obtained a service contract with a provider. Under these agreements, the
Company is leasing back the processing terminals from the lessor and in turn
leases them to the purchaser for a period of 48-60 months however; the customer
may terminate the agreement after 12 months. The Company is accounting for the
transactions as sale-leasebacks. The leases with the customers are inclusive
with the monthly service contracts and are effectively accounted for as
operating leases. Gains on terminal sales under sale-leaseback transactions are
deferred and are being amortized to income in proportion to amortization of the
assets, generally over the term of the lease with the credit facility generally
for a period of 48 to 60 months. At March 31, 2003, the remaining deferred
equipment gain of $3,449,454 is shown as "Deferred Revenue" in the Company's
Balance Sheet. For the nine months ended March 31, 2003, the total interest
expense incurred by the Company under these leases was $234,320.
REVENUES
Revenues from the MedCard system are generated through the sale of
terminals, and processing insurance eligibility/verification, insurance claims,
and financial transaction processing. The Company receives a fixed amount per
terminal, and also receives fees for each transaction processed through the
MedCard System. Revenue sources include fees for financial transactions
processed through the 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 MedCard System for
hospitals and large practice groups. The Company receives a percentage of the
billing amount collected under these arrangements.
12
ADDITIONAL INFORMATION
Medcom files reports and other materials with the Securities and Exchange
Commission. These documents may be inspected and copied at the Commission's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. You
can obtain information on the operation of the Public Reference Room by calling
the Commission at 1-800-SEC-0330. You can also get copies of documents that the
Company files with the Commission through the Commission's Internet site at
www.SEC.gov.
-----------
RESULTS OF OPERATIONS
Revenues for the quarter ended March 31, 2004 were $1,190,412 as compared to the
quarter ended March 31, 2003 of $679,016. The Company has divested of all its
business segments other than the MedCard business, which it intends to devote it
full resources. Revenues are primarily derived from monthly service fees
collected and revenues related to the leasing of terminal assets.
Cost of sales for the quarter ended March 31, 2004 was $221,914 as compared to
quarter ended March 31, 2003 of $41,935. Overall margins have decreased as the
Company has decreased its service offerings and divested unprofitable business
sectors. As a result, the Company's focus on medical transaction processing has
increased its costs due to volume increases in benefit verification transaction
processing.
General and administrative expenses for quarter ended March 31, 2004 was
$987,350 as compared to quarter ended March 31, 2003 of $755,919. These expenses
have increased despite the Company instituting cost curtailment measures.
Selling expenses for the quarter ended March 31, 2004 was $535,189 as compared
to the quarter ended March 31, 2003 of $237,348. These expenses have increased
and are directly attributed to the Company's aggressive marketing and outside
sales organizations that market the Company's equipment and services.
Interest expense for the quarter ended March 31, 2004 was $234,320 as compared
to quarter ended March 31, 2003 of $125,140. Interest expense has increased as
a result of volume increases of leased terminal assets by the Company.
Other expense of $586,641 for the three and nine month periods ended March 31,
2004, Relates to a settlement with a shareholder and investor. This shareholder
had invested in the Company in 2001 and interpreted its investment agreement to
provide certain dilution protection. The Company and the investor came to an
agreement and settled as to the number of shares necessary to provide that
protection. In connection therewith, the Company issued an addition 266,655
shares of common stock. Those shares were valued at the trading price of $2.20.
No tax benefit was recorded on the expected operating loss for the quarter ended
March 31, 2003 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.
Net loss for the quarter ended March 31, 2004 was ($2,142,056) compared net loss
for the quarter ended March 31, 2003 of ($838,708).
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the nine months ended March 31, 2004, was
($4,220,918) as compared to cash used in operating activities for the nine
months ended March 31, 2003 of ($2,249,864). Overall terminal sales have
increased; specifically in the areas of direct sales and sales-leaseback
transactions, and has resulted in increases in inventory purchases.
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Cash used in investing activities for the nine months ended March 31, 2004 was
($1,251,232) as compared to cash provided by investing activities for the nine
months ended March 31, 2003 of $628,774. Terminal software upgrade expenses
have been incurred, and also repayments on advances from affiliate.
Cash provided by financing activities was $5,505,775 for the nine months ended
March 31, 2004 compared to cash provided by financing activities for the nine
months ended March 31, 2003 of $1,692,048. The Company continued with its
efforts in marketing and obtained proceeds from common stock sales. The Company
has financed its terminal equipment though the leasing-back of terminals and as
a result has received proceeds. Proceeds provided by financing activities have
been utilized for working capital requirements, marketing, and additional
inventory purchases.
ADVANCES TO AFFILIATE
The Company has relied upon a significant shareholder to fund its operating
cash flow deficiencies since June 2001. This funding in the past was
accomplished in the form of loans to the Company. At March 31, 2004, the
Company has a note receivable of $ 1,112,000, due from this affiliated
shareholder and is due upon demand. This note is unsecured and bears interest
at 3%. During the quarter ended March 31, 2004, this note payable has become a
receivable and has been classified as current in the accompanying Balance Sheet,
because repayment is anticipated during the next year.
As described above, the Company has secured an arrangement with a third
party leasing company to provide funds upon the execution of a rental and
service agreement with a customer. Generally, the health care provider customer
will enter into an agreement with the Company to rent a terminal and subscribe
to the transaction processing and insurance verification service. At that time,
the Company will sell the terminal associated with the service contract to the
lessor and then leaseback that terminal. The leasing transactions provide for
funding to the Company to cover its cost of the terminal, placement of the
terminal with the customer and a profit margin. The Company is generally
required to pay the lease rentals to the lessor from 48 to 60 months. The source
of funds for those repayments is the rental payments from the health care
provider customer.
Management believes that current trends in its electronic transaction
processing to the health care industries will provide cash flow in the near
fiscal period to be self-sustaining from operations. The amount of such will be
dependent upon the rate of growth experienced and demand for the Company's
product and services.
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, 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 at any particular period, and the ability to continue to
improve the 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.
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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, 2003. No material developments
occurred in any of these proceedings during the quarter ended March 31, 2004.
The costs and results associated with these legal proceedings could be
significant and could affect the results of future operations.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in this report is recorded, processed,
accumulated, and reported to its management, including the chief executive
officer, to allow timely decisions regarding the required disclosure. Within
the 90 days prior to the filing date of this report, MedCom's management, with
the participation of its chief executive officer performed an evaluation of the
effectiveness of the design and operation of these disclosure controls and
procedures. Management has concluded that such disclosure controls and
procedures are effective at ensuring that required information is disclosed in
the Company's reports.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
evaluation date.
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ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
NO REPORTS ON FORM 8-K
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.
EXHIBIT INDEX
Exhibit Number Description
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Exhibit 31 Management Certification
Exhibit 32 Sarbanes-Oxley Act Certification
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