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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, 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
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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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The number of shares of the issuer's common equity outstanding as of
October 27, 2004 was 50,957,995 shares of common stock.
Transitional Small Business Disclosure Format (check one):
Yes No X
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1
MEDCOM USA, INC.
INDEX TO FORM 10-QSB FILING
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Balance Sheet
As of September 30, 2004 . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations
For the Three Months Ended September 30, 2004
and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows
For the Three Months Ended September 30, 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.
BALANCE SHEET (UNAUDITED)
AS OF SEPTEMBER 30, 2004
ASSETS:
CURRENT ASSETS
Cash $ 81,194
Accounts receivable, net of allowance of $35,257. 476,337
Accounts receivable - affiliate 784,630
Inventories 609,634
Prepaid expenses and other current assets 71,574
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Total current assets 2,023,369
PROCESSING TERMINALS, net 3,835,580
PROPERTY AND EQUIPMENT, net 390,429
GOODWILL, net of accumulated amortization of $322,575 436,423
OTHER ASSETS 87,657
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TOTAL ASSETS $ 6,773,458
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LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 357,812
Accrued expenses and other liabilities 606,133
Dividend payable 23,750
Notes payable - current 109,437
Deferred revenue - current portion 1,411,447
Reserve for sales returns 40,270
Capital lease obligations - current portion 1,605,973
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Total current liabilities 4,154,822
CAPITAL LEASE OBLIGATIONS - long-term portion 3,494,814
DEFERRED REVENUE 1,685,460
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Total liabilities 9,335,096
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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, $.0001 par value, 80,000,000 shares authorized,
51,924,665 issued and 51,737,678 outstanding 5,194
Subscriptions receivable (500,000)
Treasury stock (37,397)
Paid in capital 72,672,929
Accumulated deficit (74,702,397)
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Total stockholders' equity (2,561,638)
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,773,458
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See the accompanying notes to these unaudited financial statements.
3
MEDCOM USA, INC.
STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003.
Three Months Ended
2004 2003
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REVENUES:
Terminal sales $ 156,366 $ 88,626
Service 428,703 314,437
Equipment lease 286,403 235,115
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871,472 638,178
COST OF SALES AND SERVICE: 179,850 28,233
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GROSS PROFIT 691,622 609,945
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OPERATING EXPENSES:
General and administrative 933,075 797,255
Sales and marketing 292,299 261,553
Professional and consulting fees 110,400 30,000
Royalties 26,621 34,353
Depreciation and amortization 362,389 382,632
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Total operating expenses 1,724,784 1,505,793
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OPERATING LOSS (1,033,162) (895,848)
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OTHER (INCOME) AND EXPENSES
Interest expense 200,102 220,928
Other income (9,402) (202,984)
Loss on disposal of assets 25,016 -
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Total other expense 215,716 17,944
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NET LOSS (1,248,878) (913,792)
Preferred stock dividend - -
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TOTAL NET LOSS AVAILABLE TO COMMON SHAREHOLDERS $(1,248,878) $ (913,792)
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NET LOSS PER SHARE:
Basic: $ (0.03) $ (0.02)
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Diluted: $ (0.03) $ (0.02)
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Weighted Average Common Shares Outstanding
Basic 49,812,487 37,392,878
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Diluted 49,812,487 37,392,878
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See the accompanying notes to these unaudited financial statements.
4
MEDCOM USA, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2004 AND 2003
2004 2003
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(1,248,878) $ (913,792)
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 362,389 382,632
Issuance of common stock as compensation for services 96,400 -
Loss on disposal of assets 25,016 -
Changes in assets and liabilities:
Trade accounts receivable (193,034) 7,679
Inventories 112,109 (42,176)
Prepaid and other current assets 17,649 (12,727)
Other assets (70,000) -
Accounts payable and accrued liabilities 35,115 (205,781)
Deferred revenue (286,403) (235,115)
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Net cash (used) in operating activities: (1,149,637) (1,019,280)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property & equipment (116,187) (25,793)
Net repayments of advances to affiliate 635,599 107,674
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Net cash provided by investing activities: 519,412 81,881
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on capital leases (359,684) (255,933)
Proceeds from sale of common stock 623,450 300,000
Proceeds from capital sale-leaseback transactions 361,032 874,868
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Net cash provided by financing activities 624,798 918,935
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INCREASE (DECREASE) IN CASH (5,427) (18,464)
CASH, BEGINNING OF PERIOD 86,621 54,460
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CASH, END OF PERIOD $ 81,194 $ 35,996
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SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 212,582 $ 167,698
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Income taxes paid - -
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SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Terminals capitalized under sales/leaseback transactions $ 334,671 $ 1,034,862
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Terminals returned and placed back into inventory at net
capitalized cost $ 55,625 $ 309,275
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See the accompanying notes to these unaudited financial statements.
5
MEDCOM USA, INC.
NOTES TO FINANCIAL STATEMENTS
INTERIM PERIODS ENDED SEPTEMBER 30, 2004
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements represent the financial
position of Medcom USA, Inc. ("Company") as of September 30, 2004 and includes
results of operations of the Company for the three months ended September 30,
2004 and September 30, 2003 and cash flows for the three months ended September
30, 2004 and September 30,2003. These statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions for Form 10-QSB. Accordingly, they do not
include all the information and footnotes required by generally accepted
accounting principles ("GAAP") for complete financial statements. In the opinion
of management, all adjustments to these unaudited financial statements necessary
for a fair presentation of the results for the interim period presented have
been made. The results for the three months ended September 30, 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, 2004, including specifically the
financial statements and notes to such financial statements contained therein.
Accounting Policies and Estimates
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The preparation of our financial statements in conformity with accounting
principles generally accepted in the United States of America requires our
management to make certain estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. As such, in accordance with
the use of accounting principles generally accepted in the United States of
America, our actual realized results may differ from management's initial
estimates as reported. A summary of significant accounting policies are
detailed in notes to the financial statements which are an integral component of
this filing.
Cash and Cash Equivalents
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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
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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 are carried at the lower of cost or market on a first-in first-out
basis. The Company purchases hardware from its supplier and records inventory
at its original cost. Inventory terminals are sometimes returned by customers,
and if these units have been sold and repurchased under sale-leaseback
transactions, the Company records the returned inventory units at the amortized
capitalized cost under the sale-leaseback arrangements. The capitalized costs
under the sale-leaseback transactions are substantially greater than the
original purchase price from the supplier. Management believes that all such
units returned to-date are recorded at costs less than what they can be resold.
Therefore, no impairment of carrying value is recorded.
6
Property and Equipment
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Property and equipment is stated at cost less accumulated depreciation.
Depreciation is recorded on a straight-line basis over the estimated useful
lives of the assets ranging from 3 to 5 years. The Company's leaseback
transactions of processing terminals to healthcare providers are generally for a
period of 48 to 60 months. Depreciation expense for the leased terminal assets
are on the straight-line method over the term of the lease in amounts necessary
to reduce the carrying amount of the terminal asset. Estimated and actual
residual values are reviewed on a regular basis to determine that depreciation
amounts are appropriate.
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
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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
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The Company recognizes income on monthly service and transaction fees it charges
to customers in the month in which the service is provided. Income on
sale-leaseback transactions is deferred and recognized over the tem of the
leaseback. Management has determined that the sale-leaseback transactions are
capital leases.
Customers may return terminals under certain terms outlined in the rental
agreements. Generally, customer returns do not affect previously recognized
revenue in that rental/service and transaction fee income is recognized as the
customer utilizes the terminal. When a customer terminates service, the billing
process ceases and the terminals are returned and placed into inventory.
Income Taxes
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Management evaluates the probability of the utilization of the deferred income
tax assets. The Company has estimated a $23,652,000 deferred income tax asset at
September 30, 2004. Of that amount, $20,281,000 related to net operating loss
carry-forwards at September 30, 2004. Management determined that because the
Company has not yet generated taxable income it was not appropriate to recognize
a deferred income tax asset related to the net operating loss carry-forward.
Therefore, a fully deferred income tax asset is offset by an equal valuation
allowance. If the Company begins to generate taxable income, management may
determine that some, if not all of the deferred income tax asset may be
recognized. Recognition of the asset could increase after tax income in the
future. Management is required to make judgments and estimates related to the
timing and utilization of net operating loss carry-forwards, utilization of
other deferred income tax assets, applicable tax rates and feasible tax planning
strategies.
7
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
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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
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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
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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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Goodwill was recognized in the Company's acquisition of Medcard. Since that
time, the Company has divested of all other business segments. Management
believes that there is no impairment of the carrying value of $436,000 at
September 30, 2004. Management believes that there is sufficient evidence that
the Company will generate operating income and operating cash flows. Also,
management believes that there is substantial value in its proprietary software.
Research and Development Expenditures
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Research and development costs are expensed as incurred.
Impairment of Assets
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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.
8
2. 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 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 $6,219,177
Less accumulated amortization (2,383,597)
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Terminals, net $3,835,580
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During the three months ended September 30, 2004, the Company entered into
capital lease obligations under sale-leaseback transactions totaling $369,500.
The total gain realized on those transactions was $87,700 for the three months
ended September 30, 2004.
3. 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
September 30, 2004, the amount of subscribed stock is $500,000 and is shown as
"Subscriptions Receivable" in the Company's Balance Sheet.
4. COMMON STOCK TRANSACTIONS
During the three months ended September 30, 2004, the Company issued 2,245,000
shares of common stock for net cash proceeds of $623,450. Additionally, the
Company granted 52,187 common shares as consideration for services.
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 September 30, 2004, 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
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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 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
patient. These options insure providers that payments are timely processed with
the features of electronic accounts receivable management. These services are
10
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 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
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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
using 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 to 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 September 30, 2004, the remaining
deferred equipment gain of $3,096,907 is shown as "Deferred Revenue" in the
Company's Balance Sheet. For the three months ended September 30, 2004, the
total interest expense incurred by the Company under these leases was $202,835.
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.
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RESULTS OF OPERATIONS
Revenues for the quarter ended September 30, 2004 increased to $871,472 as
compared to the quarter ended September 30, 2003 of $638,178. This increase 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 transaction processing.
Cost of sales for the quarter ended September 30, 2004 increased to $179,850 as
compared to quarter ended September 30, 2003 of $28,233. Overall margins have
decreased; also an increase in the volume of sales has directly increased the
volume of transaction processing and as a result has increased the total costs
of processing transactions.
General and administrative expenses for quarter ended September 30, 2004
increased to $933,075 as compared to quarter ended September 30, 2003 of
$797,255. This increase is attributed to the Company's hiring of additional
employees as growth has occurred in the area of providing technical support for
our products and services in relation to increases in sales.
Selling expenses for the quarter ended September 30, 2004 increased to $292,299
as compared to quarter ended September 30, 2003 of $261,553. This increase is
primarily the result of marketing efforts and includes commissions paid to
internal sales personnel to market the Company's products and services.
Interest expense for the quarter ended September 30, 2004 decreased to $200,102
as compared to September 30, 2004 of $220,928. This decrease is a result of
payments made and interest income recognized from the note receivable made to
the affiliate.
No tax benefit was recorded on the expected operating loss for the quarter ended
September 30, 2004 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 September 30, 2004 was ($1,248,878) compared net
loss for the quarter ended September 30, 2003 of ($913,792).
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the three months ended September 30, 2004,
was ($1,149,637) as compared to cash used in operating activities for the three
months ended September 30, 2003 of ($1,019,280). Overall sales have increased
in the areas of direct sales along with sales-leaseback transactions.
Cash provided by investing activities for the three months ended September 30,
2004 was $519,412 as compared to cash used in investing activities for the three
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months ended September 30, 2003 of $81,881. There has been terminal equipment
that has been transacted as sales-leaseback transactions and terminal software
upgrade expenses that have been incurred. Also, the Company has collected funds
that were advanced from an affiliate to fund operations for deficiencies in
operating cash requirements as of September 30, 2004.
Cash provided by financing activities was $624,798 for the three months ended
September 30, 2004 compared to cash provided by financing activities for the
three months ended September 30, 2003 of $918,935. The Company has increased
the amount of transacted sales in connection with its terminal equipment though
direct sales, and as a result has decreased sales and the related financing
through its credit facility.
The Company has advanced funds to an affiliated entity that is controlled by the
Company's chairman and chief executive officer. As of September 30, 2004 the
Company maintains an account receivable from this entity for the amount of
$784,630 including accrued interest.
SOURCES OF CAPITAL
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.
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.
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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, 2004. No material developments
occurred in any of these proceedings during the quarter ended September 30,
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.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
NO REPORTS ON FORM 8-K
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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.
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