Form 10-Q for INSTACARE CORP.

14-Nov-2008

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.

Overview of Current Operations

We are a publicly-traded distributor of life-saving and life-enhancing prescription drugs and diagnostics to several channels in the healthcare industry, a developer of patent-pending technologies for e-health and EMR applications that we employ to leverage and add value to our prescription drug and diagnostics business, and a Wi-Fi PDA technology provider to the lodging industry. We have recently added modules to our medical and EMR applications that allow for the management of medical products distribution and reporting management. We are in the initial stages of marketing these new modules under the trade name Decision IT.


Our proprietary ResidenceWare, MD@Hand and Practice Probe technologies manage critical data, enhance productivity and e-commerce, and facilitate communication with applications in the healthcare, medical distribution and hotel/motel markets and industries. We have recently focused our business attention towards providing prescription drugs and medical diagnostics through several medical distribution channels.

All of the company's business is transacted in the United States. We do not sell or ship for export.

During the next 12 months we plan to continue to focus our efforts on the following primary businesses:

Providing medical communication devices based on networks of personal digital assistants (PDA). These products are believed to provide benefits of on demand medical information to private practice physicians, licensed medical service providers such as diagnostic testing laboratories, and medical insurers;

The distribution of medical diagnostic products primarily aimed at institutions that service patients with diabetic and asthma related diseases and ailments. Our current market focus for these products is the assisted living and long term care sector of the larger healthcare market, however we plan to expand into additional sectors where we can service certain chronic ambulatory disease states;

Providing medical communication devices based on networks of personal digital assistants (PDA) and desktop computers with software that manages decision, control, audit and fulfillment for the medical products distribution markets. These products are believed to provide benefits of on demand medical information to medical products manufacturers as part of their financial management of distribution contracts;

The distribution and fulfillment of prescriptions for ethical pharmaceuticals primarily aimed at the indigent and uninsured sectors of the greater medical service markets. Our first market focus for these products will be those state Medicaid and Federally chartered clinics (and initiatives) where funding for pharmaceutical fulfillment enterprises exists;

Building electronic commerce networks based on personal digital assistants (PDA) to the hotels, motels and single building, multi-unit apartment buildings with a desire to offer local advertising and electronic services to their tenants/guests.

Seasonality

The distribution of medical products and medical diagnostics in aggregate account for the overwhelming percentage of our revenues. We have completed 15 quarters of operations in these markets. Our experiences point to a business that displays certain seasonal trends. In each of the last two operating years and the first three quarters of the current year our order intake was concentrated in the first five months of the calendar year and to an identifiable but lesser degree in the last two months of the calendar year. One explanation is that these months correspond with the beginning of a prescription drug plan years where new prescription drug cards are distributed by insurers to their insured in January along with new plan formularies (price schedules).
This in turn trends to influence "stocking up" buying/ordering behavior on the part of the insured.

Results of Operations for the three months ended September 30, 2008 and 2007 compared.

The following tables summarize selected items from the statement of operations for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.

INCOME:


For the three months ended
September 30, Increase (Decrease)
2008 2007 $ %

Revenue $ 3,439,271 $ 1,585,538 $ 1,853,733 117%
Cost of Sales 3,233,370 1,327,518 1,905,852 144%

Gross Profit 205,901 258,020 (52,119) (21%)

Gross Profit Percentage of Sales 6% 16% (9%)


Revenue

Our revenue for the three months ended September 30, 2008 was $3,439,271 compared to revenue of $1,585,538 in the three months ended September 30, 2007.
This resulted in an increase in revenue of $1,853,733, or 117%, from the same period a year ago. The increase in revenue over the three months ended September 30, 2007 was a result of our market focus towards the direct sale of diabetic test strips and medical-surgical products into several prescription drug channels and our expansion into medical surgical products and markets.

Cost of sales / Gross profit percentage of sales

Our cost of sales for the three months ended September 30, 2008 was $3,233,370, an increase of $1,905,852, or 144% from $1,327,518 for the three months ended September 30, 2007. The increase in cost of sales during the current period was expected due to our increased sales over the prior quarter and an increase in our direct to patient market sales.

Gross profit as a percentage of sales decreased from 16% for the three months ended September 30, 2007 to 6% for the three months ended September 30, 2008.
The decrease in gross profit margin was due to additional shipping as we have expanded to international national markets. We are currently seeking additional transportation sources and focusing efforts in building a target market to grow our revenue stream with the anticipation of maintaining current costing.

EXPENSES:


For the Three Months Ended
September 30,
2008 2007 Increase / (Decrease)
Amount Amount $ %

Expenses:
General & administrative expenses $ 66,319 $ 48,820 $ 17,499 36%
Consulting services 25,804 225,597 (199,793) (89%)
Payroll expense 47,335 74,358 (27,023) (37%)
Professional fees 6,184 1,680 4,504 268%
Depreciation 9,063 11,618 (2,555) (22%)
Total expenses 154,705 362,073 (207,368) (58%)

Net operating income (loss) 51,196 (104,053) 155,249 150%

Other income (expense):
Financing costs (70,527) (3,205) 67,322 2101%
Interest expense (56,823) (56,293) 530 1%

Net income (loss) $ (76,154) $ (163,551) $ 74,518 46%

General and Administrative Expenses

General and administrative expenses for the three months ended September 30, 2008 were $66,319, an increase of $17,499, or 36%, from $48,820 for the three months ended September 30, 2007. We have focused our business development towards targeted market areas for our diabetic testing products, as a result of this focused agenda, we have been able to streamline overhead utilizing only those resources that directly attribute to our sales growth whereby allowing us to eliminate unnecessary general and administrative expenditures. It is the goal of management to continue efforts in limiting redundant overhead.

Consulting Services

We have historically relied on outside consultants for assistance in business development and sales. As we are becoming more seasoned in our pharmaceutical product lines, we have been able to limit the amount of outside services required to build and maintain our market share, evidenced by our decrease in consulting services for the three months ended September 30, 2008. During this quarter we expended $25,804 compared to $225,597 for the three months ended September 30, 2007, representing a decrease of 89% over the same period in the previous year.


Payroll expense

We currently staff five full-time positions. Each of which, assist in sales, marketing and administrative support. We have made tremendous efforts to maintain cash-flow through a reduction in salaries and wages. During the three months ended September 30, 2008 our payroll expense was comprised of cash totaling $15,335 and equity compensation of $32,000 compared to $74,358 in cash for the comparable period in 2007. Currently, our labor expense for the three months ended September 30, 2008 is approximately 2% of our total revenue verses 5% for the same period in the previous year. As our sales continue to grow, we anticipate our payroll expense will also increase at a pro rata rate.

Professional Fees

Our professional fees consist of legal, accounting and public company reporting services. Our fees for these services increased by $4,504 compared to the three months ended September 30, 2008 as a result of a decrease in legal fees. During the three-months ended September 30, 2008 we incurred accounting fees of $4,500 and reporting costs of $1,684 compared to $7,700 in accounting fees, $6,750 in legal fees and $1,556 in reporting fees for the three-month period ended September 30, 2007. During the three month period in 2007, we received a credit in accounting fees in the amount of $14,236 as a professional courtesy. We do not anticipate any further discounts and expect the current period fees to be representative of our near term costs.

Depreciation

Depreciation for the three months ended September 30, 2008 was $9,063, a decrease of $2,555 from $11,618 for the three months ended September 30, 2007.
The decrease in depreciation is the expected result of asset reaching their expected useful lives.

Total Expenses

Our operating expenses decreased $207,368 or 58% overall for the three months ended September 30, 2008. Our streamlined operational environment and limitations on the use of outside consultants has allowed for the decrease in total operational costs.

Net Operating Income (Loss)

We had net operating income in the amount of $51,196 for the three months ended September 30, 2008, versus a net operating loss of $104,053 for the three months ended September 30, 2007, an increase of net operating income totaling $155,249. As we maintain our business focus toward building sales and minimizing unnecessary overhead, we look forward to continued increases in net operating income.

Financing Costs

Financing costs for the three months ended September 30, 2008 were $70,527, an increase of $67,322 compared to $3,205 for the three months ended September 30, 2007. Our financing costs have increased substantially as a result of our revolving line of credit with Centurion Credit Resources LLC. This agreement allows us the necessary capital to finance and turn our inventory creating an ability to generate revenue we had not previously had due to our significant deficiencies in working capital. Our agreement with Centurion requires an interest payment equal to 5% of each advance. Interest payments are made to Centurion with common stock of the Company. The ability to pay in shares allows us to build our own working capital through the gross profit received on each sale with the anticipation of limiting the necessity for future working capital financing.

Interest Expense

Our interest expense has remained consistent at $56,823 with the comparable period one year ago. Until such time as we are able to pay down or convert our existing debt, we anticipate a continued expense of this amount throughout the up coming year.

Net Income (Loss)

We experienced net loss for the three months ended September 30, 2008 in the amount $76,154, a decrease of $74,518 from our previous comparative net loss of $163,551. The decrease in net loss was attributable to our overall decrease in general and administrative expenses and consulting fees during the quarter, as noted above.

Results of Operations for the nine months ended September 30, 2008 and 2007 compared.

The following tables summarize selected items from the statement of operations for the three months ended September 30, 2008 compared to the three months ended September 30, 2007.


INCOME:


For the nine months ended Increase (Decrease)
September 30,
2008 2007 $ %

Revenue $ 9,257,347 $ 3,705,669 $ 5,551,678 150%
Cost of Sales 8,259,316 3,124,822 5,134,494 156%

Gross Profit 998,031 580,847 417,184 72%

Gross Profit Percentage of Sales 11% 16% (4%)

Revenue

Our revenue for the nine months ended September 30, 2008 was $9,257,347 compared to revenue of $3,705,669 in the nine months ended September 30, 2007. This resulted in an increase in revenue of $5,551,678, or 150%, from the same period a year ago. The increase in revenue over the three months ended September 30, 2007 was a result of our expansion into international markets. We are currently working towards intensifying our overseas markets in an effort to add additional revenue streams to our developing direct sales of diabetic testing products.

Cost of sales / Gross profit percentage of sales

Our cost of sales for the nine months ended September 30, 2008 was $8,259,316, an increase of $5,134,494, or 156% from $3,124,822 for the nine months ended September 30, 2007. The increase in cost of sales during the current period was expected due to our increased sales over the prior quarter and an increase in our direct to patient market sales.

Gross profit as a percentage of sales decreased from 16% for the nine months ended September 30, 2007 to 11% for the nine months ended September 30, 2008. During the third quarter we made a change in our primary supplier in anticipation of achieving a higher margin on our sales through stronger buying power on increased volume. Though we did see stronger margins in our domestic sales, the costs associated with our emergence into international markets offset our domestic savings. We are predicting moderate increases in our gross profit margin as we continued to build our international distribution channels.

EXPENSES:


For the Nine Months Ended
September 30,
2008 2007 Increase / (Decrease)
Amount Amount $ %

Expenses:
General & administrative
expenses $ 191,623 $ 230,345 $ (38,722) (17%)
Consulting services 119,539 603,674 (484,135) (81%)
Payroll expense 247,670 162,256 85,414 53%
Professional fees 73,781 83,656 (9,875) (12%)
Depreciation 27,189 35,108 (7,919) (23%)
Total expenses 659,802 1,115,039 (455,237) (41%)

Net operating income
(loss) 338,230 (534,192) 872,422 164%

Other income (expense):
Financing costs (186,788) (14,328) 172,460 1204%
Interest (expense) (168,216) (168,786) (570) -%

Net income (loss) $ (16,775) $ (717,306) $ (700,531) (98%)


General and Administrative Expenses

General and administrative expenses for the nine months ended September 30, 2008 were $191,623, a decrease of $38,722, or 17%, from $230,345 for the nine months ended September 30, 2007. We have focused our business development towards targeted market areas for our diabetic testing products, as a result of this focused agenda, we have been able to streamline overhead utilizing only those resources that directly attribute to our sales growth whereby allowing us to eliminate unnecessary general and administrative expenditures. It is the goal of management to continue efforts in limiting redundant overhead.

Consulting Services

We have historically relied on outside consultants for assistance in business development and sales. As we are becoming more seasoned in our pharmaceutical product lines, we have been able to limit the amount of outside services required to build and maintain our market share, evidenced by our decrease in consulting services for the nine months ended September 30, 2008. During this quarter we expended $119,539 compared to $603,674 for the nine months ended September 30, 2007, representing a decrease of 81% over the previous period.

Payroll expense

We currently staff five full-time positions. Each of which, assist in sales, marketing and administrative support. We have made tremendous efforts to maintain cash-flow through a reduction in salaries and wages. During the nine months ended September 30, 2008 our payroll expense was comprised of cash totaling $49,170 and equity compensation of $198,500 compared to $115,800 in cash and $52,500 in equity based compensation for the comparable period in 2007. Currently, our labor expense is approximately 3% of our total revenue verses 5% for the same period in the previous year. As our sales continue to grow, we anticipate our payroll expense will also increase at a pro rata rate.

Professional Fees

Our professional fees consist of legal, accounting and public company reporting services. Our fees for these services decreased by $9,875 compared to the nine months ended September 30, 2008 as a result of a decrease in legal fees. During the nine-months ended September 30, 2008 we incurred accounting fees of $68,502 and reporting costs of $5,279 compared to $49,450 in accounting fees, $22,250 in legal fees and $11,956 in reporting fees for the nine month period ended September 30, 2007. We anticipate these fees to remain stable throughout the remainder of the year.

Depreciation

Depreciation for the nine months ended September 30, 2008 was $27,189, a decrease of $7,919 from $35,108 for the nine months ended September 30, 2007.
The decrease in depreciation is the expected result of asset reaching their expected useful lives.

Total Expenses

Our operating expenses decreased $455,237 or 41% overall for the nine months ended September 30, 2008. Our streamlined operational environment and limitations on the use of outside consultants has allowed for the decrease in total operational costs.

Net Operating Income (Loss)

We had net operating income in the amount of $338,230 for the nine months ended September 30, 2008, versus a net operating loss of $534,192 for the nine months ended September 30, 2007, an increase of net operating totaling $872,422. As we maintain our business focus toward building sales and minimizing unnecessary overhead, we look forward to a continued reward of positive earnings results.

Financing Costs

Financing costs for the nine months ended September 30, 2008 were $186,788, an increase of $172,460 compared to $14,328 for the nine months ended September 30, 2007. Our financing costs have increased substantially as a result of our revolving line of credit with Centurion Credit Resources LLC. This agreement allows us the necessary capital to finance and turn our inventory creating an ability to generate revenue we had not previously had due to our significant deficiencies in working capital. Our agreement with Centurion requires an interest payment equal to 5% of each advance. Interest payments are made to Centurion with common stock of the Company. The ability to pay in shares allows us to build our own working capital through the gross profit received on each sale with the anticipation of limiting the necessity for future financing of working capital.


Interest Expense

Our interest expense has remained consistent at $168,216 with the comparable period one year ago. Until such time as we are able to pay down or convert our existing debt, we anticipate a continued expense of this amount throughout the up coming year.

Net Income (Loss)

We recognized a net loss for the nine months ended September 30, 2008 in the amount $16,775 a decrease in net loss of $700,531 from our previous year net loss of $717,306. The decrease in net loss and our resulting profit was attributable to our overall decrease in general and administrative expenses and consulting fees during the quarter, as noted above.

Liquidity and Capital Resources

A critical component of our operating plan impacting our continued existence is the ability to obtain additional capital through additional equity and/or debt financing. We do not anticipate generating sufficient positive internal operating cash flow until such time as we can deliver our product to market, complete additional financial service company acquisitions and generate substantial revenues, which may take the next few years to fully realize. In the event we cannot obtain the necessary capital to pursue our strategic plan, we may have to cease or significantly curtail our operations. This would materially impact our ability to continue operations.

The following table summarizes our current assets, liabilities and working capital at September 30, 2008 compared to December 31, 2007.

                                                                         Increase / (Decrease)
September 30, 2008 December 31, 2007 $ %

Current Assets $ 1,638,413 $ 773,660 $ 864,753 112%
Current Liabilities 3,225,506 2,758,243 467,263 17%
Working Capital Deficit $ 1,587,093 $ 1,984,583 $ 397,490 20%

Internal and External Sources of Liquidity

MAG Entities Agreement

On February 7, 2005, we entered into agreements with Mercator Momentum Fund, LP and Monarch Pointe Fund, Ltd. (collectively, the "Purchasers") and Mercator Advisory Group, LLC ("MAG"). Under the terms of the agreement, we agreed to issue and sell to the Purchasers, and the Purchasers agreed to purchase from the Company, 20,000 shares of Series "C" Convertible Preferred Stock at $100.00 per share. Additionally, we issued 1,250,000 warrants to purchase share of our common stock at $1.60 per share, all of the warrants expired on February 7, 2008. To date, MAG has converted 2,140 shares of their Series "C" preferred into 1,372,901 shares of our restricted common stock. On October 8, 2008 the company received a letter from Kroll (BVI) Limited of the British Virgin Islands informing the company that the Monarch Pointe Fund, Ltd had lapsed into receivership. The company was advised to cease all communications with Monarch Pointe Fund, Ltd. And Mercator Advisory Group, LLC.

Pinnacle Investment Partners, LP Promissory Note

On March 24, 2004, we entered into a Secured Convertible Promissory Note with Pinnacle Investment Partners, LP for the principal amount of $700,000 with an interest rate of 12% per annum. On February 10, 2005 we entered into a note extension agreement whereby Pinnacle agreed to advance an additional $400,000 and extend the maturity until April 24, 2006. On July 1, 2006, we entered into a second extension of the note which matured on December 24, 2006. We are accruing interest at a default rate of 12% per annum. The note is convertible at a rate of $0.30 per share and has been secured by 2,212,500 shares of our common stock which can be sold by the lender as a means to repay the balance due. As of September 30, 2008, Pinnacle has sold 924,948 escrow shares valued at $406,215 which has been applied to accrued interest and the principal balance of the note.

Since August 3, 2006, the Company has not had contact with any of the Pinnacle fund management or attorney in fact. We have not delivered the shares called for under the July 1, 2006 extension after being advised by the fund management to "stand still." On September 23, 2008 the company received a phone call from an attorney formerly associated with Pinnacle Investment Partners, LP and was advised that the fund had ceased operations, and was closed. We were also informed that of the two fund principals, one was deceased and the other incarcerated until at least 2010.


Promissory Notes with Dennis Cantor and Novex International

On May 23, 2006, we entered into a promissory note with Dennis Cantor and Novex International for the principal amount of $255,000. Pursuant to the note we promised to pay Dennis Cantor and Novex International the sum of $255,000 together with interest at a rate of one half of one percent (0.5%) every ten days beginning on May 23, 2006 and running through the maturity date of June 30, 2006. In the case of a default in payment of principal, all overdue amounts under the note shall bear a penalty obligation at a rate of twelve percent (12%) per annum accruing from the maturity date. On July 1, 2006, we extended the note to July 31, 2006. We have made principal payments of $125,000. As of September 30, 2008, the remaining principal balance was $130,000.

Convertible Loan Payment Agreement

On July 17, 2006, we entered into a convertible loan payment agreement with Wayne G. Knapp wherein Mr. Knapp agreed to loan the Company the sum of $200,000.
The loan is for 120 days. On October 17, 2006, we renewed the note. On January 17, 2007, the parties verbally agreed to a renewal that expires on May 16, 2007. The note accrues monthly interest at a rate of 1.50% and the interest is payable quarterly in cash. The total amount owing pursuant to the agreement, was convertible at the option of Mr. Knapp at any time from July 17, 2006 until November 30, 2006, at the strike price equal to $0.32 per share or 90% of the final bid price of our common stock on the day prior to conversion with a floor price of $0.10 per share. We renewed Mr. Knapp's conversion option on January . . .