18-May-2009
Annual Report
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 our 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:
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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;
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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;
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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;
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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;
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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. Our
experiences point
to a business that displays certain seasonal trends. In each of the
last three
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 years ended December 31, 2008 and 2007 compared.
The following tables summarize selected items from the statement of operations for the years ended December 31, 2008 compared to 2007.
INCOME: |
Revenue
Our revenue for the fiscal year ended December 31, 2008 was $14,953,356 compared to revenue of $6,254,278 in the fiscal year ended December 31, 2007. This resulted in an increase in revenue of $8,699,078, or 139%, from the same period a year ago. The increase in revenue over the fiscal year ended December 31, 2007 was a result of our market focus towards the direct sale of diabetic test strips into several prescription drug channels and our efforts to increase our gross profit margin.
Cost of sales / Gross profit percentage of sales
Our cost of sales for the fiscal year ended December 31, 2008 was $13,474,843, an increase of $7,629,061, or 131% from $5,845,782 for the fiscal year ended December 31, 2007. The increase in the cost of sales in the current period was a direct result of our increased sales during the year and an increase in direct to patient market sales.
Gross profit as a percentage of sales increased from 6% for the fiscal year ended December 31, 2007 to 10% for the fiscal year ended December 31, 2008. The increase in gross profit margin was caused by a change in our product mix whereby we increased our sales levels direct to patient markets verses resale markets, which historically have a lower profit margin.
EXPENSES: |
Net income (loss) $ 187,773 $ (1,409,779) $ 1,597,552 -
General and Administrative Expenses
General and administrative expenses for the fiscal year ended December 31, 2008 were $258,937, a decrease of $11,380, or 4%, from $270,317 for the fiscal year ended December 31, 2007. The decrease in general and administrative expenses was due to our concerted efforts to reduce overhead while continuing to increase sales revenue.
Consulting Services
Consulting services for the fiscal year ended December 31, 2008 were $159,956, a decrease of $568,482, or 78%, from $728,438 for the fiscal year ended December 31, 2007. The decrease in consulting services was due to our decreased utilization of outside consultants.
Payroll expense
Payroll expenses for the fiscal year ended December 31, 2008 were $279,155, a decrease of $63,622, or 19%, from $342,777 for the fiscal year ended December 31, 2007. The decrease was due to the elimination full time employees who were replaced be regional part-time and at-will specialists.
Professional Fees
Professional fees for the fiscal year ended December 31, 2008 were $85,871, a decrease of $62,208, or 42%, from $148,079 for the fiscal year ended December 31, 2006. The decrease in professional fees was due to the elimination of previous legal fees required in connection with litigation surrounding the Ronald Kelly, et al and Investor Relations Services, Inc. matters.
Depreciation
Depreciation for the fiscal year ended December 31, 2008 was $36,250, a decrease of $10,476 from $46,726 for the fiscal year ended December 31, 2007. The decrease in depreciation is the expected result of assets reaching their expected useful lives.
Total Expenses
Total expenses for the fiscal year ended December 31, 2008 were $820,169, a decrease of $716,168, or 47%, from $1,536,337 for the fiscal year ended December 31, 2007. The decrease in total expenses was primarily due to a reduction in general and administrative expenses and professional fees.
Net Operating Income (Loss)
Net operating income for the fiscal year ended December 31, 2008 was $658,344, versus a net operating loss of $1,127,841 for the fiscal year ended December 31, 2007, a change of $1,786,185. The generation of net operating income for the year ended December 31, 2008 was primarily attributable to the decrease in overall expenses and increased sales activity during the year ended December 31, 2008.
Financing Costs
Financing costs for the fiscal year ended December 31, 2008 were $245,813, an increase of $200,384, or 441%, from $45,429 for the fiscal year ended December 31, 2007. During the year ended December 31, 2008, we paid significantly more financing costs associated with our credit facilities.
Interest Expense
Interest expense for the fiscal year ended December 31, 2008 was $224,758, a decrease of $11,751, or 5%, from $236,509 for the fiscal year ended December 31, 2007. The decrease in interest expense was the result of changes in interest rates during the year.
Net Income (Loss)
Net income for the fiscal year ended December 31, 2008 was $187,773 from a net loss of $1,409,779 for the fiscal year ended December 31, 2007. The transition from a net loss to net income was the result of our overall decrease in professional fees and general and administrative expenses during the year, coupled with a significant increase in overall sales and gross profit margin.
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 December 31, 2008 compared to December 31, 2007.
December 31, December 31, Increase / (Decrease) |
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 December 31, 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 August 2011.
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 December 31, 2008, the remaining principal balance was $130,000.
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
17, 2007. We also issued Mr. Knapp a warrant to purchase 50,000 shares
of our
common stock at $0.32 per share through December 31, 2008. Mr. Knapp
exercised
his option on March 30, 2007.
Centurion Credit Resources
On November 17, 2007, we entered into an agreement with Centurion Credit Resources, LLC to secure a $1,000,000 revolving credit facility that is geared specifically to our business. As of October 2008 the company renewed its agreement with Centurion Credit Resources, LLC until November 17, 2009 and as an inducement to renew the credit line was increased to $2,000,000. This facility, offered to us at market credit rates. Terms of the credit facility allow us to increase the available credit in increments of $250,000 as our business grows. We drew down on this credit line for the first time on November 30, 2007. As of December 31, 2008 we have draw down $13,527,068 and repaid $12,460,514. We believe that this facility will adequately finance our at home diabetes diagnostics business through revenues rates of $10.0 million per quarter. We are also entertaining additional proposed credit facilities with various hedge funds, commercial banks and a religious fund.
Cragmont Capital, LLC
On March 1, 2008, we entered into a Convertible Promissory Note
Purchase
Agreement with Cragmont Capital, LLC ("Cragmont") wherein Cragmont
agreed to
loan the Company an aggregate sum of $250,000. As of September 30,
2008, we
have received $75,000. The loan is for one year, maturing on February
28, 2009.
The total amount owing pursuant to the agreement, is convertible at the
option
of the lender, at a strike price equal to $0.015 per share. Further we
have
agreed to issues 100 warrants with a strike price of $0.03 expiring on
December
31, 2010 for every dollar loaned by Cragmont. During the year ended
December 31,
2008, we terminated our relationship with Cragmont. We are currently in
litigation with Cragmont.
Cash Flow. Since inception, we have primarily financed our cash flow requirements through the issuance of common stock, the issuance of notes and sales generated income. With the growth of our current business in 2008 and anticipated growth for 2009 we may, during our normal course of business, experience net negative cash flows from operations, pending receipt of revenue which often are delayed as a result of the nature of the healthcare industry. Further, we may be required to obtain financing to fund operations through additional common stock offerings and bank or other debt borrowings, to the extent available, or to obtain additional financing to the extent necessary to augment our available working capital.
Satisfaction of our cash obligations for the next 12 months.
As of December 31, 2008, our cash balance was $111,208. Our plan for satisfying our cash requirements for the next twelve months is through additional equity, third party financing, and/or debt financing. We anticipate sales-generated income during that same period of time, but do not anticipate generating sufficient amounts of positive cash flow to meet our working capital requirements. Consequently, we intend to make appropriate plans to insure sources of additional capital in the future to fund growth and expansion through additional equity or debt financing or credit facilities.
As we expand operational activities, we may continue, from time to time, to experience net negative cash flows from operations, pending receipt of sales or development fees, and will be required to obtain additional financing to fund operations through common stock offerings and debt borrowings to the extent necessary to provide working capital. . It was not until the company entered into the agreement with Centurion Credit Resources, LLC that the company could fill orders for patients and customers on a continuous basis. Until the Centurion credit line was put in place we managed to keep a small portion of our distribution activities going when our limited resources allowed us.
Given our operating history, predictions of future operating results difficult to ascertain. The recent addition of a credit line has helped but we have found it increasingly difficult to transact commerce in the very cash intensive prescription drug industry. Thus, our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of commercial viability, particularly companies in new and rapidly evolving technology markets. Such risks include, but are not limited to, an evolving and unpredictable business model and the management of growth. To address these risks we must, among other things, implement and successfully execute our business and marketing strategy, continue to develop and upgrade technology and products, respond to competitive developments, and continue to attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.
Expected purchase or sale of plant and significant equipment.
We do not anticipate the purchase or sale of any plant or significant equipment; as such items are not required by us at this time.
Going Concern
The financial statements included in this report have been prepared in conformity with generally accepted accounting principles that contemplate the continuance of the Company as a going concern. The Company's cash position is currently inadequate to pay all of the costs associated with testing, production and marketing of products. Management intends to use borrowings and security sales to mitigate the effects of its cash position, however no assurance can be given that debt or equity financing, if and when required will be available. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets and classification of liabilities that might be necessary should the Company be unable to continue existence.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results or operations, liquidity, capital expenditures or capital resources that is material to investors.
Critical Accounting Policies and Estimates
Stock-based Compensation: In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 123 (revised 2004) "Share-Based Payment" ("SFAS 123R), which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123R is similar to the approach described in Statement 123. However, Statement 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.
Recent Accounting Developments
In May 2008, the FASB issued SFAS No. 162 ("FAS 162"), "The Hierarchy of Generally Accepted Accounting Principles". FAS 162 sets forth the level of authority to a given accounting pronouncement or document by category. Where there might be conflicting guidance between two categories, the more authoritative category will prevail. FAS 162 will become effective 60 days after the SEC approves the PCAOB's amendments to AU Section 411 of the AICPA Professional Standards. FAS 162 has no effect on our financial position, statements of operations, or cash flows at this time.
As of January 1, 2008 we adopted SFAS No. 159, "The Fair Value Option for Financial Assets and Financial Liabilities" ("SFAS No. 159"). SFAS No. 159 allows the company to choose to measure many financial assets and financial liabilities at fair value. Unrealized gains and losses on items for which the fair value option has been elected are reported in earnings. The adoption of SFAS 159 has not had a material impact on our financial position, results of operation or cash flows.
As of January 1, 2008 we adopted SFAS No. 157, "Fair Value Measurements" ("SFAS No. 157"). SFAS No. 157 defines fair value and provides guidance for measuring and disclosing fair value. The adoption of SFAS 157 has not had a material impact on our financial position, results of operation or cash flows.