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MMRGLOBAL, INC. - 10-Q/A - Management's Discussion and Analysis of Financial Condition and Results of Operations
(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion of our financial condition and results
of operations in conjunction with our financial statements and related notes
appearing elsewhere in this Quarterly Report on Form 10-Q and the description of
our business appearing in our Annual Report on Form 10-K for the year ended
December 31, 2011, filed with the SEC on March 30, 2012 (the "Form 10-K"). This
discussion contains forward-looking statements, which inherently involve risks
and uncertainties. Please see "Cautionary Note Regarding Forward-Looking
Statements" below. Our actual results could differ materially from those
anticipated in these forward- looking statements for many reasons, including the
risks faced by us described in "Risk Factors" in Item 1A of the Form 10-K.
Cautionary Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains certain forward-looking statements.
The words "anticipate," "expect," "believe," "plan," "intend," "will" and
similar expressions are intended to identify such statements. Although the
forward-looking statements in this Quarterly Report on Form 10-Q reflect the
good faith judgment of our management, such statements are subject to various
risks and uncertainties, including but not limited to the following:
º Our ability to obtain financing to fund our operations;
º Our inability to generate sufficient cash flow to service our debt
obligations;
º The ability to generate subscribers for our products and services given the
current competitive landscape;
º Our ability to adapt our products to conform to any technical
specifications necessary to benefit from stimulus package funding;
º Our ability to raise dilutive and non-dilutive capital in order to meet our
financial obligations and invest in our business to grow revenues,
including risks related to our trading in the Over the Counter market;
º Our ability to launch new products or to successfully commercialize our
existing or planned products;
º Managing costs while building an effective sales and service delivery
organization for our products with our small management team;
º Our ability to maximize our legacy biotechnology assets and otherwise
protect our intellectual property assets;
º Our ability to enter into marketing arrangements with large membership and
affinity organizations for our products and maintain and grow subscribers
from such arrangements, such as those noted above, particularly after the
initial introductory period; and
º The possible invalidity of the underlying assumptions and estimates related
to our business and market;
º Conditions and actions taken or omitted to be taken by third parties,
including customers, suppliers, business partners and competitors and
legislative, judicial and other governmental authorities and officials; and
º Possible changes or developments in economic, business, industry, market,
legal and regulatory circumstances.
Assumptions related to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond our control. Any of such assumptions
could be inaccurate. You should not place undue reliance on these
forward-looking statements, which are based on our current views and
assumptions. In evaluating these statements, you should specifically consider
various factors, including the foregoing risks and those outlined under "Risk
Factors" in Item 1A of the Form10-K. Our forward-looking statements represent
estimates and assumptions only as of the date of this Quarterly Report on Form
10-Q. Except as required by law, we undertake no obligation to update any
forward-looking statement to reflect events or circumstances occurring after the
date of this Quarterly Report on Form 10-Q.
Overview
Background
We provide secure and easy-to-use online Personal Health Records ("PHRs") and
electronic safe deposit box storage solutions, serving consumers, healthcare
professionals, employers, insurance companies, professional organizations and
affinity groups. MyMedicalRecords enables individuals and families to access
their medical records and other important documents, such as birth certificates,
passports, insurance policies and wills, anytime from anywhere using the
Internet. The MyMedicalRecords Personal Health Record is built on proprietary,
patent pending, issued and applied for technologies to allow documents, images
and voicemail messages to be transmitted and stored in the system using a
variety of methods, including fax, phone, or file upload without relying on any
specific electronic medical record platform to populate a user's account. The
Company's professional offering, MMRPro, is designed to give physicians' offices
an easy and cost-effective solution to digitizing paper-based medical records
and sharing them with patients in real time. Since receiving the first notices
of allowance in late 2011, the U.S. Patent and Trademark Office has issued the
Company a total of four patents and one additional notice of allowance
pertaining to the "Method and System for Providing Online Medical Records" and
"Method and System for Providing Online Records". Such patents had been applied
for as early as 2005 and the Company believes these patents along with the
remaining pending and applied for claims represent a competitive barrier to
entry and create a competitive advantage for the Company which the Company is
looking to leverage through licensing agreements. For a description of our
corporate organizational history prior to the date hereof, please see Note 1 to
our financial statements.
Source of Revenues
We derive our revenues from the provision of services, which are comprised of
facilitating electronic access to consumer medical records and other vital
documents, as well as international licensing of our services. We offer our
services to subscribers either on a direct subscription basis or an "access"
basis through various types of organizations, and in both cases, we record these
revenues under "Subscriber" in our income statement. On a direct subscription
basis, which we use when we market our products direct to consumers or wholesale
through corporations to their employees, or through affinity and membership
organizations to their members, the subscriber pays us directly with a credit
card or PayPal account either on a monthly or annual plan. On an access basis,
which we currently use only with corporations, affinity and membership
organizations, hospitals and other business to business customers, we charge a
monthly fee to the organization based on the number of users who will have
access to our services through such organization, whether or not such users
actually enroll. During the three and nine months ended September 30, 2012, the
Company received $31,017, and $130,943 from subscriber revenues, respectively,
which represents 9.0% and 18.3% of our revenues for such periods, respectively.
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We also derive our revenues from the sale of our MMRPro system, which includes a
high-tech scanner, various licenses to use third party software, a license to
use MMR's proprietary MMRPro application software, dedicated telephone lines,
secure online storage and warranties. Installation and training are provided as
part of the agreement. Software licenses, telephone lines, online secure storage
and warranties are provided over the three year term of the agreement. Our
customers pay these contracts in advance and are not refundable. We allocate the
revenue derived from these arrangements among all the deliverables, based on the
relative selling price of each deliverable. With the exception of MMR's
proprietary MMRPro application software, we used third party evidence to set the
selling prices used for this allocation. During the three and nine months ended
September 30, 2012, the Company received $314,804, and $425,083 from MMRPro
revenues, respectively, which represents 91.0% and 59.3% of our revenues for
such periods, respectively.
On September 27, 2012, the Company signed an agreement with VisiInc PLC, which
is incorporated in this filing as Exhibit 10.1, for the sale of a minimum of
1,275 MMR Pro systems through a large reseller of medical products and services
to health care professionals. As of September 30, 2012, we had delivered the
first 25 MMRPRo systems. In addition, the agreement obligates VisiInc PLC to
purchase a minimum of 50 MMRPro by the first quarter of 2013. MMRPro will be
bundled with other Visi products and marketed as VISI MMRPro. The VISI MMRPro
systems are being sold through the Seagate VAR and OEM channels, which includes
a syndicate of Seagate VARs, as well as through the Burkhart Dental channel, as
part of a Seagate/Visi/MMR/Via3 product bundle. The entire product bundle will
be featured at the Synnex VAR conference "Varnex" in Las Vegas on November 14,
2012 to an estimated 700 VAR partners.
The bundle offering also includes Seagate's Network Attached Storage ("NAS")
Boxes (NAS440), which, when connected to VISI MMRPro, will store documents and
images created in the VISI MMRPro system in the NAS boxes, as well as in MMRPro.
Initially, the Agreement calls for exclusivity in the dental market through
Burkhart Dental ("Burkhart"), which has an estimated 24,000 dental office
clients. Burkhart has already begun the process of installing MMRPro systems in
several of its dental clients' offices. Although the Agreement is based on
selling exclusively to the dental channel, VISI has subsequently requested
exclusive rights to include, legal, accounting and other verticals. As a result,
the Company believes the number of units may increase.
We are also generating revenues from the licensing of our biotech assets, which
may include non-refundable license and up-front fees, non-refundable milestone
payments that are triggered upon achievement of a specific event and future
royalties or lump-sum payments on sales of related products. We record these
licensing revenues under "License Fees - Biotech" in our income statement. We
are sometimes paid an upfront license fee and milestone payments and we
recognized these fees as revenue as payments were received. During the three and
nine months ended September 30, 2012, the Company received $0, and $100,000 from
Celgene, respectively, which represents 0% and 13.9% of our revenues for such
periods, respectively.
We also have generated revenues from licensing the sale and marketing of our
services internationally and, to a lesser extent, from ancillary fee payments
including web and marketing development services, amongst others. We record
these licensing revenues under "License Fees" and other ancillary revenues under
"Other Revenues" in our income statement. When we enter into a licensing
arrangement, we are sometimes paid an upfront license fee and typically receive
ongoing royalty payments that are often based on a percentage of revenue earned
by our licensee. We recognize these fees over the license period. When we
receive ancillary one-time payments, we record them when services or products
are delivered.
In addition, we plan on generating future revenues from the licensing of our
biotech and health IT patents. In the third quarter of 2012, we retained the law
firm of Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor LLP (Liner)
to lead the effort. With Liner's assistance, we will pursue markets that rely on
the Company's patented health IT technologies, including hospitals, healthcare
providers and physician group practices using document management, imaging,
faxing and/or sharing of paper-based medical records into digital online
Personal Health Records. The Liner firm will protect and monetize the Company's
intellectual property, including the past, present and future use by third
parties of its health IT and Biotech patents. Liner will also work with existing
consultants and bankers to identify markets and potential infringers, including
healthcare IT service vendors and healthcare providers. We will record those
fees as revenue as payments are received. These fees may include non-refundable
license and up-front fees, non-refundable milestone payments that are triggered
upon achievement of a specific event and or future royalties or lump-sum
payments on sales of related products.
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Cost of Revenue
Our cost of revenue includes the cost of maintaining our voice and fax
mailboxes, long-distance call transport costs, fax and voice call processing
costs, credit card transaction processing costs, web hosting and management
fees, website maintenance and support costs, costs associated with creating and
mailing enrollment packages to our subscribers and the cost of Kodak scanners.
Cost of revenue also includes customer service costs. We also charge to cost of
revenue our direct selling costs, which include commissions paid to sales
representatives who sell our wholesale and access based accounts.
Operating Expenses
The largest component of our operating expenses is our general and
administrative expenses, which include personnel salaries and benefits, office
rent and supplies, insurance costs, fees for legal and professional services, as
well as our expenses for corporate telecommunications and internet access not
associated with our products. Our operating expenses also include sales and
marketing expenses (which include expenses associated with attending trade shows
and travel costs, as well as a portion of personnel salaries allocated to sales
and marketing activities), as well as technology development expenses (which
includes expenses related to research and development as well as a portion of
personnel salaries allocated to development activities).
Recent Accounting Pronouncements
For a description of recent accounting pronouncements and how we apply such
pronouncements to our financial statements, see the accompanying notes to our
consolidated financial statements appearing elsewhere in this Quarterly Report
on Form 10-Q.
Factors Affecting Future Results
Intellectual Property
Over the past year, we have been focusing on maximizing the value of our
intellectual property portfolio, mainly the Health IT patents that have been
granted since the end of last year. To that end, the Company announced in August
that it had retained the law firm of Liner Grode Stein Yankelevitz Sunshine
Regenstreif & Taylor LLP ("Liner") as patent litigation counsel to assist us in
monetizing our extensive patent portfolio of global Health IT patents and
biotechnology assets. Due to changes in U.S. healthcare laws, most notably the
HITECH Act of 2009, healthcare professionals are being required to provide
patients with online access to their personal health information by 2014. We
believe that the Company holds significant foundational patents which are
relevant to providers who communicate health records in that they limit their
ability to communicate without infringement.
In September, the Company began the process of pursuing claims for infringement
against hundreds of healthcare providers and other organizations that use
document management, imaging and faxing solutions to transmit medical records
into digital online Personal Health Records in manners that could infringe on
our intellectual property. MMR is also offering a program of annual renewable
licenses to healthcare professionals that are not providing MyMedicalRecords.com
or using the Company's MMRPro document management and imaging solution.
In the third quarter, the Company was successful in receiving two additional
Notices of Allowance ("NOA") granted by the United States Patent and Trademark
Office (as detailed below in the "MMRGlobal Health Information Technology
Patents" section) with one of the two having become an issued patent in October
2012, which helped to strengthen our health IT portfolio and raised the bar for
PHRs. The Company believes that the new patents make it extremely difficult to
comply with certain MU requirements under HITECH without a license from MMR for
the Company's IP.
The MMR patent portfolio was created in conjunction with the intellectual
property law boutique of McKee, Voorhees & Sease, P.L.C. ("MVS"). MVS has worked
with MMR from the beginning and continues to assist in building U.S. and
international patent portfolios in the health information technology and
biotechnology areas.
Exploiting MMRGlobal Biotech Assets and Patents
Although the Company's primary business is the Web-based storage and management
of personal and professional health and vital records, we acquired intellectual
property rights to certain biotech assets through the Merger with Favrille, Inc.
which currently includes 3 U.S. patents, 4 U.S. pending patent applications, 6
patents in foreign countries and 14 pending patent applications in foreign
countries. Pre-Merger, the Company spent more than $140 million in development
of the biotech assets, which are comprised of patents, patient samples and data
from the FavId™/Specifid™ idiotype vaccine trials and our proprietary anti-CD20
antibody panels to treat B-cell lymphoma and additional B-Cell mediated
conditions such as rheumatoid arthritis. Subsequent to the Merger, we have
recovered additional intellectual property, including certain physical assets
used by Favrille, Inc. in the form of over 1,800 patient tissue samples, samples
of the B-Cell vaccine, a collection of insect cells used in the manufacture of
the vaccine and other materials collected during the Company's pre-Merger
FavId™/Specifid™ vaccine trials. The insect cells are of a particular kind
believed to be susceptible to a particular baculovirus infection providing
unique utility including Trichoplusia ni (Hi-5) and Spodoptera Frugiperda (Sf9)
cells which are important to the Company and a material element in its issued
patents numbers 6,911,204, 8,114,404 and 8,133,486 as well as pending patent
applications.
The Company was granted a Notice of Allowance from the Mexican Industrial
Property Institute (the equivalent to the United States Patent and Trademark
Office) during the second quarter for the patent entitled "Antibodies and
Methods for Making and Using Them" (Patent No. MX302058). After successfully
prosecuting the breadth of the allowed Mexican Patent, the patent was granted to
cover all of the Company's proprietary antibodies that have particular utility
in fighting cancers. The Mexican Patent represents the first of the Company's
patents for its anti-CD20 monoclonal antibody assets. Patents for the Company's
antibodies are also pending in a number of additional countries including the
United States, Australia, Brazil, Canada, China, Hong Kong, India, Europe, Japan
and Korea. The anti-CD20 monoclonal antibodies are considered valuable assets of
the Company based on the commercial value and benefits demonstrated by Rituxan®,
the first monoclonal antibody approved by the FDA with reported sales of $7.1
billion in 2011. Rituxan is due to go off patent in 2015.
MMRGlobal's biotech patents also include the B-Cell vaccine patents and patent
applications entitled "Method and Composition for Altering a B Cell Mediated
Pathology" which relate to methods of manufacturing compositions for B-cell
vaccines used in the fight against lymphoma and potentially other forms of
cancer, including U.S. Patents 6,911,204, 8,114,404 and 8,133,486. An additional
manufacturing divisional patent application was filed with the Mexican
Industrial Property Institute in the third quarter after the awarding of a
second Mexican patent No. MX302477 in June to further enhance the protection of
the manufacturing patents already issued in various countries, including the
U.S. The Company continues its pursuit of robust patent protection around the
world in various countries of commercial interest.
In addition to our patent litigation firm, Liner Grode Stein Yankelevitz
Sunshine Regenstreif & Taylor, and our investment banking firm, B. Riley, we
continue to work with scientists and experienced venture capitalists to assist
us in generating revenue through licensing agreements as would be usual and
customary in that industry. Moreover, we plan to continue pursuing license
agreements with companies like Celgene that have expertise in the area of
biotechnology and specifically in treating lymphomas and other cancers, and
which can benefit from the use of our clinical and scientific data.
MMRGlobal Health Information Technology Patents
Currently, the Company's health IT patents have been either issued or are
pending in more than 13 countries, and our Personal Health Records patent
portfolio has been the subject of worldwide rigorous examination creating a
significant licensing opportunity to companies providing EMR or electronic
health information services globally. The Personal Health Records patent
portfolio is in addition to our portfolio of biotech patents and includes issued
patents on our MyMedicalRecords.com, MyEsafeDepositBox.com and MMRPro document
imaging and management systems as well as the pending provisional patents and
utility applications in the U.S. and numerous other countries around the world.
MMR began applying for its patents in 2005. After more than seven years of
effort and the expenditure of millions of dollars in technology on behalf of our
shareholders, the Company's bankers and analysts believe the licensing of our
health IT patent portfolio could represent substantial ongoing revenue to the
Company.
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Following the approval of three of our patents by the United States Patent and
Trademark Office ("USPTO") in the first quarter directed at a "Method and System
for Providing Online Medical Records," we were granted a similar patent in April
by the Mexican Industrial Property Institute, and most recently going into the
fourth quarter, received two additional Notices of Allowance from the USPTO for
health information technology patents, including U.S. Serial No. 13/041,809 and
13/352,026, making a total of five U.S. patents with additional patent
applications still pending. The latest two issuances are most significant in
that they cover aspects of the exchange of protected health information to and
from patients, doctors, pharmacies, insurance providers and other healthcare
professionals in forms including, but not limited to, email, text, phone,
facsimile and web-based portals. The latest issuance, 13/352,026, was filed on
January 17, 2012 and received a Notice of Allowance in less than nine months.
The patent portfolio is believed to be relevant to providers of online medical
records and transmitters of electronic health records in that it will limit
their ability to communicate protected health information without potentially
infringing. The Company is in the process of negotiating licensing agreements on
terms that will allow MMR's Personal Health Record to be sold as an
Administrative and General cost under reimbursed managed care plans such as
Medicare and Medicaid.
After the latest patent issuances, MMR believes it holds significant
foundational patents entitled "Method and System for Providing Online Medical
Records" and "Method and System for Providing Online Records" and that the
patents are relevant to any provider who transmits Electronic Health Records in
that they limit their ability to communicate without infringement. Accordingly,
the process of enforcement and licensing of its patent portfolio through the law
firm, Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor LLP, has
continued to build throughout the third quarter including a campaign of sending
250 letters per week to hospitals, medical groups, pharmacies and other
healthcare professionals as part of efforts to license the MMR IP.
Starting in 2014, Meaningful Use requirements mandate that patients receive
timely online access to their personal health information. The Company believes
that the claims in its patent portfolio provide solutions necessary and
desirable for healthcare providers to meet those requirements. Because the MMR
HIT Patents issued thus far have priority dates in advance of the relevant
Meaningful Use requirements, the Company believes that its patent portfolio
makes it difficult for eligible healthcare professionals to fully qualify for
incentives under the HITECH Act without licensing from MMR. Also, because of
government incentives, there will continue to be increased interest and need by
hospitals and physician groups to deploy Web-based patient portals that have
access to medical records.
The Liner law firm is also representing the Company in the collection of $30
million dollars under the Company's Settlement and Patent License Agreement with
SCM as further described in our Litigation Matters section herewith.
The Company also has hundreds of patent claims in pending U.S. applications,
including 17 U.S. utility and provisional patent applications related to health
information technology. These include applications directed towards a Mobile
Platform for Personal Health Records, a Method and System for Managing Personal
Health Records with Telemedicine and Personal Health Monitoring Device Features,
Prepaid Card Services related to Personal Health Records, a Universal Patient
Record Conversion Tool, Aggregation of Data from Third Party Systems into a
Personal Health Record Account and Electronic Health Records in Clinical Trials.
The Company believes that many of the pending claims will ultimately be allowed
including both health IT and non-health IT/medical applications which are
pending in the Company's entire patent portfolio. We also have 5 patents in
foreign countries and 9 pending patent applications in foreign countries, and
one pending Patent Cooperation Treaty ("PCT") application.
Our patent portfolio also includes numerous other issued patents and pending
applications in the U.S. and countries of commercial interest including
Australia, Singapore, New Zealand, Mexico, Canada, Hong Kong, Japan, South
Korea, Israel and European nations.
Competition
Major competitors include NoMoreClipboard.com, WebMD Health Manager,
MyMediConnect and Zweena Health, however, MMR believes that it offers the most
comprehensive, universal, versatile and easy-to-use service creating a
competitive advantage in the marketplace:
º Universal PHR built on patented telecommunications platform that seamlessly
integrates Internet, fax, and voicemail technologies to transmit, store and
share medical records enabling multi-platformed, multi-channeled and more
connected healthcare.
º Interfaces/communicates with virtually any EMR platform (easy integration
capability).
º More cost-effective and easy-to-use interface relative to other options
(competitors offer limited document management capabilities).
º Company's numerous patents and IP act as a barrier to entry.
Moreover, even though we are competing with companies that spend hundreds of
millions of dollars in the health IT market, we have managed to spend a fraction
of that amount and still enjoy strategic partnerships and sales and licensing
agreements designed to generate revenues with companies such as UST Global,
4medica, Alcatel-Lucent and ng Connect, Chartis Insurance, Coverdell, China
Joint Venture Partner Unis-Tonghe Technology (Zhengzhou) Co., Ltd., Australian
licensee VisiInc PLC, Eastman Kodak, E-mail Frequency, Fujitsu Computer Products
of America, Inc., Interbit Data, MedicAlert, REACH Air Medical Services, Mickey
Fine Pharmacy, St. Helens Hospital in the United Kingdom, XN Financial, VIDA
Senior Resource, Inc., and healthcare providers and surgery centers across the
United States. The Company has also entered into agreements to provide its
products and services through Mobile Home Park chains, Evolution Fitness
(formerly Gold's Gyms), and Datavo Business Data & Voice Solutions, and is
planning on launching services under an amendment to its Chartis/AIG Agreement
with Travel Guard.
Although we have competition, we believe that our product is the most robust and
comprehensive product in the market and we feel confident that the patents
surrounding the products will prove to have tremendous potential in the end.
This was made clearer by the 2012 National Physicians Survey published in June,
which showed that fax remains the predominant form of communication for 63% of
healthcare providers. While 33% of physicians use a laptop, 20% use Smartphones
and 12% use iPads in their practices, the fax is "still king with physicians"
along with the telephone. We believe this survey further highlights the value of
our patented products and services since telephone and fax make up the backbone
and infrastructure of the Company's SaaS Personal Health Record and professional
document management systems.
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Marketing and Sales
Marketing Update
Demand for both our consumer and professional medical records products is driven
primarily by the U.S. healthcare market and the health information technology
market. We are expanding our consumer market through strategic partnerships with
nurse advocates, local pharmacies, home healthcare specialists, and medical
supply companies, all of whom have significant one-on-one relationships with
patients who can benefit immediately from the use of our PHR. Likewise, we have
created a retail consumer model through the use of prepaid Personal Health
Record cards, which will be sold through retail brick and mortar outlets. On the
professional side, demand is increasing in the field of ambulatory surgical
centers and EMR systems as well as other clinics looking for an elegant and
cost-effective scanning and document management solution. We also view specialty
practice areas such as pediatrics, chronic care illnesses and geriatrics as
fertile grounds for expanding the MMRPro solution with the integrated patient
portal MMRPatientView.
With the use of teleconsulting and telemedicine becoming increasingly prevalent
in healthcare, our MyMedicalRecords PHR solution provides a well-suited platform
to facilitate collaboration between patients and their doctors and other
healthcare providers with the ease of use and integration the solution provides.
Through the Company's relationship with ngConnect and Alcatel-Lucent, we have
launched a telemedicine reporting module inside the MyMedicalRecords PHR and are
further working on identifying strategic partners to send medical information
through our portal. We are also actively working with ng Connect to assist the
Company in taking our Personal Health Record products and services into Alcatel-
Lucent's government and telecommunications clients. Additionally, we are
continuing to work with major telecommunications companies to bring the
MyMedicalRecords.com Personal Health Record to Smartphones. We continue to be
actively involved in meetings with Verizon. The Company believes that its
patents give us a competitive advantage when negotiating services with the major
carriers since many mobile phones receive fax.
As previously reported, we are working with 4medica to integrate our PHR with
laboratory reporting services which is used by tens of thousands of doctors
nationwide. Once this application is available, information will be put directly
into subscribers' accounts and users will be able to view their laboratory
report results in binary format, meaning they will also be able to chart and
graph this data. The ability for consumers to directly access their lab report
results is also a national initiative being driven by the Department of Health
and Human Services which under "new rules" seeks to expand the rights of
patients to gain access to test results reports directly from labs using health
IT solutions. We also are working with 4Medica to create a "fax portal" for
their 30,000 doctors to facilitate better handling of the still large number of
lab results that are paper-based in their network. That portal, which creates a
significant new revenue stream for the Company, was completed in September and
is expected to begin to be made available by 4Medica to its client doctors in
November.
Under the Health Information Technology for Economic and Clinical Health Act
(HITECH), which was part of the 2009 American Recovery and Reinvestment Act
(stimulus bill), a core "Meaningful Use" objective requires that for physicians
to qualify for government incentive payments, they need to provide more than 50%
of their patients with timely electronic copies of their personal health
information in Stage 1, transitioning to the same measure of patients being
provided the ability to view online, download and transmit their health
information in Stage 2, and at least 90% of patients in Stage 3 by 2014. This is
believed to be spurring eligible healthcare professionals to seriously focus on
how they will offer Personal Health Records to their patients. As a result, the
Company entered into such strategic partnerships in the last year as we have
with UST Global and Interbit Data, the latter to provide our MMRPatientView
portal to users of the MEDITECH EMR system. MEDITECH is being used by more than
650 hospitals nationwide. Although the solution is only deployed for MEDITECH at
this time, we believe that it can work with virtually any EMR platform, which
opens up a significant new market opportunity for us.
On the professional side, after nearly three years of development, the Company
launched the modules that enable physicians to receive and send faxes from
inside a fully functional EMR. Partnered with 4medica, we began incorporating
our EMR/EHR Fax Communications Gateway in 4medica's Certified Meaningful Use
Integrated Electronic Health Record (4medica iEHR®) at the end of June. 4medica
provides the industry's leading cloud clinical integration platform and
solutions and the program will also use MMR's patented document management and
imaging solution to facilitate electronic consultations for both inbound and
outbound referral letters. 4medica will pay monthly minimum usage and patent
licensing fees based on the size of the Gateway plus a 20% royalty on revenues
generated from healthcare providers.
We plan to continue to take advantage of the burgeoning consumer health
information market and leverage federal legislation and initiatives. Beyond
HITECH, we believe that the healthcare reform legislation passed by Congress and
signed by the President into law in March 2010 (Patient Protection and
Affordable Care Act, or ACA) also represents a significant behavioral shift in
how consumers will manage their healthcare because of the requirement that most
everyone have insurance. After the U.S. Supreme Court heard oral arguments
challenging the law during the last week of March 2012, the Court announced its
ruling on June 28 to uphold most of the healthcare reform law, which includes
the individual mandate requiring most U.S. residents to have health insurance.
Although the ruling did not touch directly on health IT or affect the federal
incentive programs for EMR/EHR adoption, healthcare reform is now able to move
forward with greater clarity. The challenges created by the influx of newly
insured to better manage the cost of their care along with the administrative
efficiencies mandated by the ACA should see greater demand for health IT
solutions such as those provided by MMR.
With government mandates and stimulus building both awareness and momentum for
personal and electronic health records, others not directly affected by
Meaningful Use incentives are driving healthcare technology to control
healthcare spending, and we began recalibrating our marketing and sales
strategies in 2012 to allocate resources in these areas. These include
pharmacies that can offer patients drug interaction tools within a PHR and
prescription refill reminders, the patient-centered medical home where
caregivers placed PHRs at the top of their list of technologies that can best
support their practice issues, retailers who can use this as a tool to create
stickiness and build loyalty programs at the point-of-sale, and the world of
telemedicine where data from remote patient monitoring devices is transmitted by
smartphones into a patient's PHR for sharing by the entire medical team, such as
what the Company is doing with Alcatel-Lucent.
It should also be noted that demand is not solely U.S.-centric. As health IT
spreads around the globe, and other countries intensify their focus on
controlling healthcare costs through the improved use of information technology,
we are seeing increased demand internationally. This expansion and increased
demand is evidenced by the Company's agreements in China, Australia and other
countries in development to offer Personal Health Record and electronic document
management and imaging services. Moreover, in a global economy, companies are
increasingly sending employees overseas, a practice which is expected to
increase demand for our MyMedicalRecords PHR or MyEsafeDepositBox among ex-pats,
particularly in Europe and the Middle East. Additionally, the growth of health
IT at home and abroad is further impetus for ensuring the protection and
enforcement of our patents worldwide.
20
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Sales Update
MyMedicalRecords PHR
In Q1 2012, we analyzed our sales and distribution strategy and identified eight
vertical business opportunities designed to generate accelerated revenue by
putting Personal Health Records directly into the hands of consumers. These
verticals are: independent pharmacies, pharmacy chains and other mass
merchandisers, visiting nurses, caregivers, patient advocates, in-home sales
affiliates, hospitals and medical supply companies. The Company believes that it
will be able to efficiently and profitably gain traction in these markets to
create revenue that will allow us to focus on many larger strategic, government,
international and licensing opportunities such as the MMR's agreements with
Chartis Insurance, MedicAlert, Unis-Tonghe in China and VisiInc in Australia,
which take long periods of time and significant capital to incubate and develop
to their full revenue potential.
As part of the strategy, we are in the process of creating a national sales
representative network that will be able to bring us into the larger retail
accounts such as chain pharmacies. The Company is completing the agreement
process with the first of these representatives and expects to be calling on
large retailers by end of Q3. Consumers will be able to purchase a Prepaid
Personal Health Record card at retail, which will be manufactured in a high
quality credit-card style. The package surrounding it will provide information
on the PHR service to encourage both initial purchase and then active use.
Because the prepaid card is high quality, emergency personnel will be able to
find it in a user's wallet in the event of a medical emergency, which reinforces
the special Emergency Login feature of the MMR product. The Company plans to
have a magnetic stripe on the back of the card as well, which will allow us to
offer the prepaid product in conjunction with pharmacy or store loyalty
programs. In September, the Company hired Mike Dietrich, a business executive
formerly with Office Depot, School Specialty and Troxell Communications, to
assist the Company with leading the effort to sell its MyMedicalRecords Personal
Health Record products and services to retailers, with particular focus on the
launch of MMR's Prepaid Personal Health Record cards at retail. Dietrich will
also manage sales to the education marketplace including schools and
universities. A nine-year veteran of the United States Air Force, Dietrich will
also assist the Company with programs for Veterans, including connecting to
MMRGlobal's MyBlueButton.com initiative. Additionally, Dietrich will use his
experience and expertise to work with CEO Bob Lorsch on the sale of Emergency
Services through Personal Health Records to major wireless carriers and cell
phone retailers and operators.
In addition, the Company is working to create partnership programs with
caregivers who can distribute its product to patients who most need a Personal
Health Record. The Company is in the process of launching its program with VIDA
Senior Resource, Inc., a family owned and operated community resource
organization headquartered in Boise, Idaho, which provides senior home care
services nationwide through a network of certified owned and operated agencies.
It is estimated that our product will be sold to some 50,000 patients. It is
important to note that VIDA will be selling the PHR at a significantly higher
price point, $19.95 per month or $199.95 annually, than it is currently being
sold direct to consumer on the Company's Website. The Company has conducted
several trainings for VIDA personnel in preparation for rolling out the product
to VIDA clients. At the same time, the Company announced relationships with
patient advocates who are selling the MyMedicalRecords PHR directly to their
clients. The Company also attended the Visiting Nurses Association of America
trade show in Phoenix in order to begin to create distribution to that channel
in which 90,000 nurses work with nearly 4 million patients nationwide. The
Company has conducted training for Vida offices in Las Vegas and in San Diego
and is now rolling out a telemarketing program with the San Diego office, which
deals with private pay rather than Medicare clients. In addition, the Company is
beginning to work with Vida's Assisted Transition franchisees to make the
Personal Health Record part of their offering to the clients they help to move
into assisted living and nursing homes. It is expected that this program will
begin to be tested late in the fourth quarter. The programs the Company has
created for Vida are requiring significant lead time, training and testing to
deploy.
We are actively working with E-mail Frequency and its partners, AmeriDoc™ and
National Benefit Builders, Inc., on embedding MyMedicalRecords in benefit
programs as part of a suite of healthcare products and services.
The Company recently introduced a new enhanced service called Personal Touch, in
which a credentialed health professional collects the medical records on behalf
of a MyMedicalRecords.com subscriber, then works with the subscriber to organize
the records and put them into the PHR. The Company believes that the new service
will help to speed-up adoption of the PHR product because it removes the need
for the user to collect his or her own medical records, thus providing a
tremendous convenience. The Personal Touch service also is sold at a premium
price - $179.95 annually instead of $99.95 annually. Initial test marketing of
the product has shown very promising metrics and we believe that the Personal
Touch concierge service can make a significant contribution to our subscriber
revenues beginning in Q3 as the marketing program expands after successful
testing of the concept. The above is in addition to our ongoing main sales
channels focused on healthcare professionals, direct to consumer, corporate
sales, insurance companies, affinity group and membership organizations.
In the second quarter, the Company increased utilization of social media
(YouTube, Facebook, Twitter) to enhance brand loyalty for our MyMedicalRecords
PHR and connect with a greater number of potential users. The Facebook
advertising campaign that we have been running delivered 20.7 million
impressions in the month of June. The campaign uses targeted messages which
drive people to both disease-specific and family wellness pages such as
www.mymedicalrecords.com/diabetes and www.mymedicalrecords.com/family. In the
fourth quarter, the Company also is expected to roll out an affiliate marketing
program, in which marketing partners such as list publishers and health-related
websites will be offered the ability to bring the Personal Health Record to
their customers on a "Per Acquisition" basis, which means MMR only pays them if
the Company received a paid subscription. This program will give MMR the ability
to put its marketing message in front of millions of new eyeballs, in a targeted
way, without having to pay cost of advertising upfront.
MMRPro
Sales of MMRPro are being directed at physicians, particularly small group and
sole practitioners who still do not have any way to digitize the paper in their
offices and who do not want to invest the hundreds of thousands of dollars
necessary to implement an EMR system, community hospitals and other clinics
which do not have the funds or technology resources to invest in a fully
functional EMR system, surgery centers and specialty clinics, and EMR and EHR
vendors who are looking for a way to bring a patient portal into their systems
without having to build their own import modules. We also work with document
imaging sales and distribution channels, and the Company is utilizing
distribution networks of companies who already sell other products into doctor
offices. These distribution partners also help increase our integration and
support network.
We are also continuing to build relationships with companies managing Ambulatory
Surgical Centers (ASCs), and in the second quarter we signed two additional
agreements with, Regent Surgical Health to install MMRPro systems. The MMRPro
systems were installed at facilities managed by Regent in Fort Myers, Florida
and New Brunswick, New Jersey. The Company expects additional agreements in
Chicago, Illinois this quarter. These sales are in addition to previous sales of
MMRPro systems for Regent, a leading surgery center management and development
company that currently manages more than 20 facilities nationwide. Additionally,
through our partnership with Interbit Data, we created a joint software solution
that allows hospitals and other clinical facilities to use a Meaningful Use
certified solution to instantly make health information available to patients
securely over the Internet using MMRPatientView from any EMR system without
first having to scan, fax or print any documents. The Interbit Data-MMR module,
which the Company presented at the International MUSE Conference in May-June, is
already being installed in hospitals and is certified for Meaningful Use with
MEDITECH systems.
21
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In June, we announced a new business arrangement with Fujitsu Computer Products
of America, Inc., one of the world leaders in scanning solutions, which
incorporates MMRPro with their new ScanSnap N1800 Network Scanner. Utilizing a
proprietary interface created by DocuFi™, the document imaging solution offers
smaller physician offices, community hospitals and surgery centers the MMRPro
system as a lower cost service alternative to digitize medical records.
In September, the Company signed an Agreement with VisiInc, which has committed
to selling an initial 75 units, of which the first 25 have been delivered, the
next 25 are scheduled to be delivered by the end of the fourth quarter, and the
remaining 25 in the first quarter of 2013. Starting in the second quarter of
2013, the agreement calls for the reseller to purchase or license a guaranteed
minimum of 100 additional MMRPro systems per quarter over the life of the
three-year contract, which represents a minimum of $5 million to $16.8 million
in revenues in addition to $1,050,000 for the first 75 units. VisiInc's primary
focus is distributing the MMRPRo product into the dental channel, which
represents a new opportunity for the Company.
China
In June 2012, the Company received its official business license from the
Chinese Government to operate the Unis Tonghe MMR International Health
Management Service Co., Ltd. Joint Venture (the "JV"). The license enables the
JV to develop medical information management software, medical information
technology software, health records management systems, and provision of related
services, including the Company's Personal Health Record systems. The JV will
offer its products and services to the Chinese government, hospitals, healthcare
facilities and to the public, and is valid through 2042. The completion of the
definitive Joint Venture agreement between MMR and Unis-Tonghe Technology
(Zhengzhou) Co., Ltd., or Unis, was first announced in January 2010, with the
cooperation to build a customized version of MMR's proprietary PHR services and
professional document imaging and management solutions in China. During the
application and registration process of responding to requests from the Chinese
Government, the JV has already been installing early stage EMR systems in three
hospitals in Henan Province, with a population of over 100 million. The JV,
under a 30-year operating agreement, has also begun participating in formal
government bids to commence numerous medical records projects in China, which
include continuing to offer MMR's Personal Health Record services and other
related products.
Since 2010, Alcatel Lucent has provided support to MMR in China, and MMR also
became a member of Alcatel Lucent's ng Connect program. The Unis-Tonghe/MMR JV
is working with Alcatel-Lucent to also assist the launch of MMR's Personal
Health Record products and services in China. More recently MMR has begun
conversations with ng Connect to expand that support throughout the Asia Pacific
region. As part of this relationship Alcatel-Lucent is also supporting the JV's
first installations of MMR Personal Health Records in a 10-hospital network
operating in Qinyang City and Xiuwu County in the prefecture-level city of
Jiaozuo in northern Henan Province. The 10 hospitals serve approximately one
million patients.
We also continue to leverage our resources in China with other U.S. partners on
the ground while our JV partner continues to actively support Chinese Local
Government projects utilizing our patented and patent-pending technologies,
platforms and features. Furthermore, since Alcatel-Lucent owns 50% plus one
share of Shanghai Bell Co. Ltd., and MMR's platform uses a telecommunications
infrastructure, the relationship is expected to speed-up the launch of the
Company's Personal Health Record products and services throughout China.
Australia
There is a very active market for Personal Health Records in Australia where MMR
holds dominant patents in the market. Through its Australian strategic partner,
VisiInc PLC, this includes integrating telemedicine applications, document
management solutions and sales to affinity programs. Just three weeks following
the launch of the Australian Government's Personally Controlled eHealth Record
(PCEHR) on July 1, 2012, the Department of Health and Ageing announced it was
putting the records system out to bid after two years of planning and reportedly
hundreds of billions of dollars' worth of investment. MMR and VisiInc plan to
offer a combined product that represents a solution within the PCEHR standard as
defined by the Government's National E-Health Transition Authority (NEHTA). The
Company believes this represents an enormous opportunity for both companies to
consolidate their technologies and enable VisiInc to leverage the
MyMedicalRecords Australian patent portfolio to implement a secure
NEHTA-compliant service that delivers unified integration of electronic Personal
Health Records to work with the take-up of any system, from digitizing plain
paper files to transmitting, storing and sharing digital files.
Value Added Reseller ("VAR") Networks
On September 27, 2012, the Company signed an agreement with VisiInc PLC, which
is incorporated in this filing as Exhibit 10.1, for the sale of a minimum of
1,275 MMR Pro systems through a large reseller of medical products and services
to health care professionals. As of September 30, 2012, we had delivered the
first 25 MMRPRo systems. In addition, the agreement obligates VisiInc PLC to
purchase a minimum of 50 MMRPro by the first quarter of 2013. MMRPro will be
bundled with other Visi products and marketed as VISI MMRPro. The VISI MMRPro
systems are being sold through the Seagate VAR and OEM channels, which includes
a syndicate of Seagate VARs, as well as through the Burkhart Dental channel, as
part of a Seagate/Visi/MMR/Via3 product bundle. The entire product bundle will
be featured at the Synnex VAR conference "Varnex" in Las Vegas on November 14,
2012 to an estimated 700 VAR partners.
The bundle offering also includes Seagate's Network Attached Storage ("NAS")
Boxes (NAS440), which, when connected to VISI MMRPro, will store documents and
images created in the VISI MMRPro system in the NAS boxes, as well as in MMRPro.
Initially, the Agreement calls for exclusivity in the dental market through
Burkhart Dental ("Burkhart"), which has an estimated 24,000 dental office
clients. Burkhart has already begun the process of installing MMRPro systems in
several of its dental clients' offices. Although the Agreement is based on
selling exclusively to the dental channel, VISI has subsequently requested
exclusive rights to include, legal, accounting and other verticals. As a result,
the Company believes the number of units may increase.
Results of Operations for the three and nine months ended September 30, 2012 as
Compared to the three and nine months ended September 30, 2011
Revenues.
Revenues for the third quarter of 2012 were $345,821, a decrease of $6,237 or
1.8% compared to $352,058 in 2011. Revenues for the nine months ended September
30, 2012 were $717,398, a decrease of $372,278 or 34.2% compared to $1,089,676
in 2011. The year-to-date decrease was primarily due to lower biotech license
fees, which varied based on the milestones reached in the same period as
compared to prior year.
22
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Cost of revenue.
Cost of revenue decreased by $108,747, or 51.7%, from $210,474 for the third
quarter of 2011 to $101,727 in 2012. Cost of revenue decreased by $27,789, or
6.2%, from $448,238 for the nine months ended September 30, 2011 to $420,449 in
2012. The decrease was primarily due to decreased website hosting fees and
license fees. Gross profit as a percentage of revenues was $244,094, or 70.6%
for the third quarter of 2012, as compared to $141,584, or 40.2% in 2011. Gross
profit as a percentage of revenues was $296,949, or 41.4% for the nine months
ended September 30, 2012, as compared to $641,438, or 58.9% in 2011. Gross
profit decreased for the nine months ended September 30, 2012 primarily due to
lower biotech licensing fees received as compared to prior year.
Operating expenses.
Total operating expenses increased by $76,793, or 4.9%, from $1,580,885 in the
third quarter of 2011 to $1,657,678 in 2012. Total operating expenses decreased
by $612,532, or 12.1%, from $5,053,797 in the nine months ended September 30,
2011 to $4,441,265 in 2012. General and administrative expenses increased by
$42,753, or 4.7%, from $917,525 in the third quarter of 2011 to $960,278 in
2012. General and administrative expenses decreased by $297,300, or 10.0%, from
$2,979,372 in the nine months ended September 30, 2011 to $2,682,072 in 2012.
The year-to-date decrease in 2012 as compared to 2011 was driven primarily by a
reduction in stock-based compensation expenses of approximately $68,000 and
lower consulting fees of $248,000, offset by higher office rent and office
expenses of approximately $17,000.
Sales and marketing expenses increased by $50,381, or 8.5%, from $592,910 in the
third quarter of 2011 to $643,291 in 2012. Sales and marketing expenses
decreased by $298,955, or 16.2%, from $1,840,559 in the nine months ended
September 30, 2011 to $1,541,604 in 2012. The year-to-date decrease in 2012 as
compared to 2011 was primarily due to lower investor relations costs of
approximately $229,000 and a reduction in stock-based compensation expenses of
$140,000, offset by higher marketing expenses of approximately $70,000.
Technology development expenses decreased by $16,341, or 23.2%, from $70,450 in
the third quarter of 2011 to $54,109 in 2012. Technology development expenses
decreased by $16,277, or 7.0%, from $233,866 in the nine months ended September
30, 2011 to $217,589 in 2012. The year-to-date decrease in 2012 as compared to
2011 was primarily due to an overall decrease in product management expenses.
Change in valuation of derivative liabilities.
In November 2007, Favrille issued warrants to purchase 4.4 million shares of
common stock in conjunction with a registered direct offering of common stock
and warrants. We assumed these outstanding warrants as a result of the Merger on
January 27, 2009. The value associated with these warrants was recorded as a
liability utilizing the Black-Scholes valuation model, and revalued at the end
of each quarter. The change in valuation of the warrants from the beginning to
the end of the period is recorded as change in valuation of derivative
liabilities. There was no change in valuation for the third quarter of 2012.
We also had certain non-employee options and warrants outstanding which were
accounted for as derivatives as there was a possibility, although remote, that
the Company may not have enough authorized shares to settle its 12% Convertible
Promissory Note obligations using common stock. The event giving rise to this
condition was the first Convertible Note the Company entered into on July 16,
2009. We remedied this condition on May 5, 2010 when all convertible notes were
converted into common stock and warrants granted in connection with the
convertible notes were exercised. On May 5, 2010, we again valued these
contracts using the Black- Scholes option valuation model and we recorded the
difference between the value at December 31, 2009 of $1,534,824 and the value at
May 5, 2010 of $7,397,392, as a loss on change in value of derivatives for the
year ended December 31, 2010 of $5,862,568. On May 5, 2010, we reclassified the
value of the derivative liabilities back into equity. Since then, no additional
valuation was recorded.
There was no change in the valuation of derivative liabilities for the nine
months ended September 30, 2012.
Interest and Other Finance Charges, Net.
We had interest and other finance charges, net of $113,131 for the third quarter
of 2012, a decrease of $500,113 from $613,244 in 2011. Interest and other
finance charges totaled $341,215 for the nine months ended September 30, 2012, a
decrease of $1,457,708 from $1,798,923 for the same period of 2011. The decrease
was primarily due to lower non-cash interest expense attributed to the
conversion feature and warrant issued with Convertible Promissory Notes of
approximately $1.3M and lower line of credit interest expense of approximately
$129,000.
Net loss.
As a result of the foregoing, we had a net loss of $1,526,715 for the third
quarter of 2012 compared to a net loss of $2,140,489 for the third quarter of
2011. We had a net loss of $4,485,531 for the nine months ended September 30,
2012 compared to a net loss of $6,248,027 for the same period of 2011.
Going Concern
As more fully described in Note 1 to the consolidated financial statements
appearing above in this Quarterly Report on Form 10-Q, our independent
registered public accounting firm included an explanatory paragraph in their
report on our 2011 financial statements for the year ended December 31, 2011
related to the uncertainty of our ability to continue as a going concern. As of
September 30, 2012, our current liabilities of $8,481,841 exceeded our current
assets of $625,114.
For a description of our management's plan regarding our ability to continue as
a going concern, please see Note 1 to the financial statements included above.
Liquidity and Capital Resources
As of September 30, 2012, the Company's current liabilities exceeded its current
assets by $7.86 million. We have incurred net losses of $1,526,715 and
$2,140,489 for the three months ended September 30, 2012 and 2011, respectively,
and $4,485,531 and $6,248,027 for the nine months ended September 30, 2012 and
2011, respectively. At the current level of borrowing, we require cash of
$275,000 per year to service our debt. Furthermore, not including debt service,
in order to continue operating our business, we use an average of $278,000 in
cash per month, or $3.3 million per year. At this rate of cash burn, over the
next twelve months, the Company's existing current assets will sustain our
business for approximately one to three months.
23
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In addition to the above cash burn from operations, we will be required to
obtain additional financing in order to meet the obligations for installment
payments of $621,000 under the Creditor Plan and our obligations under the
secured indebtedness to The RHL Group under the Seventh Amended Note (which had
a balance of $1,640,328 at September 30, 2012), amongst other debt obligations.
Such obligations are currently due and payable pursuant to the terms of the
notes. The components of the RHL Group Note payable and the related balance
sheet presentation as of September 30, 2012 are as follows: $1,005,974, which is
included in the line of credit, related party; and $634,353 for other
obligations due to The RHL Group, which is included in related party payables.
Traditionally, we have relied on the issuance of stock and debt to the RHL Group
to finance our activities. At September 30, 2012, we had a line of credit with
The RHL Group in the amount of $4.5 million. As of September 30, 2012,
availability under this line of credit was $1.45 million.
Furthermore, we may utilize portions of our standby equity facility with Granite
as needed. Additionally, we raised $780,000 and $1,800,858 in convertible debt
during 2012 and 2011, respectively. We expect to continue offering a limited
amount of convertible debt in 2012. The Company also expects sales from MMRPro,
its prepaid Personal Health Record cards, and fees from patent licensing
agreements to generate revenue and gross profit that will significantly improve
its monthly sales and reduce annual cash burn from operations.
Cash Flows for the three and nine months ended September 30, 2012 compared to
three and nine months ended September 30, 2011
Net cash used in operating activities for the nine months ended September 30,
2012 was $1,638,725, compared to $1,958,363 used in the similar period in 2011.
In 2012, we had a net loss of $4,485,531, less non-cash adjustments
(depreciation, amortization, common stock and warrants issued for services and
interest, change in valuation of derivative liabilities, gain or loss of
disposition of assets, stock compensation expense and the non-cash write-down of
assets) of $1,489,518, less changes in operating assets and liabilities of
$1,357,288. In 2011, cash used in operating activities included net loss of
$6,248,027, less similar non-cash adjustments of $3,609,716, plus changes in
operating assets and liabilities of $679,948. Compared to 2011, non-cash
adjustments in 2012 were lower primarily due to a decreased in stock-based
compensation expense and lower amortization of loan discount.
Net cash used in investing activities in the nine months ended September 30,
2012 and 2011 totaled $268,936 and $416,078 respectively. Compared to 2011,
investing activities in 2012 were lower mainly due to a decrease in MMRPro and
website development costs.
Net cash provided by financing activities in the nine months ended September 30,
2012 and 2011 totaled $1,639,270 and $2,191,737, respectively. Financing
activities primarily included proceeds generated from the issuance of
convertible notes, common shares and net proceeds from draw downs on our line of
credit from The RHL Group, Inc., a significant stockholder wholly-owned by
Robert H. Lorsch, our Chairman and Chief Executive Officer. Compared to 2011,
financing activities in 2012 were lower primarily due to a decreased in
convertible notes and warrant activities.
As of September 30, 2012, we had cash and cash equivalents of $42,712, compared
to $180,985 at September 30, 2011.
Description of Indebtedness
The RHL Group
For a description of our indebtedness to The RHL Group, please See Note 3 -
Related Party Note Payable, included above in this Quarterly Report on Form
10-Q.
The RHL Group's Seventh Amended Note had a balance of $1,640,328 at September
30, 2012. The components of the RHL Group Note payable and the related Balance
Sheet presentation as of September 30, 2012 are as follows: $1,005,974, which is
included in the Line of Credit, Related Party balance; and $634,353 for other
obligations due to The RHL Group, which are included in related party payables.
Total interest expense on this note for the three months ended September 30,
2012 and 2011 amounted to $39,201 and $27,930, respectively. Total interest
expense on this note for the nine months ended September 30, 2012 and 2011
amounted to $116,155 and $88,530, respectively. The unpaid interest balances as
of September 30, 2012 and December 31, 2011 were $29,478 and $24,145,
respectively.
Convertible Notes
During the first quarter of 2012, the Company entered into one Convertible
Promissory Note ("Note") with an accredited investor for an aggregate amount of
$35,000. The note carried an annual interest rate of 12%, and was convertible at
the option of the Purchaser into a number of shares of our common stock at
$0.028 per share.
During the second quarter of 2012, the Company entered into thirteen different
Convertible Promissory Notes (the "Convertible Notes") with twelve different
unrelated third-parties for principal amounts totaling $235,000. The Convertible
Notes bear interest at a rate of 6% per annum payable in cash or shares of
common stock or a combination of cash and shares of common stock. The decision
whether to pay in cash, shares of common stock or combination of both shall be
at our sole discretion. At any time from and after the earliest to occur of (i)
the approval of the stockholders' of the Company of the increase in the
authorized shares of the Company's common stock from 650,000,000 to 950,000,000;
or (ii) the availability of sufficient unreserved shares, the Company shall be
entitled to convert any portion of the outstanding and unpaid conversion amount
into fully paid and non-assessable shares of common stock. The Company elected
to convert the Notes, issuing a total of 13,250,000 shares.
During the third quarter of 2012, the Company entered into eight different
Convertible Promissory Notes (the "Notes") with eight different unrelated
third-parties for principal amounts totaling $480,000. The Notes are convertible
at the option of the Company into a number of shares of our common stock at
$0.02 per share. These Notes bear interest at a rate of 6% per annum payable in
cash or shares of common stock or a combination of cash and shares of common
stock at the option of the Company. As of September 30, 2012, $130,000 remained
unconverted.
As of September 30, 2012, a total of $1,002,808 of Convertible Notes remained
outstanding and the Company or the holders had not elected to convert their Note
balances into shares of our common stock.
Commitments and Contingencies
For information relating to our commitments and contingent liabilities, please
see Note 5 to our financial statements appearing elsewhere in this Quarterly
Report on Form 10-Q.
24
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Off-Balance Sheet Arrangements
On January 4, 2010, we entered into a Cooperation Agreement with UNIS, which we
refer to as the "Cooperation Agreement". Under the Cooperation Agreement, UNIS
and the Company agreed to form the JV for the purpose of deploying our Personal
Health Record services and document imaging and management solutions in China.
We will own 40% of the JV and UNIS will own 60% and each party will have the
right to designate two members of the JV's board of directors, with the fifth
member being a Chinese citizen mutually designated by us and UNIS. Under the
Cooperation Agreement, board actions will require the approval of more than
three of the five members of the JV's board of directors and no material actions
may be taken unless all board members are present and voting at the meeting.
Under the Cooperation Agreement, UNIS and the Company will contribute an
aggregate of 50 million RMB to the joint venture, based on each party's
respective ownership, in the form of intellectual property rights, equipment,
brand value, cash and such other consideration as may be agreed upon by the
parties. Each party's obligation to contribute to the joint venture is subject
to a number of conditions, including obtaining all necessary approvals of and
licenses from the Chinese government, as well as the joint venture meeting its
budget, goals and objectives at the time contributions are due. Under the
Cooperation Agreement, each party's contributions will be made over a period of
sixty months.
For a more complete description of the terms of the Cooperation Agreement,
please see Exhibit 10.26 in our annual Report on Form 10-K for the year ended
December 31, 2009, as filed with the SEC on March 31, 2010.
On August 10, 2010, the Company entered into a Supplementary Agreement for the
purpose of clarifying certain non-material terms of the original Cooperation
Agreement mentioned above.
On July 2, 2012, the Company received its official business license from the
Chinese government to operate the JV. The JV is officially licensed with the
Chinese government and is approved to operate and generate revenue. The license
enables the JV to develop medical information management software, medical
information technology software, health records management systems, and
provision of related services, including the Company's Personal Health Record
systems. The JV will offer its products and services to the Chinese government,
hospitals, healthcare facilities, and to the public and is valid through 2042.
The Company's entry into the Cooperation Agreement described above constitutes
the creation of a direct financial obligation.
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