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U.S. Securities and Exchange Commission
Washington, D.C. 20549
____________________
FORM 10-QSB
____________________
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
[_] For the quarterly period ended December 31, 2003.
Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act
For the transition period from N/A to N/A
____________________
Commission File No. 0-25474
____________________
MEDCOM USA, INCORPORATED
(Name of small business issuer as specified in its charter)
DELAWARE 65-0287558
State of Incorporation IRS Employer Identification No.
7975 NORTH HAYDEN ROAD, SUITE C-260
SCOTTSDALE, AZ 85258
(Address of principal executive offices)
(480) 675-8865
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes No X
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The number of shares of the issuer's common equity outstanding as of
January 28, 2004 was 38,326,532 shares of common stock.
Transitional Small Business Disclosure Format (check one):
Yes No X
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1
MEDCOM USA, INC.
INDEX TO FORM 10-QSB FILING
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2003
TABLE OF CONTENTS
PART I
FINANCIAL INFORMATION
PAGE
Item 1. Financial Statements
Balance Sheet
As of December 31, 2003 . . . . . . . . . . . . . . . . . . . . . 3
Statements of Operations
For the Three and Six Months Ended December 31, 2003
and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Statements of Cash Flows
For the Six Months Ended December 31, 2003
and 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Notes to the Financial Statements . . . . . . . . . . . . . . . . 6 - 9
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations . . . . . . . . . . . . . . . . . . . . . 10 - 15
PART II
OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 3. Control and Procedures. . . . . . . . . . . . . . . . . . . . . . . . . 15
CERTIFICATIONS
Exhibit 31 - Management Certification . . . . . . . . . . . . . . . . . . 16
Exhibit 32 - Sarbanes-Oxley Act . . . . . . . . . . . . . . . . . . . . . 17
2
PART I - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
MEDCOM USA, INC.
CONSOLIDATED BALANCE SHEET (UNAUDITED)
AS OF DECEMBER 31, 2003
ASSETS
CURRENT ASSETS
Cash $ 16,098
Accounts receivable, net of allowance of $49,525 297,107
Inventories 436,076
Prepaid expenses and other current assets 1,251
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Total current assets 750,532
PROCESSING TERMINALS, net of accum. deprec. $1,398,773 4,497,810
PROPERTY AND EQUIPMENT, net of accum. deprec. $1,207,339 214,593
GOODWILL, net of accumulated amortization of $322,575 436,423
OTHER ASSETS 17,657
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TOTAL ASSETS $ 5,917,015
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LIABILITIES AND STOCKHOLDERS' EQUITY:
CURRENT LIABILITIES:
Accounts payable $ 1,280,577
Accrued expenses and other liabilities 1,116,573
Dividend payable 23,750
Notes payable - current 109,437
Deferred revenue - current portion 1,073,126
Capital lease obligations - current portion 1,302,276
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Total current liabilities 4,905,739
CAPITAL LEASE OBLIGATIONS - long-term portion 3,890,175
NOTE PAYABLE- affiliate 1,336,482
DEFERRED REVENUE 2,509,791
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Total liabilities 12,642,187
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STOCKHOLDERS' EQUITY:
Convertible preferred stock, Series A $.001par value, 52,900 shares
designated, 4,250 issued and outstanding 4
Convertible preferred stock, Series D $.01par value, 50,000 shares
designated, 2,850 issued and outstanding 29
Common stock, $.0001 par value, 80,000,000 shares authorized,
38,679,865 issued and 38,492,878 outstanding 3,868
Paid in capital 64,135,519
Accumulated deficit (70,864,592)
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Total stockholders' equity (6,725,172)
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 5,917,015
=============
See the accompanying notes to these unaudited financial statements.
3
MEDCOM USA, INC.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
Three Months Ended Six Months Ended
2003 2002 2003 2002
-------------------------- --------------------------
REVENUES:
Terminal sales $ 290,779 $ 200,507 $ 379,405 $ 233,782
Service 588,334 362,153 1,137,886 634,987
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879,113 562,660 1,517,291 868,769
COST OF SALES AND SERVICE: 96,566 41,288 124,799 72,830
-------------------------- --------------------------
GROSS PROFIT 782,547 521,372 1,392,492 795,939
OPERATING EXPENSES:
General and administrative 754,850 651,518 1,552,105 1,455,915
Sales and marketing 331,329 319,633 592,882 485,525
Professional and consulting fees 180,000 22,500 210,000 27,400
Royalties 23,502 22,093 57,855 87,989
Depreciation and amortization 341,601 217,036 724,232 384,241
-------------------------- --------------------------
Total operating expenses 1,631,282 1,232,780 3,137,074 2,441,070
-------------------------- --------------------------
OPERATING LOSS (848,735) (711,408) (1,744,582) (1,645,131)
-------------------------- --------------------------
OTHER (INCOME) AND EXPENSES
Interest expense 248,478 73,854 469,406 117,982
Other income 8,161 - (194,823) -
-------------------------- --------------------------
Total other expense 256,639 73,854 274,583 117,982
-------------------------- --------------------------
LOSS FROM CONTINUING OPERATIONS (1,105,374) (785,262) (2,019,165) (1,763,113)
NET LOSS (1,105,374) (785,262) (2,019,165) (1,763,113)
Preferred stock dividend - - - -
-------------------------- --------------------------
TOTAL NET COMPREHENSIVE LOSS $(1,105,374) $ (785,262) $(2,019,165) $(1,763,113)
========================== ==========================
NET LOSS PER SHARE:
Basic:
Continuing operations $ (0.03) $ (0.02) $ (0.05) $ (0.05)
Discontinued operations - - - -
------------ ------------ ------------ ------------
Total Basic $ (0.03) $ (0.02) $ (0.05) $ (0.05)
============ ============ ============ ============
Diluted:
Continuing operations $ (0.03) $ (0.02) $ (0.05) $ 0.05
Discontinued operations - - - -
-------------------------- --------------------------
Total Diluted $ (0.03) $ (0.02) $ (0.05) $ 0.05
========================== ==========================
Weighted Average Common Shares Outstanding
Basic 38,320,595 36,979,865 37,599,128 36,929,865
========================== ==========================
Diluted 38,320,595 36,979,865 37,599,128 36,929,865
========================== ==========================
See the accompanying notes to these unaudited financial statements.
4
MEDCOM USA, INC.
STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE THREE AND SIX MONTHS ENDED DECEMBER 31, 2003 AND 2002
2003 2002
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CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $(2,019,165) $(1,763,113)
Adjustments to reconcile net income to net cash
(used in) operating activities:
Depreciation and amortization 724,232 384,241
Payment of expenses through the issuance of common stock 32,500 26,000
Allowance for sales returns 20,113 -
Changes in assets and liabilities:
Trade accounts receivable (107,495) (45,499)
Inventories (25,783) (181,718)
Prepaid and other current assets 1,876 -
Accounts payable and accrued liabilities (314,130) 152,832
Deferred revenue (498,127) (201,930)
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Net cash (used in) operating activities: (2,185,979) (1,629,187)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and software upgrades (25,000) (55,041)
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Net cash (used in) investing activities: (25,000) (55,041)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Principal repayments on capital leases (544,074) (226,950)
Proceeds from sale of common stock 825,001 -
Advances from affiliates 558,174 411,000
Proceeds from line-of-credit 7,430
Proceeds from capital sales-leaseback transactions 1,326,086 1,512,720
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Net cash provided by financing activities 2,172,617 1,696,770
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INCREASE (DECREASE) IN CASH (38,362) 12,542
CASH, BEGINNING OF PERIOD 54,460 27,428
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CASH, END OF PERIOD $ 16,098 $ 39,970
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION:
Interest paid $ 365,017 $ 116,982
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Income taxes paid - -
============ ============
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING
ACTIVITIES:
Terminals capitalized unders sales/leaseback transactions $ 1,576,502 $ 1,726,593
============ ============
SEE the accompanying notes to these unaudited financial statements.
5
MEDCOM USA, INC.
NOTES TO FINANCIAL STATEMENTS
INTERIM PERIODS ENDED DECEMBER 31, 2003
1. BASIS OF PRESENTATION
The accompanying unaudited financial statements represent the financial
position of MedCom USA, Inc. ("Company") as of December 31, 2003 and includes
results of operations of the Company for the six months ended December 31, 2003
and cash flows for the six months ended December 31, 2003. These statements
have been prepared in accordance with generally accepted accounting principles
for interim financial information and the instructions for Form 10-QSB.
Accordingly, they do not include all the information and footnotes required by
generally accepted accounting principles ("GAAP") for complete financial
statements. In the opinion of management, all adjustments to these unaudited
financial statements necessary for a fair presentation of the results for the
interim period presented have been made. The results for the six months ended
December 31, 2003 may not necessarily be indicative of the results for the
entire fiscal year. These financial statements should be read in conjunction
with the Company's Form 10-KSB for the fiscal year ended June 30, 2003,
including specifically the financial statements and notes to such financial
statements contained therein.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accounting policies followed by the Company, and the methods of applying
those policies, which affect the determination of its financial position,
results of operations or cash flows are summarized below:
Cash and Cash Equivalents
-------------------------
Cash and cash equivalents include all short-term liquid investments that are
readily convertible to known amounts of cash and have original maturities of
three months or less. At times cash deposits may exceed government insured
limits.
Concentration of Credit Risk
----------------------------
The Company maintains its operating cash balances in banks in Islandia, New
York, and in Scottsdale, Arizona. The Federal Depository Insurance Corporation
(FDIC) insures accounts at each institution up to $100,000.
Inventories
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Inventories consist primarily of processing terminals that deploy the MedCard
system, and demonstration terminals and spare parts that are held for sale.
Inventories are stated at the lower of cost (first-in, first-out basis) or
market (net realizable value). Rapid technological change and new product
introductions and enhancements could result in excess or obsolete inventory. To
minimize this risk, the Company evaluates inventory levels and expected usage on
a periodic basis and records adjustments as required.
Property and Equipment
----------------------
Property and equipment is stated at cost less accumulated depreciation.
Depreciation is recorded on a straight-line basis over the estimated useful
lives of the assets ranging from 3 to 5 years. The Company's leaseback
transactions of processing terminals to healthcare providers are generally for a
period of 48 to 60 months. Depreciation expense for the leased terminal assets
are on the straight-line method over the term of the lease in amounts necessary
to reduce the carrying amount of the terminal asset. Estimated and actual
residual values are
6
reviewed on a regular basis to determine that depreciation amounts are
appropriate. Depreciation expense relating to leased terminal assets was
$320,714 for the three months ended December 31, 2003.
Assets Held under Capital Leases
--------------------------------
Assets held under capital leases are recorded at the lower of the net present
value of the minimum lease payments or the fair value of the leased asset at the
inception of the lease. Amortization expense is computed using the straight-line
method over the shorter of the estimated useful lives of the assets or the
period of the related lease.
Amortization of Leasehold Improvements
--------------------------------------
Amortization of leasehold improvements is computed using the straight-line
method over the shorter of the remaining lease term or the estimated useful
lives of the improvements.
Revenue Recognition
-------------------
Sales Revenues: The Company's sales revenues are derived from the sale of
processing terminals, computer equipment and other items and are recognized upon
shipment. Revenue from the licensing of equipment software is recognized upon
acceptance by the customer, if the licensing agreement includes such an
acceptance provision, otherwise it is recognized upon shipment.
Service Fee Revenues: Revenue related to the processing of insurance eligibility
verification and medical claim processing is recorded at the time the
transaction is completed. Financial transactions involve approvals of credit
card and debit card payments from the use of processing terminals or personal
computers and are recorded at the time the transactions are completed.
Deferred Gains on Sale Leasebacks: Gains related to processing terminal
equipment sales in the form of sale-leaseback transactions are amortized
generally over the lease term of 48 to 60 months and are recognized
proportionately over the lease term. Gains are initially realized when terminals
are sold to a third party that finances the terminals used by the Company's
customers through the sale leaseback with the Company. The Company purchases
the terminals from a supplier and when the Company enters into a service
agreement with a customer, the customer may rent the terminal from the Company.
When the customer rents the terminal, the Company generally will sell that
terminal to the third party leasing company and in turn leases-back that
terminal.
Comprehensive Income
--------------------
Comprehensive income consists of net income and other gains and losses affecting
shareholders' equity that, under generally accepted accounting principles are
excluded from net income.
Income Taxes
------------
The Company provides for income taxes based on the provisions of Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, which,
among other things, requires that recognition of deferred income taxes be
measured by the provisions of enacted tax laws.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets, including tax loss and credit carryforwards, and
liabilities are measured using enacted tax
7
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities or a change in tax rates is recognized as income in the
period that includes the enactment date. Deferred income tax expense represents
the change during the period in the deferred tax assets and deferred tax
liabilities. The components of the deferred tax assets and liabilities are
individually classified as current and non-current based on their
characteristics.
Fair Value of Financial Instruments
-----------------------------------
Financial instruments consist primarily of accounts receivable, and obligations
under accounts payable, accrued expenses, capital lease obligations and notes
payable. The carrying amounts of accounts receivable, accounts payable, accrued
expenses and notes payable approximate fair value because of the short maturity
of those instruments. The carrying value of the Company's capital lease
arrangements approximates fair value because the instruments were valued at the
cost of the equipment at the time the Company entered into the arrangements. The
Company has applied certain assumptions in estimating these fair values. The use
of different assumptions or methodologies may have a material effect on the
estimates of fair values.
Net Loss Per Share
------------------
Net loss per share is calculated using the weighted average number of shares of
common stock outstanding during the year. The Company has adopted the provisions
of Statement of Financial Accounting Standards No. 128, Earnings Per Share.
Use of Estimates
----------------
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions.
This may affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Stock-Based Compensation
------------------------
Statements of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation, ("SFAS 123") established accounting and disclosure requirements
using a fair-value based method of accounting for stock-based employee
compensation. In accordance with SFAS 123, the Company has elected to continue
accounting for stock based compensation using the intrinsic value method
prescribed by Accounting Principles Board Opinion No. 25, "Accounting for Stock
Issued to Employees."
Intangible Assets
-----------------
Intangible assets at December 31, 2003 consist of goodwill associated with the
Company's acquisition of MedCard, and the difference between the purchase price
of the acquired business and the fair value of the identifiable net assets.
Research and Development Expenditures
-------------------------------------
Research and development costs are expensed as incurred.
8
Impairment of Assets
--------------------
The Company performs an assessment of impairment of long-lived assets
periodically whenever there is an indication that the carrying amount of the
asset may not be recoverable. Recoverability of these assets is determined by
comparing the forecasted undiscounted cash flows generated by those assets to
the assets' net carrying value. The amount of impairment loss, if any, is
measured as the difference between the net book value of the assets and the
estimated fair value of the related assets.
3. TERMINALS AND SALE-LEASEBACK TRANSACTIONS
The Company capitalizes the value of the point of sale terminals that are sold
under capital sale-leaseback transactions. The terminals are purchased from
third party vendors and are recorded as inventory at that time. The Company
enters into sale and service agreements with its customers at which time the
terminal is programmed with the Company's proprietary software and is then
installed with the customer. Many of those terminals are the basis for the
sale-leaseback transactions. The terminals are capitalized at the value
determined by the lessor on the basis of the cash flow under the terms of the
sale and service agreements with the customers.
Terminals $5,896,583
Less accumulated amortization (1,398,773)
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Terminals, net $4,497,810
===========
During the three months ended December 31, 2003, the Company entered into
capital lease obligations under sale-leaseback transactions totaling $468,348.
The total gain realized on these transactions was $363,195 for the three months
ended December 31, 2003. As of December 31, 2003, of the total gain amount
$13,631 was recognized and $349,564 is deferred to future periods.
9
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Except for historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. Such forward-looking statements include, but are not limited to,
statements regarding future events and plans and expectations. Actual results
could differ materially from those discussed herein. Factors that could cause or
contribute to such differences include, but are not limited to, those discussed
elsewhere in this Form 10-QSB (incorporated herein Forward-Looking Statements).
OVERVIEW
MedCom USA, Inc. (the "Company") a Delaware corporation was formed in
August 1991 under the name Sims Communications, Inc. The Company's primary
business was providing telecommunications services. In 1996 the Company
introduced four programs to broaden the Company's product and service mix: (a)
cellular telephone activation, (b) sale of prepaid calling cards, (c) sale of
long distance telephone service and (d) rental of cellular telephones using an
overnight courier service. With the exception of the sale of prepaid calling
cards, these four programs were discontinued in December 1997. During the
fiscal year of 1998, the Company diversified its operations and moved into the
area of medical information processing.
The Company changed its name to MedCom USA, Inc. in October 1999. During
the fiscal years of 1999 and continuing through 2000, the Company directed its
efforts in medical information processing. As of December 31, 2003, the Company
currently operates the MedCard System (MedCard) that is deployed through a
point-of-sale terminal or personal computer offering electronic transaction
processing, as well as insurance eligibility verification. The Company has
aggressively focused on its primary operations in Electronic Data Interchange
(EDI) and core business in electronic Medical Transaction Processing.
MEDICAL TRANSACTION PROCESSING
------------------------------
MEDCARD SYSTEM
The Company provides innovative technology-based solutions for the
healthcare industry that enable users to efficiently collect, use, analyze and
disseminate data from payers, health care providers and patients. The MedCard
System currently operates through a point-of-sale terminal or a personal
computer. The point-of-sale terminals are purchased from Hypercom Corporation
(Hypercom). The MedCard System also operates in a PC version and an on-line
version. The Company is in the process of assessing the feasibility of offering
a service bundled package that would have the capability of processing unlimited
claims and eligibility verification for monthly service fees.
FINANCIAL SERVICES
The Company's credit card center and check services, provides the
healthcare industry an unprecedented combination of services designed to improve
collection and approvals of credit/debit card payments along with the added
benefit and convenience of personal check guarantee from financial institutions.
Flex-pay is an accounts receivable management program that allows a
provider to swipe a patient's credit card and store the patient's signature in
the terminals, and bill the patient's card at a later date when it is determined
what services rendered were not covered by the patient's insurance. Also, an
easy-pay option is offered which allows patient's the added benefit and
convenience of a one-time payment option or a recurring installment payments
that will be processed on a specified date determined by the provider and
patient. These
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options insure providers that payments are timely processed with the features of
electronic accounts receivable management. These services are all deployed
thorough point-of-sale terminals or a personal computer. Using the MedCard
system, medical providers are relieved of the problems associated with billings
and account management, and results in lower administrative documentation and
costs.
PATIENT ELIGIBILITY
The MedCard System is also an electronic processing system that
consolidates insurance eligibility verification, processes medical claims, and
monitors referrals. The MedCard System allows a patient's primary care
physician to request approval from the patient's insurance carrier or managed
care plan for a referral to a secondary physician or specialist. The secondary
physician or specialist can use the MedCard system to verify that referrals are
approved by the patient's insurance carrier. The MedCard system's referral
capabilities reduce documentation and administrative costs which results in
increased productivity and greater patient information for the specialist, as
well as a written record of the referral authorization.
The MedCard System can record and track encounters between patients and
health care providers for performance evaluation and maintenance of records.
After examining a patient the physician enters a patient's name, procedure code
and diagnostic code at a nearby terminal. This information is then uploaded to
MedCom's computer network, processed and transmitted back to the provider
formatted in both summary and/or detailed reports, and as a result healthcare
providers' reimbursements are accelerated and account receivables are reduced.
The average time it takes the healthcare providers to collect payments from
insurance carriers and plans decreases from an average of 89 days to 7 to 21
days. Health care providers will benefit from a 100% paperless claim processing
system.
TECHNICAL SUPPORT ASSISTANCE
The Company offers multiple training options for its products and services
and is easily accessed at www.MedCard.com. The online E-learning tools enable
---------------
health care professionals and health providers an opportunity to familiarize
themselves with the Health Insurance Portability and Accountability Act (HIPAA)
and also the mandates and compliance issues. Onsite training and
teleconferencing, and technical support assistance are also features offered to
health care providers. Also, a 24-hour terminal replacement program and system
upgrades are offered.
MARKETING STRATEGY
MedCard's marketing plan is built around a strategy of expanding its sales
capacity by using experienced external Independent Sales Organizations (ISO) and
putting less reliance on an internal sales force. MedCom has set-up these
Independent Sales Organizations (ISOs) to market and distribute the MedCard
System throughout the U.S. Currently, there are 16 active ISOs promoting the
MedCard system, with an average ISO that contains approximately 10-20 sales
people, some selling the MedCard System exclusively. Financial service
companies comprise an important sales channel that views the healthcare industry
as an important growth opportunity. Only 6% of all healthcare payments are made
with a credit card today, although according to a recent survey 55% of all
consumers would prefer to pay doctor and hospital visits by credit/debit card.
SERVICE AGREEMENTS
During December 1998, the Company entered into a service agreement with
WebMD Envoy. This agreement encompasses the process of Electronic Data
Interchange (EDI) and related services. The services provided are complimentary
to the Company's core business, and accomplishes transaction processing services
11
that allows healthcare providers and payers to process medical transactions
quickly and accurately, and results in reduced administrative costs and an
increase in healthcare reimbursements to healthcare providers.
During January 2002, the Company has entered into a service agreement with
MedUnite. This alliance will encompass the utilization of proprietary
technologies and will enhance the existing network of healthcare constituents.
Strategically both companies share the same vision of transforming the
healthcare transactions systems affecting how healthcare providers, health
plans, and other groups transacting business with one another by significantly
reducing claim and payment processing time, and reducing healthcare
administrative costs.
PROCESSING TERMINAL LEASING AGREEMENTS
The Company has entered into leasing agreements with LADCO Financial Group
for the purpose of leasing processing terminals. The Company has pledged and
granted for collateral in connection with the lease agreements, one million
restricted common shares. These common shares would be surrendered upon default
of the leasing agreements. This pledge and granting of security interest was
executed on January 2002.
The Company has arranged its terms with this credit facility as an
equipment lessor whereby the Company sells terminals to the lessor when it has
obtained a service contract with a provider. Under these agreements, the
Company is leasing back the processing terminals from the lessor and in turn
leases them to the purchaser for a period of 48-60 months however; the customer
may terminate the agreement after 12 months. The Company is accounting for the
transactions as sale-leasebacks. The leases with the customers are inclusive
with the monthly service contracts and are effectively accounted for as
operating leases. Gains on terminal sales under sale-leaseback transactions are
deferred and are being amortized to income in proportion to amortization of the
assets, generally over the term of the lease with the credit facility generally
for a period of 48 to 60 months. At December 31, 2003, the remaining deferred
equipment gain of $3,582,917 is shown as "Deferred Revenue" in the Company's
Balance Sheet. For the three months ended December 31, 2003, the total interest
expense incurred by the Company under these leases was $237,947.
REVENUES
Revenues from the MedCard system are generated through the sale of
terminals, and processing insurance eligibility/verification, insurance claims,
and financial transaction processing. The Company receives a fixed amount per
terminal, and also receives fees for each transaction processed through the
MedCard System. Revenue sources include fees for financial transactions
processed through the terminal, fees for collection of receivables if the
Company provides billing services, fees associated with reimbursements made by
insurance carriers for submitting claims that are processed electronically, fees
for using the system's referral program and, fees for processing uploaded data.
The Company also markets a complete billing service using the MedCard System for
hospitals and large practice groups. The Company receives a percentage of the
billing amount collected under these arrangements.
ADDITIONAL INFORMATION
Medcom files reports and other materials with the Securities and Exchange
Commission. These documents may be inspected and copied at the Commission's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C., 20549. You
can obtain information on the operation of the Public Reference Room by calling
the Commission at 1-800-SEC-0330. You can also get copies of documents that the
Company files with the Commission through the Commission's Internet site at
www.SEC.gov.
-----------
12
RESULTS OF OPERATIONS
Revenues for the quarter ended December 31, 2003 were $879,113 as compared to
the quarter ended December 31, 2002 of $562,660. The Company has divested of
all its business segments other than the MedCard business, which it intends to
devote it full resources. Revenues are primarily derived from monthly service
fees collected and revenues related to the leasing of terminal assets.
Cost of sales for the quarter ended December 31, 2003 was $96,566 as compared to
quarter ended December 31, 2002 of $41,288. Overall margins have increased as
the Company has decreased its service offerings and divested unprofitable
business sectors. As a result, the Company's focus on medical transaction
processing has increased its costs due to increases in benefit verification
transaction processing.
General and administrative expenses for quarter ended December 31, 2003 was
$754,850 as compared to quarter ended December 31, 2002 of $651,518. These
expenses have increased despite the Company instituting cost curtailment
measures.
Selling expenses for the quarter ended December 31, 2003 was $331,329 as
compared to the quarter ended December 31, 2002 of $319,633. These expenses are
directly attributed to the Company's aggressive marketing and outside sales
organizations that market the Company's equipment and services.
Interest expense for the quarter ended December 31, 2003 was $248,478 as
compared to quarter ended December 31, 2002 of $73,854. Interest expense has
increased as a result of volume increases of leased terminal assets by the
Company.
No tax benefit was recorded on the expected operating loss for the quarter ended
December 31, 2003 as required by Statement of Financial Accounting Standards No.
109, Accounting for Income Taxes. For the quarter ended we do not expect to
realize a deferred tax asset and it is uncertain, therefore we have provided a
100% valuation of the tax benefit and assets until we are certain to experience
net profits in the future to fully realize the tax benefit and tax assets.
Net loss for the quarter ended December 31, 2003 was ($1,105,374) compared net
loss for the quarter ended December 31, 2002 of ($785,262).
LIQUIDITY AND CAPITAL RESOURCES
Cash used in operating activities for the six months ended December 31, 2003,
was ($2,185,979) as compared to cash used in operating activities for the six
months ended December 31, 2002 of ($1,629,187). Overall sales have increased in
the areas of direct sales along with sales-leaseback transactions, and as a
result has impacted inventory purchases.
Cash used in investing activities for the six months ended December 31, 2003 was
($25,000) as compared to cash used in investing activities for the six months
ended December 31, 2002 of ($55,041). Terminal software upgrade expenses have
been incurred.
Cash provided by financing activities was $2,172,617 for the six months ended
December 31, 2003 compared to cash provided by financing activities for the six
months ended December 31, 2002 of $1,696,770. The Company has financed its
terminal equipment though the leasing-back of terminals and as a result has
received proceeds, and also the Company has been advanced from an affiliate in
the form of loans to fund operations for deficiencies in operating cash
requirements.
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SOURCES OF CAPITAL
The Company has relied upon a significant shareholder to fund its operating
cash flow deficiencies since June 2001. Presently, this funding is accomplished
in the form of loans to the Company. At December 31, 2003, an affiliated
shareholder to the Company has advanced $1,336,000 to the Company. The loans
are represented by unsecured notes, and carry interest at 9%. Accordingly,
these loans are recorded as long-term debt in the accompanying financial
statements. Management believes that current trends in its electronic
transaction processing to the health care industries will provide cash flow in
the near fiscal period to be self-sustaining from operations. The amount of
such will be dependent upon the rate of growth experienced and demand for the
Company's product and services.
As described above, the Company has secured an arrangement with a third
party leasing company to provide funds upon the execution of a rental and
service agreement with a customer. Generally, the health care provider customer
will enter into an agreement with the Company to rent a terminal and subscribe
to the transaction processing and insurance verification service. At that time,
the Company will sell the terminal associated with the service contract to the
lessor and then leaseback that terminal. The leasing transactions provide for
funding to the Company to cover its cost of the terminal, placement of the
terminal with the customer and a profit margin. The Company is generally
required to pay the lease rentals to the lessor from 48 to 60 months. The
source of funds for those repayments is the rental payments from the health care
provider customer.
OTHER CONSIDERATIONS
There are numerous factors that affect our business and the results of its
operations. Sources of these factors include general economic and business
conditions, federal and state regulation of business activities, the level of
demand for the Company's product or services, the level and intensity of
competition in the medical transaction processing industry, the Company's
ability to develop new services based on new or evolving technology and the
market's acceptance of those new services, the Company's ability to timely and
effectively manage periodic product transitions, the services, customer and
geographic sales mix at any particular period, and the ability to continue to
improve the infrastructure (including personnel and systems) to keep pace with
the growth in its overall business activities.
FORWARD-LOOKING STATEMENTS
Except for historical information contained herein, this Form 10-QSB
contains express or implied forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Exchange Act.
The Company intends that such forward-looking statements be subject to the safe
harbors created thereby. The Company may make written or oral forward-looking
statements from time to time in filings with the SEC, in press releases, or
otherwise. The words "believes," "expects," "anticipates," "intends,"
"forecasts," "project," "plans," "estimates" and similar expressions identify
forward-looking statements. Such statements reflect the current views with
respect to future events and financial performance or operations and are only as
of the date the statements are made.
Forward-looking statements involve risks and uncertainties and readers are
cautioned not to place undue reliance on forward-looking statements. The
Company's actual results may differ materially from such statements. Factors
that cause or contribute to such differences include, but are not limited to,
those discussed elsewhere in this Form 10-QSB, as well as those discussed in
Form 10-KSB which is incorporated by reference in this Form 10-QSB.
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Management believes that the assumptions underlying the forward-looking
statements are reasonable, any of the assumptions could prove inaccurate and,
therefore, there can be no assurance that the results contemplated in such
forward-looking statements will be realized. The inclusion of such
forward-looking information should not be regarded, as a representation that the
future events, plans, or expectations contemplated will be achieved. The Company
undertakes no obligation to publicly update, review, or revise any
forward-looking statements to reflect any change in expectations or any change
in events, conditions, or circumstances on which any such statements are based.
Our filings with the Securities Exchange Commission, including the Form 10-KSB,
and may be accessed at the SEC's web site, www.SEC.gov.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MedCom is involved in various legal proceedings and claims as described in
our Form 10-KSB for the year ended June 30, 2003. No material developments
occurred in any of these proceedings during the quarter ended December 31, 2003.
The costs and results associated with these legal proceedings could be
significant and could affect the results of future operations.
ITEM 3. CONTROLS AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES
The Company maintains controls and procedures designed to ensure that
information required to be disclosed in this report is recorded, processed,
accumulated, and reported to its management, including the chief executive
officer, to allow timely decisions regarding the required disclosure. Within
the 90 days prior to the filing date of this report, MedCom's management, with
the participation of its chief executive officer performed an evaluation of the
effectiveness of the design and operation of these disclosure controls and
procedures. Management has concluded that such disclosure controls and
procedures are effective at ensuring that required information is disclosed in
the Company's reports.
CHANGES IN INTERNAL CONTROLS
There were no significant changes in the Company's internal controls or in
other factors that could significantly affect these controls subsequent to the
evaluation date.
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
NO REPORTS ON FORM 8-K
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SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its behalf by
the undersigned, there unto duly authorized.
EXHIBIT INDEX
Exhibit Number Description
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Exhibit 31 Management Certification
Exhibit 32 Sarbanes-Oxley Act Certification
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