ITEM 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto in Part II, Item 8 to this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations. Actual results and the timing of events may differ significantly from those projected in forward- looking statements due to a number of factors.
Given these uncertainties, readers of this filing and investors are cautioned not to place undue reliance on such forward-looking statements.
Special Note Regarding Smaller Reporting Company Status
We are considered a "smaller reporting company" under applicable regulations of the SEC and are therefore eligible for relief from certain disclosure requirements. In accordance with such provisions, we have elected to provide our audited consolidated statements of operations and comprehensive (loss), cash flows and changes in stockholders' equity for two, rather than three, years. As a result, we provided a discussion of changes in results of operations and cash flows for two, rather than three, years in this Management's Discussion and Analysis of Financial Condition and Results of Operations.
Overview and Recent Events
The Company was organized in mid-2008. The operation was financed with a considerable amount of toxic convertible debt. This type of financing, along with several other issues, prevented the Company from realizing a robust growth rate for its first few years of operation. Since that time, considerable management time has been spent and investor money utilized to turn the Company's operation around. As of the date of this filing, the Company is currently experiencing a robust growth rate, quality relationships with quality customers, and a significantly improved balance sheet.
The Company's flagship product is called the MediPendant(R), which is a personal emergency alarm that is used to summon help in the event of an emergency at home. While it is primarily a device for older people, there is also a market for those who are physically disabled, as well as for persons living alone. The MediPendant(R) device has
(table of contents)
significant feature and function advantages over other personal medical alarms in the marketplace today. Approximately 70% of all medical alarms currently being sold in the United States are first-generation technologies that require the user to speak and listen through a central base station unit. If the user of one of these older generation products is not within speaking or listening distance to the base station, the user may not be heard by the operator in the centralized emergency monitoring center. The MediPendant(R) enables the wearer to simply speak and listen directly through the pendant in the event of an emergency. The MediPendant(R) is designed to be worn in the bath or shower and offers a 600-foot range, so that the wearer can operate the unit from virtually anywhere within their home or on their property. The product is extremely durable, very reliable, and offers an extremely long battery life. The MediPendant(R) has strong intellectual property patent protection. The patent protects a unique feature of the product, which is voice prompts that alert the user of the operational status of the device. This gives the user some peace of mind during an emergency because they know with certainty that their distress signal has been activated and help is being summoned.
During December of 2011, the Company announced that the MediPendant(R) would be distributed by Costco Wholesale Corporation. Costco is one of the largest retailers in not only the United States, but throughout the world with approximately 75,000,000 customers. The Company's relationship with this retailer has been strong, sales are occurring on a daily basis, and customer satisfaction is high. The Company successfully runs sales programs at Costco including email blasts, Costco coupons, inserts in Costco Magazines, and assorted other promotions. The MediPendant(R) product will continue to be included in Costco promotions. The MediPendant(R) has received 28 product reviews on the retailer's website, 21 of which are "5 out of 5 Star" ratings. The average rating is "4.5 Stars" out of 5 Stars.
The Company has a relationship with APS Healthcare Bethesda Inc. Under the terms of the contract, the MediPendant(R) will be offered to qualified individuals, based on certain criteria, at little or no cost to the individual. The health insurance company is responsible for the monthly monitoring fee as well as the cost of the equipment. These programs are not only an added benefit and security measure for qualifying individuals living alone with medical issues, but also as a cost-saving method for health insurance companies, by helping to avoid unnecessary ambulance and emergency room visits. We expect to expand this program to other health insurance companies throughout the country during 2015.
The Company has also had successes internationally with distribution agreements and relationships in Denmark, Ireland, Canada, and Bermuda. Medical Alarm Concepts is expecting steady growth from its international markets in 2015 and is currently working on an agreement in Dubai that would create a pilot program to supply medical monitoring with the MediPendant in the Arabic language.
The Company also distributes the MediPendant(R) through Internet marketing via SEO (search engine optimization), online advertising, social media, and relationships with other websites that have synergistic products and customer demographics. We work with several online dealers who promote and sell the MediPendant(R) on their own websites and through their own online marketing channels.
We also have relationships with outside call centers/monitoring centers whose customer base and marketing efforts are similar to ours. We have a variety of marketing agreements with these call centers to promote the MediPendant(R) to new and existing customers.
Significant investment is planned to expand sales opportunities relative to the above areas.
The Company expects the balance of calendar year 2015 and 2016 to be one of continued growth when taking into account the combined effect of both monthly recurring revenues and distribution sales, which will allow the Company to realize sustainable positive operating cash flow. In general, monthly recurring revenues have been growing steadily and while the company has not seen substantial sales growth this was because distribution sales (sales of
(table of contents)
equipment only) declined while recurring revenues increased. However, because of our new product (iHelp Mobile Medical Alert System) and its dealer program we are working on, we believe that growth will continue in both monthly revenues and distribution sales and that this growth would be based on the new iHelp Alert system and remain sustainable into the future.
The company recently announced the launch of a new, advanced medical alarm device called the iHelp(TM). The iHelp(TM) is an advanced mobile medical alert system, designed to be easy to use, lightweight yet durable, but with significantly advanced features. The company has invested time, manpower, and money into the development and launch of this product. On September 30, 2014 the company signed an agreement for a $300,000 line of credit to enable it to launch iHelp(TM) and to build the infrastructure that will allow us to buy and track air time from AT&T and T-Mobile for cellular operation of this unit. The iHelp(TM) has enhanced features and functions including an advanced GPS system, the ability to remotely locate a loved one, patented voice prompts, and a dealer portal that enables dealers to manage their own iHelp customer base. A significant amount of time was spent on the back end systems, including the dealer portal. iHelp(TM) dealers will have significant benefits, most importantly the ease of use in ordering product, activating and deactivating customers, tracking their customer usage, and creating and printing a variety of reports to assist in billing and collecting revenues. The iHelp(TM) dealer program is a turn-key program that offers the dealer the opportunity to provide his/her customers with the latest products without having to change his/her own back end. The company has already had a significant amount of interest in the iHelp(TM) product and anticipates that the iHelp(TM) will increase its revenues substantially, and enable it to show continued growth in both revenues, gross margins, and cash flow.
The company generates sales mainly through recurring revenues generated by monitoring fees paid by the users of our medical alert systems, equipment sales which are generated by those "dealers" that would like to resell our products to users, and through recurring revenues generated by those dealers who will resell our new mobile alert system (iHelpAlarm) air time that we purchase through Kore, a reseller of air time (AT & T and T-Mobile). Our customers pay us a monthly subscription fee (recurring) in exchange for providing them a service. This creates an initial negative cash flow because the company also needs to supply equipment (a medical alert system) for the customer to be able to use their services. When the customer pushes the emergency button on the unit's transmitter, an operator at a monitoring center that we subcontract this service to will respond and ask if they need help. Most companies, except possibly for the very largest, in the PERS (Personal Emergency Response System) industry also subcontract this work out because it is often less expensive, the costs are fixed, and they do not have enough customers to take advantage of scaling this cost. We use three different monitoring centers. We pay a fixed cost for this monitoring (approximately $4 per customer), and pass this on to our "user" for approximately $30 per customer. The gross margin helps pay for the cost of the medical alert system equipment, the cost for the monitoring, customer service, warranty replacements, and billing functions. We will either dispatch help, patch the call to a loved one, or answer any questions they may have. The ability to contract this monitoring service has allowed the company to have an exact fee that we are charged for this service, and to create relationships with people in the industry (the monitoring centers) that help us sell our product. With the new arrival of the iHelpAlarm system we will be increasing our equipment sales as this will be a "dealer" program. This unit will be mainly sold directly to dealers and/or monitoring centers who will resell the product and its services directly to users. Additionally, each iHelpAlarm system requires a SIM card for ongoing telecommunications. The Company will continue to charge the dealer a monthly fee for the ongoing telecommunications charges, and this monthly rate will create a profit for the company on an ongoing monthly basis as long as the unit stays activated.
The company has also begun its search to acquire synergistic company(s), in an effort to expand the business in other areas of the healthcare-related industry. We believe that adding company acquisitions to our business plan in 2015 will help us with our strategy to build a strong company with long term goals, and enable us to increase our market share in this vastly growing market.
In keeping with that strategy, the Company recently announced the acquisition of 51% of Medical Sales Group, LLC
(table of contents)
(MSG). MSG was formed primarily to acquire PERS and mPERS accounts in bulk, from dealers that want to quickly capitalize on their account base. MSG has done several acquisitions and continues to seek out additional dealers interested in selling their existing accounts. MSG is also seeking to acquire synergistic company(s), in an effort to expand the business in other areas as well. The Company plans to accomplish this by either raising money through an offering, doing acquisitions with stock, or through a combination of both methods. The acquisition will not be completed until an ongoing audit necessary to comply with regulatory requirements is finished.
The Company received an investment led by strategic partner, JTT-EMS LTD of Shijiazhuang, China. Under the terms of the investment, JTT-EMS LTD purchased Common Stock in a private placement transaction and has indicated to the Company that it plans to hold these shares as a long-term investment. The financing, including additional investments by current shareholders total up to approximately $330,000. There are no warrants or options associated with this investment. As more fully noted below, funds received will primarily be used to rebuild inventory levels to meet the growing demand and to pay professional fees associated with returning the Company to fully reporting status.
On December 10, 2013, the Company entered into a Global Settlement Agreement (the "Agreement") with the holder of its credit line and major shareholders. Under the terms of the agreement, all of the Company's credit line and accrued interests on credit line were forgiven and all of the convertible debt would be converted to common shares, except for the balance of $25,908. On November 2, 2014, the holder of the convertible note informed the Company that the holder of the convertible debt would no longer seek repayment of the outstanding $25,908.
In exchange for the credit line cancellation and the conversion of convertible debt, both parties agreed on the following terms: 1) the management team agreed to modify its September 19, 2011 agreement with the Company giving up all anti-dilution rights, 2) the Company agreed to take steps to increase the number of authorized shares to accommodate the debt conversions and would complete a reverse split of its shares, 3) The Company would file a registration statement with the SEC, and 4) the Company would continue to file past due periodic reports with the SEC on Forms 10-Q and 10-K in order to return the Company to full reporting status, a process that is complete.
We believe upcoming balance sheets, on which we expect to be free of nearly all long-term debt and free of warrants, options and minimal outstanding preferred stock, will more accurately reflect the true value of our growing company.
The Company expects calendar year 2015 to show continued growth in both monthly recurring revenues and distribution sales, which will allow the Company to realize sustainable positive operating cash flow. We believe the growth rate we are currently realizing is sustainable into 2015 and beyond.
These consolidated financial statements are presented on the basis that we will continue as a going concern. The going concern concept contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
As the accompanying consolidated financial statements, the Company has working capital deficit of $3,135,937, did not generate cash from its operations, had stockholders' deficit of $2,036,440 and had operating losses for past two years. These circumstances, among others, raise substantial doubt about the Company's ability to continue as a going concern.
While the Company is attempting to generate sufficient revenues, the Company's cash position may not be enough to support the Company's daily operations. Management intends to raise additional funds by way of a public or private offering. Management believes that the actions presently being taken to further implement its business plan and generate sufficient revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to increase revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company's ability to further implement its business plan and generate sufficient revenues.
(table of contents)
The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Results of Operations
Net sales generated during the years ended June 30, 2014 and 2013 were $1,153,693 and $572,712, respectively; representing a 101% or $580,981 increase, resulting from a change in strategic business direction toward more widespread product distribution and away from reliance on only a few resellers and distributors. This Company believes this change in business direction will lead to stronger growth and margins and higher overall sales during future periods. During 2014 and 2013, net sales were generated from sales to distributors, resellers and from direct sales to consumers who pay the Company for monthly monitoring services.
Cost of Revenue
Cost of revenue incurred during years ended June 30, 2014 and 2013 were $324,503 and $441,788, respectively, representing a 27% or $117,285 decrease. The decrease of cost of sales was mainly due to the Company changed its strategic business direction and generated more revenue from providing monitoring services to customers. Revenue from monitoring services normally generate higher gross profit.
Gross profit generated during fiscal 2014 and 2013 was $829,190 and $130,924, representing a 533% or $698,266 increase. The gross profit margin for 2014 and 2013 was 72% and 23%, respectively. The increase in gross profit margin was mainly due to more revenue generated from monitoring services which has higher gross profit margin.
Selling expenses incurred during fiscal 2014 and 2013 was $212,133 and $244,162, respectively. The $32,029 was a 13% decrease compared to the previous period. During fiscal 2014, the Company began to shift its sales emphasis more toward consumer marketing, which contributed to the reduction in sales expenses.
General and Administrative
General and administrative expenses for fiscal 2014 and 2013 were $1,695,423 and $628,273, respectively; representing 170% or $1,067,150 increase. During the year ended June 30, 2014, the Company issued 1,493,669 shares of common stocks to management pursuant to Global Settlement Agreement and recorded stock compensation expense of $ 955,948. The Company also issued 50,000 shares of common stocks to a shareholder for consulting services, during the year ended June 30, 2014, which was valued at $38,500. During the year ended June 30, 2013, stock compensation expense was $28,267.
Change in Fair Value of Derivative Instrument
Changes in fair value of derivative instrument generated $1,514,947 and $4,500,057 income during fiscal 2014 and 2013, respectively. This was due to a lower value of the derivative liability and lower amount of convertible notes outstanding at June 30, 2014.
(table of contents)
Interest expense for fiscal 2014 and 2013 were $211,540 and $569,460, respectively. The $357,920 or 62% decrease in interest expense was mainly due to decreased amount of interest expense recorded on the excess of derivative liability over the amount of the convertible debt, which was recorded as interest expense at the inception of the note, amortization of debt discount and interest expense for credit line and convertible notes.
Net Income (Loss)
Net income generated during 2014 and 2013 was $225,041 and $3,189,086 income respectively for the reasons stated above.
Liquidity and Capital Resources
As of June 30, 2014 and 2013, we had $7,673 and $5,857 in cash, respectively.
During fiscal 2014 and 2013, operating activities used net cash of $25,684 and $497,120, respectively. Main reasons for the $471,436 or 95% decrease in net cash used in operating activities were outlined below:
1. Net income generated during 2014 and 2013 was $225,041 and $3,189,086, respectively;
During fiscal 2014and 2013, financing activities generated net cash inflow of $27,500 and $482,400, respectively. The decrease of $454,900 or 94% was mainly due the following reasons.
1. Cash received from loan receivable during 2013 was $60,000, in contrast, during 2014, there was no transaction in the same nature;
We believe we can satisfy our cash requirements for the next twelve months with our current cash flow from business operations, although there can be no assurance to that effect. If we are unable to satisfy our cash requirements, we may be unable to proceed with our plan of operation. We do not anticipate the purchase or sale of any significant equipment. We also do not expect any significant additions to the number of employees. The foregoing represents our best estimate of our cash needs based on current planning and business conditions. In the event we are not successful in reaching our initial revenue targets, additional funds may be required, and we may not be able to proceed with our
(table of contents)
business plan for the development and marketing of our core services. Should this occur, we may be forced to suspend or cease operations.
We anticipate incurring operating losses in the foreseeable future. Therefore, our auditors have raised substantial doubt about our ability to continue as a going concern.
Off-Balance Sheet Arrangements
At June 30, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise had we engaged in such relationships.
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements under Item 8, Part II.
May 01, 2015