UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q


(Mark One) 
xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31,September 30, 2012
 OR
oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ____________ to __________                      

Commission File Number 033-25126-D

MedeFile International, Inc.
(Exact name of registrant as specified in its charter)

Nevada 85-0368333
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)

301 Yamato Rd, Suite 1200
Boca Raton, FL  33431
(Address of principal executive offices) (Zip Code)

Registrant’s telephone number, including area code (561) 912-3393

Copies to:
Richard A. Friedman, Esq.
Jeff Cahlon, Esq.
Sichenzia Ross Friedman Ference LLP
61 Broadway, 32 nd32nd Floor
New York, New York 10006
Phone: (212) 930-9700
Fax: (212) 930-9725


Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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  x No o
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   x Yes   o   No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 Large accelerated filero Accelerated filero
 Non-accelerated filero Smaller reporting companyx

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes  o No x

Number of shares outstanding of registrant’s class of common stock, par value $0.0001 (the “Common Stock”) 11,213,189 as of May 15, 2012: 52,920,494,067.November 13, 2012.
 
 
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Table of ContentsContent [to be revised]

 Page
PART I 
  
FINANCIAL INFORMATION3
ITEM 1. Financial Statements
3-133
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
1416
ITEM 3. Quantitative and Qualitative Disclosures about Market Risk
1619
ITEM 4. Controls and Procedures
1619
  
PART II 
  
OTHER INFORMATION
20
1720
1720
1720
1720
1720
1720
1720
Signatures
1821
 
 


 
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Item 1. Financial Statements.
Medefile International, Inc.
Consolidated Balance Sheets


Medefile International, Inc. 
Consolidated Balance Sheets 
      
 Unaudited     Unaudited    
 March 31,  December 31,  September 30,  December 31, 
Assets 2012  2011  2012  2011 
Current assets              
Cash $30,344  $198,173  $559,882  $198,173 
Accounts receivable, net  1,893   617   150   617 
Inventory  53,859   53,925   55,855   53,925 
Merchant services reserve  64,320   62,530   64,319   62,530 
Prepaid insurance  -   1,055   1,996   1,055 
Total current assets  150,416   316,300   682,202   316,300 
Website development, net of accumulated amortization  20,982   26,227   96,491   26,227 
Furniture and equipment, net of accumulated depreciation  7,927   10,278   3,325   10,278 
Intangibles  1,339   1,339   1,339   1,339 
Total assets $180,664  $354,144  $783,357  $354,144 
                
Liabilities and Stockholders' Equity                
Accounts payable and accrued liabilities $200,589  $180,244  $115,167  $180,244 
Cash overdraft  -   - 
Deferred revenues  6,894   9,855   4,972   9,855 
Warrant liabilities  5,335,019   111,636 
Total Current Liabilities  207,483   190,099   5,455,158   301,735 
                
                
Stockholders' Equity                
Preferred stock, $.0001 par value: 10,000,000 authorized,                
no shares issued and outstanding  -   -   -   - 
Common stock, $.0001 par value: 75,000,000,000 authorized;        
4,019,830,281 and 3,958,258,852 shares issued and outstanding on        
March 31, 2012 and December 31, 2011, respectively  401,983   395,826 
Common stock, $.0001 par value: 100,000,000 authorized;        
11,208,099 and 791,652 shares issued and outstanding on        
September 30, 2012 and December 31, 2011, respectively  1,121   79 
Common stock payable  -   24,000   100,000   24,000 
Additional paid in capital  18,046,851   17,986,149   23,786,518   17,746,753 
Accumulated deficit  (18,475,653)  (18,241,930)  (28,559,440)  (17,718,423)
Total stockholders' equity  (26,819)  164,045   (4,671,801)  52,409 
Total liability and stockholders' equity $180,664  $354,144  $783,357  $354,144 
                
        
The accompanying notes are an integral part of these consolidated financial statements 

 
The accompanying notes are an integral part of these consolidated financial statements
 
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Medefile International, Inc. 
Consolidated Statements of Operations 
(Unaudited) 
       
  For the Three  For the Three 
  Months  Months 
  Ended  Ended 
  March 31,  March 31, 
  2012  2011 
Revenue $13,714  $132,102 
         
Cost of goods sold  66   63,475 
Gross profit  13,648   68,627 
         
Operating expenses        
Selling, general and administrative expenses  239,774   379,120 
Marketing expense  -   129,854 
Depreciation and amortization expense  7,597   7,846 
Total operating expenses  247,371   516,820 
         
Loss from operations  (233,723)  (448,193)
         
Other income (expenses)  -   - 
         
Loss before income tax  (233,723)  (448,193)
Provision for income tax  -   - 
Net loss $(233,723) $(448,193)
         
Net loss per share: basic and diluted $(0.00) $(0.00)
         
Weighted average share outstanding  3,977,538,217   3,450,021,410 
basic and diluted        
         
         
The accompanying notes are an integral part of these consolidated financial statements 
Medefile International, Inc.
Consolidated Statements of Operations
(Unaudited)
             
  For the Three  For the Three  For the Nine  For the Nine 
  Months  Months  Months  Months 
  Ended  Ended  Ended  Ended 
  September 30,  September 30,  September 30,  September 30, 
  2012  2011  2012  2011 
     (Restated)     (Restated) 
Revenue $11,127  $83,802  $32,001  $403,644 
                 
Cost of goods sold  3,635   9,838   3,701   163,579 
Gross profit  7,492   73,964   28,300   240,065 
                 
Operating expenses                
Selling, general and administrative expenses  337,489   675,015   10,701,297   1,496,220 
Marketing expenses  -   70,641   -   511,362 
Depreciation and amortization expenses  7,495   7,745   22,689   23,349 
Total operating expenses  344,984   753,401   10,723,986   2,030,931 
                 
Loss from operations  (337,492)  (679,437)  (10,695,686)  (1,790,866)
                 
Other income (expenses)                
Gain (loss) on changes in fair value                
of warrant liabilities  271,684   (422,329)  (145,331)  (422,329)
Total other income  271,684   (422,329)  (145,331)  (422,329)
                 
Loss before income tax  (65,808)  (1,101,766)  (10,841,017)  (2,213,195)
Provision for income tax  -   -   -   - 
Net loss $(65,808) $(1,101,766) $(10,841,017) $(2,213,195)
                 
Net loss per share: basic and diluted $(0.01) $(1.42) $(1.64) $(3.04)
                 
Weighted average share outstanding  10,855,787   777,643   6,593,651   728,528 
basic and diluted                

The accompanying notes are an integral part of these consolidated financial statements
 
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Medefile International, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
 
Medefile International, Inc. 
Consolidated Statements of Cash Flows 
(Unaudited) 
  For the Three  For the Three 
  Months  Months 
  Ended  Ended 
  March 31,  March 31, 
  2012  2011 
Cash flows from operating activities      
Net loss $(233,723) $(448,193)
Adjustments to reconcile net loss to net        
cash used in operating activities        
Depreciation  2,352   7,847 
Amortization  5,245     
Stock based services  42,859   37,500 
         
Changes in operating assets and liabilities        
Accounts receivable  (1,276)  (1,523)
Inventory  66   1,766 
Prepaid insurance  1,055   - 
Accounts payable and accrued liabilities  20,344   62,943 
Merchant services reserve  (1,790)  (4,777)
Cash overdraft  -   7,019 
Deferred revenue  (2,961)  (2,036)
Net Cash used in operating activities  (167,829)  (339,454)
Cash flows from investing activities        
Investment      (1,800)
Net cash used in investing activities  -   (1,800)
Cash flow from financing activities        
Proceeds from common stock subscription  -   230,000 
Net cash provided by financing activities  -   230,000 
Net increase (decrease) in cash and cash equivalents  (167,829)  (111,254)
Cash and cash equivalents at beginning of period  198,173   499,652 
Cash and cash equivalents at end of period $30,344  $388,398 
         
Supplemental disclosure of cash flow information        
Cash paid during period for        
Cash paid for interest $-  $- 
Cash paid for income taxes $-  $- 
Cancellation of payroll liability to CEO $-  $116,000 
  
  
The accompanying notes are an integral part of these consolidated financial statements 

       
  For the Nime  For the Nine 
  Months  Months 
  Ended  Ended 
  September 30,  September 30, 
  2012  2011 
     (Restated) 
Cash flows from operating activities      
Net loss $(10,841,017) $(2,213,195)
Adjustments to reconcile net loss to net        
cash used in operating activities        
Depreciation  6,953   7,613 
Amortization  15,736   15,737 
Compensation related to anti-dilution stock issuance  9,792,000     
Stock based services  102,859   172,731 
Warrant expense      377,938 
Changes in fair value of warrant liabilities  145,331   422,329 
Changes in operating assets and liabilities        
Accounts receivable  467   1,708 
Inventory  (1,930)  (31,793)
Prepaid insurance  (941)  (2,775)
Accounts payable and accrued liabilities  (65,077)  38,305 
Merchant services reserve  (1,789)  (57,968)
Cash overdraft  -   (6,928)
Deferred revenue  (4,883)  (2,524)
Net Cash used in operating activities  (852,291)  (1,278,822)
Cash flows from investing activities        
Website development  (86,000)    
Net cash used in investing activities  (86,000)  - 
Cash flow from financing activities        
Proceeds from common stock subscription      24,000 
Proceeds from common stock sale  1,300,000   1,238,000 
Net cash provided by financing activities  1,300,000   1,262,000 
Net increase (decrease) in cash and cash equivalents  361,709   (16,822)
Cash and cash equivalents at beginning of period  198,173   499,652 
Cash and cash equivalents at end of period $559,882  $482,830 
         
Supplemental disclosure of cash flow information        
Cash paid during period for        
Cash paid for interest $-  $- 
Cash paid for income taxes $-  $- 
Cancellation of payroll liability to CEO $-  $116,000 
Common stock issued for consulting services $-  $165,325 
 
The accompanying notes are an integral part of these consolidated financial statements
 
 
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MedeFile International, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
 
 
1. BASIS OF PRESENTATION AND NATURE OF BUSINESS OPERATIONS

Basis of Presentation
 
The accompanying unaudited condensed consolidated financial statements of MedeFile International Inc., a Nevada corporation (the "Company"), have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. These unaudited condensed consolidated financial statements and related notes should be read in conjunction with the Company's Form 10-K for the fiscal year ended December 31, 201. In the opinion of management, these unaudited condensed consolidated financial statements reflect all adjustments that are of a normal recurring nature and which are necessary to present fairly the financial position of the Company as of March 31,September 30, 2012, and the results of operations and cash flows for the threenine months ended March 31,September 30, 2012 and 2011. The results of operations for the three and nine months ended March 31,September 30, 2012 are not necessarily indicative of the results that may be expected for the entire fiscal year.

Restatement

In connection with Securities Purchase Agreements entered into during the third quarter 2011 (see Notes 5 and 6), the Company granted warrants with ratchet provisions that were not accounted for properly. The warrants, which were for the purchase of up to 35,461 shares of the Company’s common stock with an original exercise price of $2.50, were granted in July 2011 in connection with the sale of 35,461 shares of common stock. The warrants’ ratchet provision were triggered by the Company’s sale of common stock in April 2012 at a purchase price of $0.0001, as a result of which , the exercise price was adjusted to $0.50 and the number of shares underlying the warrants was increased to 1,733,050.  The anticipated effects of the resulting adjustments are as follows:

Upon grant, the Company assesses the fair value of the warrants using the Black Scholes pricing model and records a warrant liability for the value.  The adjustment for this valuation to Warrant Liability is $635,143.  An adjustment to change in fair value of warrant liability is a gain of $523,507 for the year ended December 31, 2011 reflected directly to retained earnings.  The warrant liability at December 31, 2011 is $111,636.

During the first quarter 2012, the company recognized a loss on the change in fair value of warrant liability in the amount of $42,351, the resulting warrant liability balance at March 31, 2012 is $153,987.

The following table provides additional details regarding the changes to the balance sheet as of December 31, 2011

  As restated  
As previously
reported
  Change 
Warrant liabilities $111,636   $-  $111,636 
Additional paid in capital  17,351,006   17,986,149   (635,143)
Retained earnings $(17,718,423)  $(18,241,930)  $(523,507) 
Nature of Business Operations
 
MedeFile International, Inc. has developed and globally markets a proprietary, patient-centric, Internet-enabled Personal Health Record (iPHR) system for gathering, digitizing, maintaining, accessing and sharing an individual’s actual medical records. MedeFile's goal is to revolutionize the medical industry by bringing patient-centric digital technology to the business of medicine. MedeFile intends to accomplish its objective by providing individuals with a simple and secure way to access their lifetime of actual medical records in an efficient and cost-effective manner. MedeFile's products and services are designed to provide healthcare providers with the ability to reference their patients’ actual past medical records, thereby ensuring the most accurate treatment and services possible while simultaneously reducing redundant procedures.

Interoperable with most electronic medical record systems utilized by physician practices, clinics, hospitals and other care providers, the highly secure, feature-rich MedeFile iPHR solution has been designed to gather all of its members’ actual medical records on behalf of each member, and create a single, comprehensive Electronic Health Record (EHR). The member can access his/her records 24-hours a day, seven days a week – or authorize a third party user – on any web-enabled device (PC, cell phone, PDA, e-reader, et al), as well as the portable MedeFile flash drive/keychain or branded UBS-bracelet.
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By subscribing to the MedeFile system, not only do members can empower themselves to take control of their own health and well-being, theyas well as empower their healthcare providers to make sound and lifesaving decisions with the most accurate, up-to-date medical information available.  In addition, with MedeFile, members enjoy the peace of mind that comesbenefit from knowing that their medical records are protected from fire, natural disaster, document misplacement or the closing of a medical or dental practice.

MedeFile believes it enjoys a number of competitive advantages over other firms within the medical records marketplace, including:

●·MedeFile has developed products and services geared to the patient, while containing the depth and breadth of information required by treating physicians and medical personnel.
●·MedeFile does all the work of collecting and updating medical information on an ongoing basis; its dependence on the  patient taking action is minimal – particularly when compared to patient action required to support competing solutions.

●·MedeFile provides a complete medical record. Other companies claim complete longitudinal records, but in reality only provide histories (usually completed by the member/patient), and are by no means complete or necessarily accurate records.
●·MedeFile provides a coherent mix of services and products that are intended to affect the quality of healthcare by enabling the patient to manage and access the information normally retained by doctors and other care providers.
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Going Concern

The accompanying financial statements have been prepared contemplating a continuation of the Company as a going concern. However, the Company has reported a net loss of $233,723$10,841,017 for the threenine months ended March 31,September 30, 2012 and $2,079,374$1,555,867 for the year ended December 31, 2011 and had an accumulated deficit of $18,475,653$28,559,440 as of March 31,September 30, 2012.  The Company has net negative working capital of $57,067$4,772,956 as of March 31,September 30, 2012.

The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The operating losses raise substantial doubt about the Company's ability to continue as a going concern. The Company's ability to obtain additional financing depends on the availability of its borrowing capacity, the success of its growth strategy and its future performance, each of which is subject to general economic, financial, competitive, legislative, regulatory and other factors beyond the Company's control.
 
We will need additional investments in order to continue operations to cash flow break even. Additional investments are being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities or other financing mechanisms.

However, the trading price of our common stock could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations.

Cash and Cash Equivalents

For purposes of these financial statements, cash and cash equivalents includes highly liquid debt instruments with maturity of less than three months.
 
Concentrations of Credit Risk

Financial instruments and related items, which potentially subject the Company to concentrations of credit risk, consist primarily of cash and cash equivalents. The Company places its cash and temporary cash investments with high credit quality institutions. At times, such investments may be in excess of the FDIC insurance limit.  Currently our operating account is not above the FDIC limit.

Advertising

The Company follows the policy of charging the costs of advertising to expense as incurred. The Company incurred advertising costs for the three months ended March 31,June 30, 2012 and 2011 of approximately $0 and $0, respectively.  The Company incurred advertising costs for the six months ended June 30, 2012 and 2011 of approximately $0 and $6,500, respectively.
7

Income Taxes

The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statements and tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
 
The Company records net deferred tax assets to the extent the Company believes these assets will more likely than not be realized. In making such determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax planning strategies and recent financial operations. A valuation allowance is established against deferred tax assets that do not meet the criteria for recognition. In the event the Company were to determine that it would be able to realize deferred income tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the valuation allowance which would reduce the provision for income taxes.
 
The Company follows the accounting guidance which provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits. Income tax positions must meet a more-likely-than-not recognition threshold at the effective date to be recognized initially and in subsequent periods. Also included is guidance on measurement, recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition.

Property and Equipment

Property and equipment are stated at cost. When retired or otherwise disposed, the related carrying value and accumulated depreciation are removed from the respective accounts and the net difference less any amount realized from disposition, is reflected in earnings. Minor additions and renewals are expensed in the year incurred. Major additions and renewals are capitalized and depreciated over their estimated useful lives being three years up to ten years.
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Trademark Costs

Trademark costs incurred in the registration and acquisition of trademarks and trademark rights are capitalized. These costs will be amortized over the legal life of the related trademark once the trademark is awarded. The Company performs an annual review of its identified intangible assets to determine if facts and circumstances exist which indicate that the useful life is shorter than originally estimated or that the carrying amount of the assets may not be recoverable.

The Company expenses all software costs associated with the conceptual formulation and evaluation of alternatives until the application development stage has been reached. Costs to improve or support the technology are expensed as these costs are incurred.

Website Development

The Company's policy is to capitalize website development costs at original cost and amortize the balance over the life of the website.  The life of website is determined at completion of the project. The Company reviews the amounts capitalized for impairment whenever events or circumstances indicate that the carrying amounts of the assets may not be recoverable.

The Company expenses all development costs associated with the conceptual formulation and evaluation of alternatives until the application development stage has been reached. Costs to improve or support the technology are expensed as these costs are incurred.

Revenue Recognition

The Company generates revenue from licensing the right to utilize its proprietary software for the storage and distribution of healthcare information to individuals and affinity groups. For revenue from product sales, the Company recognizes revenue based on four basic criteria which must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the selling prices of the products delivered and the collectability of those amounts. Provisions for discounts and rebates to customers, estimated returns and allowances, and other adjustments are provided for in the same period the related sales are recorded.

Deferred Revenue

The Company generally receives subscription fees for its services. From time to time, the Company will receive quarterly or annual subscriptions paid in advance and deferred revenue is recorded at that time. The deferred revenue is amortized into revenue on a pro- rata basis each month. Customers with quarterly or annual subscriptions may cancel their subscriptions and request a refund for future months' revenues at any time. Therefore, a liability is recorded to reflect the amounts that are potentially refundable.  At March 31,September 30, 2012 and 2011, deferred revenue totaled $6,894$4,972 and $7,539,$7,051, respectively.
8

Reclassifications

Certain reclassifications have been made in prior periods financial statements to conform to classifications used in the current period.

Recent Accounting Pronouncements

On January 1, 2012, the Company adopted changes issued by the Financial Accounting Standards Board (FASB) to conform existing guidance regarding fair value measurement and disclosure between GAAP and International Financial Reporting Standards. These changes both clarify the FASB’s intent about the application of existing fair value measurement and disclosure requirements and amend certain principles or requirements for measuring fair value or for disclosing information about fair value measurements. The clarifying changes relate to the application of the highest and best use and valuation premise concepts, measuring the fair value of an instrument classified in a reporting entity’s shareholders’ equity, and disclosure of quantitative information about unobservable inputs used for Level 3 fair value measurements. The amendments relate to measuring the fair value of financial instruments that are managed within a portfolio; application of premiums and discounts in a fair value measurement; and additional disclosures concerning the valuation processes used and sensitivity of the fair value measurement to changes in unobservable inputs for those items categorized as Level 3, a reporting entity’s use of a nonfinancial asset in a way that differs from the asset’s highest and best use, and the categorization by level in the fair value hierarchy for items required to be measured at fair value for disclosure purposes only. Other than the additional disclosure requirements, the adoption of these changes had no impact on the Consolidated Financial Statements.
 
8
On January 1, 2012, the Company adopted changes issued by the FASB to the presentation of comprehensive income. These changes give an entity the option to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements; the option to present components of other comprehensive income as part of the statement of changes in stockholders’ equity was eliminated. The items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income were not changed. Additionally, no changes were made to the calculation and presentation of earnings per share. Management elected to present the two-statement option. Other than the change in presentation, the adoption of these changes had no impact on the Consolidated Financial Statements.

In December 2011, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update No. 2011-10 (“ASU 2011-10”), Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real Estate—a Scope Clarification (a consensus of the FASB Emerging Issues Task Force). ASU 2011-10 clarifies when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance for Real Estate Sale (Subtopic 360-20). The provisions of ASU 2011-10 are effective for public companies for fiscal years and interim periods within those years, beginning on or after June 15, 2012. When adopted, ASU 2011-10 is not expected to materially impact our consolidated financial statements.
 
In May 2011, FASB issued ASU 2011-04 “Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs.” The amendments in this update result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently, the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. For many of the requirements, the Board does not intend for the amendments in this update to result in a change in the application of the requirements in Topic 820. Some of the amendments clarify the Board’s intent about the application of existing fair value measurement requirements. Other amendments change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements. For public entities, the new guideline is effective for interim and annual periods beginning after December 15, 2011 and should be applied prospectively. The Company does not expect that the guidance effective in future periods will have a material impact on the financial statements.

In May 2011, the FASB issued ASC Update No. 2011-05, Comprehensive Income (Topic 820): Presentation of Comprehensive Income. Update No. 2011-05 requires that net income, items of other comprehensive income and total comprehensive income be presented in one continuous statement or two separate consecutive statements. The amendments in this Update also require that reclassifications from other comprehensive income to net income be presented on the face of the financial statements. We are required to adopt Update No. 2011-05 for our first quarter ending March 31, 2012, with the exception of the presentation of reclassifications on the face of the financial statements, which has been deferred by the FASB under ASC Update No. 2011-12, Comprehensive Income (Topic 820): Deferral of the Effective Date for Amendments to the Presentation of Reclassifications of Items Out of Accumulated Other Comprehensive Income. The adoption of Update No. 2011-05 is not expected have a material impact the financial statements.
9

In December 2011, the Financial Accounting Standards Board (“FASB”) released Accounting Standards Update No. 2011-10 (“ASU 2011-10”), Property, Plant and Equipment (Topic 360): Derecognition of in Substance Real Estate—a Scope Clarification (a consensus of the FASB Emerging Issues Task Force). ASU 2011-10 clarifies when a parent (reporting entity) ceases to have a controlling financial interest in a subsidiary that is in substance real estate as a result of default on the subsidiary’s nonrecourse debt, the reporting entity should apply the guidance for Real Estate Sale (Subtopic 360-20). The provisions of ASU 2011-10 are effective for public companies for fiscal years and interim periods within those years, beginning on or after June 15, 2012. When adopted, ASU 2011-10 is not expected to have a material impact on the financial statements.

Net Loss per Share
 
Basic and diluted loss per share amounts are computed based on net loss divided by the weighted average number of common shares outstanding. Warrants to purchase 145,175,00064,496 common shares were not included in the computation of diluted loss per share because the assumed conversion and exercise would be anti-dilutive for the year ending December 31, 2011.   Warrants to purchase 8,175,000 common shares and options to purchase 5,640,0003,002,084 common shares were not included in the computation of diluted loss per share because the assumed conversion and exercise would be anti-dilutive for the threenine months ended March 31,September 30, 2012.

Management Estimates
 
The presentation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that 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 reported period. Actual results could differ from those estimates.
 
Stock-Based Compensation
 
The Company accounts for all compensation related to stock, options or warrants using a fair value based method whereby compensation cost is measured at the grant date based on the value of the award and is recognized over the service period, which is usually the vesting period. The Company uses the Black-Scholes pricing model to calculate the fair value of options and warrants issued to both employees and non-employees. Stock issued for compensation is valued using the market price of the stock on the date of the related agreement.
9


2.  ACCOUNTS RECEIVABLE

Due to the collection history of the Company, an allowance for doubtful accounts is not maintained.  Recognition of a specific uncollectible account is written directly against the invoice in accounts receivable and expensed in the current period.

3.   WEBSITE DEVELOPMENT

Website development consists of the following:

 
March 31,
 2012
  December 31, 2011  
June 30,
 2012
  December 31, 2011 
Website development $62,946  $62,946  $62,946  $62,946 
Additional development  86,000     
Accumulated amortization  (41,964)  (36,719)  (52,455)  (36,719)
Net website development $20,982  $26,227  $96,491  $26,227 

Beginning May 2012 the Company began redesigning of its website.  The redesign is anticipated to be completed in December 2012

Amortization is calculated over a three-year period beginning in the second quarter of 2010.  Amortization expense for the three months ended March 31,September 30, 2012 and 2011 is $5,245 and $5,245, respectively.  Amortization expense for the nine months ended June 30, 2012 and 2011 is $15,736 and $15,737, respectively

4. FURNITURE AND EQUIPMENT

Furniture and equipment consists of the following:
 
 March 31, 2012  
December 31,
2011
  June 30, 2012  
December 31,
2011
 
Computers and equipment
 $169,286  $169,286  $169,286  $169,286 
Furniture and fixtures
  38,618   38,618   38,618   38,618 
Subtotal
  207,904   207,904   207,904   207,904 
Less: accumulated depreciation
  (199,977)  (197,626)  (204,579)  (197,626)
Net furniture and equipment
 $7,927  $10,278  $3,325  $10,278 
10
 
Depreciation is calculated by using the straight-line method over the estimated useful life.   Depreciation expense totaled $2,352 and $2,600$2,250and $2,500 for the three months ended March 31,September 30, 2012 and 2011, respectively.  Depreciation expense totaled $6,953 and $7,613 for the nine months ended September 30, 2012 and 2011, respectively.

5. WARRANT LIABILITY

In connection with certain securities purchase agreements entered into during the third quarter 2011 and the second quarter 2012 (see Note 6), the Company granted warrants with ratchet provisions. The warrants contain an expiration date of four years from the date of grant. During the first two years of grant, should the Company issue any additional shares of common stock at a price per share less than the exercise price in effect, the exercise price will be adjusted to equal the average price per share received by the Company for the additional shares issued. After the first two years, should the Company issue any additional shares of common stock at a price per share less than the exercise price in effect, the exercise price will be adjusted using a formula based on the existing exercise price, the outstanding shares before and after the issuance of such shares, and the average price during the issuance of such shares. In addition to the exercise price adjustment, the number of shares upon exercise of the warrants are also adjusted.

Upon grant, the Company assesses the fair value of the warrants using the Black Scholes pricing model and records a warrant liability for the value. The Company then assesses the fair value of the warrants quarterly based on the Black Scholes Model and increases or decreases the warrant liability to the new value, and records a corresponding gain or loss. (see Note 6 for variables used in assessing the fair value). The Company uses expected volatility based primarily on historical volatility using weekly pricing observations for recent periods that correspond to the expected life of the warrants. The risk-free interest rate is based on U.S. Treasury securities rates.

Due to the ratchet provisions, the Company treats the warrants as a derivative liability in accordance with the provisions of ASC 815 “Derivatives and Hedging” (ASC 815). ASC 815 applies to any freestanding financial instruments or embedded features that have the characteristics of a derivative and to any freestanding financial instruments that potentially settle in an entity’s own common stock.

As of September 30, 2012, these warrants include the following:

Warrants granted during July 2011 in connection with the sale of 35,461 shares of common stock with the right to originally purchase up to 35,461 shares of the Company’s common stock with an original exercise price of $2.50. Due to the issuance of the Company’s common stock in April 2012, the exercise price was adjusted to $0.50 and the number of shares to 1,773,050. Fair value was determined using the following variables:

  Grant Date  September 30, 2012  December 31, 2011 
Risk-free interest rate at grant date  1.21%  0.47%  0.41%
Expected stock price volatility  194.9%  137.8%  217.8%
Expected dividend payout  -   -   -- 
Expected option in life-years  4   3.25   3.0 
Warrants granted during April 2012 in connection with the sale of 100,000 shares of the Company’s preferred stock to a significant shareholder and brother of the Chief Executive Officer with the right to purchase up to 200,000,000 shares of the Company’s common stock with an exercise price of $0.50. Fair value was determined using the following variables:

  Grant Date  September 30, 2012 
Risk-free interest rate at grant date  0.47%  0.57%
Expected stock price volatility  137.8%  169.8%
Expected dividend payout  -   - 
Expected option in life-years  3.75   3.8 

 Warrants granted during April 2012 in connection with the sale of 1,000,000 shares of the Company’s common stock with an exercise price of $0.50.

  Grant Date  September30, 2012 
Risk-free interest rate at grant date  0.47%  0.57%
Expected stock price volatility  137.8%  169.8%
Expected dividend payout  -   - 
Expected option in life-years  3.75   3.8 
11

Transactions involving warrants with ratchet provisions are as follows:

  Number of Warrants  Weighted-Average Price Per Share 
Outstanding at December 31, 2010  -  $- 
Granted  35,461   25.00 
Exercised  -     
Canceled or expired  -   - 
Outstanding at December 31, 2011  35,461  $25.00 
Granted  1,200,000   0.50 
Exercised  -   - 
Canceled or expired  -   - 
Addition due to ratchet trigger  1,773,050   0.50 
Outstanding at June 30, 2012  3,008,511  $0.788 

As of September 30, 2012 and December 31, 2011, the warrant liability consisted of the following:

  September 30, 2012  
December 31,
2011
(Restated)
 
Warrant liability (beginning balance) $111,636  $- 
Additional liability due to new grants  5,078,052   635,143 
Loss(gain) on changes in fair market value of warrant liability  145,331   (523,506 
       Net warrant liability $5,335,019  $111,636 

Change in fair market value of warrant liability resulted in a gain (loss) totaling $271,684 and $(145,331) for the three and nine months ended September 30, 2012, respectively, compared to $(422,309) for the three and nine months ended September 30, 2011.

6. EQUITY

Common Stock
On October 8, 2012, the Company filed a Certificate of Amendment to its Articles of Incorporation with the Secretary of State of Nevada, pursuant to which (i) the Company effected a 5,000-to-1 reverse split of its common stock and (ii) the number of authorized shares of the Company’s common stock decreased from 75,000,000,000 to 100,000,000. The market effective date of the reverse split was October 9, 2012.  The effect of the stock split has been applied retroactively.

During the first quarter 2011, the Company entered into a Securities Purchase Agreement, pursuant to which the Company sold 201,000,00040,200 shares of common stock at a purchase price of $0.003$15.00 per share.  Total proceeds from the sale of the stock totaled $603,000.

On March 31, 2011, the Company issued 9,375,0001,875 shares of common stock for amounts due to consultant.  The shares had a market value of $37,500.

On April 29, 2011, the Company issued 7,653,0611,531 shares of common stock for amounts due to a consultant.  The shares had a market value of $32,143.

On May 11, 2011, the Company issued 10,000,0002,000 shares of common stock for amounts due to consultants.  The shares had a market value of $70,000.

During the first quarter 2011, the Company entered into a Securities Purchase Agreement for the sale of 45,000,0009,000 shares of common stock at a purchase price of $0.003$15.00 per share.   The funds were received during the first quarter of 2011 and recorded as a stock payable in the amount of $135,000 as of June 30, 2011.  On July 8, 2011, 45,000,0009,000 shares of common stock were issued.

On June 3, 2011, the Company received $24,000 from proceeds from a Securities Purchase Agreement for the purchase of 8,000,0001,600 shares of common stock.  On March 15, 2012 the Company issued the 8,000,0001,600 shares of common stock in accordance with the Securities Purchase Agreement and the shares of common stock were issued against the remaining balance in Stock Payable.
.
 
 
1012
 
.
During the third quarter of 2011, the Company entered into a Securities Purchase Agreement pursuant to which it sold 177,304,96035,461 shares of common stock at a purchase price of $0.00282$14.10 per share.

On August 1, 2011, the Company issued 11,029,4212,206 shares of common stock for amounts due to consultant.  The shares had a market value of $33,088.

On November 1, 2011, the Company issued 46,875,0009,375 shares of common stock for amounts due to consultants.  The shares had a market value of $42,187.50.

On March 1, 2012, the Company issued 53,571,42910,714 shares of common stock to a consultant. The market value of the shares was $42,859,

On April 10, 2012, the Company filed a certificate of designation of Series B Preferred Stock (the “Series B Certificate of Designation”) with the Secretary of State of Nevada, pursuant to which 100,000 shares of the Company’s preferred stock were designated as Series B Convertible Preferred Stock (the “Series B Preferred Stock”).  Pursuant to the Series B Certificate of Designation, the Series B Preferred Stock:

●  Has a liquidation preference over the common stock equal to the stated value of $1.00 per share.
●  Votes as a single class with the common stock and entitles its holders, for each share of Series B Preferred Stock, to cast such number of votes equal to 0.00051% of the total number of votes entitled to be cast. Accordingly, a holder of all 100,000 shares of Series B Preferred Stock will have the right to cast 51% of the total number of votes entitled to be cast.
●  Will automatically convert into common stock at a ratio of 2 shares of common stock for each share of Series B Preferred Stock, effective upon the Company’s filing of a certificate of amendment to its articles of incorporation, pursuant to which the Company’s number of authorized shares of common stock will increase to75,000,000,000.

On April 12, 2012, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Lyle Hauser (the “Preferred Stock Investor”). Lyle Hauser is the Company’s largest shareholder and the brother of Kevin Hauser, the Company’s chief executive officer. Pursuant to the Purchase Agreement, on April 12, 2012, the Company sold 100,000 shares of Series B Preferred Stock to the Preferred Stock Investor for an aggregate purchase price of $100,000, and the Company issued four-year warrants to purchase 200,000 shares of common stock to the Preferred Stock Investor with an exercise price of $0.50. Pursuant to the Purchase Agreement, the Preferred Stock Investor agreed to vote its shares of Series B Preferred Stock to approve an amendment to the Company’s articles of incorporation to increase the Company’s authorized shares of common stock to 75,000,000,000.

On April 13, 2012, the Preferred Stock Investor voted its 100,000 shares of Series B Preferred Stock, representing 51% of the voting power of the Company’s shareholders, to approve an amendment to the Company’s articles of incorporation to increase the Company’s number of authorized shares of common stock to 75,000,000,000.

On April 18, 2012, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with accredited investors (the “Investors”) pursuant to which, on April 18, 2012, the Company sold 1,000,000 shares of common stock for an aggregate purchase price of $500,000, and the Company issued four-year warrants to purchase 1,000,000 shares of common stock to the Investors with an exercise price of $0.50. The Investors were purchasers under the Company’s Securities Purchase Agreements entered into in July 2011.

On April 23, 2012, the Company issued an aggregate of 8,180,133 shares of common stock to certain shareholders of the Company, in accordance with anti-dilution rights held by such shareholders, including 5,583,594 shares to Lyle Hauser, 1,632,000 shares to Kevin Hauser, and 964,539 shares to purchasers under Securities Purchase Agreements entered into by the Company in July 2011. Lyle Hauser is the Company’s largest shareholder and the brother of Kevin Hauser, the Company’s chief executive officer.

On May 15, 2012, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with accredited investors (the “Investors”) pursuant to which, on May 15, 2012, the Company sold 600,000 shares of common stock for an aggregate purchase price of $300,000, and the Company issued four-year warrants to purchase 600,000 shares of common stock to the Investors with an exercise price of $0.50. The Investors were purchasers under the Company’s Securities Purchase Agreements entered into in July 2011.

On June 26, 2012, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with accredited investors (the “Investors”) pursuant to which, on June 26, 2012, the Company sold 200,000 shares of common stock for an aggregate purchase price of $100,000, and the Company issued four-year warrants to purchase 200,000 shares of common stock to the Investors with an exercise price of $0.50. The Investors were purchasers under the Company’s Securities Purchase Agreements entered into in July 2011.  As of June 30, 2012 the share are unissued.
13

On July 16, 2012, the Company issued 24,000 shares of common stock to a consultant in the amount of $60,000.

On July 18, 2012, the Company entered into a Securities Purchase Agreement with accredited investors pursuant to which, on July 18, 2012, the Company sold 100,000 shares of common stock for an aggregate purchase price of $50,000. 

On July 18, 2012, the Company sold 10,000 shares of common stock for a purchase price of $50,000.   As of September 30, 2012, the shares have not been issued

On September 20, 2012, the Company sold 100,000 shares of common stock for a purchase price of $50,000.   As of September 30, 2012, the share have not been issued


On August 24, 2012, the Company entered into a Securities Purchase Agreement with accredited investors pursuant to which, the Company sold 500,000 shares of common stock for an aggregate purchase price of $250,000. 

Stock Options

2006 Incentive Stock Plan

In January 2006, the Board of Directors of the Company approved an Incentive Stock Plan, pursuant to which they have initially reserved 10,000,0002,000 shares of common Stock for issuance. Under the 2006 Incentive Stock, the Board has granted an aggregate of 5,640,0001,128 options to employees pursuant to certain employment agreement that are more fully described below:  As of December 31, 2011 all options have expired.

2008 Amended and Restated Incentive Stock Plan

In November 2008, our Board of Directors adopted the 2008 Equity Incentive Plan and subsequently amended it in January 2009, June 2009 and July 2009 (the “2008 Plan”). The purpose of the 2008 Plan was to provide an incentive to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons into our development and financial success. Under the 2008 Plan, the Company is authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and long term incentive awards. The 2008 Plan will be administered by our Board of Directors until such time as such authority has been delegated to a committee of the board of directors.

2010 Incentive Stock Plan

In December 2009, our Board of Directors adopted the 2010 Equity Incentive Plan (the “2010 Plan”). The purpose of the 2010 Plan was to provide an incentive to attract and retain directors, officers, consultants, advisors and employees whose services are considered valuable, to encourage a sense of proprietorship and to stimulate an active interest of such persons into our development and financial success. Under the 2010 Plan, we are authorized to issue incentive stock options intended to qualify under Section 422 of the Code, non-qualified stock options, stock appreciation rights, performance shares, restricted stock and long term incentive awards. The 2010 Plan will be administered by our Board of Directors until such time as such authority has been delegated to a committee of the Board of Directors.

A summary of option activity under all Plans as of March 31,September 30, 2012, and changes during the period then ended are presented below:

 
 
Options
  Weighted-Average Exercise Price  
 
Options
  Weighted-Average Exercise Price 
Outstanding at December 31, 2010
  5,640,000  $0.80   1,128  $4,000.00 
Issued
  -   -   -   - 
Exercised
  5,640,000   0.80   1,128   4,000.00 
Forfeited or expired
  -   -   -   - 
Outstanding at December 31, 2011
  -  $0.00   -  $0.00 
Issued
  -   -   -   - 
Expired
  -   -   -   - 
Forfeited
  -   -   -   - 
Outstanding at March 31, 2012
  -   - 
Non-vested at March 31, 2012
  -   - 
Exercisable at March 31, 2012
  -  $0.00 
Outstanding at September 30, 2012
  -   - 
Non-vested at September 30, 2012
  -   - 
Exercisable atSeptember 30, 2012
  -  $0.00 
 
 
 
1114
 

Stock-based compensation expense recognized during the period is based on the value of the portion of share-based payment awards that is ultimately expected to vest during the period.  For the years ended December 31, 2011 and 2010, the Company recorded no compensation expense related to options.

Other Warrants
  
The Company awarded 175,00035 Common Stock warrants, at an exercise price of $0.56$2,500.06 per share, to former Board members at the quoted stock price on the effective date of the awards. The warrants have an expiration date of five years from the issue date and contain provisions for a cash exercise. The estimated value of the compensatory warrants granted to non-employees in exchange for services and financing expenses was determined using the Black-Scholes pricing model and the following assumptions:

Risk-free interest rate at grant date
  
4.75
%
Expected stock price volatility
  
155
%
Expected dividend payout
  
--
 
Expected option in life-years
  
5
 
 
On June 22, 2011, the Company awarded 10,000,0002,000 Common Stock warrants, at an exercise price of $0.01$50.00 per share, to consultants for services at the quoted stock price on the effective date of the awards. The warrants have an expiration date of four years from the issue date and contain provisions for a cash exercise. The estimated value of the compensatory warrants granted to non-employees in exchange for services and financing expenses was determined using the Black-Scholes pricing model and the following assumptions listed below:

On July 28, 2011, the Company awarded 135,000,00027 Common Stock Warrants, at an exercise price of $0.005$25.00 per share to consultants for services at the quoted stock price on the effective date of the awards.  The warrants have an expiration date of three years from the issue date and contain provisions for a cash exercise.  The estimated value of the compensatory warrants granted to non-employees in exchange for services was determined using the Black-Scholes pricing model and the assumptions listed below.


Risk-free interest rate at grant date
  
0.39
%
Expected stock price volatility
  
172.1
%
Expected dividend payout
  
--
 
Expected option in life-years
  
4
 

.Transactions involving warrants are summarized as follows:
  Number of Warrants  Weighted-Average Price Per Share 
Outstanding at December 31, 2010
  8,175,000  $.73 
Granted
  145,000,000   .01 
Exercised
  -     
Canceled or expired
  8,000,000   .73 
Outstanding at December 31, 2011
  145,175,000  $0.19 
Granted
  -   - 
Exercised
  -   - 
Canceled or expired
  -   - 
Outstanding at March 31, 2012
  145,175,000  $0.019 

12

Warrants Outstanding  Warrants Exercisable 
      Weighted        Weighted 
      Average  Weighted     Average 
      Remaining  Average     Remaining 
Exercise  Number  Contractual  Exercise  Number  Contractual 
Prices  Outstanding  Life (years)  Price  Exercisable  Life (years) 
 
$
0.56
   
175,000
   
1.25
  
$
0.56
   
175,000
   
1.25
 
  
0.005
   
135,000,000
   
2.50
   
0.005
   
135,000,000
   
2.50
 
  
0.01
   
10,000,000
   
3.50
   
0.01
   
10,000,000
   
3.50
 
      
145,175,000
   
2.56
  
$
0.56
   
145,175,000
   
2.56
 
6.  SUBSEQUENT EVENTS

On April 10,.During the second quarter of 2012, the Company filed a certificate of designation of Series B Preferred Stock (the “Series B Certificate of Designation”) with the Secretary of State of Nevada, pursuant to which 100,000 shares of the Company’s preferredissued 1,200,000 Common stock were designated as Series B Convertible Preferred Stock (the “Series B Preferred Stock”).  Pursuant to the Series B Certificate of Designation, the Series B Preferred Stock:

●
Has a liquidation preference over the common stock equal to the stated value of $1.00 per share.
●
Votes as a single class with the common stock and entitles its holders, for each share of Series B Preferred Stock, to cast such number of votes equal to 0.00051% of the total number of votes entitled to be cast. Accordingly, a holder of all 100,000 shares of Series B Preferred Stock will have the right to cast 51% of the total number of votes entitled to be cast.
●
Will automatically convert into common stockwarrants, at a ratio of 10,000 shares of common stock for each share of Series B Preferred Stock, effective upon the Company’s filing of a certificate of amendment to its articles of incorporation, pursuant to which the Company’s number of authorized shares of common stock will increase to75,000,000,000.

On April 12, 2012, the Company entered into a securities purchase agreement (the “Purchase Agreement”) with Lyle Hauser (the “Preferred Stock Investor”). Lyle Hauser is the Company’s largest shareholder and the brother of Kevin Hauser, the Company’s chief executive officer. Pursuant to the Purchase Agreement, on April 12, 2012, the Company sold 100,000 shares of Series B Preferred Stock to the Preferred Stock Investor for an aggregate purchase price of $100,000, and the Company issued four-year warrants to purchase 1,000,000,000 shares of common stock to the Preferred Stock Investor with an exercise price of $0.0001. Pursuant to the Purchase Agreement, the Preferred Stock Investor agreed to vote its shares of Series B Preferred Stock to approve an amendment to the Company’s articles of incorporation to increase the Company’s authorized shares of common stock to 75,000,000,000.

On April 13, 2012, the Preferred Stock Investor voted its 100,000 shares of Series B Preferred Stock, representing 51% of the voting power of the Company’s shareholders, to approve an amendment to the Company’s articles of incorporation to increase the Company’s number of authorized shares of common stock to 75,000,000,000.

On April 18, 2012, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with accredited investors (the “Investors”) pursuant to which, on April 18, 2012, the Company sold 5,000,000,000 shares of common stock for an aggregate purchase price of $500,000, and the Company issued four-year$0.50 per share.  The warrants to purchase 5,000,000,000 shares of common stock to the Investors with an exercise price of $0.0001. The Investors were purchasers under the Company’s Securities Purchase Agreements entered into in July 2011.

On April 23, 2012, the Company issued an aggregate of 39,900,663,786 shares of common stock to certain shareholders of the Company,Transactions involving warrants, excluding warrants discussed in accordance with anti-dilution rights held by such shareholders, including 26,917,968,750 shares to Lyle Hauser, 8,160,000,000 shares to Kevin Hauser, and 4,822,695,036 shares to purchasers under Securities Purchase Agreements entered into by the Company in July 2011. Lyle Hauser is the Company’s largest shareholder and the brother of Kevin Hauser, the Company’s chief executive officer.Note 5, are summarized as follows:
 
  Number of Warrants  Weighted-Average Price Per Share 
Outstanding at December 31, 2010
  1,635  $3,650.00 
Granted
  29,000   50.00 
Exercised
  -   - 
Canceled or expired
  1,600   3,650.00 
Outstanding at December 31, 2011
  29,035  $54.33 
Granted
  -   - 
Exercised
  -   - 
Canceled or expired
  -   - 
Outstanding at September 30, 2012
  29,035  $54,.33 
Warrants Outstanding  Warrants Exercisable 
      Weighted        Weighted 
      Average  Weighted     Average 
      Remaining  Average     Remaining 
Exercise  Number  Contractual  Exercise  Number  Contractual 
Prices  Outstanding  Life (years)  Price  Exercisable  Life (years) 
 
$
2800.00
   
33
   
.75
  
$
2800.00
   
33
   
.75
 
  
25.00
   
27,000
   
2.00
   
25.00
   
27,000
   
2.00
 
  
50.00
   
2,000
   
3.00
   
50.00
   
2,000
   
3.00
 
      
29,035
   
2.07
  
$
54.33
   
29,035
   
2.07
 

 
1315
 
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
 
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS

It should be noted that this Management’s Discussion and Analysis of Financial Condition and Results of Operations may contain "forward-looking statements." The terms "believe," "anticipate," "intend," "goal," "expect," and similar expressions may identify forward-looking statements. These forward-looking statements represent the Company's current expectations or beliefs concerning future events. The matters covered by these statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in the forward-looking statements, including the Company's dependence on product introduction and customer acceptance of new products, the impact of competition and price erosion, as well as other risks and uncertainties. The foregoing list should not be construed as exhaustive, and the Company disclaims any obligation subsequently to revise any forward-looking statements to reflect events or circumstances after the date of such statements, or to reflect the occurrence of anticipated or unanticipated events. In light of the significant uncertainties inherent in the forward-looking information included herein, the inclusion of such information should not be regarded as a representation that the strategy, objectives or other plans of the Company will be achieved. The Company wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made. WeExcept as may be required under applicable, securities laws, we undertake no duty to update this information. More information about potential factors that could affect our business and financial results is included in the section entitled "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission on April 16, 2012. The following discussion should be read in conjunction with our consolidated financial statements provided in this quarterly report on Form 10-Q.

OVERVIEW

Organizational History

On November 1, 2005, Bio-Solutions International, Inc. ("Bio-Solutions") entered into an Agreement and Plan of Merger (the "Agreement") with OmniMed Acquisition Corp., (the "Acquirer), a Nevada corporation and a wholly owned subsidiary of Bio-Solutions, OmniMed International, Inc., a Nevada corporation ("OmniMed"), and the shareholders of OmniMed (the "OmniMed Shareholders"). Pursuant to the Agreement, Bio-Solutions acquired all of the outstanding equity stock of OmniMed from the OmniMed Shareholders. As consideration for the acquisition of OmniMed, Bio-Solutions agreed to issue 9,894,9001,979 shares of Bio-Solutions' common stock to the OmniMed Shareholders. These issuances were deemed to be exempt under rule 506 of Regulation D and Section 4(2) of the Securities Act of 1933, as amended since, among other things, the transaction did not involve a public offering, the investors were accredited investors and/or qualified institutional buyers, the investors had access to information about the company and their investment, the investors took the securities for investment and not resale, and the Company took appropriate measures to restrict the transfer of the securities.

As a result of the Agreement, the OmniMed Shareholders assumed control of Bio-Solutions. Effective November 21, 2005, Bio-Solutions changed its name to OmniMed International, Inc.  Effective January 17, 2006, OmniMed changed its name to MedeFile International, Inc. ("MedeFile" or the "Company").

Overview of Business

MedeFile International, Inc., through its MedeFile, Inc. subsidiary, has developed and globally markets a proprietary, patient-centric, Internet-enabled Personal Health Record (iPHR) system for gathering, digitizing, maintaining, accessing and sharing an individual’s actual medical records. Our goal is to revolutionize the medical industry by bringing patient-centric digital technology to the business of medicine. We intend to accomplish itsthis objective by providing individuals with a simple and secure way to access their lifetime of actual medical records in an efficient and cost-effective manner. Our products and services are designed to provide healthcare providers with the ability to reference their patient's actual past medical records, thereby ensuring the most accurate treatment and services possible while simultaneously reducing redundant procedures.

Interoperable with most electronic medical record systems utilized by physician practices, clinics, hospitals and other care providers, the highly secure, feature-rich MedeFile iPHR solution has been designed to gather all of its members’ actual medical records on behalf of each member, and create a single, comprehensive Electronic Health Record (EHR).  The member can access his/her records 24-hours a day, seven days a week – or authorize a third party user – on any web-enabled device (PC, cell phone, PDA, e-reader, et al), as well as the portable MedeFile flash drive/keychain or branded UBS-bracelet.
 
By subscribing to the MedeFile system, not only do members can empower themselves to take control of their own health and well-being theyas well as empower their healthcare providers to make sound and lifesaving decisions with the most accurate, up-to-date medical information available.  In addition, with MedeFile, members enjoy the peace of mind that comesbenefit from knowing that their medical records are protected from fire, natural disaster, document misplacement or the closing of a medical or dental practice.
 
 
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We believe we enjoy a number of direct, competitive advantages over others in the medical records marketplace:
 
·  We have developed products and services geared to the patient, while containing the depth and breadth of information required by treating physicians and medical personnel.personnel

·  We do all the work of collecting and updating medical information on an ongoing basis; its dependence on the patient taking action is minimal – particularly when compared to patient action required to support competing solutions.

·  We provide a complete medical record.  Other companies claim complete longitudinal records, but in reality only provide histories (usually completed by the member/patient), and are by no means complete or necessarily accurate records.records

·  We provide a coherent mix of services and products that are intended to affect the quality of healthcare by enabling the patient to manage and access the information normally retained by doctors and other care providers.
 

RESULTS OF OPERATIONS

THREE-MONTHSTHREE MONTHS ENDING MARCH 31,SEPTEMBER30, 2012 COMPARED TO THREE MONTHS ENDING MARCH 31,SEPTEMBER 30, 2011

Revenues

Revenues for the quarterthree months ended March 31,September 30, 2012 totaled $13,714$11,127 compared to revenues of $132,102$83,802 during the three months ended September 30, 2011.   The decrease in membership revenue is primarily related to a decrease in the amount of members and medical record reimbursement revenue received from members. Medical record reimbursement revenue is a dollar for dollar reimbursement for charges from members’ doctors for sending updated medical records to MedeFile. The off-setting expense is charged to selling general and administrative expense.  The Company has decreased its marketing and advertising efforts through a previously used telemarketing campaign.  As a result, there has been a substantial decrease in memberships over the previous period.  Revenues received from memberships are recognized through the period of the membership, and, therefore, revenue recognized represents a fraction of the membership in the quarter being reported.   

Selling, General and Administrative Expenses
Selling, general and administrative expenses for the three months ended March 31,September 30, 2012 totaled $337,489, a decrease of $337,526 or approximately 50.0% compared to selling, general and administrative expenses of $675,015 for the three months ended September 30, 2011. The overall decrease in the total selling, general and administrative is primarily due to decreased costs associated with a previously used telemarketing campaign and business development expenses.
Marketing Expense

Marketing expense for the three months ended September 30, 2012 totaled $0, compared to $70,641 for the three months ending September 30, 2012.  The decrease marketing expense was due to decreased use of lead generation for telemarketing efforts.  The Company relied on one source for generation of leads through the Company’s telemarketing efforts.

Depreciation Expense
Depreciation expense totaled $2,250 for the three months ended September 30, 2012, compared to depreciation expense of $2,500 during the three months ended September 30, 2012. The decrease in depreciation was due to some assets being fully depreciated.    

Amortization Expense

Amortization expense for the three months ended September 30, 2012 totaled $5,245, compared to $5,245 for the three months ended September 30, 2011.  Amortization expense is the expensing of the website development through May 2013.  Amortization began in the second quarter of 2010 and is expensed at $5,245 per quarter over a three-year period.

Changes in Fair Market Value of Warrant Liability

Change in fair market value of warrant liability for the three months ended September 30, 2012 totaled a gain of $271,684 compared to a loss if $422,329 for the three months ended September 30, 2011.  The change in warrant liability is associated with warrants issued and unexercised as of September 30, 2012.

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Net Loss

For the reasons stated above, our net loss for three months ended September 30, 2012 was $65,808, or $0.01 per share, a decrease of $1,035,958, compared to a net loss of $1,101,766 or $1.42 per share, during the three months ended September 30, 2011.

NINE MONTHS ENDING SEPTEMBER 30, 2012 COMPARED TO NINE MONTHS ENDING SEPTEMBER 30, 2011

Revenues

Revenues for the nine months ended September 30, 2012 totaled $32,001 compared to revenues of $403,644 during the nine months ended September 30, 2011.   The decrease in membership revenue is primarily related to a decrease in the amount of members and medical record reimbursement revenue received from members. Medical record reimbursement revenue is a dollar for dollar reimbursement for charges from member’s doctors for sending updated medical records to MedeFile. The off-setting expense is charged to selling general and administrative expense.  The Company has decreased its marketing and advertising efforts through a previously used telemarketing campaign.  As a result, there has been a substantial decrease in memberships over the previous period.  Revenues received from memberships are recognized through the period of the membership, and, therefore, revenue recognized represents a fraction of the membership in the quarter being reported.   

Selling, General and Administrative Expenses
 
Selling, general and administrative expenses for the quarternine months ended March 31,September 30, 2012 totaled $239,774,$10,701,297, a decreaseincrease of $139,346$9,205,077 or approximately 36.8%615.22% compared to selling, general and administrative expenses of $379,120$1,496,220 for the quarternine months ended March 31,September 30, 2011. The overallOverall there was a decrease in the total selling, general and administrative which is primarily due to decreased costs associated with a previously used telemarketing campaign and business development expenses.  However, on April 10, 2012 there was an expense totaling $9,792,000 for the issuance of 1,632,000 shares, at a closing price of $6.00 per share to the CEO in relation to an anti-dilution agreement.   The shares issued to the CEO are treated as compensation under GAAP accounting.
 
Marketing Expense

Marketing expense for the quarternine months ended March 31,September 30, 2012 totaled $0, compared to $129,854$511,362 for the quarternine months ending March 31,September 30, 2012.  The decrease marketing expense was due to decreased use of lead generation for telemarketing efforts.  The Company relied on one source for generation of leads through the Company’s telemarketing efforts.

Depreciation Expense
 
Depreciation expense totaled $2,352$6,953 for the quarternine months ended March 31,September 30, 2012, compared to depreciation expense of $2,600$7,613 during the quarternine months ended March 31,September 30, 2012. The decrease in depreciation was due to some assets being fully depreciated.    

Amortization Expense

Amortization expense for the quarternine months ended March 31,September 30, 2012 totaled $5,245,$15,736, compared to $5,245$15,737 for the quarternine months ended March 31,September 30, 2011.  Amortization expense is the expensing of the website development through May 2013.  Amortization began in the second quarter of 2010 and is expensed at $5,245 per quarter over a three-year period.

Changes in Fair Market Value of Warrant Liability

Change in fair market value of warrant liability for the nine months ended September 30, 2012 totaled a loss of $145,331 compared to a loss of $422,329 for the nine months ended September 30, 2011.  The loss represents the decrease in warrant liability associated with warrants issued and unexercised as of September 30, 2012 and 2011 respectively..

Net Loss

For the reasons stated above, our net loss for quarternine months ended March 31,September 30, 2012 was $233,723,$10,841,017, or $0.00$1.64 per share, a decrease of $214,470,$8,627,822, compared to a net loss of $448,193,$2,213,195, or $0.00$3.04 per share, during the quarternine months  ended March 31,September 30, 2011.
 
 
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FINANCIAL CONDITION

Liquidity and Capital Resources

As of March 31,September 30, 2012, we had cash and cash equivalents of $30,344,$559,882, inventory of $53,859,$55,855, merchant services reserve of $64,320,$64,319, and accounts receivable of $1,893.$150.  Net cash used in operating activities for the threenine months ended March 31,September 30, 2012 was approximately $167,829.$852,291. Current liabilities of $207,483$5,455,158 consisted of $200,589$115,167 for accounts payable and accrued liabilities, and deferred revenues of $6,894.$4,972 and warrant liabilities of $5,335,019. We have a net negative working capital of $57,067.$4,772,956.

The accompanying financial statements have been prepared contemplating a continuation of the Company as a going concern. The Company has reported a net loss of $233,723$10,841,017 for the threenine months ended March 31,September 30, 2012 and $2,079,374$1,555,867 for the year ended December 31, 2011 and had an accumulated deficit of $18,475,653$28,559,440 as of March 31,September 30, 2012.  The Company has a net negative working capital of $57,067$4,772,956 as of March 31,June 30, 2012.

The Company currently estimates that it will require approximately $420,000 to continue its operations for the next twelve months.  Additional investments are being sought, but we cannot guarantee that we will be able to obtain such investments. Financing transactions may include the issuance of equity or debt securities, obtaining credit facilities, or other financing mechanisms. However, the trading price of our common stock and the downturn in the U.S. stock and debt markets could make it more difficult to obtain financing through the issuance of equity or debt securities. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek alternative financing. Further, if we issue additional equity or debt securities, stockholders may experience additional dilution or the new equity securities may have rights, preferences or privileges senior to those of existing holders of our common stock. If additional financing is not available or is not available on acceptable terms, we will have to curtail our operations

Off-Balance Sheet Arrangements
 
We do not have any off balance sheet arrangements as of March 31,September 30, 2012 or as of the date of this report.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

As a Smaller Reporting Company as defined Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item 3.
 
ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file under the Exchange Act is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this Quarterly Report, we conducted an evaluation, under the supervision and with the participation of our Chief Executive Officer (Principal Executive and Financial Officer); of our disclosure controls and procedures (as defined in Rule 13a-15(e) and Rule 15d-15(e) of the Exchange Act). Based upon this evaluation, our Chief Executive Officer (Principal Executive and Financial Officer) concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and which also are effective in ensuring that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s Chief Executive Officer (Principal Executive and Financial Officer), to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

During the quarter ended March 31,September 30, 2012, there has been no change in our internal control over financial  reporting  (as defined in Rule  13a-15(f) and 15d-15(f) under the Exchange Act) ) that has materially affected,  or is reasonably likely to materially affect, our internal control over financial reporting.

 
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PART II - OTHER INFORMATION
 
Item 1. Legal Proceedings

From time to time, the Company may become involved in litigation relating to claims arising out of its operations in the normal course of business. We are not involved in any pending legal proceeding or litigation and, to the best of our knowledge, no governmental authority is contemplating any proceeding to which we are a party or to which any of our properties is subject, which would reasonably be likely to have a material adverse effect on the Company.

Item 1A. Risk Factors

As a Smaller Reporting Company as defined Rule 12b-2 of the Exchange Act and in item 10(f)(1) of Regulation S-K, we are electing scaled disclosure reporting obligations and therefore are not required to provide the information requested by this Item .
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

On March 21,July 18, 2012, the Company issued 53,571,429100,000 shares of common stock to an accredited investor for a purchase price of $50,000.

On July 16, 2012, the Company issued 24,000 shares of common stock to a consultant for services.

On August 24, 2012, the Company issued 500,000 shares of common stock to an accredited investor relations services. for a purchase price of $250,000.

In connection with the foregoing, the Company relied onupon the exemption from registration provided by Section 4(2) of the Securities Act of 1933, as amended for transactions not involving a public offering.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures.

Not applicable.
 
Item 5. Other Information

None. 
 
Item 6. Exhibits
 
31.1
  
32.1
32.1
Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
EX-101.INSXBRL INSTANCE DOCUMENT
  
EX-101.SCHXBRL TAXONOMY EXTENSION SCHEMA DOCUMENT
  
EX-101.CALXBRL TAXONOMY EXTENSION CALCULATION LINKBASE
  
EX-101.DEFXBRL TAXONOMY EXTENSION DEFINITION LINKBASE
  
EX-101.LABXBRL TAXONOMY EXTENSION LABELS LINKBASE
  
EX-101.PREXBRL TAXONOMY EXTENSION PRESENTATION LINKBASE
 
 
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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 
 MEDEFILE INTERNATIONAL, INC. 
    
MayNovember 15, 2012By:/s/ Kevin Hauser 
  Kevin Hauser 
  President, Chief Executive Officer, Acting Chief Financial Officer and Director (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) 
    
 
 
 
 
 
 
 
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