The Company follows the accounting standards related to reporting comprehensive (loss) income to recognize the elements of comprehensive (loss) income. The Company’s comprehensive loss is comprised of net loss and all changes to the statements of changes in stockholders' deficit, except those due to investments by stockholders, changes in paid-in capital and distributions to stockholders. For the Company, comprehensive loss for the three months ended March 31, 2011 and 2010 included net loss and unrealized losses from foreign currency translation adjustments.
Research and development costs are expensed as incurred. For the three months ended March 31, 2011 and 2010, research and development costs were deemed immaterial.
Parties are considered to be related to the Company if the parties directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests. The Company has disclosed all related party transactions for all periods presented. All transactions were recorded at fair value of the goods or services exchanged.
Other accounting standards that have been issued or proposed by FASB that do not require adoption until a future date are not expected to have a material impact on the consolidated financial statements upon adoption.
Since inception, the Company has incurred cumulative net losses of $19,485,105, and has a stockholders' deficit of $10,088,932 and a working capital deficit of $11,000,945 at March 31, 2011. Since inception, the Company has funded operations through short-term borrowings and the proceeds from equity sales in order to meet its strategic objectives. On April 4, 2011, the Company sold its sole operating business subsidiary and accordingly, the Company has limited continuing operations that generate no revenues and will be seeking new opportunities to exploit its technologies outside of Brazil or to seek a merger candidate. The Company's future operations are dependent upon external funding and its ability to obtain revenues and reduce expenses. Management believes that sufficient funding will be available from additional related party borrowings to meet its business objectives, including anticipated cash needs for working capital, for a reasonable period of time. However, there can be no assurance that the Company will be able to obtain sufficient funds to continue the development of its business plan.
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Unaudited Consolidated Financial Statements
March 31, 2011
NOTE 2 – GOING CONCERN (continued)
As a result of the foregoing, there exists substantial doubt about the Company's ability to continue as a going concern. These consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTE 3 – PROPERTY AND EQUIPMENT, NET
Property and equipment consisted of the following at March 31, 2011 and December 31, 2010:
| | | | |
| | 2011 | | 2010 |
Computer Equipment | $ | 1,640 | $ | 1,640 |
Less: Accumulated Depreciation | | (1,148) | | (1,066) |
| $ | 492 | $ | 574 |
For the three months ended March 31, 2011 and 2010, depreciation expense amounted to $65,739 and $61,378, of which $65,657 and $61,296 is included in loss from discontinued operations, respectively.
NOTE 4 – RELATED PARTY TRANSACTIONS
Convertible Loan - Related Party
At March 31, 2011 and December 31, 2010, the Company had aggregate loans payable for $175,000 and $175,000, respectively, to Carlingford Investments Limited (“Carlingford”), a related party company whose officer is an officer of the Company. These loans are convertible into the Company's common stock at $0.125 per share (1,400,000 common shares). For each share of common stock received upon conversion of the principal balance, the related party is entitled to receive one warrant to purchase the Company's common stock at $0.25 per share for a period of two years from the conversion date. The interest rate of the loan is 12% per annum computed at simple interest. At March 31, 2011 and December 31, 2010, interest due on these loans amounted to $71,857 and $66,679, respectively, and the aggregate principal amount due is $175,000. During the three months ended March 31, 2011 and 2010, the Company incurred $5,178 and $5,178, respectively, in interest expense related to these two loans. These two loans are in default and are due on demand.
Due to Related Parties
For the three months ended March 31, 2011 and 2010, the Company incurred $52,500 and $52,500 respectively, in management fees to an officer/director of the Company, which has been included in management and consulting fees - related party on the accompanying consolidated statements of operations. Effective July 1, 2007, pursuant to a Management Consulting Services Agreement, the Company’s board of directors approved compensation for this officer/director of $17,500 per month. At March 31, 2011 and December 31, 2010, $755,450 and $702,950 in management fees and other expenses are payable to this officer/director and are included in due to related parties within the accompanying consolidated balance sheets. The amount due is unsecured, non-interest bearing and payable on demand.
For the three months ended March 31, 2011 and 2010, the Company incurred $3,000 and $5,945, respectively, in accounting fees to a company whose officer is an officer of the Company. The fees are included in management and consulting fees - related party on the accompanying consolidated statements of operations. At March 31, 2011 and December 31, 2010, $104,205 and $100,605 in these fees is payable to this officer and are included in due to related parties within the accompanying consolidated balance sheets. The amount due is unsecured, non-interest bearing and payable on demand.
At March 31, 2011 and December 31, 2010, $24,000 and $24,000 in directors fees is payable to a director and are included in due to related parties on the accompanying consolidated balance sheets. For the three months ended March 31, 2011 and 2010, there were no directors fees included in management and consulting fees - related party on the accompanying consolidated statements of operations The amount due is unsecured, non-interest bearing and payable on demand.
12
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Unaudited Consolidated Financial Statements
March 31, 2011
NOTE 4 – RELATED PARTY TRANSACTIONS (continued)
Loans Payable – Related Party
On March 5, 2004, the Company borrowed 115,000 Euros (translated to $162,138 and $152,409 at March 31, 2011 and December 31, 2010, respectively) from an officer of the Company for working capital purposes. The loan accrues 0.8% non-compounding interest per month, (9.6% per annum), had an initial term of twelve months, and was repayable quarterly in arrears. This loan has not been repaid and is currently payable on demand. Additionally, through March 31, 2011, the Company borrowed $234,950 from this officer. These loans accrue 1.0% non-compounding interest per month, (12% per annum), and are due on demand. For the three months ended March 31, 2011 and 2010, the Company incurred $10,624 and $8,595, respectively, in interest related to these loans. At March 31, 2011 and December 31, 2010, $143,215 and $128,035 in interest and loan fees was accrued on these loans and the aggregate principal and interest amount due is $540,303 and $510,444, respectively, and is included in loan payable - related party on the accompanying consolidated balance sheets.
NOTE 5 – DISCONTINUED OPERATIONS
Sale of Medlink Conectividade
On April 4, 2011, pursuant to a Quota Purchase and Sale Agreement amongst Transax Limited, QC Holding, and Medlink Conectividade, the Company sold 100% of its interest in Medlink Conectividade to QC Holding. For the three months ended March 31, 2011 and 2010, the Company’s operating subsidiary, Medlink Conectividade, is reported as a discontinued operation and all periods have been restated in the Company's consolidated financial statements and related footnotes to conform to this presentation.
In accordance with the terms and provisions of the Agreement: (i) QC Holding acquired the equity interest of Medlink Conectividade resulting in the sale of the Company’s operating subsidiary. As consideration for the purchase and sale of 100% of the Company’s interest in Medlink Conectividade, QC paid to the Company approximately $298,000; (ii) QC Holding agreed to assume all debt and other contingent liabilities of Medlink Conectividade, which as of March 31, 2011 was approximately $8,400,000 including $5,800,000 in past taxes and social security contributions due to the Brazil Government; and (iii) QC agreed to contribute to Medlink Conectividade approximately $1,402,000 which be used to pay to the Company approximately $1,402,000 in loans and interest due to Transax Limited by Medlink Conectividade. In accordance with the further terms and provisions of the Agreement, the Company retains its relevant technology assets consisting of software code and other intellectual property developed by Medlink Conectividade to seek business outside of Brazil. Currently, the Company does not have any revenues outside of Brazil. In the second quarter of 2011, the Company expects to record a gain from the sale of its discontinued operation of approximately $6,600,000
The Company’s board of directors considered the sale of Medlink Conectividade to be in the best interests of the Company and its shareholders. Factors considered included (i) the high levels of debt in Medlink Conectividade, (ii) its continuing net losses from operations and (iii) reports from Brazilian legal counsel to Medlink Conectividade indicating that immediate tax and social security payments were due to the Brazilian Government of over $1,000,000.
The following table sets forth for the three months ended March 31, 2011 and 2010 selected financial data of the Company's discontinued operations.
| | | | |
| | 2011 | | 2010 |
Revenues | $ | 1,241,042 | $ | 1,022,832 |
Operating expenses | | 1,616,704 | | 1,457,669 |
Other expenses | | 163,210 | | 455,464 |
Loss from discontinued operations | $ | (538,872) | $ | (890,301) |
13
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Unaudited Consolidated Financial Statements
March 31, 2011
NOTE 5 – DISCONTINUED OPERATIONS (continued)
Sale of Medlink Conectividade (continued)
At March 31, 2011 and December 31, 2010, assets and liabilities from discontinued operations consisted of the following:
| | | | |
| | 2011 | | 2010 |
Assets of discontinued operations: | | | | |
Accounts receivable | $ | 593,927 | $ | 478,526 |
Prepaid expenses and other current assets | | 104,981 | | 85,784 |
Property and equipment, net | | 212,613 | | 240,328 |
Assets of discontinued operations | $ | 911,521 | $ | 804,638 |
| | | | |
Liabilities of discontinued operations: | | | | |
Loans payable | $ | 1,280,663 | $ | 1,354,193 |
Accounts payable and accrued expenses | | 7,093,444 | | 6,447,591 |
Liabilities of discontinued operations | $ | 8,374,107 | $ | 7,801,784 |
NOTE 6 – STOCKHOLDERS’ DEFICIT
Preferred stock
On January 13, 2006, the Company's Board of Directors approved the creation of 16,000 shares of Series A Convertible Preferred Stock having the following rights, preferences and limitations:
| | |
| (a) | Each share has a stated value of $100 per share and no par value. |
| | |
| (b) | With respect to the payment of dividends and other distributions on the capital stock of the Company, including distribution of the assets of the Company upon liquidation, the Series A Preferred Shares shall be senior to the common stock of the Company, par value $.00001 per share and senior to all other series of Preferred Shares (the "Junior Stock"). |
| | |
| (c) | The holders of Series A Preferred Shares shall be entitled to receive dividends or distributions on a pro rata basis according to their holdings of shares of Series A Preferred Shares in the amount of seven percent (7%) per year (computed on the basis of a 365-day year and the actual days elapsed). Dividends shall be paid in cash. Dividends shall be cumulative. No cash dividends or distributions shall be declared or paid or set apart for payment on the common stock in any calendar year unless cash dividends or distributions on the Series A Preferred Shares for such calendar year are likewise declared and paid or set apart for payment. No declared and unpaid dividends shall bear or accrue interest. |
| | |
| (d) | Each share of Series A Preferred Shares shall be convertible, at the option of the holder thereof, at any time after the date of issuance of such shares, into such number of fully paid and non-assessable shares of common stock equal to the sum of (i) the Liquidation Amount of the Series A Preferred Shares ($100 per share) plus (ii) all accrued but unpaid dividends thereon, divided by the “Conversion Price”, which is equal to the lower of (i) $0.192 ( the "Fixed Conversion Price"), or (ii) eighty percent (80%) of the lowest daily volume weighted average price ("VWAP") of the common stock during the ten (10) Trading Days immediately preceding the date of conversion (the "Market Conversion Price"). The VWAP shall be determined using price quotations from Bloomberg, LP. A "Trading Day" is any day during which the FINRA OTC Bulletin Board is open for trading. Additionally, each share of Series A Preferred Shares shall automatically convert into shares of common stock at the Conversion Price then in effect immediately upon the consummation of the occurrence of a stock acquisition, merger, consolidation or reorganization of the Company into or with another entity through one or a series of related transactions, or the sale, transfer or lease of all or substantially all of the assets of the Company. Currently, the Company does not have enough authorized common shares to effectuate an automatic conversion of the Series A preferred shares into shares of common stock and will need to seek shareholder approval to increase the amount of authorized common shares. |
14
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Unaudited Consolidated Financial Statements
March 31, 2011
NOTE 6 – STOCKHOLDERS’ DEFICIT (continued)
Preferred stock (continued)
| | |
| (e) | The Series A Preferred Shares shall not have any voting rights except as provided under the laws of the State of Colorado. |
| | |
| (f) | The Company has the right to redeem (unless otherwise prevented by law), with three (3) business days advance written notice (the "Redemption Notice"), any shares of Series A Preferred Shares provided that the closing bid price of the of the Company's common stock, as reported by Bloomberg, LP, is less than the Fixed Conversion Price at the time of the Redemption Notice. The Company shall pay an amount equal to One Hundred Fifteen percent (115%) of the Liquidation Amount, plus accrued but unpaid dividends thereon (the "Redemption Amount"). The Company shall deliver to the holder the Redemption Amount on the third (3rd) business day after the Redemption Notice. Upon receipt of a Redemption Notice, the holder shall be entitled to continue to convert outstanding shares of Series A Preferred Shares until the Redemption Price is received, subject to the conversion limitations as defined. The Company may not redeem these shares under any other circumstances. |
Initially, there was an automatic conversion clause associated with the Series A Preferred Shares which would cause them to automatically convert into shares of common stock at the Conversion Price then in effect upon the third anniversary of the date of the Investment Agreement. On January 8, 2009, the Company amended the certificate of designation for the Series A Preferred shares to eliminate this provision.
The Company is required to record the fair value of the ECF and warrants as a liability. At March 31, 2011 and 2010, the Company revalued the ECF and warrants (expired in January 2011) resulting in a gain on derivative liabilities of $485,563 and $582,656 for the three months ended March 31, 2011 and 2010, respectively.
At March 31, 2011, the estimated fair value of the ECF liabilities was $700,000. At December 31, 2010, the estimated fair value of the ECF and warrants were liabilities of $1,185,563 and $0, respectively. These derivative liabilities are reflected as a conversion feature liability and a warrant liability, respectively, on the accompanying consolidated balance sheets.
At the valuation date of December 31, 2010, the fair value of the ECF and warrants were estimated using the Black-Scholes-Merton option pricing model with the following assumptions:
| | | | |
| | | 2010 | |
Dividend rate | | | 0% | |
Term (in years) | | | .04 to .50 years | |
Volatility | | | 252% | |
Risk-free interest rate | | | 0.12% - 0.22% | |
At March 31, 2011, the derivative was valued at the $700,000, the amount that the Company paid to redeem all outstanding series A preferred shares (See Note 8–Subsequent Event).
Stock Options
On November 28, 2004, the Company adopted the 2004 Incentive Stock Option Plan (the "Plan"). The Plan, as amended, provides options to be granted, exercisable for a maximum of 7,000,000 shares of common stock. Both incentive and nonqualified stock options may be granted under the Plan. The exercise price of options granted, the expiration date, and the vesting period, pursuant to this plan, are determined by a committee of the Board of Directors.
15
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Unaudited Consolidated Financial Statements
March 31, 2011
NOTE 6 – STOCKHOLDERS’ DEFICIT (continued)
Stock Options (continued)
A summary of the status of the Company's outstanding stock options as of March 31, 2011 and changes during the period ending on that date is as follows:
| | | |
| Three Months Ended March 31, 2011 |
| Number
of Options | | Weighted Average
Exercise Price |
Stock options | | | |
Balance at December 31, 2010 | 1,025,000 | $ | 0.10 |
Granted | — | | — |
Exercised | — | | — |
Forfeited | (200,000) | | (0.15) |
Balance at March 31, 2011 | 825,000 | $ | 0.08 |
| | | |
Options exercisable at March 31, 2011 | 825,000 | $ | 0.08 |
| | | |
Weighted average fair value of options granted during the three months ended March 31, 2011 | | $ | — |
The following table summarizes information about employee and consultant stock options outstanding at March 31, 2011:
| | | | | | | | | | | |
Options Outstanding | | Options Exercisable |
| Range of Exercise Price | | Number Outstanding at March 31, 2011 | | Weighted Average Remaining Contractual Life (Years) | | Weighted Average Exercise Price | | Number Exercisable at March 31, 2011 | | Weighted Average Exercise Price |
$ | 0.15 | | 225,000 | | 0.38 | | 0.15 | | 225,000 | | 0.15 |
$ | 0.06 | | 600,000 | | 1.65 | | 0.06 | | 600,000 | | 0.06 |
| | | 825,000 | | | $ | 0.08 | | 825,000 | $ | 0.08 |
As of March 31, 2011 and December 31, 2010, there are no unrecognized compensation costs since all options granted under the stock option plan are vested.
Since the exercise price of the outstanding stock options was greater than the fair value of the Company’s common stock, there was no intrinsic value associated with the stock options.
Stock Warrants
A summary of the status of the Company's outstanding stock warrants as of March 31, 2011 and activities during the three months ended March 31, 2011 is as follows:
| | | |
| Three Months Ended March 31, 2011 |
| Number
of Warrants | | Weighted Average
Exercise Price |
Warrants | | | |
Balance at December 31, 2010 | 5,000,000 | $ | 0.25 |
Forfeited | (5,000,000) | | (0.25) |
Balance at March 31, 2011 | — | $ | — |
16
TRANSAX INTERNATIONAL LIMITED AND SUBSIDIARIES
Notes to the Unaudited Consolidated Financial Statements
March 31, 2011
NOTE 7 – CONTINGENCIES
Legal Proceedings
Medlink Conectividade, is involved litigation pertaining to a previous provider of consultancy services regarding “breach of contract” and two labor law suits involving employees for “unfair dismissal’ claims. Medlink Conectividade has accrued approximately $472,000 and $272,000 at March 31, 2011 and December 31, 2010 related to these lawsuits respectively, which has been included in liabilities of discontinued operations. The outcome of these clams is uncertain at this time.
NOTE 8 – SUBSEQUENT EVENT
On May 4, 2011, the Company entered into an agreement to redeem 100% of the outstanding shares of Series A convertible preferred stock held by YA Global Investments L.P. (“YA Global”) and to release and indemnify the Company against all claims and liabilities for the sum of $700,000 paid in cash. As of the date of redemption, YA Global owned 14,190 Series A convertible preferred shares.
17
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following analysis of the results of operations and financial condition should be read in conjunction with our unaudited consolidated financial statements for the three months ended March 31, 2011 and notes thereto contained elsewhere in this report.
GENERAL
Transax International Limited is a Colorado corporation and currently trades on the OTC Pink Sheet market under the symbol "TNSX.PK" and the Frankfurt and Berlin Stock Exchanges under the symbol "TX6". Please note that throughout this report, and unless otherwise noted, the words "we," "our," "us," or the "Company" refer to Transax International Limited. Through April 1, 2011, we were an international provider of information network solutions, products and services specifically designed for the healthcare providers and health insurance companies (collectively, the "Health Information Management Products").
On April 4, 2011, pursuant to a Quota Purchase and Sale Agreement amongst Transax Limited, QC Holding I Participacoes S.A., a corporation organized under the laws of Brazil (“QC Holding”), and Medlink Conectividade, we sold 100% of our interest in Medlink Conectividade. As such all related operations have been retroactively presented as discontinued operations for all periods presented and related operating assets and liabilities have been classified as assets from discontinued operations and liabilities from discontinued operations, respectively for all periods presented.
In accordance with the terms and provisions of the Agreement: (i) QC Holding acquired the equity interest of Medlink Conectividade resulting in the sale of our operating subsidiary. As consideration for the purchase and sale of 100% of our interest in Medlink Conectividade, in April 2011, QC paid to us approximately $298,000; (ii) QC Holding agreed to assume all debt and other contingent liabilities of Medlink Conectividade, which as of December 31, 2010 was approximately $8,400,000 including $5,800,000 in past taxes and social security contributions due to the Brazil Government; and (iii) QC contributed to Medlink Conectividade approximately $1,402,000 which was used to pay us approximately $1,402,000 in loans and interest due to Transax Limited by Medlink Conectividade. In accordance with the further terms and provisions of the Agreement, we retained our relevant technology assets consisting of software code and other intellectual property to carry on business outside of Brazil.
Our board of directors considered the sale of Medlink Conectividade to be in the best interests of the Company and its shareholders. Factors considered included (i) the high levels of debt in Medlink Conectividade, (ii) its continuing net losses and (iii) reports from Brazil counsel to Medlink Conectividade indicating that immediate tax and social security payments were due to the Brazilian Government of over $1,000,000.
Subsequent to April 4, 2011, we will have no revenues and limited operations consisting of financial reporting, administration and seeking new business opportunities or a merger candidate.
CRITICAL ACCOUNTING POLICIES
Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. We continually evaluate our estimates, including those related to bad debts, recovery of long-lived assets, income taxes, the change in fair value of our derivatives, and the valuation of equity transactions.
We base our estimates on historical experience and on various other assumptions that we believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Any future changes to these estimates and assumptions could cause a material change to our reported amounts of revenues, expenses, assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of the financial statements
We review the carrying value of property and equipment for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets is measured by the comparison of its carrying amount to the undiscounted cash flows that the asset or asset group is expected to generate. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the property, if any, exceeds its fair market value.
18
Consolidated Statement of Operations
THREE MONTHS ENDED MARCH 31, 2011 COMPARED TO THREE MONTHS ENDED MARCH 31, 2010
| | | | | | |
| For the Three Months Ended March 31, | |
| 2011 | | 2010 | |
REVENUES | $ | — | | $ | — | |
| | | | | | |
OPERATING EXPENSES | | | | | | |
Professional fees | | 36,740 | | | 20,000 | |
Management and consulting fees – related partiers | | 55,500 | | | 58,445 | |
Depreciation | | 82 | | | 82 | |
General and administrative | | 2,184 | | | 5,912 | |
TOTAL OPERATING EXPENSES | | 94,506 | | | 84,439 | |
| | | | | | |
LOSS FROM CONTINUING OPERATIONS | | (94,506 | ) | | (84,439 | ) |
| | | | | | |
OTHER (EXPENSES) INCOME | | | | | | |
Foreign exchange (loss )gain | | (14,285 | ) | | 13,844 | |
Gain from derivative liabilities | | 485,563 | | | 582,656 | |
Interest expense –related parties | | (15,802 | ) | | (13,773 | ) |
Total Other Income | | 455,476 | | | 582,727 | |
| | | | | | |
INCOME BEFORE DISCONTINUED OPERATIONS | | 360,970 | | | 498,288 | |
| | | | | | |
LOSS FROM DISCONTINUED OPERATIONS | | (538,872 | ) | | (890,301 | ) |
| | | | | | |
NET LOSS | | (177,902 | ) | | (392,013 | ) |
| | | | | | |
OTHER COMPREHENSIVE LOSS | | | | | | |
Unrealized foreign currency translation gain | | 88,167 | | | 60,560 | |
| | | | | | |
COMPREHENSIVE LOSS | $ | (89,735 | ) | $ | (331,453 | ) |
Our net loss for the three months ended March 31, 2011 was $177,902 compared to $392,013 for the three months ended March 31, 2010 (a decrease of $214,111 or 54.6%).
Operating Expenses
During the three months ended March 31, 2011, we incurred operating expenses in the aggregate amount of $94,506 as compared to $84,439 incurred during the three months ended March 31, 2010 (an increase of $10,067 or 11.9%). The increase in operating expenses incurred during the three months ended March 31, 2011 compared to the three months ended March 31, 2010 resulted from an increase of $16,740 or 83.7% in professional fees due to an increase in auditing fees during the 2011 period. This increase was offset by a decrease of $2,945 or 5.0% in management and consulting fees – related parties incurred and a decrease in general and administrative expenses of $3,728 due cost cutting measures.
Loss from Continuing Operations
We reported a loss from continuing operations of $94,506 for the three months ended March 31, 2011 as compared to a loss from operations of $84,439 for the three months ended March 31, 2010 (an increase of $10,067 or 11.9%).
Other Income (Expenses)
For the three months ended March 31, 2011, we recorded other income of $455,476 as compared to $582,727 for the three months ended March 31, 2010 (a decrease of $127,251 or 21.8%). The variance for the three months ended March 31, 2011 as compared to the three months ended March 31, 2010 resulted primarily from:
19
| | |
| · | The change in the fair value of the Company’s derivative liabilities which was a gain of $485,563 for the three months ended March 31, 2011 as compared to a gain of $582,656 for the three months ended March 31, 2010; |
| | |
| · | For the three months ended March 31, 2011, we incurred interest expense of $15,802 as compared to $13,773 for the three months ended March 31, 2010, an increase of $2,029 or 14.7% primarily attributable to an increase in related party borrowings; and |
| | |
| · | For the three months ended March 31, 2011, we recorded a loss from foreign currency exchange of $(14,285) as compared to a gain from foreign currency exchange of $13,844 for the three months ended March 31, 2010, a change of $28,129 or 203.2%. |
Loss from Discontinued Operations
On April 4, 2011, we sold 100% of our interest in Medlink Conectividad. Due to this sale, all operations of Medlink Conectividade have been retroactively presented as discontinued operations for all periods presented and related operating assets and liabilities have been classified as assets and liabilities of discontinued operations for all periods presented. Loss from discontinued operation is summarized as follows:
| | | | |
| | 2011 | | 2010 |
Revenues | $ | 1,241,042 | $ | 1,022,832 |
Operating expenses | | 1,616,704 | | 1,457,669 |
Other expenses * | | 163,210 | | 455,464 |
Loss from discontinued operations | $ | (538,872) | $ | (890,301) |
| | |
| * | During the three months ended March 31, 2010, we accrued additional penalties and interest on unpaid taxes and social security contributions due to the Brazil Government of approximately $300,000. |
Net Loss
Due to the reasons described above, for the three months ended March 31, 2011, our loss was $177,902 as compared to a loss of $392,013 for the three months ended March 31, 2010.
During the three months ended March 31, 2011, we recorded a cumulative preferred stock dividend of $24,833 as compared to $25,200 for the three months ended March 31, 2010, which is related to our Series A Preferred Stock.
We reported a net loss attributable to common shareholders of $202,735 for the three months ended March 31, 2011 as compared to $417,213 for the three months ended March 31, 2010. This translates to a net loss per common share available to shareholders of $0.00 and $0.00 for the three months ended March 31, 2011 and 2010, respectively.
Comprehensive Loss
We recorded an unrealized foreign currency translation gain of $88,167 and $60,560 for the three months ended March 31, 2011 and 2010, respectively. This resulted in a comprehensive net loss during the three months ended March 31, 2011 of $89,735 as compared to $331,453 for the three months ended March 31, 2010.
LIQUIDITY AND CAPITAL RESOURCES
Liquidity is the ability of a company to generate funds to support its current and future operations, satisfy its obligations and otherwise operate on an ongoing basis. At March 31, 2011 and December 31, 2010, we had cash balances of $30,435 and $18,388, respectively. These funds are located in financial institutions located as follows:
| | | | | | | | | | |
| | March 31, 2011 | | December 31, 2010 |
Country: | | | | | | | | | | |
United States | | $ | 972 | | 3.2% | | $ | 3,660 | | 19.9% |
Brazil | | | 29,463 | | 96.8% | | | 14,728 | | 80.1% |
Total cash and cash equivalents | | $ | 30,435 | | 100.0% | | $ | 18,388 | | 100.0% |
20
For the three months ended March 31, 2011, net cash flow provided by operating activities was $114,258 as compared to net cash used in operating activities of $(199,076) for the three months ended March 31, 2010.
For the three months ended March 31, 2011, net cash provided by operating activities of $114,258 primarily consisted of our loss from discontinued operations of $(538,872) adjusted for the add back of certain non-cash item such as depreciation of $65,657 and an increase in net liabilities in assets and liabilities of discontinued operations of $595,111 offset by net cash used in continuing operations of $7,638. For the three months ended March 31, 2010, net cash used in operating activities of $199,076 primarily consisted of our loss from discontinued operations of $(890,301) adjusted for the add back of certain non-cash item such as depreciation of $61,296 and the amortization of software development costs of $17,893, an increase in net liabilities in assets and liabilities of discontinued operations of $627,632 and by net cash used in continuing operations of $15,596.
For the three months ended March 31, 2011, net cash flows used in investing activities amounted to $17,656 and as compared to $6,722 for the three months ended March 31, 2010 and related to the acquisition of property and equipment for discontinued operations.
Net cash flows used in financing activities for the three months ended March 31, 2011 were $(84,947) as compared to net cash provided by financing activities of $193,234 for the three months ended March 31, 2010. For the three months ended March 31, 2011, cash used financing activities was attributable to $89,897 in payments on loans from discontinued operations and proceeds of $4,950 from related party loans. For the three months ended March 31, 2010, cash flow provided by financing activities was attributable to $173,234 in proceeds from loans related to our discontinued operations and $20,000 in proceeds from loans-related party.
PLAN OF OPERATIONS
Since inception, we incurred cumulative net losses of $19,485,105, and have a stockholders' deficit of $10,088,932 and a working capital deficit of $11,000,945 at March 31, 2011. Since inception, we have funded operations through short-term borrowings and the proceeds from equity sales in order to meet our strategic objectives. Additionally, on April 4, 2011, we sold our sole operating business subsidiary and accordingly, we now have limited continuing operations that generate no revenues and will be seeking new opportunities to exploit our technologies or to seek a merger candidate. Our future operations are dependent upon external funding and our ability to obtain revenues and reduce expenses. Management believes that sufficient funding will be available from additional related party borrowings to meet our business objectives, including anticipated cash needs for working capital, for a reasonable period of time. However, there can be no assurance that we will be able to obtain sufficient funds to continue the development of our business plan.
As result of the sale as discussed above, in April 2011, we received cash of approximately $1.7 million. We used these funds to:
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| · | Pay outstanding liabilities for services rendered; |
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| · | Pay outstanding related party loans and interest; |
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| · | In May 2011, we reached a settlement with all remaining Series A Preferred shareholders to repurchase all outstanding preferred shares for $700,000; and |
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| · | Fund on-going operations. |
As of the filing date of this quarterly report, we have approximately $70,000 of cash renaming and there is substantial doubt regarding our ability to continue as a going concern as we have not generated sufficient cash flow to fund our business operations and material commitments and we will have no revenues in the near future. Our future success and viability, therefore, is dependent on our ability to develop, provide and market our information network solutions to healthcare providers, health insurance companies and other end-users outside of Brazil, our ability to generate capital financing, or to seek a merger candidate. We are optimistic that we will be successful in our business operations and capital raising efforts; however, there can be no assurance that we will be successful in generating revenue or raising additional capital. The failure to generate sufficient revenues or raise additional capital may have a material and adverse effect upon us and our shareholders.
Based upon a twelve (12) month work plan, it is anticipated that such a work plan would require approximately $100,000 of financing designed to fund various commitments and business operations.
There can be no assurance, however, that we will be able to raise additional capital. Our failure to successfully raise additional capital will have a material and adverse effect upon us and our shareholders.
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Our future success and viability are primarily dependent upon our current management to generate revenues from business operations and raise additional capital through further private offerings of our stock or loans from private investors. There can be no assurance, however, that we will be able to raise additional capital. Our failure to successfully raise additional capital will have a material and adverse effect upon us and our shareholders.
MATERIAL COMMITMENTS
Convertible Loans – Related Party
A material liability for us at March 31, 2011 is the aggregate principal amount of $175,000 and $71,857 in accrued interest due and owing to a related party in accordance with two convertible promissory notes (collectively, the "Convertible Promissory Note(s)"). The Convertible Promissory Notes are convertible into shares of our common stock at $0.125 per share together with a warrant to purchase our common stock at $0.25 per share for a period of two years. As of March 31, 2011, an aggregate principal amount of $175,000 and interest in the amount of $71,857 remains due and owing under the Convertible Promissory Notes. As of the date of this quarterly report, the Convertible Promissory Notes are deemed in default and are due on demand.
Loan – Related Party
A material liability for us at March 31, 2011 is the aggregate amount of $540,303 in principal and interest due and owing to Stephen Walters, our Chief Executive Officer (collectively, the "Loans"). The Loans are evidenced by a promissory note with an interest rate of 0.8% per month and are currently due on demand. For the three months ended March 31, 2011 and 2010, we incurred $10,624 and $8,595, respectively, in interest related to these loans. At March 31, 2011 and December 31, 2010, $143,215 and $128,035 in interest and loan fees was accrued on these loans and the aggregate principal and interest amount due is $540,303 and $510,444, respectively. During the three months ended March 31, 2011, we borrowed $4,950 which was used for working capital purposes.
Consulting Agreement
A material liability for us at March 31, 2011 is the amount due and owing as management fees to Stephen Walters, our Chief Executive Officer. For the three months ended March 31, 2011 and 2010, we incurred $52,500 and $52,500, respectively, in management fees. At March 31, 2011 and December 31, 2010, $755,450 and $702,950 in management fees and other expenses are payable to Mr. Walters. In accordance with the terms of an agreement effective July 2007, we pay monthly to Mr. Walters an aggregate amount of $17,500 as compensation for managerial and consulting services he provides.
Purchase of Significant Equipment
We do not intend to purchase any significant equipment during the next twelve months.
Off-Balance Sheet Arrangements
As of the date of this quarterly report, we do not have any off-balance sheet arrangements that have or are reasonably like to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required for smaller reporting companies.
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ITEM 4T. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
As required by Rule 13a-15 under the Exchange Act, our management evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2011.
Disclosure controls and procedures refer to controls and other procedures designed to ensure that information required to be disclosed in the reports we file or submit under the Securities Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC and that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management is required to apply its judgment in evaluating and implementing possible controls and procedures.
Management conducted its evaluation of disclosure controls and procedures under the supervision of our chief executive officer and our chief financial officer. Based on that evaluation, because of the continuing material weaknesses in internal control over financial reporting described below, our disclosure controls and procedures were not effective as of March 31, 2011.
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act. Our management is also required to assess and report on the effectiveness of our internal control over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002 (“Section 404”). Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2010. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework. During our assessment of the effectiveness of internal control over financial reporting as of March 31, 2011, management identified material deficiencies related to (i) the U.S. GAAP expertise of our internal accounting staff, (ii) our internal audit functions, (iii) a lack of segregation of duties within accounting functions, and (iv) a lack of an independent board of directors or audit committee.
A material weakness (within the meaning of PCAOB Auditing Standard No. 5) is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis. A significant deficiency is a deficiency, or a combination of deficiencies, in internal control over financial reporting that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of the company’s financial reporting.
Changes in Internal Controls over Financial Reporting
There were no changes in our internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
MedlinkConectividade, is involved litigation pertaining to a previous provider of consultancy services regarding “breach of contract” and two labor law suits involving employees for “unfair dismissal’ claims. We have accrued approximately $472,000 and approximately $272,000 at March 31, 2011 and December 31, 2010 related to these lawsuits respectively, which has been included in liabilities of discontinued operations. The outcome of these clams is uncertain at this time.
Management is not aware of any other legal proceedings contemplated by any governmental authority or any other party involving us or our properties. As of the date of this Quarterly Report, no director, officer or affiliate is (i) a party adverse to us in any legal proceeding, or (ii) has an adverse interest to us in any legal proceedings. Management is not aware of any other legal proceedings pending or that have been threatened against us or our properties.
ITEM 1A. RISK FACTORS
Not required for smaller reporting companies.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. (REMOVED AND RESERVED)
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
31.1 Certification of the principal executive officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
31.2 Certification of the principal financial and accounting officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002
32.1 Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2 Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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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.
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| TRANSAX INTERNATIONAL LIMITED |
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Dated: May 23, 2011 | By: /s/ STEPHEN WALTERS |
| Stephen Walters, President/Chief Executive Officer and Director |
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Dated: May 23, 2011 | By: /s/ ADAM WASSERMAN |
| Adam Wasserman, Chief Financial Officer and Principal Accounting Officer |
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