UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(Mark One)
| x | QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2004
| ¨ | TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 0-50435
MD Technologies Inc.
(Name of small business issuer in its charter)
| DELAWARE | 72-1491921 | |
(State or other jurisdiction of incorporation or organization) | (I. R. S. Employer Identification No.) | |
620 FLORIDA ST., SUITE 200 BATON ROUGE, LOUISIANA | 70801 | |
| (Address of principal executive offices) | (Zip Code | |
Issuer’s telephone number (225) 343-7169
Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDINGS DURING THE PRECEDING FIVE YEARS
Check whether the registrant filed all documents and reports required to be filed by Section l2, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨ Not applicable.
APPLICABLE ONLY TO CORPORATE ISSUERS
State the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date: Common Stock: 3,949,311 shares outstanding as of August 2, 2004.
Transitional Small Business Disclosure Form (check one): Yes x No ¨
INDEX TO FORM 10-QSB
June 30, 2004
PART I – FINANCIAL INFORMATION
BALANCE SHEETS
| June 30, 2004 | Dec. 31, 2003 | |||||||
ASSETS | ||||||||
| Current Assets | ||||||||
Cash and cash equivalents | $ | 1,850,875 | $ | 2,923 | ||||
Accounts receivable | 27,201 | 24,016 | ||||||
Deferred offering costs | — | 129,186 | ||||||
Prepaid expenses | 26,598 | 2,471 | ||||||
Total current assets | 1,904,674 | 158,596 | ||||||
| Property and Equipment | ||||||||
Computer equipment and software | 152,223 | 45,059 | ||||||
Furniture and fixtures | 24,839 | 4,792 | ||||||
| 177,062 | 49,851 | |||||||
Less: Accumulated depreciation | 36,404 | 18,816 | ||||||
| 140,658 | 31,035 | |||||||
| Other Assets | ||||||||
Capitalized software costs held for sale, net | 239,415 | 189,969 | ||||||
Total assets | $ | 2,284,747 | $ | 379,600 | ||||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current Liabilities | ||||||||
Accounts payable | $ | 18,442 | $ | 167,216 | ||||
Accrued expenses and interest | 33,846 | 96,030 | ||||||
Notes payable and other term debt | 27,288 | 228,025 | ||||||
Deferred revenue | 17,250 | 4,000 | ||||||
Total current liabilities | 96,826 | 495,271 | ||||||
| Long Term Liabilities | — | 13,153 | ||||||
| Stockholders’ Equity | ||||||||
Preferred stock, no par value; 20,000 shares authorized, no shares issued or outstanding | — | — | ||||||
Common stock, $0.0004 par value; 30,000,000 shares authorized, 4,905,561 shares issued and 3,949,311 shares outstanding | 1,962 | 1,457 | ||||||
Additional paid-in capital | 4,338,957 | 1,450,751 | ||||||
Treasury stock | (383 | ) | (383 | ) | ||||
Stock subscription receivable | (2,400 | ) | (863 | ) | ||||
Retained earnings | (2,150,215 | ) | (1,579,786 | ) | ||||
| 2,187,921 | (128,824 | ) | ||||||
Total liabilities and stockholders’ equity | $ | 2,284,747 | $ | 379,600 | ||||
The accompanying notes are an integral part of the financial statements.
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STATEMENTS OF OPERATIONS
For the three months ended June 30, | For the six months ended June 30, | |||||||||||||||
| 2004 | 2003 | 2004 | 2003 | |||||||||||||
REVENUES | ||||||||||||||||
Sales and service revenue | $ | 144,179 | $ | 69,056 | $ | 264,624 | $ | 131,599 | ||||||||
Total revenues | 144,179 | 69,056 | 264,624 | 131,599 | ||||||||||||
COSTS OF REVENUES | ||||||||||||||||
Salaries direct | 20,855 | 8,554 | 35,300 | 17,733 | ||||||||||||
Depreciation | 16,046 | 12,507 | 29,456 | 23,802 | ||||||||||||
Other cost of revenue | 12,796 | 6,892 | 21,521 | 12,017 | ||||||||||||
Total cost of revenues | 49,697 | 27,953 | 86,277 | 53,552 | ||||||||||||
Gross profit (loss) | 94,482 | 41,103 | 178,347 | 78,047 | ||||||||||||
OPERATING EXPENSES | ||||||||||||||||
Compensation | 257,284 | 92,495 | 406,831 | 128,825 | ||||||||||||
Depreciation | 12,743 | 6,892 | 24,285 | 14,422 | ||||||||||||
Selling, general and administrative expenses | 168,699 | 25,927 | 312,397 | 58,417 | ||||||||||||
Total operating expenses | 438,726 | 125,314 | 743,513 | 201,664 | ||||||||||||
Income from operations | (344,244 | ) | (84,211 | ) | (565,166 | ) | (123,617 | ) | ||||||||
OTHER INCOME (EXPENSE) | ||||||||||||||||
Interest income | 3,081 | — | 3,483 | — | ||||||||||||
Interest expense | (1,002 | ) | (6,740 | ) | (8,746 | ) | (12,375 | ) | ||||||||
| 2,079 | (6,740 | ) | (5,263 | ) | (12,375 | ) | ||||||||||
NET LOSS | (342,165 | ) | (90,951 | ) | (570,429 | ) | (135,992 | ) | ||||||||
Retained earnings, beginning of period | (1,808,050 | ) | (1,277,559 | ) | (1,579,786 | ) | (1,232,518 | ) | ||||||||
Retained earnings, end of period | $ | (2,150,215 | ) | $ | (1,368,510 | ) | $ | (2,150,215 | ) | $ | (1,368,510 | ) | ||||
Income per share: (Basic and diluted) | $ | (0.07 | ) | $ | (0.06 | ) | $ | (0.13 | ) | $ | (0.09 | ) | ||||
Wtd. average number of shares outstanding | 4,898,622 | 1,519,872 | 4,269,674 | 1,519,872 | ||||||||||||
The accompanying notes are an integral part of the financial statements.
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STATEMENTS OF CASH FLOWS
| For the six months ended June 30, | ||||||||
| 2004 | 2003 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES | $ | (741,708 | ) | $ | (94,088 | ) | ||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||||
Plant and equipment purchases | (127,211 | ) | (7,097 | ) | ||||
Capitalization of software development costs | (85,597 | ) | (23,005 | ) | ||||
Net cash flows used by investing activities | (212,808 | ) | (30,102 | ) | ||||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||||
Deferred offering costs | 129,186 | (17,941 | ) | |||||
Issuance of stock for cash | 2,886,312 | 119,979 | ||||||
Repayment of debt | (213,893 | ) | (8,215 | ) | ||||
Decrease in stock subscriptions receivable | 863 | — | ||||||
Net cash flows provided by financing activities | 2,802,468 | 93,823 | ||||||
NET INCREASE IN CASH | 1,847,952 | (30,367 | ) | |||||
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD | 2,923 | 36,327 | ||||||
CASH AND CASH EQUIVALENTS, END OF PERIOD | $ | 1,850,875 | $ | 5,960 | ||||
The accompanying notes are an integral part of the financial statements.
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NOTES TO FINANCIAL STATEMENTS
June 30, 2004
| 1. | Management’s Representation of Interim Financial Information |
The accompanying financial statements have been prepared by MD Technologies Inc. without audit pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted as allowed by such rules and regulations, and management believes that the disclosures are adequate to make the information presented not misleading. These financial statements include all of the adjustments which, in the opinion of management, are necessary to a fair presentation of financial position and results of operations. All such adjustments are of a normal and recurring nature. These financial statements should be read in conjunction with the audited financial statements at December 31, 2003.
| 2. | Initial Public Offering of Equity Securities |
During the quarter ended June 30, 2004, the Company issued 10,000 of its common shares in an initial public offering for gross proceeds of $24,000, or $2.40 per share. This offering was closed as of June 30, 2004.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING INFORMATION
The discussion in this Quarterly Report on Form 10-QSB regarding MD Technologies Inc., its business and operations includes “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1996. This report and the information incorporated by reference in it contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. The Company intends the forward-looking statements to be covered by the safe harbor provisions for forward-looking statements in these sections. Such statements consist of any statement other than a recitation of historical fact and can be identified by the use of forward-looking terminology such as “may,” “expect,” “anticipate,” “estimate” or “continue” or the negative thereof or other variations thereon or comparable terminology. The reader is cautioned that all forward-looking statements are necessarily speculative and there are certain risks and uncertainties that could cause actual events or results to differ materially from those referred to in such forward looking statements. We do not have a policy of updating or revising forward-looking statements and thus it should not be assumed that silence by us over time means that actual events are bearing out as estimated in such forward looking statements.
When used in this Quarterly Report, the terms “ we,” “our,” “us,” and “MD Technologies” refers to MD Technologies Inc., a Delaware corporation.
Certain statements contained in this Management’s Discussion and Analysis are forward-looking statements. Actual results could differ materially from those encompassed within such forward-looking statements as a result of various factors.
General
For an understanding of the significant factors that influenced our results during the past three fiscal years, you should read the following discussion in conjunction with our consolidated financial statements and related notes.
The Quarter Ended June 30, 2004 Compared with the Quarter Ended June 30, 2003
| • | Total revenue increased 109% in the quarter ended June 30, 2004 to $144,179 from $69,056 in the quarter ended June 30, 2003. |
| • | Cost of Revenues increased 78% to $49,697. |
| • | Operating Expenses increased 250% to $438,726. |
| • | Net Loss increased 276% to $342,165 ($.07/share.) |
The Six Months Ended June 30, 2004 Compared with the Six Months Ended June 30, 2003
| • | Total revenue increased 101% in the six months ended June 30, 2004 to $264,624 from $131,599 in the six months ended June 30, 2003. |
| • | Cost of Revenues increased 61% to $86,277. |
| • | Operating Expenses increased 269% to $743,513. |
| • | Net Loss increased 319% to $570,429 ($.13/share.) |
During the three months ended June 30, 2004 and the six months ended June 30, 2004, we continued the aggressive expansion of the Company’s operations that began in the first quarter of 2004 with the proceeds of the public offering. During the three months ended June 30, 2004 we hired eight new employees, including three in administration, three in research and development, and two in sales and marketing. For the six months ended June 30, 2004, we hired a total of twenty employees, including seven in administration, six in research and development, and seven in sales and marketing. This mode of operations contrasts sharply with the first three months and first six months of 2003 when we were focused mostly on increasing our net income with limited resources while we prepared for the public offering. Net increases in Operating Expenses, Cost of Revenues, and Net Loss are a direct result of our aggressive expansion in 2004.
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In the quarter ended June 30, 2004, we sold 10,000 shares of stock in the public offering raising $24,000 in proceeds. In the six months ended June 30, 2004, we sold 1,264,833 shares of stock in the public offering raising $3,035,600 in proceeds. This is the total amount of proceeds raised from the public offering as it was closed on June 30, 2004.
Results of Operations
Revenues
Total revenues increased from $69,056 in the quarter ended June 30, 2003 to $144,179 in the quarter ended June 30, 2004, a 109% increase in total revenue. Total revenues increased from $131,599 in the six months ended June 30, 2003 to $264,624 in the six months ended June 30, 2004, a 101% increase in total revenue.
These increases in total revenue for both the three month period and the six month period are largely due to continued success in the sale and implementation of our products and services,Medtopia Manager andMedtopia Expert. TheMedtopia Manager revenue consists of one-time setup and training fees and monthly subscription fees, while theMedtopia Expert revenue consists of monthly percentage-based revenue that is earned from customer billing and collection activity. Total revenue for the quarter ended June 30, 2004 forMedtopia Manager was $84,410 and total revenue for the same quarter forMedtopia Expert was $59,769. Total revenue for the six months ended June 30, 2004 forMedtopia Manager was $153,064 and total revenue for the same period forMedtopia Expert was $111,560. Revenue from each of these products and services has been growing consistently and can be attributed to the direct result of our expanded sales and marketing efforts. We expect this trend of increased sales activity to continue for the foreseeable future.
Costs of Revenues
The Cost of Revenues for the three month period ended June 30, 2004 increased 78% from $27,953 in the quarter ended June 30, 2003 to $49,697 in the quarter ended June 30, 2004. This increase is mainly due to the deployment of new employees needed to handle the increased customer base for our products and services. These additional expenses contributed specifically to an increase in the Cost of Revenues Direct Salaries from $8,554 in the quarter ended June 30, 2003 compared to $20,855 in the quarter ended June 30, 2004, an increase of 144%. The other cost of revenues during this period stayed relatively the same with only nominal increases in the expenses comprising this line item.
The Cost of Revenues for the six month period ended June 30, 2004 increased 61% from $53,552 in the six months ended June 30, 2003 to $86,277 in the six months ended June 30, 2004 as a result of the hire of new personnel and moderate pay raises to existing employees. These additional expenses contributed to an increase in the Cost of Revenues Direct Salaries from $17,733 in the six months ended June 30, 2003 compared to $35,300 in the six months ended June 30, 2004, an increase of 99%. The other cost of revenues during this period stayed relatively the same with only nominal increases in the expenses comprising this line item.
Operating Expenses
Our operating expenses increased significantly from $125,314 in the quarter ended June 30, 2003 to $438,726 in the quarter ended June 30, 2004, an increase of 250%. This increase in operating expenses resulted in a greater loss from operations of $342,165 in the quarter ended June 30, 2004 in comparison to $90,951 in the quarter ended June 30, 2003, an increase of 276%. The increase in operating expenses is a result of the new sales, marketing, programming, and administration staff that were hired in the first half of the year. These additional employees contributed to an increase in Operating Expenses Compensation from $92,495 in the quarter ended June 30, 2003 to $257,284 in the quarter ended June 30, 2004, an increase of 178%. The remainder of the increase in operating expenses is a result of increased selling, general, and administrative expense, which increased from $25,927 in the quarter ended June 30, 2003 to $168,699 in the quarter ended June 30, 2004, an increase of 551%. This increase in selling, general, and administrative expenses is directly related to the increase in personnel costs related to our aggressive plan to increase sales. While total revenues increased 109%, the increase in the cost of revenues coupled with the increase in operating expenses contributed to a greater net loss of $342,165 in the quarter ended June 30, 2004 in comparison to $90,951 in the quarter ended June 30, 2003, an increase of
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276%. These losses were funded primarily from the issuance of $3,035,600 in stock that was sold during the public offering of our company’s stock. We expect the net loss to continue in the near future as we continue to implement the expansion of sales, research and development, and operations that began in the first quarter 2004. However, the net loss is also expected to decrease moderately from quarter to quarter as we have completed our initial build-out phase of hiring new administrative and programming employees. New employees in these areas and the associated administrative expenses are expected to increase incrementally in the future as we add additional customers and potentially enter into new markets or release new products.
Our operating expenses increased from $201,664 in the six months ended June 30, 2003 to $743,513 in the six months ended June 30, 2004, an increase of 269%. This increase in operating expenses resulted in a greater loss from operations of $570,429 in the six months ended June 30, 2004 in comparison to $135,992 in the six months ended June 30, 2003, an increase of 319%. The increase in operating expenses is a result of the additional sales, marketing, programming, and administration staff that were hired and deployed in the first six months of the year. These additional employees contributed to an increase in Operating Expenses Compensation from $128,825 in the six months ended June 30, 2003 to $406,831 in the six months ended June 30, 2004, an increase of 216%. The remainder of the increase in operating expenses is a result of increased selling, general, and administrative expense, which increased from $58,417 in the six months ended June 30, 2003 to $312,397 in the six months ended June 30, 2004, an increase of 435%. The increase in selling, general, and administrative expenses was a direct result of the additional costs required to implement our growth plan. While total revenues increased 101% in this six month period, the increase in the cost of revenues coupled with the increase in operating expenses contributed to a greater net loss of $570,429 in the six months ended June 30, 2004 in comparison to $135,992 in the six months ended June 30, 2003, an increase of 319%. These losses were funded primarily from the issuance of $3,035,600 in stock that was sold during the public offering of our company’s stock. This net loss is expected to decrease in the second half of the year as revenue from expanded sales and marketing increases. The projected increase in revenue will be offset by our plan of only adding expenses incrementally to support the expected additional revenues or to expand into new markets.
Liquidity and Capital Resources
Our cash and cash equivalents increased by 63,221% from $2,923 at the beginning of the year to $1,850,875 at June 30, 2004 for a total cash increase of $1,847,952. This increase is primarily due to $3,035,600 raised from the sale of stock during the public offering in the first six months of 2004 less the cash used to fund our operating loss and capital improvements in the first six months of the year.
As of June 30, 2004, the Company had working capital and stockholders’ equity surpluses of $1,807,848 and $2,187,921 respectively. Prior to 2004, we have relied upon loans from management, issuance of common stock to consultants, the sale of common stock in private placements, and limited cash flow from the sales of our products and services in order to fund our activities. To fund current and future activities, we raised $3,035,600 through a public offering of stock at $2.40 per share. The offering closed June 30, 2004. The proceeds of the offering are being used as working capital in order to fund sales and marketing, operations, and the research and development of our products and services. In addition, the proceeds have also been used to retire almost all of the Company debt and purchase new equipment. $146,888 in costs of the initial public offering were incurred, and have been charged to the proceeds of the offering in the accompanying financial statements. The cash infusion from the public offering is expected to satisfy our cash and working capital requirements for at least the next twelve months.
Critical Accounting Policies
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions. Critical accounting policies are those policies that can have a significant impact on our financial position and results of operations and require complex judgments and the most significant use of these subjective estimates and assumptions. Because of the uncertainty inherent in such estimates, actual results may differ from these estimates. Specific risks inherent in our application of these critical policies are described below. For all of these policies, we caution that future events rarely develop exactly as forecasted, and the best estimates routinely require adjustment. These policies also often require difficult judgments on complex matters that may be subject to multiple sources of authoritative guidance.
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Revenue
The Company recognizes revenue from the sale of third-party hardware and software products upon shipment from the Company. Title transfers FOB shipping point. Revenue from professional services is recognized upon completion of the work and notification from the customer of their acceptance. Revenue from software licensing is recognized in accordance with Statement of Position 97-2, Software Revenue Recognition. Revenue from software licensing is recognized when delivery of the software has occurred, a signed non-cancelable license agreement has been received from the customer, and any remaining obligations under the license agreement are insignificant. Revenue associated with agreements to provide product support services is recognized as related services are provided. Revenue from annual or other renewals of maintenance contracts is deferred and recognized on a straight-line basis over the term of the contracts.
Property and Equipment
Property and equipment are recorded at cost. Expenditures for renewals and improvements are capitalized while expenditures for repairs and maintenance are charged to operations as incurred. Depreciation and amortization of property and equipment are computed by the straight-line method at rates adequate to allocate the cost of applicable assets over their estimated useful lives.
Costs of computer software developed for external uses and costs associated with technology under development are capitalized. Amortization is recorded for each of the Company’s products separately, using the greater of a) the amount calculated under the straight-line method over the remaining estimated economic life of each product, or b) the amount calculated using the ratio of current year revenue to projected total revenue for each product. Capitalization of costs begins when conceptual and design activities have been completed, technological feasibility is assured, and when management has authorized and committed to fund a project. Costs capitalized include external and internal costs of labor, materials, and services. Costs associated with training and general and administrative activities are expensed as incurred. The Company does not develop nor capitalize software for internal purposes.
Item 3. Controls and Procedures.
The Company’s management, including our Chief Executive Officer and Chief Financial Officer, have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-14(c) promulgated under the Securities Exchange Act of 1934, as amended) as of the quarter ended June 30, 2004, the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded, that our disclosure controls and procedures are effective for timely gathering, analyzing and disclosing the information we are required to disclose in our reports filed under the Securities Exchange Act of 1934, as amended.
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Item 4. Submission of Matters to a Vote of Security Holders.
At the Annual Meeting of Shareholders held on May 1, 2004 (the “Annual Meeting”), the Company’s shareholders voted to approve the ratification of Comiskey & Company as the Company’s auditors for the year-ended December 31, 2004. The following is a summary of the vote:
Ratification of Comiskey & Company as Auditors | ||
Votes | ||
For | 2,385,499 | |
Against | ||
Abstain | ||
Also at the Annual Meeting, the Company’s shareholders voted to elect Terry Jones, William J. Burnell, and Frank Fazio, M.D., each as a director of the Company to serve until the third annual meeting of stockholders after their election or until their successors are elected and qualified.
The following is a summary of the vote:
Votes | Terry Jones | William J. Burnell | Frank Fazio, M.D. | |||
For | 2,385,499 | 2,385,499 | 2,385,499 | |||
Against | ||||||
Abstain |
The building, located at 620 Florida St., Baton Rouge, Louisiana, where we lease and maintain our principal operating location was sold to 620 Florida, L.L.C. on May, 18, 2004. The previous owner of the building was Hearin Properties. 620 Florida, L.L.C. is owned and controlled by members of our board of directors. These members of the board of directors are: Jose Canseco, William Davis, Thomas Frazer and William Burnell. There were no material changes in the leases for our space.
We lease a portion of its principal operating location under a five-year operating lease agreement. We lease the remainder of its principal operating location for $3,080 per month under a month-to-month operating lease agreement that went into effect March 1, 2004. For more information on our leases please refer to Note 3 in the Notes to the December 31, 2003 and 2002 Financial Statements filed in Form 10-KSB and Form 10-QSB, dated May 11, 2004, under Item 2.
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Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:
Exhibit Number | Description | |
| 31.1 | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 31.2 | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| 32.1 | Certification of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| 32.2 | Certification of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
(b) Reports on Form 8-K.
We did not file any reports on Form 8-K during the second quarter of 2004.
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In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| MD Technologies Inc. | ||||
| (Registrant) | ||||
| Date: August 10, 2004 | By: | /s/ William D. Davis | ||
| William D. Davis | ||||
| President & Chief Executive Officer, Director | ||||
| By: | /s/ William D. Eglin | |||
| William D. Eglin | ||||
| Chief Financial Officer | ||||
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