UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended March 31, 2014
Commission file number: 000-52765
iMEDICOR, INC. AND SUBSIDIARY
(Exact Name of Registrant as Specified in Its Charter)
| Nevada | 95-4696799 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
13506 Summerport Pkwy #160, Windermere, FL 34786
(Address of principal executive offices) (Zip Code)
(888) 810-7706
(Registrant’s Telephone Number, Including Area Code)
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 ¨ No þ
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, ever y Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer ¨ | Accelerated filer ¨ | ||
Non-accelerated filer ¨ | Smaller reporting company þ | ||
| (Do not check if a smaller reporting company) | |||
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
There were 1,116,299,589 outstanding shares of the issuer’s Common Stock, $0.001 par value, on February 23, 2015.
iMEDICOR, INC. AND SUBSIDIARY
FORM 10-Q QUARTERLY REPORT
FOR THE QUARTER ENDED MARCH 31, 2014
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March 31, 2014 | June 30, 2013 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
Cash and cash equivalents - interest bearing | $ | 78,344 | $ | 513,272 | ||||
Accounts receivable, net of allowance for doubtful accounts of $-0- and $-0 - at March 31, 2014 and June 30, 2013, respectively | 805,906 | 8,186 | ||||||
Total Current Assets | 884,250 | 521,458 | ||||||
Fixed Assets, net of accumulated depreciation | 14,683 | - | ||||||
Other assets: | ||||||||
Security deposit | 3,600 | - | ||||||
Total Assets | $ | 902,533 | $ | 521,458 | ||||
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) | ||||||||
Current Liabilities: | ||||||||
Notes payable and accrued interest in default | $ | 5,397,570 | $ | 4,820,361 | ||||
Accounts payable and accrued expenses | 782,863 | 1,852,851 | ||||||
Due to related party | 692,225 | 638,785 | ||||||
Line of Credit payable | 417,000 | - | ||||||
Warrants – derivative liability | - | 5,999,435 | ||||||
Total Liabilities | 7,289,658 | 13,311,432 | ||||||
Stockholders' Equity (Deficit) | ||||||||
Preferred Stock, Series A par value $.001; Authorized: 37 shares; Issued and Outstanding: 35.75 and 35.75 shares at March 31, 2014 and June 30, 2013, respectively | - | - | ||||||
Preferred Stock, Series B par value $.001; Authorized 63 shares; Issued and Outstanding: 29.50 and 18.75 shares at March 31, 2014 and June 30, 2013, respectively | - | - | ||||||
| Common stock, par value $.001 per share; Authorized: 4,000,000,000 shares; | ||||||||
Issued and outstanding: 1,043,399,590 and 997,299,586 shares at March 31, 2014 and June 30, 2013, respectively | 1,043,300 | 997,299 | ||||||
Additional Paid-in Capital | 45,732,093 | 41,445,027 | ||||||
Accumulated Deficit | (53,162,518 | ) | (55,232,300 | ) | ||||
Total Stockholders' Deficit | (6,387,125 | ) | (12,789,974 | ) | ||||
Total Liabilities and Stockholders' Deficit | $ | 902,533 | $ | 521,458 | ||||
See notes to financial statements.
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| For the Three Months Ended, | ||||||||
March 31, 2014 | March 31, 2013 | |||||||
Revenues | $ | 412,045 | $ | 36,333 | ||||
Cost of Services | 81,180 | - | ||||||
| �� | ||||||||
Gross Profit | 330,865 | 36,333 | ||||||
Expenses: | ||||||||
General and administrative | 519,520 | 5,663,099 | ||||||
Impairment of technology asset | - | 966,412 | ||||||
Acquisition expenses | - | 400,016 | ||||||
Bad debt expense | - | 26,280 | ||||||
Depreciation and amortization | 2,097 | 4,820 | ||||||
Total Expenses | 521,617 | 7,060,627 | ||||||
Loss from operations | (190,752 | ) | (7,024,294 | ) | ||||
Other Income/(Expenses:) | ||||||||
Change in Fair Value - Derivatives | - | 605,546 | ||||||
Other income – litigation/debt settlement | 248,164 | - | ||||||
Interest expense | (106,561) | (116,000) | ||||||
Loan extension fees | (5,038) | - | ||||||
Financing costs | - | (142,571) | ||||||
Total Other Income/(Expenses) | 136,565 | 346,975 | ||||||
Net loss | $ | (54,187 | ) | $ | (6,677,319 | ) | ||
Net income (loss) per share | $ | - | $ | (0.01 | ) | |||
Weighted average shares basic and diluted | 1,027,899,409 | 782,114,877 | ||||||
See notes to financial statements.
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| For the Nine Months Ended, | ||||||||
March 31, 2014 | March 31, 2013 | |||||||
Revenues | $ | 977,486 | $ | 65,685 | ||||
Cost of Services | 288,812 | - | ||||||
Gross Profit | 688,674 | 65,685 | ||||||
Expenses: | ||||||||
General and administrative | 2,202,251 | 6,558,145 | ||||||
Impairment of technology asset | - | 1,143,457 | ||||||
Acquisition expense | - | 400,016 | ||||||
Bad debt expense | - | 88,280 | ||||||
Depreciation and amortization | 2,097 | 4,820 | ||||||
Total Expenses | 2,204,348 | 8,194,718 | ||||||
Loss from operations | (1,515,674 | ) | (8,129,033 | ) | ||||
Other Income/(Expenses:) | ||||||||
Change in Fair Value - Derivatives | 2,966,493 | 1,385,520 | ||||||
Other income – litigation/debt settlement | 992,895 | - | ||||||
Gain (loss) on debt redemption | - | (49,672) | ||||||
Interest expense | (315,454) | (361,446 | ) | |||||
Loan extension fees | (58,478) | - | ||||||
Financing costs | - | (716,927 | ) | |||||
Total Other Income/(Expenses) | 3,585,456 | 257,475 | ||||||
Net income (loss) | $ | 2,069,782 | $ | (7,871,558 | ) | |||
Net income (loss) per share | $ | - | $ | (0.01 | ) | |||
Weighted average shares basic | 1,027,899,409 | 650,783,725 | ||||||
Weighted average shares diluted | 1,698,603,773 | 650,783,725 | ||||||
See notes to financial statements.
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| For the Nine Months Ended, | ||||||||
March 31, 2014 | March 31, 2013 | |||||||
| Cash Flows From Operating Activities | ||||||||
Net income (loss) | $ | 2,069,782 | $ | (7,871,558) | ||||
Adjustment to reconcile net income to net Cash provided by operating activities | ||||||||
Depreciation expense | 2,097 | 4,820 | ||||||
Share based compensation expense | 574,500 | 4,893,342 | ||||||
Gain on change in value – Derivative Warrant | (2,966,493) | (1,385,520) | ||||||
Loss on redemption | - | 49,672 | ||||||
Financing and acquisition costs | - | 1,116,943 | ||||||
Impairment of technology asset and goodwill | - | 1,143,457 | ||||||
Bad Debt | - | 88,280 | ||||||
(Increase) decrease in | ||||||||
Change in accounts receivable | (797,720) | 398 | ||||||
Change in accounts payable | (709,014) | 637,925 | ||||||
Change in security deposit | (3,600) | - | ||||||
Net Cash Used in Operating Activities | (1,830,448 | ) | (1,322,241 | ) | ||||
Cash Flows Used in Investing Activities | ||||||||
Purchase of leasehold improvements | (16,780) | - | ||||||
Net Cash Used in Investing Activities | (16,780) | - | ||||||
Cash Flows From Financing Activities | ||||||||
Proceeds from line of credit | 417,000 | - | ||||||
Proceeds from note payable | 307,000 | 195,000 | ||||||
Payments on notes payable | (37,325) | (150,000 | ) | |||||
Proceeds from issuance of common stock | 725,625 | 1,409,375 | ||||||
Net Cash Provided by Financing Activities | 1,412,300 | 1,454,375 | ||||||
Net Increase (Decrease) in Cash | (434,928 | ) | 132,134 | |||||
Cash at the Beginning of Period | 513,272 | 67 | ||||||
Cash at End of Period | $ | 78,344 | $ | 132,201 | ||||
Supplemental disclosures: | ||||||||
Non-Cash Investing and Financing Activities | ||||||||
Derivative liability - Warrants | $ | 5,999,435 | $ | 8,228,882 | ||||
Share based compensation expense | 574,500- | - | ||||||
Exchanged stock for acquisition expense | - | 400,016 | ||||||
Exchanged stock for Technology software asset | - | 660,000 | ||||||
Exchanged stock for acquisition of Claridis stock | - | 421,053 | ||||||
Exchanged stock for note payable and accrued interest | - | 358,434 | ||||||
Issuance of common stock for debt extension | - | 211,289 | ||||||
Issuance of warrants for debt extension | - | 19,531 | ||||||
See notes to financial statements.
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iMedicor Inc., a Nevada Corporation, (the “Company” or “iMedicor”), builds cloud based software and healthcare records capture, storage, retrieval, transport and security related products. The Company’s focus presently is on four distinct revenue streams: (1) iMedicor’s cloud-based exchange, the iCoreExchange, which allows physicians, patients and other members of the healthcare community to exchange patient-specific healthcare information securely via the internet, while maintaining compliance with all current Health Insurance Portability and Accountability Act (“HIPAA”) regulations. (2) A customized EHR platform technology, iCoreMD, that is specifically tailored to provide specialized medical practices with a technology that conforms to workflows of that particular medical discipline such as ophthalmology, orthopedics and other specialty practices. (3) A customized EHR platform technology, iCoreDental the is specifically tailored to provide dental practices with a technology that conforms to dental imaging dental workflows and other aspects of dental care. This technology is the first specialty medical discipline that represents a customized platform base on the iCoreMD platform technology (4) iMedicor has developed a Meaningful Use Consulting Practice targeting both medical and dental healthcare providers to assist becoming “Meaningful Use” compliant and ultimately qualify for federal incentive funds under the Federal Meaningful Use Incentive Funds Program.
iMedicor’s integrated software and service offering is unique in the healthcare space as it enables doctors to meet the increasing regulatory burden associated with secure HIPAA-compliant medical records capture, retrieval and transport. The challenge to a software and service provider is to provide products and services that allow healthcare providers to maintain HIPAA compliance with no change in healthcare delivery workflows at a very reasonable cost. The iCoreExchange provides security to records transport while the Company’s custom EHR software solutions allow healthcare providers to migrate to digital records capture, storage and retrieval at an extremely affordable price relative to the Company’s competition. iMedicor’s software solutions are:
| ● | Cloud based, requiring no capital investment for equipment, servers, infrastructure or internal IT support on the part of the customer. | |
| ● | Flexible, cloud-based and interoperable across virtually all EHRs that use CCD/CCR standards. | |
| ● | Able to provide patient-interactive capability that allows primary care and specialized physicians to include patients and other members of the medical ecosystem to engage in a virtually-real time discussion regarding a patient’s healthcare issues | |
| ● | Highly affordable and suitable for dental and medical practices of any size | |
| ● | Customized in a HIPAA-compliant manner to perform across all records capture, storage and retrieval environments |
The iCoreExchange is a HIPAA-compliant, online healthcare information data exchange and secure messaging hub for physicians, patients and other members of the healthcare community, to collaborate, exchange secure patient- specific records and use the network as a broad-based referral community. HIPAA stands for the Health Insurance Portability and Accountability Act of 1996 and is a set of rules and guidelines that must be followed by doctors, hospitals and other health care providers concerning the handling and privacy protection of vital patient medical data.
The iCoreExchange allows Physicians to communicate securely with other doctors, sharing patient files, records and images quickly and securely in a HIPAA-compliant environment. The exchange assists doctors and their staff members to use the network to securely communicate outside of the network for individual record transport/communication, collaboration and referrals.
The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the rules and regulations of the United States Securities and Exchange Commission (“SEC”) to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by United States GAAP for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods have been included. Operating results for the three and nine month periods ended March 31, 2014, are not necessarily indicative of the results that may be expected for the full year. These financial statements should be read in conjunction with the financial statements of the Company for the year ended June 30, 2013 and notes thereto contained in the Annual Report on Form 10-K of the Company as filed with the SEC on February 24, 2014.
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2. GOING CONCERN
The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. The Company has incurred operating losses to date and has an accumulated deficit, total stockholders’ deficit and net working capital deficit of $53,162,518, $6,387,125 and $6,405,408 at March 31, 2014, respectively. The Company’s activities have been primarily financed through convertible debentures, and private placements of equity securities. The Company intends to raise additional capital through the issuance of debt or equity securities to fund its operations. The financing may not be available on terms satisfactory to the Company, if at all. (See Note 14 - Subsequent Events).
Currently, management is seeking to develop a vastly improved healthcare communications system and attract alliances with strategic partners to allow the Company to generate revenues that will enable the Company to be self- sustaining. While management believes in the viability of its strategy to increase revenues and in its ability to raise additional funds, there can be no assurances to that effect. Management’s ability to continue as a going concern is ultimately dependent upon its ability to continually increase the Company’s customer base and realize increased revenues from signed contracts. The consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities and disclosures at the date of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company classifies highly liquid temporary investments with an original maturity of three months or less when purchased as cash equivalents. The Company maintains cash balances at various financial institutions. Balances at US banks are insured by the Federal Deposit Insurance Corporation up to $250,000. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant risk for cash on deposit.
Accounts Receivable and Allowance for Doubtful Accounts
Accounts receivable consist primarily of amounts due to the Company from normal business activities. The Company maintains an allowance for doubtful accounts to reflect the expected non-collection of accounts receivable based on past collection history and specific risks identified within the portfolio. If the financial condition of the customers were to deteriorate resulting in an impairment of their ability to make payments, or if payments from customers are significantly delayed, additional allowances might be required. The Company expects to establish an allowance at June 30, 2014.
The Company has not created an allowance for doubtful accounts in the present period due to the specific nature of the two businesses for which the Company generates revenue and maintains accounts receivable. The Company’s NextEMR business is billed in advance of the month during which service is provided. In the event a customer does not remit payment within 30 days of invoicing, iMedicor places the service into read-only mode. Customers that have been converted to read only mode either remit payment immediately or cancel the service. The Company does not book revenue for accounts in read only mode and thus do not create a doubtful account receivable under that circumstance.
The Company has also not created an allowance for doubtful accounts for the Meaningful Use Consulting business. The funding source behind this business is the federal government and payments are made by states that administer the Meaningful Use Incentive Funds Program. iMedicor secures funds through this program for doctors who have had difficulty understanding the program or who were unaware of the program’s existence. When a state is prepared to issue a check to a doctor or dentist that has been approved for funding, iMedicor is notified in advance by the state. iMedicor then notifies the doctor or dentist that a check will be forthcoming and that an invoice will arrive at approximately the same time as the check. When the doctor or dentist receives a check they have already been invoiced for iMedicor’s portion of the MU dollars and generally pay iMedicor within 30 days of receiving their check. The Company has not experienced a circumstance under which a client has refused or substantially delayed payment. The Company has experienced circumstances under which delays have occurred due to delays at the state level, processing a specific attestation application. While such delays may increase the time it takes to collect our consulting fees, the Company has not experienced any non-payment by physicians after a state has dispersed a check.
8
The Company believes two reasons exist for the high compliance rate. The first reason is simply because iMedicor is highly successful securing funds on behalf of our clients who would otherwise not have known about or been able to obtain the funds. The second reason is that a provision of the MU program regulations provides a strong incentive for physicians to make payment to iMedicor after they have received funding. iMedicor reports payments by physicians to iMedicor to the state that made payment to the physician. In the event a state is notified that a physician has not remitted payment to iMedicor, the physician will no longer be eligible for the remaining 67% of MU incentive funds available over the remaining life of the program. In addition, a physician that does not remit payment will not become MU compliant and will, therefore, be subject to Medicare rate reductions of 1% or more as determined by the federal government. While this rate reduction does not yet apply to Medicaid-eligible physicians, the Company believes that such an incentive will be initiated in the coming months.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, ClariDIS Corporation. Inter-Company items and transactions have been eliminated in consolidation.
Revenue Recognition
iMedicor derives revenue from two primary sources. The first source is our Electronic Health Records (EHR)
technology, NextEMR that was acquired in 2013. iMedicor continues to support NextEMR customers and bills these customers monthly for the services provided. The second source of revenue is the Company’s Meaningful Use Consulting business. This is a consultative business in which the Company is contracted by dentists and medical doctors to secure funds under the Federal Meaningful Use Incentive Program. The program is funded by the federal government and administered individually by each state. The work iMedicor provides consists of consulting with customers to determine if they are eligible for funds under the program and if not, what they might be able to do to become eligible. iMedicor contracts only with eligible doctors and dentists. Upon signing of a contract the Company works to compile the data and information required by the federal government to submit to the relevant state on behalf of our customer. The process is known as the “attestation process.” Each state manages its MU attestation process in a different manner and thus timing of payments to physicians may vary based upon the processes a particular state has in place. iMedicor is advised when the attestation application has been accepted by the state and when payment will be made, at which time the Company notifies its clients that a check will be forthcoming. When the doctor or dentist receives their payment, they remit payment to iMedicor.
Revenue for each of the above two sources is considered realized when iMedicor receives a signed contract from its client, the services have been provided to the customer, the work has been accepted by the customer and collectability is reasonably assured. Furthermore, if an actual measurement of revenue cannot be determined, the Company defers all revenue recognition until such time that an actual measurement can be determined. If, during the course of a contract engagement, management determines that losses are expected to be incurred, such costs are charged to operations in the period such losses are determined. Revenues are deferred when cash has been received from the customer but the revenue has not been earned.
Stock Based Compensation
The Company has share-based compensation plans under which employees, consultants, suppliers and directors may be granted restricted stock, as well as options to purchase shares of Company common stock at the fair market value at the time of grant. Stock-based compensation cost is measured by the Company at the grant date, based on the fair value of the award, over the requisite service period. For options issued to employees, the Company recognizes stock compensation costs utilizing the fair value methodology over the related period of benefit. Grants of stock options and stock to non-employees and other parties are accounted for in accordance with the ASC 505.
Property and Equipment
Property and Equipment are recorded at their historical cost. Depreciation and amortization are provided by the straight-line method over the useful lives of the assets, which vary from five to seven years. The cost of repairs and maintenance is charged to operations in the period incurred.
9
Intangible Assets
The Company accounts for intangible assets in accordance with recently issued and adopted accounting pronouncements, which require that intangible assets with indefinite useful lives should not be amortized, but instead be tested for impairment at least annually at the reporting unit level. If impairment exists, a write-down to fair value (normally measured by discounting estimated future cash flows) is recorded. Intangible assets with finite lives are amortized primarily on a straight-line basis over their estimated useful lives and are reviewed for impairment at least annually.
Loan Acquisition Costs
Loan acquisition costs incurred in obtaining or modifying loans are capitalized and amortized over the life of the loan at origination or date of modification as applicable.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount that the carrying amount of the asset exceeds the fair value of the asset.
Related Party Transactions
Transactions involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive, free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations can be substantiated.
The Company has accrued $150,000 for compensation due to Robert McDermott, the Company’s Chief Executive Officer, at March 31, 2014. The amount accrued relates to a compensation agreement between Mr. McDermott and the Company’s Board of Directors effective July 1, 2013 the date on which Mr. McDermott was appointed by the Board to the position of Chief Executive Officer.
Accounting for Derivative Instruments
The Company records all derivatives on the balance sheet at fair value. At June 30, 2013 , the Company had
derivative liabilities that consisted of warrants issued by the Company which were deemed derivative instruments as the Company did not have sufficient authorized and unissued common stock to settle all common stock contracts outstanding during the periods to which the derivatives are outstanding. On July 13, 2013, the Company increased the number of authorized shares to 4,000,000,000 and accordingly, at such time, the Company was then able to assert that it did have sufficient authorized and unissued common stock to settle all common stock contracts outstanding. Thus, in accordance with ASC 815-40, the derivative liability was measured at fair value through earnings one last time on July 13, 2013 and then reclassified on such date to additional paid in capital. As a result, the Company recognized a gain on change in derivative of approximately $2.97 million for the three months ended September 30, 2013 and reclassified approximately $3.03 million from derivative liability to additional paid in capital on July 13, 2013.
The final derivative liability valuation at July 13, 2013 was valued using the Black Scholes Merton valuation model with the following estimates used significant inputs:
| Exercise Price | $ | 0.01 | ||
| Term | 0.04 | |||
| Volatility | 79.25 | % | ||
| Risk Free Rate of Return | 0.02 | % |
10
Fair Value of Financial Instruments
Management believes that the carrying amounts of the Company’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and accrued liabilities approximate fair value due to the short - term nature of these instruments. The carrying amount of the Company’s debt also approximates fair value, based on market quote values (where applicable) or discounted cash flow analyses. (See discussion of Fair Value Measurements below).
Fair Value Measurements
The Company follows applicable accounting guidance for measurements and disclosures about the fair value of its financial instruments. GAAP establishes a framework for measuring fair value and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements and related disclosures, GAAP has established a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy are described below:
Level 1 - Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level 2 - Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3 - Pricing inputs that are generally not observable and not corroborated by market data. Financial assets and liabilities are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies, lattice models or similar techniques and at least one significant model assumption or input is unobservable.
If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of the instrument.
The Company’s Level 3 financial liabilities consisted of the derivative financial instruments for which there is no current market for these securities such that the determination of fair value requires significant judgment or estimation. The Company valued the warrant derivatives using Black Scholes Merton valuation models. These models incorporate transaction details such as Company stock price, contractual terms, maturity, risk free rates, as well as assumptions about future volatility. The Company used Level 3 of the fair value hierarchy to measure the fair value of the derivative liabilities; revalued its derivative liability at every reporting period; and recognized gains or losses in the Statements of Operations are attributable to the change in the fair value of the derivative liability.
Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis
Summary of Fair Value of Financial Assets and Liabilities Measured on a Recurring Basis
Fair Value Measurement Using
| March 31, 2014 | Carrying Value | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
| Derivative warrant liability | $ | - | $ | - | $ | - | $ | - | $ | - | ||||||||||
| March 31, 2014 | Carrying Value | Level 1 | Level 2 | Level 3 | Total | |||||||||||||||
Derivative warrant liability | $ | 5,999,435 | $ | - | $ | - | $ | 5,999,435 | $ | 5,999,435 | ||||||||||
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Income Taxes
Income tax benefit is based on reported loss before income taxes. Deferred income taxes reflect the effect of temporary differences between asset and liability amounts that are recognized for financial reporting purposes and the amounts that are recognized for income tax purposes. These deferred taxes are measured by applying currently enacted tax laws where that company operates out of. The Company recognizes refundable and deferred assets to the extent that management has determined their realization.
The Company accounts for income taxes under the liability method, whereby deferred income tax liabilities or assets at the end of each period are determined using the tax rate expected to be in effect when the taxes are actually paid or recovered. A valuation allowance is recognized on deferred tax assets when it is more likely than not that some or all of these deferred tax assets will not be realized. The policy is to prescribe a recognition threshold and measurement attribute for the recognition and measurement of a tax position taken or expected to be taken in a tax return. The Company has analyzed its filing positions in all jurisdictions where it is required to file returns, and found no positions that would require a liability for unrecognized income tax positions to be recognized. The Company is subject to tax examinations. In the event that it is assessed penalties and or interest, penalties will be charged to other financing expense and interest will be charged to interest expense.
Recently Issued Accounting Pronouncements
From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board, or FASB, or other standard setting bodies that are adopted by us as of the specified effective date. Unless otherwise discussed, we believe that the impact of recently issued standards that are not yet effective will not have a material impact on our financial position or results of operations upon adoption.
4. NET EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per share are computed by dividing net income or loss by the weighted average number of shares of common stock outstanding for the period. In gain periods, diluted net income per share reflects the potential dilution of securities by adding other common stock equivalents, including stock options, warrants and convertible notes to the weighted-average number of common shares outstanding for a period, if dilutive. In loss periods, all anti-dilutive securities are excluded.
As of March 31, 2014 and 2013 the Company had 406,176,001 and 259,767,666, respectively, warrants and options which may be converted into common shares. The Company had convertible debt and Series A and Series B convertible preferred shares that were convertible into 680,296,533 and 699,633,789 common shares at March 31, 2014 and 2013, respectively.
5. WARRANTS AND OPTIONS
During the nine months ended March 31, 2014, no warrants were exercised. During the nine months ended March, 2014, 16,315,666 warrants expired,.
During the nine months ended March 31, 2014 the Company issued 12,500,000 warrants.
Summary of the warrants is as follows:
| March 31, 2014 | ||||||||
Warrants | Weighted Exercise Price Range | |||||||
| Outstanding at beginning of the period | 307,927,667 | $ | 0.01 - 0.24 | |||||
| Issued | 12,500,000 | $ | 0.01 | |||||
| Exercised | - | |||||||
| Forfeited | - | |||||||
| Expired | (16,315,666 | ) | $ | 0.01 - 0.105 | ||||
| Outstanding at end of period | 304,112,001 | $ | 0.01 - 0.24 | |||||
| Exercisable at end of period | 304,112,001 | $ | 0.01 - 0.24 | |||||
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The intrinsic value of the outstanding warrants at March 31, 2014 is $0.
Summary of Options:
On July 1, 2013, the Company granted 100,000,000, four year options to Robert McDermott. The options vest as follows: 25,000,000 immediately, 25,000,000 on each subsequent three July 1 periods. For the nine-months ended March 31, 2014, the Company recorded $387,000 of stock compensation expense The Company uses the Black Scholes option pricing model to value options. The significant assumptions relating to the valuation of the Company’s options for the period ended March 31, 2014 were as follows:
| Exercise Price | $ | 0.013 | ||
| Term | 4 years | |||
| Volatility | 79.25 | % | ||
| Risk Free Rate of Return | 3.40 | % | ||
As of March 31, 2014, the remaining unamortized stock compensation expense is $903,000, which will be recognized through June 30, 2017.
6. NOTES PAYABLE IN DEFAULT
Interest expense for the nine months ended as of March 31, 2014 was $315,454 and for the nine months ended March 31, 2013 was $361,446. Notes payable and accrued interest at March 31, 2014 and June 30, 2013 consisted of the following:
March 31, 2014 | June 30, 2013 | |||||||
(1) Hospice Convertible Debenture | $ | 150,000 | $ | 150,000 | ||||
(2) Schneller Convertible Note, Related Party | 335,952 | 306,857 | ||||||
(3) Koeting Convertible Note | 70,164 | 66,384 | ||||||
(4) Sonoran Pacific Resources Secured Convertible Note | 1,607,512 | 1,513,964 | ||||||
(5) Sonoran Pacific Resources Secured Convertible Note | 2,265,169 | 1,836,473 | ||||||
(6) Wellbrock Group | 386,139 | 370,200 | ||||||
(7) Note, Related Party | 376,259 | 371,387 | ||||||
(8) Other Notes | 40,000 | 35,000 | ||||||
(9) Genesis Finance Corporation Note | 166,375 | 170,095 | ||||||
| Total notes payable, current | $ | 5,397,570 | $ | 4,820,361 | ||||
(1) 17.98% - Hospice convertible debenture – Originally due on September 30, 2004 and is convertible at $1.00 per share. The note was revised to accrue interest of $50,000 through September 30, 2004, the original due date. The debenture was to begin to be paid in January 2007 over a period of 18 months at a monthly amount of $8,333. The note holder had agreed to no additional interest beyond September 30, 2004. The Company is in breach of this agreement as of June 2008 and thereafter as a result of not making payments and is in default. The Company has not received a response from the note holder regarding a settlement proposal. This note is unsecured and continues in default.
(2) Schneller convertible notes (John Schneller is a member of the Board of Directors, appointed on July 3, 2013 and was appointed Chief Financial Officer on May 1, 2014.) originated on December 23, 2008 with a loan of $100,000 with a maturity date of December 31, 2009. The note is convertible at $0.05 per share. If the loan was not repaid by the designated date a loan redemption fee of $50,000 was added to principal. The $150,000 bears a default simple interest rate of 20%. The accrued interest payable was $185,952 and $156,858 for March 31, 2014 and June 30, 2013. Since this note has been in default the Company has been accruing costs that reflect the value of 2,672,000 common shares and2,672,000 warrants for every 90 days that this note remains in default. The stock and the warrants have not been issued. As of March 31, 2014, 44,084,000 shares of common stock and 44,084,000 warrants to purchase common stock with a 5 year term were due to Schneller. The value of the accrued financing costs for the interest, 44,084,000 common shares and warrants as of March 31, 2014 was $692,225.
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(3) Koeting convertible note payable, with simple interest at 10%, originated on March 26, 2010 with a loan to the Company of $50,000 payable on July 26, 2010. The note is convertible at $0.05 per share. Accrued interest was payable as of June 30, 2014 and 2013 of $20,164 and $16,384, respectively. The Company is in default on this note as of July 26, 2010 and thereafter. The Company has sought an extension, has received a response and is considering options to renegotiate the terms of the note. The note is unsecured.
(4) The original note amount of $1,069,199 was lent by Sonoran Pacific Resources (a related party to a shareholder that has significant ownership in the Company) over the past several years at varying amounts. Interest payable had accrued in the amount of $538,313 at March 31, 2014 for a total note balance at such date of $1,607,512. Interest payable had accrued in the amount of $444,765 as of June 30, 2013 for a total note balance at such date of $1,513,964. As of July 1, 2012, an amended and restated loan agreement was signed which stated that the note was deemed not in default. The lender was awarded 100 million common shares and 100 million warrants in exchange for the amended and restated loan agreement which was expensed as interest. As part of the amended loan agreement the note was extended to June 30, 2014. The interest rate from July 1, 2012 to June 30, 2014 was 10%. If the note is not repaid by June 30, 2014, the interest will increase to 18% until such latter default is cured. This note and the one described below are convertible into Preferred B stock at $125,000 per share based on the total outstanding note balances at the dates of conversion. This note is secured by all assets of the Company. The note is in default.
(5) The original note amount of $1,190,458 was also lent by Sonoran Pacific Resources over the past several years at varying amounts.. Interest payable had accrued in the amount of $1,074,711 at March 31, 2014 for a total note balance at such date of $2,265,169. There was accrued interest payable of $646,015 at June 30, 2013 for a total note balance at such date of $1,836,473 There was a Replacement Secured Convertible Promissory Note in the original amount of $1,395,452 having an original date of April 17, 2010 and a Replacement Date of January 1, 2011. As of July 1, 2012, an amended loan agreement was signed that the note was deemed not in default. The interest rate from July 1, 2012 to June 30, 2014 is 8%. If the note is not repaid by June 30, 2014, the interest will increase to 18% until such latter default is cured. This note is secured by all assets of the Company. The note is in default.
The above convertible notes (4) and (5) are convertible into an aggregate of 30.98 shares of Series “B” preferred stock.
(6) On October 20, 2005, the Company agreed to repurchase shares of several shareholders referred to as the Wellbrock Group; the shares were exchanged for a $300,000 three-year note. The shares of stock are held in escrow until the notes are completely paid. If there are any late payments per the payment schedule, the shares are to be released from escrow and to revert back to the original shareholders. The first ten monthly payments of principal and interest were to be in installments of $1,000 and the remaining 26 payments were to be in installments of $3,640. The balloon payment of $272,076 was due on November 1, 2008. The balloon balance was subsequently paid down to $263,492, but no further payments were made. The Company continues to be in default on this note. The Company has sought an extension/modification and has not received a response. The Company continues to accrue interest at 8%. The accrued interest payable was $122,647 and $106,708 at March 31, 2014 and June 30, 2013, respectively. The total note balances at such dates were $386,139 and $370,200, respectively.
(7) One of the Company’s former directors has lent funds in varying amounts beginning November 5, 2010. The Company paid $150,000 on the note on January 3, 2013. Interest payable accrued at 8%. Total balances outstanding of $376,259and $371,387, at March 31, 2014 and June 30, 2013, respectively. There is no maturity.
(8) Two notes payable totaling $40,000 and $35,000 as of March 31, 2014 and June 30, 2013, respectively. The notes are non-interest bearing and unsecured The Company is in default on the notes, is in discussions to seek an extension on one of the notes and has not received a response from one of the note holders.
(9) Genesis Finance Corporation loaned the Company $155,000 during fiscal 2012. The note accrues interest at 18%. The note was being paid in installments of $2,325 on the 25th of each month. On August 26, 2012 an amended promissory note extended the maturity date to February 27, 2013. On January 30, 2013 an additional extension of six months was granted through August 23, 2013. On August 2013, an extension was granted through February 23, 2014. In February 2014 an extension was granted through August 23, 2014. The Company agreed to pay a 2% extension fee in the amount of $3,100 upon signing of each extension and to deposit $6,975 to be used to make monthly payments for March, April and May 2013 and August, September and October of 2013. In connection with the debt extensions, the Company issued an aggregate of 1,000,000 shares to Genesis. The Company issued .5 unit of Preferred Series B in exchange for the note extensions. This note is guaranteed by Sonoran Pacific Resources. Accrued interest expense was $11,374 and $15,095 at March 31, 2014 and June 30, 2013, respectively. The Company is current at March 31, 2014 and is negotiating an extension through February 2015.
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7. COMMON STOCK
As of March 31, 2014 and June 30, 2013, the Company had a total of 1,043,299,590 and 997,299,586 shares of common stock outstanding, respectively. On July 13, 2013, the Board of Directors amended the Articles of Incorporation to increase the authorized number of common shares in the Company to 4 billion shares from 2 billion shares previously authorized.
On October 1, 2013 a third party individual purchased 2 Series B Preferred Shares, 12,000,000 Common Shares, and 4,000,000 Warrants to purchase Common Shares with a two-year expiration and a $0.01 strike price. The Company received proceeds of $250,000.
On November 1, 2013, a third party individual purchased 1 Series B Preferred Share, 10,000,000 Common Shares, and 4,000,000 Warrants to purchase Common Shares with a 2-year expiration and a $0.01 strike price. The Company received proceeds of $125,000
On December 13, 2013, a third party investment company purchased 0.5 Series B Preferred Share, 3,000,000 Common Shares, and 1,000,000 Warrants to purchase Common Shares with a two year expiration and a $0.01 strike price. The Company received proceeds of $62,500.
The Company received proceeds of $15,000 on October 1, 2013 for the purchase of .05 preferred share and 1,500,000 common shares and warrants to purchase 500,000 common shares with a two year expiration and a $0.01 strike price. These shares were issued September 30, 2013.
During the three months ended September 30, 2013 the Company issued 1.50 Series B Preferred Shares 11,000,000 shares of common stock with 3,500,000 warrants for total consideration of $203,125.
During the three months ended December 31, 2013, the Company issued no common shares or warrants for the conversion of debt and interest.
During the three months ended March 31, 2014, the Company issued 10,000,000 common shares in exchange for $70,000. The company issued no warrants during this period.
8. PREFERRED STOCK
Pursuant to an amendment of the Articles of Incorporation on December 19, 2012, the Company was authorized to issue up to 100,000,000 shares of blank check preferred stock. The amended Articles of Incorporation authorized 37 and 63 shares of Series “A” and “B” preferred stock, respectively, of which 35.75 Series “A” and 29.50 Series “B” shares, respectively, were issued and outstanding as of March 31, 2014.
Each share of Series “A” Preferred Stock was convertible into a 1% ownership interest in the Company’s common stock on a non-dilutive basis, giving effect to the common stock issued and the exercise of all outstanding warrants to purchase common stock, on a post-exercised basis. Each share of Series “A” Preferred Stock may bear dividends when, as and if declared by the Board of Directors. The Series “A” Preferred is senior to the Series “B” Preferred and to the common stock with respect to liquidation.
Each share of Series “B” Preferred Stock is convertible into a 1% ownership interest in the Company’s common stock, on a non-dilutive basis, giving effect to the common stock issued and the exercise of all outstanding warrants to purchase common stock, on a post-exercised basis. Each share of Series “B” Preferred Stock may bear dividends when, as and if declared by the Board of Directors. The Series “B” Preferred is junior to the Series “A” Preferred, but senior to the common stock with respect to liquidation.
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Each of the Series A and Series B Preferred Stock has voting rights on all matters coming before stockholders, equal to the number of shares issuable upon conversion of the Series A and Series B Preferred Stock.
If declared by Board of Directors, holders of shares of Series B Preferred Stock were entitled to receive dividends on the last day of each March, June, September and December in each year commencing on March 31, 2011. If declared, dividends were payable in shares of Common Stock on the holders total investment per share of Series B Preferred Stock at an annual variable rate, which decreased from an initial rate of 18% to 14% and then for calendar 2012 and thereafter to 10% on the last day of each March, June, September and December of each year until such time as the Series B Preferred Stock was either converted into shares of Common Stock as provided in the Series B designation or redeemed through the sale, acquisition or merger of the Company resulting from a change of ownership of the Company.
If declared, on each quarterly dividend payment date the holder of each share of Series B Preferred Stock is to receive the following:
| 1. | That number of shares of Common Stock, rounded to the nearest whole number, equal to the amount of such dividend payment divided by the Agreed Value of a share of Common Stock on such dividend payment date. For this purpose, the Agreed Value of a share of Common Stock shall be the amount equal to the average of the closing prices of a share of Common Stock as reported on the OTC Bulletin Board for each of the five trading days immediately preceding such dividend payment date. For example, if the Agreed Value on a Dividend Payment Date is $.10 per share the total number of shares of Common Stock to be issued on such dividend payment date shall be that number equal to the Investment Per Share of Series B Preferred Stock times the annual dividend rate divided by four divided by the Agreed Value. Regardless of the actual issuance of the stock certificate for the shares of Common Stock, the shares of Common Stock specifically authorized by the board will be deemed issued on the last day of the quarter. |
| 2. | A warrant to purchase that number of shares of Common Stock equal to the number of Dividend Shares issuable on such dividend date, exercisable at an exercise price per share equal to the Agreed Value. |
Notwithstanding the foregoing, no dividend was to be declared or paid to the holders of Series B Preferred Stock until the holders of Series A Preferred Stock received all of the dividends to which the holders of Series A Preferred Stock would be entitled to receive had the Board of Directors declared dividends on the Series A Preferred Stock and no dividend was to be declared or paid to the holders of Common Stock or any other series of Preferred Stock (other than the Series A Preferred Stock) until the holders of Series B Preferred Stock received all of the dividends to which the holders of Series B Preferred Stock were entitled to receive had the Board of Directors declared dividends on the Series B Preferred Stock. No dividends have been issued or declared by the Board of Directors on any shares of preferred stock.
The Company issued a warrant to purchase 5 shares of Series B Preferred Stock to the newly appointed Chief Executive Officer (appointed July 1, 2013).
9. OTHER INCOME
During the nine months ended March 31, 2014, the Company recorded income of $992,895 from the Company’s old accounts payable and accrued expenses meeting the statute of limitations. This amount is included in other income in the Company’s statement of operations.
10. COMMITMENTS AND CONTINGINCIES
On February 22, 2014, the Board of Directors of the Company notified the former Chief Executive Officer, Fred Zolla, that he was in violation of various provisions of his Separation Agreement and that the Company would no longer make payments under the terms of the Settlement Agreement. The former Chief Executive Officer disputes this claim and has filed an arbitration action with the American Arbitration Association (AAA), as required by the Separation Agreement that was in place at the time of Mr. Zolla’s separation from the company. The company believes that it has acted in a manner in accordance with the terms of the Agreement and will rigorously make assertions to that effect during the AAA process. We do not believe that any costs or losses associated with this action will be material to the company. A hearing is expected to proceed in December 2014.
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Employment Agreements:
On June 1, 2013, Fred Zolla, Chief Executive Officer, entered into an Employment Agreement with the Company. Pursuant to the terms of the Employment Agreement, Mr. Zolla will assume the position of Executive Chairman of the Board of Directors for a period of two years. Mr. Zolla will receive an annual base salary of $200,000, plus an annual bonus up to 100% of his base salary, which bonus is to be determined by the Board. In addition, Mr. Zolla was awarded and vested in an option to acquire 100,000,000 shares of the Company’s common stock (the "Common Stock Option". The Common Stock Option: (i) has an exercise price of $.017 per share; (ii) is exercisable for the five year period from the date of the Employment Agreement; and, (iii) contains provisions for a "cashless exercise" at the discretion of Mr. Zolla. The Common Stock option shall vest as follows: (X) one 1/3 of the Common Stock Shares at the execution of this agreement, (Y) 1/3 on the first year anniversary (June 1, 2014); and (Z) 1/3 on the second anniversary (June 1, 2015). Further, Mr. Zolla was awarded Warrants to acquire 5 shares of the Company’s Series B Preferred Stock, or their equivalent (the "Series B Warrants"). The Series B Warrants: (i) have an exercise price of $125,000 per share; and (ii) are exercisable from the date of vesting until the end of the five year period from the date of the Employment Agreement. The Series B Warrants become vested as follows: (x) one 1/3 of the Series B Warrants immediately, (y)1/3 on the first year anniversary date (June 1, 2014); and (z) 1/3 on the second anniversary date (June 1, 2015). All Series B Warrants will vest immediately in the case of change of control of the Company, death or permanent disability of Mr. Zolla Any Series B Warrants that are not vested at the time that Mr. Zolla is terminated for cause or he voluntarily terminates his employment with the Company, will be void. Mr. Zolla resigned on November 18, 2013.
On July 1, 2013, Robert McDermott entered into an Employment Agreement (the "McDermott Agreement") with the Company. Pursuant to the terms of the McDermott Agreement; Mr. McDermott has assumed the position of Chief
Executive Officer of the Company. The McDermott Agreement is for a period of two years and Mr. McDermott is to receive a base annual salary of $200,000 plus an annual bonus of 100% of his base salary. Additional bonus is to be determined by the Board. In addition, Mr. McDermott was awarded an option to acquire 100,000,000 shares of the Company’s common stock (the "McDermott Common Stock Option"). 25,000,000 of the McDermott Common Stock Option vested on July 1, 2013, with the remaining McDermott Common Stock Options to be vested at the rate of 25,000,000 each on the subsequent anniversary dates of the date of the McDermott Agreement. The Common Stock Option has an exercise price equal to the Ten (10) trading day closing price of the shares prior to the Effective Date (the effective date being June 1, 2013) and, (iii) contains a provisions for a "cashless exercise" at the discretion of Mr. McDermott. Further, Mr. McDermott was awarded 5 shares of the Company’s Series B Preferred Stock, or their equivalent (the "McDermott Series B Grant"). 1.25 share of the McDermott Series B Grant was vested on July 1, 2013, with the remaining McDermott Series B Shares to be vested at the rate of 1.25 each on the subsequent anniversary dates of July 1, 2013.
11. SUBSEQUENT EVENTS
The Company has evaluated subsequent events from the balance sheet date through the date the accompanying financial statements were available to be issued and has found the following material events to report.
Common Stock, Series B Preferred Stock and Warrants to purchase Common Stock have been issued in the following amounts to investors subsequent to the close of the period ended March 31, 2014:
| ● | On April 14, 2014, a third party individual purchased 2,666,667 Common Shares. The Company received proceeds of $10,417. | |
| ● | On April 14, 2014, a third party individual purchased 2,666,666 Common Shares. The Company received proceeds of $10,417. | |
| ● | On April 14, 2014, a third party individual purchased 2,666,666 Common Shares. The Company received proceeds of $10,417. | |
| ● | On May 20, 2014, a third party individual purchased 65,000,000 Common Shares and Warrants to Purchase 6,000,000 Common Shares with a two-year expiration and a $0.015 strike price. The Company received proceeds of $250,000. | |
| ● | On June 30, 2014, a third party individual purchased 10,000,000 Common Shares and Warrants to Purchase 4,000,000 Common Shares with a two-year expiration and a $0.015 strike price. The Company received proceeds of $125,000. | |
| ● | On June 30, 2014, a third party individual purchased 2,000,000 Common Shares and Warrants to Purchase 800,000 Common Shares with a two-year expiration and a $0.015 strike price. The Company received proceeds of $25,000. |
On May 1, 2014, the Board of Directors authorized the issuance of 3.25 warrants to the Company’s Chief Executive Officer, Robert McDermott, to purchase 3.25 shares of Series B Preferred Shares, with a cashless exercise price. The Company will record compensation expense in the fourth quarter of fiscal year 2014 for the Series B Preferred Shares warrant issuance.
On June 30th 2014 the board resolved many investor, shareholder and employee disputes to the satisfaction of the company.
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Statements made in this Quarterly Report on Form 10-Q, including without limitation this Management's Discussion and Analysis of Financial Condition and Operations, other than statements of historical information, are 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. These forward-looking statements may be identified by such words as "may," "will," "expect," "anticipate," "believe," "estimate" and "continue" or similar words. We believe it is important to communicate our future expectations to investors. However, these forward-looking statements involve many risks and uncertainties, including the risk factors disclosed under the heading “Risk Factors” included in the Company's Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 22, 2013 and amended on March 26, 2013. Our actual results could differ materially from those indicated in such forward-looking statements as a result of certain factors. We are under no duty to update any of the forward-looking statements after the date of this Report on Form 10-Q to conform these statements to actual results, other than to comply with the federal securities laws.
Overview
The Company had historically focused its efforts on building a portal-based, virtual work, learning and communication/collaboration environment (a SocialHIE –Social Health Information Exchange). In 2007 the company shifted its efforts to develop a marketing internet portal for the healthcare and related industries called the iMedicor Portal. The Company’s primary focus shifted from a distant learning company with its acquisition of NuScribe, Inc. in late 2006 and started to focus exclusively on the healthcare industry. The Company executed a reverse merger in 2007 after which its shares became publicly traded. The company went through many iterations trying to find the proper markets for its technology. It produced a Social HIE, a Patient Portal, and an online Continuous Medical Education library. The Company also made acquisitions relating to pharmaceutical marketing, acquired a Meaningful Use Consulting group and purchased a data mining and data aggregation business.
In 2013, after 10 years of experiencing execution difficulties, the Board of Directors decided to bring in a new CEO, Robert McDermott. Mr. McDermott has many years of execution experience building, developing and creating value by focusing resources on promising markets. Mr. McDermott immediately brought in an experienced Senior Level Management team that, under the leadership of Mr. McDermott, streamlined operations and focused the company on a three core competencies. The new management team is experienced in all critical major management disciplines at a healthcare software and services company including Sales, Finance, Operations and Technology.
The Company anticipates generating revenue from three segments:
1. Subscription revenue from the iCoreExchange
2. Meaningful Use Consulting
3. Custom EHR Sales
The new management team expects to consistently upgrade existing software and services as well as roll out new products based on customer feedback and measured market demand.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations are based upon the condensed consolidated financial statements included in this Form 10-Q for the quarterly period ended March 31, 2014, which have been prepared in accordance with generally accepted accounting principles as recognized in the U.S. The preparation of these financial statements requires that we make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses, and disclosure of contingent assets and liabilities. Our estimates include those related to revenue recognition, the valuation of inventory, and valuation of deferred tax assets and liabilities, useful lives of intangible assets and accruals. We base our estimates on historical experience and on various other assumptions that management believes to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
Liquidity and Capital
Cash was $78,344, at March 31, 2014 compared to $513,272 at June 30, 2013. Net cash declined by $434,928 for the nine months ended March 31, 2014 as compared to a net cash increase of $132,134, for the nine months ended March 31, 2013. The increased use of cash for the nine months ended March 31, 2014 versus the nine months ended March 31, 2013 is primarily attributed to funding operations.
Net cash used in operating activities for the nine months ended March 31, 2014 was $1,830,448 as a result of the company’s expanded product development, sales and marketing efforts in conjunction with accounts payable retirement and costs of carrying increased receivables. Net cash used in investing activities was $16,780 to build out the Company’s headquarters in Windermere Florida. Net cash provided by financing activities was $1,412,300 for the nine months ended March 31, 2014 as compared to net cash provided by financing activities of $1,454,375 for the nine months ended March 31, 2013. The increase is due to increased issuance of equity during the period as well as a new accounts receivable-backed Credit Facility with our primary commercial lender.
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The Company continues to operate at a loss and is projected to do so until at least the end of fiscal 2015. A lack of available investment capital in the quarter ended March 31, 2014 required the Company to consolidate operations while attempting an aggressive development schedule to initiate the Company’s new iCoreExchange development effort. The Company will continue to rely on raising capital through equity investments and/or debt instruments and commercial lending to maintain operations. There is no assurance that the Company will be able to raise additional capital.
GOING CONCERN
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business. The Company has incurred operating losses to date and has an accumulated deficit, total stockholders’ deficit and net working capital deficit of $53,162,518, $6,387,125 and $6,405,408 at March 31, 2014, espectively. The Company’s activities have been primarily financed through convertible debentures, private placements of equity securities and borrowing under an accounts receivable-backed commercial line of credit. The Company intends to raise additional capital through the issuance of debt or equity securities to fund its operations. The financing may not be available on terms satisfactory to the Company, if at all.
Management is attempting to develop both an internal sales and marketing distribution network and alliances with strategic partners to allow us to generate revenues that will enable us to be self-sustaining. While we believe in the viability of our strategy to increase revenues and in our ability to raise additional funds, there can be no assurances to that effect. Our ability to continue as a going concern is ultimately dependent upon our ability to continually increase our customer base and realize increased revenues from recently signed contracts. The financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amount s and classification of liabilities that might be necessary should we be unable to continue as a going concern.
Results of Operations
The following table sets forth statement of operations data of the company for the periods indicated:
| Three Months Ended | Nine Months Ended | |||||||||||||||
| March 31, | March 31, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Revenues | $ | 412,045 | $ | 36,333 | $ | 977,486 | $ | 65,685 | ||||||||
| Cost of Services | 81,180 | - | 288,812 | - | ||||||||||||
| General &Administrative | 519,520 | 5,663,099 | 2,202,251 | 6,558,145 | ||||||||||||
| Impairment of Technology Asset | - | 966,412 | - | 1,143,457 | ||||||||||||
| Acquisition Expense | - | 400,016 | - | 400,016 | ||||||||||||
| Bad Debt Expense | - | 26,280 | - | 88,280 | ||||||||||||
| Depreciation & Amortization | 2,097 | 4,820 | 2,097 | 4,820 | ||||||||||||
| Total Expenses | 521,617 | 7,060,627 | 2,204,348 | 8,194,718 | ||||||||||||
| Loss from operations | $ | (190,752 | ) | $ | (7,024,294 | ) | $ | (1,515,674 | ) | $ | (8,129,033 | ) | ||||
Revenues
The Company's revenues for the three months ended March 31, 2014 increased to $412,045 from $36,333 for the three months ended March 31, 2013, an increase of approximately 1,134%.. The Company’s revenues for the nine months ended March 31, 2014 and 2013 were $977,486 and $65,685 respectively – an increase of 1,388%. The increase was due primarily to the Company’s focus on core Meaningful Use Consulting Services in which the Company assists dentists and physicians to secure funds under the Federal Meaningful Use Incentive Funds program
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Cost of Services
Cost of Services for the three months ended March 31, 2014 and 2013 were $81,180 and $-0-, respectively Cost of Services for the nine months ended March 31, 2014 and 2013 were $288,812 and $-0- respectively. . The increase in Cost of Services was attributable to increases in Consultants and support staff required to grow and support iMedicor’s Meaningful Use consulting business.
General and Administrative Expenses
General and administrative expenses for the three months ending March 31, 2014 decreased to $519,520. from
$5,663,099, for the three months ended March 31, 2013 representing a decrease of 91%. General and administrative expenses for the nine months ending March 31, 2014 decreased to $2,202,251 from $6,558,145 – a decrease of 66% This was primarily due to downsizing staff, eliminating stock offered for services, and reducing professional fees..
Bad Debt Expense
Bad Debt Expense for the nine months ended March 31, 2014 was $-0- compared to $26,280 for the period ended March 31, 2013. We do not anticipate an increase in bad debt expense in the foreseeable future due to the nature of our Meaningful Use Consulting Services.
Loss from Operations
Loss from operations for the three months ended March 31, 2014 totaled $190,752 compared to $7,024,294 for the three months ended March 31, 2013, representing a decrease of 97.2%. The decrease in losses from operations for the three months ended March 31, 2014 was primarily attributed to prior year impairment of assets in the amount of $966,412, financing acquisition expense of $400,016 and stock compensation expense
Income from operation for the nine months ended March 31, 2014 totaled $2,069,782 compared to a loss of $7,871,558 for the nine months ended March 31, 2013 representing an increase of $9,941,340.The increase in income from operations for the nine months ended March 31, 2014 was primarily attributed to prior year losses for impairment of assets in the amount of $1,143,487, stock compensation in the amount of $4,893,342 and financing acquisition expense of $400,016 and $716,927. This was accomplished while growing revenue through making measured investment in new product development and developing an effective sales and marketing team.
ITEM 4. Controls and Procedures.
Disclosure Controls and Procedures
As of March 31, 2014, under the supervision and with the participation of the Company's Chief Executive Officer and the Chief Financial Officer, management has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation and because of the material weaknesses in our internal control over financial reporting described below, the Chief Executive Officer and the Chief Financial Officer have concluded that the Company's disclosure controls and procedures were not effective as of March 31, 2014.
Management identified the following control deficiencies that constitute material weaknesses that are not fully remediated as of the filing date of this report:
The Company did not maintain an effective financial reporting process to prepare financial statements in accordance with U.S. GAAP. Specifically, our process lacked timely and complete financial statement reviews, appropriate account closing procedures, and appropriate reconciliation processes. Further, we were unable to complete regulatory filings as required by the rules of the SEC.
We do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act which is applicable to us as of March, 2014. Management evaluated the impact of our failure to have written documentation of our internal controls and procedures on our assessment of our disclosure controls and procedures and internal control over financial reporting and has concluded that the control deficiency that resulted represented a material weakness.
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On November 5, 2013 the Board of Directors adopted an Audit Committee as a permanenet committee of the Board of Directors by unanimous written consent. During the period ended March 31, 2014 the Board of Directors also adopted a formal charter for the Audit Committee which is to be chaired by an independent director or board member with the requisite credentials and experience to qualify as an “Audit Committee Financial Expert” as set forth in Section 407 of the Sarbanes Oxley Act of 2002.
This Committee is tasked, along with other appropriate matters, with the improvement of previously ineffective oversight of financial internal controls and the concomitant accuracy and timeliness of financial reporting.
We do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our size and nature, segregation of all conflicting duties may not always be possible and may not be economically feasible. However, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals. Management evaluated the impact of our failure to have segregation of duties on our assessment of our disclosure controls and procedures and internal control over financial reporting and has concluded that the control deficiency that resulted represented a material weakness.
Limitations on the Effectiveness of Internal Controls
Disclosure controls and procedures, no matter how well designed and implemented, can provide only reasonable assurance of achieving an entity's disclosure objectives. The likelihood of achieving such objectives is affected by limitations inherent in disclosure controls and procedures. These include the fact that human judgment in decision- making can be faulty and that breakdowns in internal control can occur because of human failures such as simple errors or mistakes or intentional circumvention of the established process.
Changes in Internal Control over Financial Reporting
There were no changes in internal control over financial reporting that occurred during the fiscal quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
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PART II - OTHER INFORMATION
The Board of Directors of the Company had amended and restated the Bylaws as of August 15, 2013. A copy of the Amended and Restated Bylaws are submitted as Exhibit 3(ii).
| Exhibit Number | Description | |
| 3(ii) | Amended and Restated Bylaws dated as of August 15, 2013 | |
| 4.1 | Secured Convertible Promissory Note of the Company dated April 18, 2009* | |
| 4.2 | Modification Agreement dated March 31, 2011** | |
| 4.3 | Secured Convertible Promissory Note dated March 31, 2011** | |
| 4.4 | Series “A” Preferred Stock Description** | |
| 4.5 | Series "B" Preferred Stock Subscription Agreement** | |
| 4.6 | Series “B” Preferred Stock Description** | |
| 4.7 | Form of Note dated August 24, 2011 | |
| 31.1 | Certification of the President and Chief Executive Officer pursuant to Rule 13a-14(a). | |
| 31.2 | Certification of the Chief Financial Officer and Treasurer pursuant to Rule 13a-14(a). | |
| 32.1 | Certification of the President and Chief Executive Officer pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002. | |
| 32.2 | Certification of the Chief Financial Officer and Treasurer pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the Sarbanes-Oxley Act of 2002. | |
| 101.INS | XBRL Instance Document | |
| 101.SCH | XBRL Taxonomy Extension Schema | |
| 101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
| 101.DEF | XBRL Taxonomy Extension Definition Linkbase | |
| 101.LAB | XBRL Taxonomy Extension Label Linkbase | |
| 101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
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Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
iMedicor, Inc. (Registrant) | |||
| Date: January 5, 2015 | By: | /s/ Robert McDermott | |
| Robert McDermott | |||
| Chief Executive Officer | |||
| (Principal Executive Officer) | |||
| Date: January 5, 2015 | By: | Donald G Sproat | |
| Donald G Sproat | |||
| Chief Financial Officer | |||
| (Principal Accounting Officer) | |||
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