ZYNEX MEDICAL HOLDINGS, INC.
FORM 10-QSB
INDEX
| | | Page No. |
| | | |
| Item 1. Financial Statements: | | |
Condensed Consolidated Balance Sheet - June 30, 2006 | | 3 |
Condensed Consolidated Statements of Operations - Three Months Ended June 30, 2006 and 2005 and Six Months ended June 30, 2006 and 2005 | | 4 |
Condensed Consolidated Statements of Cash Flows - Six Months Ended June 30, 2006 and 2005 | | 5 |
Condensed Consolidated Statement of Stockholders' Equity- Six Months Ended June 30, 2006 | | 6 |
Notes to Condensed Consolidated Financial Statements | | 7 |
| | | |
| Item 2. Management's Discussion and Analysis or Plan of Operations | | 13 |
| Item 3. Controls and Procedures | | 15 |
| | | |
| PART II: OTHER INFORMATION | | |
| | | |
Item 1. Legal Proceedings | | 16 |
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | | 16 |
Item 3. Defaults Upon Senior Securities | | 16 |
Item 4. Submission of Matters to a Vote of Security Holders | | 16 |
Item 5. Other Information | | 16 |
Item 6. Exhibits | | 17 |
| | | |
| SIGNATURES | | 18 |
Zynex Medical Holdings, Inc.
Condensed Consolidated Balance Sheet
June 30, 2006
(unadited)
| ASSETS | | | |
| Current Assets: | | | | |
| Cash and cash equivalents | | $ | 76,823 | |
| Receivables, less allowance for uncollectible accounts of $977,986 | | | 958,454 | |
| Inventory | | | 476,875 | |
| Deferred consulting fees and other | | | 16,575 | |
| Prepaid expenses | | | 27,314 | |
| Other | | | 1,000 | |
| | | | | |
| Total Current Assets | | | 1,557,041 | |
| | | | | |
| Property and equipment, less accumulated depreciation of $195,223 | | | 150,063 | |
| Deposits | | | 10,940 | |
| | | | | |
| | | $ | 1,718,044 | |
| | | | | |
| LIABILITIES AND STOCKHOLDER'S EQUITY | | | | |
| Current Liabilities: | | | | |
| Notes payable | | $ | 216,147 | |
| Capital lease | | | 15,112 | |
| Loans from stockholder | | | 63,398 | |
| Accounts payable | | | 360,118 | |
| Accrued payroll and payroll taxes | | | 43,395 | |
| Other | | | 81,770 | |
| | | | | |
| Total Current Liabilities | | | 779,940 | |
| | | | | |
| Notes payable, less current maturities | | | 360,216 | |
| Capital lease, less current maturities | | | 35,911 | |
| Loans from stockholder, less current maturties | | | 20,850 | |
| | | | | |
| | | | 416,977 | |
| Stockholder's Equity: | | | | |
Preferred stock, $0.001 par value, 10,000,000 authorized, no shares issued or outstanding | | | - | |
| Common stock, $0.001 par value, 100,000,000 authorized, 23,690,993 issued and outstanding | | | 23,691 | |
| Additional paid-in capital | | | 1,607,805 | |
| Accumulated deficit | | | (1,110,369 | ) |
| | | | | |
| | | | 521,127 | |
| | | | | |
| | | $ | 1,718,044 | |
See accompanying notes to financial statements.
Zynex Medical Holdings, Inc.
Condensed Consolidated Statements of Operations
(unaudited)
| | | | | | | | | | |
| | | Three Months Ended June 30, | | Six Months Ended June 30, | |
| | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | | | | |
| Net sales and rental income | | $ | 560,860 | | $ | 589,483 | | $ | 1,065,951 | | $ | 1,134,426 | |
| Cost of sales and rentals | | | 19,323 | | | 73,250 | | | 83,150 | | | 160,362 | |
| | | | | | | | | | | | | | |
Gross Profit | | | 541,537 | | | 516,233 | | | 982,801 | | | 974,064 | |
| | | | | | | | | | | | | | |
| Operating expenses: | | | | | | | | | | | | | |
| Selling, general and administrative | | | 506,686 | | | 417,784 | | | 984,304 | | | 799,824 | |
| Depreciation | | | 15,206 | | | 16,801 | | | 30,359 | | | 32,828 | |
| | | | 521,892 | | | 434,585 | | | 1,014,663 | | | 832,652 | |
| | | | | | | | | | | | | | |
| Income (loss) from operations | | | 19,645 | | | 81,648 | | | (31,862 | ) | | 141,412 | |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| Interest and other expense | | | (17,735 | ) | | (6,232 | ) | | (31,053 | ) | | (9,916 | ) |
| | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
Net income (loss) | | $ | 1,910 | | $ | 75,416 | | $ | (62,915 | ) | $ | 131,496 | |
| | | | | | | | | | | | | | |
Net income (loss) per common and common equivalent share | | | | | | | | | | | | | |
Basic | | $ | | | $ | 0.00 | | $ | | | $ | 0.01 | |
| | | | | | | | | | | | | | |
Diluted | | $ | | | $ | 0.00 | | $ | | | $ | 0.01 | |
| | | | | | | | | | | | | | |
| Weighted average number of shares outstanding | | | | | | | | | | | | | |
Basic | | | 23,277,197 | | | 23,074,024 | | | 23,244,065 | | | 23,072,210 | |
| | | | | | | | | | | | | | |
Diluted | | | 23,616,412 | | | 23,237,948 | | | 23,244,065 | | | 23,230,567 | |
See accompanying notes to financial statements.
Zynex Medical Holdings, Inc.
Condensed Consolidated Statements of Cash Flow
(unaudited)
| | | Six Months Ended June 30, | |
| | | 2006 | | 2005 | |
| | | | | | |
| Cash flows from operating activities: | | | | | |
| Net income (loss) | | $ | (62,915 | ) | $ | 131,496 | |
| Adjustments to reconcile net income (loss) to net cash (used in) provided by operations: | | | | | | | |
| Depreciation | | | 30,359 | | | 16,801 | |
| Issuance of stock for consulting services | | | 25,000 | | | 12,500 | |
| Amortization of deferred consulting fees and other | | | 15,714 | | | | |
Employee stock compensation expense | | | 9,710 | | | | |
| Changes in operating assets and liabilities: | | | | | | | |
| Accounts receivable | | | (263,562 | ) | | (285,820 | ) |
| Inventory | | | (90,756 | ) | | (76,861 | ) |
| Refundable income taxes | | | 7,586 | | | 4,105 | |
| Other current assets | | | 432 | | | 7,071 | |
| Prepaid expenses | | | (14,190 | ) | | | |
| Deposits | | | - | | | 3,532 | |
| Bank overdraft | | | | | | 19,116 | |
| Accounts payable | | | 78,073 | | | 193,666 | |
| Accrued liabilities | | | 3,029 | | | 7,981 | |
| | | | | | | | |
| Net cash (used in) provided by operating activities | | | (261,520 | ) | | 33,587 | |
| | | | | | | | |
| | | | | | | | |
| Cash flows from investing activities: | | | | | | | |
| Purchase of equipment | | | (640 | ) | | (11,408 | ) |
| | | | | | | | |
| Net cash used in investing activities | | | (640 | ) | | (11,408 | ) |
| | | | | | | | |
| Cash flows from financing activities: | | | | | | | |
| Payments of notes payable and capital leases | | | (97,581 | ) | | (50,557 | ) |
| Proceeds from note payable | | | 240,000 | | | | |
| Proceeds from loans from stockholder | | | 126,900 | | | 25,300 | |
| Payments of loans from stockholder | | | (57,632 | ) | | | |
| Issuance of common stock | | | 108,563 | | | | |
| | | | | | | | |
| Net cash provided by (used in) financing activities | | | 320,250 | | | (25,257 | ) |
| | | | | | | | |
| | | | | | | | |
| Increase (decrease) in cash and cash equivalents | | | 58,090 | | | (3,078 | ) |
| | | | | | | | |
| Cash and cash equivalents at beginning of period | | | 18,733 | | | 3,078 | |
| | | | | | | | |
| Cash and cash equivalents at end of period | | $ | 76,823 | | $ | - | |
| | | | | | | | |
| Supplemental cash flow information: | | | | | | | |
| | | | | | | | |
Interest paid, including interest paid to stockholder of $3,735 in 2006 | | $ | 30,282 | | $ | 13,212 | |
See accompanying notes to financial statements.
Zynex Medical Holdings, Inc.
Condensed Consolidated Statement of Stockholders' Equity
Six Months Ended June 30, 2006
(unaudited)
| | | Number of Shares | | Amount | | Additional Paid in Capital | | Accumulated Deficit | | Total | |
| | | | | | | | | | | | |
| December 31, 2005 | | | 23,199,421 | | $ | 23,199 | | $ | 1,465,024 | | $ | (1,047,454 | ) | $ | 440,769 | |
| | | | | | | | | | | | | | | | | |
Issuance of common stock for consulting services | | | 55,613 | | | 56 | | | 24,944 | | | | | | 25,000 | |
| | | | | | | | | | | | | | | | | |
Issuance of common stock in private placement offering | | | 435,959 | | | 436 | | | | | | 108,127 | | | 108,563 | |
| | | | | | | | | | | | | | | | | |
Employee stock compensation expense | | | | | | | | | 9,710 | | | | | | 9,710 | |
| | | | | | | | | | | | | | | | | |
| Net loss | | | | | | | | | | | | (62,915 | ) | | (62,915 | ) |
| | | | | | | | | | | | | | | | | |
| June 30, 2006 | | | 23,690,993 | | $ | 23,691 | | $ | 1,607,805 | | $ | (1,110,369 | ) | $ | 521,127 | |
See accompanying notes to financial statements.
ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Nature of Business
Zynex Medical Holdings, Inc. ("Zynex" or the "Company") engineers, manufactures, markets and sells its own design of FDA cleared (1) standard electrotherapy medical devices for pain relief / pain management, and (2) the NeuroMove(TM) medical device for stroke and spinal cord injury ("SCI") rehabilitation.
2. Basis of Presentation
The accompanying condensed consolidated financial statements are unaudited pursuant to the rules and regulations of the Securities and Exchange Commission and in accordance with accounting principles for interim financial information. In the opinion of management, these condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) necessary to fairly state the financial position of the Company as of June 30, 2006 and the results of its operations for the quarters and six months ended June 30, 2006 and 2005, and its cash flows for the six months ended June 30, 2006 and 2005.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted. Furthermore, these financial statements should be read in conjunction with Zynex Medical Holdings, Inc.'s audited financial statements at December 31, 2005 included in the Company's Form 10-KSB filed April 18, 2006.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions. Such estimates and assumptions affect the reported amounts of assets and liabilities as well as disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
Certain reclassifications have been made to conform previously reported data to the current presentation. These reclassifications have no effect on net income (loss), financial position or cash flows as previously reported. During the quarter ended March 31, 2006 the Company changed its classification of freight out costs from cost of sales and rentals to selling, general and administrative expenses as management considers these costs to be part of its marketing program and thus they believe it is preferable to classify these costs as a component of selling, general and administrative expenses. Freight costs included in selling, general and administrative expenses
during the three months ended June 30, 2006 and 2005 are $11,419 and $6,220 respectively, and for the six months ended June 30, 2006 and 2005 are $20,361and $13,187 respectively.
Recent Accounting Pronouncements
3. Recent Accounting Pronouncements
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123R supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95, "Statement of Cash Flows". SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions and requires all share-based payments to employees, including grants of employee stock options, to be recognized as additional compensation expense in the financial statements based on the calculated fair value of the awards. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. We adopted this statement effective for our fiscal year beginning January 1, 2006. We have described the impact of adopting SFAS 123R in our condensed consolidated financial statements below.
ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
4. Stock Based Compensation
The Company has a 2005 Stock Option Plan (the "Option Plan") and has reserved 3,000,000 shares of common stock for issuance under the Option Plan. Vesting provisions are determined by the Board of Directors. All stock options expire no later than ten (10) years from the date of grant.
Effective January 1, 2006, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), using the modified prospective method. SFAS 123R requires the recognition of the cost of employee services received in exchange for an award of equity instruments in the financial statements and is measured based on the grant date fair value of the award. SFAS 123R also requires the stock option compensation expense to be recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period). Prior to our adopting SFAS 123R, we accounted for our stock-based compensation plans under Accounting Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued to Employees" ("APB 25"). Under APB 25, generally no compensation expense is recorded when the terms of the award are fixed and the exercise price of the employee stock option equals or exceeds the fair value of the underlying stock on the date of grant. We adopted the disclosure-only provision of SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123").
In the second quarter of 2006, the Company recorded compensation expense related to stock options that decreased the net income from operations by $4,855 and its net income by $4,855. The stock option compensation expense was included in selling, general and administrative expenses in the accompanying condensed consolidated statement of operations.
For the three months and six months ended June 30, 2006, the Company recorded compensation expense related to stock options that decreased both net income from operations and net income by $4,855 and $9,710, respectively. The stock option compensation expense was included in selling, general and administrative expenses in the accompanying condensed consolidated statement of operations.
There were no options granted during the three months ended, June 30, 2006. The fair value of stock options at the date of grant during the three months ended June 30, 2006 and June 30, 2005 was $0.00 and $51,147. The Company used the following assumptions to determine the fair value of stock option grants during the three months ended June 30, 2005:
| Expected life | 2 years |
| Volatility | 125% |
| Risk-free interest rate | 4.95 |
| Dividend yield | 0 |
The expected life of stock options represents the period of time that the stock options granted are expected to be outstanding based on historical exercise trends. The expected volatility is based on the historical price volatility of our common stock. The risk-free interest rate represents the U.S. Treasury bill rate for the expected life of the related stock options. The dividend yield represents our anticipated cash dividend over the expected life of the stock options.
A summary of stock option activity for the six months ended June 30, 2006 is presented below:
ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| | | Shares Under Option | | Weighted Average Exercise Price | | Weighed Average Remaining Contractual Life | Aggregate Intrinsic Value |
| Outstanding at January 1, 2006 | | | | | | | |
| | | | | | | | |
| Stock option plan | | 176,670 | | $0.40 | | | |
| Granted | | -- | | -- | | | |
| Exercised | | -- | | -- | | | |
| Forfeited | | (28,000 | ) | $0.38 | | | |
| Outstanding at June 30, 2006 | | 148,670 | | $0.40 | | 8.95 Years | $980 |
| | | | | | | | |
| Exercisable at June 30, 2006 | | 24,500 | | $0.29 | | 8.65 Years | $245 |
| | | | | | | | |
A summary of the status of the Company's non-vested shares as of and for the six months ended June 30, 2006, is presented below.
| | Nonvested Shares Under Option | | Weighted Average Grant Date Fair Value |
| Nonvested at January 1, 2006 | 176,670 | | $0.26 |
| Granted | -- | | -- |
| Vested | (24,500 | ) | 0.20 |
| Forfeited | (28,000 | ) | 0.25 |
| | | | |
| Nonvested at June 30, 2006 | 124,170 | | $0.27 |
| | | | |
As of June 30, 2006, we had $29,510 of unrecognized compensation cost related to stock options that will be recognized over a weighted average period of approximately 2 years.
Prior to January 1, 2006, we accounted for stock-based compensation plans under APB 25. We adopted the disclosure-only provision of SFAS 123. Had compensation expense for stock option grants been determined based on the fair value at the grant dates consistent with the method prescribed by SFAS 123, our net income and net income per share would have been adjusted to the pro forma amounts for the three and six months ended June 30, 2005, as indicated below:
ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
| | | Three Months Ended June 30, 2005 | | Six Months Ended June 30, 2005 | |
| | | | | | |
| Net income as reported | | $ | 75,416 | | $ | 131,496 | |
| | | | | | | | |
Deduct: total stock-based employee compensation expense determined under fair value based method for all awards | | | 1,796 | | | 3,593 | |
| | | | | | | | |
| Pro forma net income | | $ | 73,620 | | $ | 127,903 | |
| | | | | | | | |
| Income per share: | | | | | | | |
| | | | | | | | |
| Basic - as reported | | $ | 0.00 | | $ | 0.01 | |
| | | | | | | | |
| Diluted - as reported | | $ | 0.00 | | $ | 0.01 | |
| | | | | | | | |
| Basic - pro forma | | $ | 0.00 | | $ | 0.01 | |
| | | | | | | | |
| Diluted - pro forma | | $ | 0.00 | | $ | 0.01 | |
5. Earnings Per Share
The Company computes net earnings (loss) per share in accordance with SFAS No. 128, "Earnings per Share", which establishes standards for computing and presenting net earnings (loss) per share. Basic earnings (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding and the number of dilutive potential common share equivalents during the period. For the six months ended June 30, 2006, the basic and diluted loss per share is the same, as the impact of potential dilutive common shares is anti-dilutive.
ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
The calculation of basic and diluted earnings (loss) per share for the three and six months ended June 30, 2006 and 2005 is as follows:
| Basic | | Three Months Ended June 30, 2006 | | Three Months Ended June 30, 2005 | | Six Months Ended June 30, 2006 | | Six Months Ended June 30, 2005 | |
Net income (loss) applicable to common stockholders - basic | | $ | 1,910 | | $ | 75,416 | | $ | (62,915 | ) | $ | 131,496 | |
| Weighted average shares outstanding - basic | | | 23,277,197 | | | 23,074,024 | | | 23,444,065 | | | 23,072,210 | |
| Net income (loss) per share | | | | | | | | | | | | | |
| Basic | | $ | 0.00 | | $ | 0.01 | | $ | 0.00 | | $ | 0.01 | |
| | | | | | | | | | | | | | |
| Diluted | | | | | | | | | | | | | |
Net income (loss) applicable to common stockholders - diluted | | $ | 1,910 | | $ | 75,416 | | $ | (62,915 | ) | $ | 131,496 | |
| Weighted average shares outstanding - basic | | | 23,277,197 | | | 23,074,024 | | | 23,444,065 | | | 23,072,210 | |
| Dilutive securities, treasury stock method | | $ | 339,215 | | $ | 163,924 | | $ | 0.00 | | $ | 158,357 | |
| Weighted average shares outstanding - diluted | | | 23,616,412 | | | 23,237,948 | | | 23,244,065 | | | 23,230,567 | |
| Net income (loss) per share - diluted | | $ | 0.00 | | $ | 0.00 | | $ | 0.00 | | $ | 0.01 | |
6. Loans from stockholder
Loans from stockholder:
Effective March 1, 2006, a previously non interest bearing loan from Thomas Sandgaard in the amount of $14,476 was converted to a 15 month, 8.25% term loan of $14,980, including accrued interest, with equal monthly payments of principal and interest commencing March 31, 2006. Payments were made for March, April and May, 2006. The June 2006 payment has not been made.
ZYNEX MEDICAL HOLDINGS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
During the six months ended June 30, 2006, Mr. Sandgaard loaned the Company $126,900, of which $50,000 was converted to a 24 month, 8.25% term loan of $50,454, including accrued interest, with equal monthly payments of principal and interest commencing March 31, 2006. Payments were made for March, April, and May 2006. The June payment has not been made. The balance of $76,900 was represented by 8.25% demand notes, of which $54,636 has been repaid. The remaining $22,264 plus $739 accrued interest will be repaid as the Company’s cash position and its bank covenants allow. At June 30, 2006, $84,248 in loans from Mr. Sandgaard remained outstanding.
At January 1, 2006 the Company owed Mr. Sandgaard $2,845 as an account payable for monies advanced by Mr. Sandgaard on the Company’s behalf for operating expenses incurred by the Company. During the six months ended June 30, 2006 Mr. Sandgaard advanced an additional $34,593 for operating expenses incurred by the Company and was paid back $10,579, leaving a June 30, 2006 accounts payable balance owing to Mr. Sandgaard of $26,859.
7. Stockholders' Equity
For the quarter ended June 30, 2006, the Company issued 23,016 shares of common stock to investor relations consultants for services performed at prices ranging from $0.42 to $0.45 per share. In addition, 390,625 shares of common stock were sold in a non public offering to accredited investors at $0.32 a share. The Company also issued warrants to purchase 312,500 shares to the investors in the non-public offering; these warrants have an exercise price of $0.39 per share and a term expiring June 30, 2011. Additionally, the Company issued 45,351 shares of common stock to the broker-dealer and an investment banker responsible for the non public offering. Subsequent to the quartered ended June 30, 2006 the company issued 326,666 shares of common stock to investor relations consultants for services to be performed at $0.30 per share.
At December 31, 2005, the Company had outstanding warrants and non-employee options to purchase 3,245,121 shares of common stock at a weighted average exercise price of $0.83. During the six months ended June 30, 2006, the Company issued warrants and non-employee options to purchase 312,500 shares of common stock with a weighted average exercise price of $0.39. At June 30, 2006, the Company had outstanding warrants and non-employee options to purchase3,557,621 shares of common stock at a weighted average exercise price of $0.78.
Additionally, at June 30, 2006, the Company had outstanding 350,000 options to an employee, granted in 2005, which were not issued pursuant to the Option Plan. The options h ave an exercise price of $0.22, have a remaining term at June 30, 2006 of
8 ¾ years and have an intrinsic value of $28,000.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following information should be read in conjunction with the Company's condensed consolidated financial statements and related footnotes contained in this report.
Results of Operations
Net Sales and Rental Income. Net sales and rental income for the quarters and six months ended June 30, 2006 and 2005 were $560,860 and $589,483 and $1,065,951 and $1,134,426 respectively, a decrease of $28,623 or 4.9% and $68,475 or 6.0%. The decrease in net revenue for the quarter and six months ended June 30, 2006 compared to the quarter and six months ended June 30, 2005 was primarily due to a $221,099 second quarter and $290,252 six month increase in the reserve for contractual adjustments (i.e., estimated insurance company adjustments) and bad debt for the quarter and six months ended June 30, 2006, coupled with a second quarter 2005 reduction of $69,000 to an accounts receivable reserve for NeuroMove Medicare accounts. Following a practice throughout the healthcare industry, insurance companies regularly adjust unilaterally the amounts which they will pay for our products instead of rentals or prices charged by us.
Subsequent to the end of the second quarter and as part of our effort to grow our business we engaged 16 additional independent contractor sales representatives more than doubling our sales force.
Gross Profit. Gross profit for the quarter and six months ended June 30, 2006 were $541,537 or 96.6% and $982,800 or 92.2% of net revenue. For the quarter and six months ended June 30, 2006 this represents an increase of $25,304 or 4.9% and $8,736 or 0.9% from the gross profit of $516,233 or 87.5% of net revenue and $974,064 or 85.9% of net revenue for the quarter and six months ended June 30, 2005 respectively. The increase in gross profit for the quarter and six months ended June 30, 2006 as compared with the same periods in 2005 is primarily because rental revenue, which maintains a higher profit margin than sales revenue, represents a larger percentage of total revenue than in the prior periods and because of a second quarter 2006 update to our inventory costing procedures, including development of a comprehensive bill of materials for all major finished goods inventory components.
Selling, General and Administrative. Selling, general and administrative expenses for the quarter and six months ended June 30, 2006 were $506,686, an increase of $88,902 or 21.3%, and $984,304, an increase of 184,480 or 23.1% respectively compared to $417,784 and $799,824 for the same periods in 2005. The quarterly increase was primarily due to increases in commissions, advertising and marketing, audit and accounting fees, office and manufacturing supplies and design, utilities (primarily because the local utility billed incorrectly in 2004 and 2005 and recovered their billing shortfall in 2006), rent and a small payroll increase. The increases were in part offset by lower insurance premiums, consulting fees, travel & entertainment, depreciation and service charges. The six-month increase was primarily due to increases in the above items plus legal fees, property taxes, and research & development, and offset by the above decreases plus finance charges, bank service fees, and car allowances.
Interest and other income (expense). Interest and other income (expense) was ($17,735) for the quarter ended June 30, 2006, an increase of $11,503 compared to ($6,232) for the same period last year, and ($31,053) for the six months ended June 30,2006, an increase of $21,137 compared to ($9,916) for the same period last year. The increases resulted primarily from the Company's September 2005 and March 2006 increases in commercial bank debt as well as loans from stockholder, which is described in Note 6 to the unaudited consolidated financial statements in this Report.
Liquidity and Capital Resources. We have limited liquidity. During the second quarter of 2006, we sold in a non-public offering through a broker dealer 435,959 shares of common stock resulting in net proceeds to us of $108,563; this offering is on-going. We expect that our cash requirements will increase as our operations expand and to implement our Business Plan, and in order to continue as a going concern we will need to raise additional debt or equity financing in 2006 and future periods. To achieve this objective we are in discussions with potential investors and investment bankers that may provide short and long term funding to further assist in executing our business plan. There can be no assurance that we will be able to raise such additional financing or do so on terms that are acceptable to the Company.
Our limited liquidity is primarily a result of (a) the required high levels of consignment inventory, (b) the payment of commissions to salespersons based on sales or rentals prior to receipt of funds, (c) the high level of accounts receivable outstanding because of the deferred payment practices of third party health payers, and (d) the delayed cost recovery inherent in rental transactions.
Contingencies such as unanticipated shortfalls in revenues or increases in expenses could affect our projected revenue, cash resulting from operations and liquidity.
Cash used in operating activities was $261,520 for the six months ended June 30, 2006 compared to $33,587 cash provided by operating activities for the six months ended June 30, 2005. The primary reasons for the decrease in cash flow was the net loss in 2006 compared to net income in 2005, an increase in inventory to accommodate increased sales and rentals, and a slower build up in accounts payable made possible by additional bank loans and loans from our largest shareholder.
Cash used in investing activities for the six months ended June 30, 2006 was $640 compared to cash used in investing activities of $11,408 for the same period in 2005. Cash used in investing activities represents the purchase of equipment and inventory currently rented to customers.
Cash provided by financing activities was $320,250 for the six months ended June 30, 2006 compared with cash used in financing activities of $25,257 for the six months ended June 30, 2005. During the six months ended June 30, 2006 the Company received working capital of $240,000 in bank financing and $22,264 in net loans from Thomas Sandgaard.
Our primary sources of capital for the quarter and six months ended June 30, 2006 have been collections from our sale and rental activities, borrowings from Silicon Valley Bank and from Thomas Sandgaard, and the non public offering described in the Liquidity and Capital Resources Section. For information regarding these borrowings from Silicon Valley Bank and Mr. Sandgaard, see Note 4 to our unaudited consolidated financial statements in this Report and Item 6 in our Form 10-KSB for the year ended December 31, 2005.
Recently issued accounting pronouncements:
In December 2004, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123 (revised 2004), "Share-Based Payment" ("SFAS 123R"), which is a revision of SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS 123R supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees" and amends SFAS No. 95, "Statement of Cash Flows". SFAS 123R focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment
transactions and requires all share-based payments to employees, including grants of employee stock options, to be recognized as additional compensation expense in the financial statements based on the calculated fair value of the awards. SFAS 123R also requires the benefits of tax deductions in excess of recognized compensation costs to be reported as a financing cash flow. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after adoption. We adopted this statement effective for our fiscal year beginning January 1, 2006. We have described the impact of adopting SFAS 123R in our condensed consolidated financial statements in Note 2, Stock Based Compensation.
SPECIAL CAUTIONARY NOTICE REGARDING FORWARD-LOOKING STATEMENTS
Certain information included in this quarterly report contains statements that are forward-looking, such as statements relating to plans for future expansion and other business development activities, as well as other capital spending and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future and, accordingly, such results may differ from those expressed in any forward-looking statements made by or on behalf of the Company. These risks include the need to obtain additional capital in order to grow our business, larger competitors with greater financial resources, the need to keep pace with technological changes, our dependence on the reimbursement from insurance companies for products sold or rented to our customers, our dependence on third party manufacturers to produce our goods on time and to our specifications, the acceptance of our products by hospitals and clinicians, implementation of our sales strategy including a strong direct sales force and other risks described in our 10-KSB Report for the year ended December 31, 2005.
ITEM 3. CONTROLS AND PROCEDURES
As of the end of the period covered by this quarterly report, an evaluation was performed under the supervision and with the participation of the Company's management including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures. Based on that evaluation, the Chief
Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of June 30, 2006.
There have been no changes in internal control over financial reporting that occurred during the quarter that have materially affected, or are reasonably likely to affect, the Company's internal control over financial reporting.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
None.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
See Note 5 to the Notes to the Condensed Consolidated Financial Statements for Information regarding the issuance of common stock to investor relations consultants and sales of our common stock to new investors during the second quarter of 2006. In the issuances, we made no general solicitation, and we believe that the investor relations consultants and investors met the standards for a purchaser in a non-public offering. We relied upon an exemption from securities registration for a non-public offering in issuing these securities to the investor relations consultants and investors.
The sale to investors in the non-public offering pursuant to Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 of Regulation D promulgated there under, was a sale to accredited investors of 390,625 shares of common stock at $.032 per share in cash. Such sales occurred on June 23, 2006. The shares were accompanied by warrants to purchase 312,500 shares of common stock. See Note 5 of Notes to Condensed Consolidated Financial Statements for additional information. The shares were offered through a broker-dealer who received commissions of $12,500 and 35,156 shares of our common stock (representing 9% of the number of shares of common stock sold by the broker). Additionally, an investment banker who introduced us to the broker dealer received a finder’s fee of $3,938 and 10,195 shares of common stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
None
ITEM 6. EXHIBITS.
(a) Exhibits
| 10.1 | | Promissory Note dated March 1, 2006 to Thomas Sandgaard |
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| 10.2 | | Promissory Note dated March 1, 2006 to Thomas Sandgaard |
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| 10.3 | | Promissory Note dated June 30, 2006 to Thomas Sandgaard |
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| 10.4 | | Form of Warrant, Non-Public Offering |
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| 31.1 | | Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| 31.2 | | Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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| 32 | | Certification of Chief Executive Officer and Chief Financial Officer Pursuant to Section 18 U.S.C. Section 1350 |
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
