1.
CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS
In the opinion of the Company, the accompanying unaudited condensed consolidated financial statements prepared in accordance with the instructions for Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission, include all adjustments (consisting only of normal recurring accruals) which are necessary for a fair
presentation of the results for the periods presented. Certain information and footnote disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted. It is suggested that these unaudited condensed consolidated financial statements be read in conjunction with the Company’s Annual Report for the year ended June 30, 2014. The balance sheet as of June 30, 2014
has been condensed from audited consolidated financial statements as of that date. The results of operations for the three and six months ended December 31, 2014 are not necessarily indicative of the results to be expected for the full year.
The unaudited condensed consolidated financial statements include the accounts of iMedicor, Inc. and its wholly-owned subsidiaries Nuscribe, Inc. and ClariDIS Corporation (the “Company”). All significant intercompany balances and transactions have been eliminated in consolidation.
2.
RECENT ACCOUNTING PRONOUNCEMENTS
Refer to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K/A for the year ended June 30, 2014 for recent accounting pronouncements.
In April 2015, the FASB issued Accounting Standards Update No. 2015-03, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs, or ASU 2015-03. ASU 2015-03 amends current presentation guidance by requiring that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction
from the carrying amount of that debt liability, consistent with debt discounts. Prior to the issuance of ASU 2015-03, debt issuance costs were required to be presented as an asset in the balance sheet. The guidance in the ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is allowed for financial statements that have not been previously issued. Entities would apply the new guidance retrospectively to all prior periods. The Company
has not early adopted this standard for the December 31, 2014 financial statements.
The Company does not believe that any other issued, but not yet effective accounting standards, if currently adopted, will have a material effect on the Company’s consolidated financial position, results of operations and cash flows.
3.
GOING CONCERN
The accompanying unaudited 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
$57,166,047 , $10,123,477
and
$7,398,884
respectively at December 31, 2014. The Company is delinquent on several of its debt and equity-related obligations. The Company’s activities have been primarily financed through bridge loans, convertible debentures, and private placements of equity securities. The Company seeks to raise additional capital through the issuance of debt
or equity securities to fund its operations. Such financing may not be available on terms satisfactory to the Company, if at all. (See Notes 5 and 10).
Currently, management intends to develop a vastly improved healthcare communications system and attract alliances with strategic partners to generate revenues that will sustain the Company. 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.
iMEDICOR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014
4.
LINE OF CREDIT
Effective October 29, 2013, the Company entered into a revolving line of credit agreement in the amount of $250,000, which was increased to $500,000 on March 12, 2014 and $750,000 on September 9, 2014. The line of credit is collateralized by all assets of the Company plus a $250,000 certificate of deposit owned by
a stockholder of the Company who is also the guarantor for the line of credit. The Company agreed to issue the stockholder 50 million shares of Common Stock as consideration for providing the guarantee. The stock, valued at $500,000, has not been issued as of December 31, 2014 and is reported as liability for unissued common stock - subsequently issued on the accompanying condensed consolidated balance sheets as a long term liability. In addition, the Company granted its Chief Executive Officer 50 million shares
of Common Stock valued at $285,000, as consideration to the Chief Executive Officer to provide a personal guarantee to the stockholder for 50% of any loss that might be incurred under his guarantee. The stock was issued on October 22, 2014.
The line carries interest at the Wall Street Journal Prime rate + 1.0% with a floor rate of 6.5%. Interest is payable monthly with all outstanding principal and unpaid interest due on January 30, 2016. (See Note 10).
5.
LONG-TERM DEBT
Long-term debt at December 31, 2014 and June 30, 2014 consisted of the following:
|
|
|
|
|
|
Schneller note payable bearing interest at 8.5% per annum, due June 30, 2017, in default
|
$
102,125
|
$
125,500
|
Sonoran convertible note bearing interest at 10% - 12% per annum maturity extended to
August 31, 2015, in default
|
2,457,728
|
2,322,712
|
Sonoran convertible note bearing interest at 8% - 18% per annum maturity extended to
August 31, 2015, in default
|
2,070,469
|
1,988,899
|
Wellbrock note bearing interest at 8% per annum, due November 2008 - disputed
|
403,139
|
391,805
|
Coddington note bearing interest at 8% per annum - disputed
|
403,671
|
391,259
|
Shemen non-interest bearing note executed September 22, 2009 in default
|
10,000
|
10,000
|
Genesis note bearing interest at 18%, maturity extended to February 23, 2017
|
155,000
|
166,895
|
Bridge Loans bearing interest at 18% due December 31, 2016
|
678,708
|
-
|
Total long-term debt
|
6,280,840
|
5,397,070
|
Less current maturities
|
(6,178,715
)
|
(793,064
)
|
Total long-term maturities
|
$
102,125
|
$
4,604,006
|
Total future minimum payments due on long-term debt as of December 31, 2014:
2015
|
$
6,178,715
|
2016
|
0
|
2017
|
102,125
|
Subsequent to December 31, 2014 several of the above notes were modified and/or extended. (See Note 10).
The Company disputes the existence of the Coddington note payable and any interest accrued on the note shown on the Balance Sheet as part of Current Portion of Long Term Debt in the aggregate amount of $397,465. No actual note has been produced by Mr. Coddington or is known by current management to exist. The Company’s records are incomplete with
respect to this note payable transaction. The Company believes that any amounts previously owed Mr. Coddington or any entities associated with Mr. Coddington in connection with a guarantee by Mr. Coddington of a loan by Citibank made to the Company and no longer outstanding were satisfied by the issuance by the Company to Mr. Coddington of 24,918,130 shares of common stock of the Company on March 8, 2013. The Company has a record of the stock issuance but does not have the document in respect to their issuance
for the cancellation of debt. The Company has no record of default being declared by the holder which would entail production of the actual note which has not occurred.
iMEDICOR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014
The Company also questions the existence of the obligations the obligations to the Wellbrock Group shown on the Balance sheet as part of Current Portion of Long Term Debt in the aggregate amount of $397,472. Management of the Company has not been able to obtain a copy or verify the existence of such note. The Company has no record of default being declared
by the holder which would entail production of the actual note which has not occurred.
6.
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 shares of Common Stock outstanding for a period, if dilutive. In loss periods, all anti-dilutive securities are excluded.
The amount of excluded securities from vested options are 193,300,000 and from warrants are 357,655,000 at December 31, 2014. The amount of excluded securities from convertible debt and shares of Series A and Series B Preferred Stock are 1,065,165,993 shares of Common Stock, at December 31, 2014.
7.
EMBEDDED CONVERSION LIABILITY – CONVERTIBLE DEBT
The Company has outstanding convertible debt. Due to an insufficiency of authorized common shares, there is not enough Common Stock in the event that all convertible securities and convertible debt were to be converted or exercised. The derivative liability for the convertible debt is $362,406 and $304,699 at December 31, 2014 and June 30, 2014, respectively. (See Note
10).
8.
WARRANTS AND OPTIONS
The following table shows warrant activity for the six-month periods ended December 31, 2014 and December 31, 2013.
Summary of the outstanding warrants is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at beginning of period
|
417,997,000
|
$
0.0736
|
407,927,667
|
$
0.01-$0.24
|
Issued
|
660,000
|
$
1.3500
|
12,500,000
|
$
0.01
|
Excercised
|
-
|
-
|
-
|
-
|
Forfeited
|
-
|
-
|
-
|
-
|
Expired
|
(61,002,000
)
|
$
0.0649
|
(14,251,666
)
|
$
0.01-$0.105
|
Outstanding at end of period
|
357,655,000
|
$
0.0953
|
406,176,001
|
$
0.01-$0.24
|
Excersiable at end of period
|
357,655,000
|
$
0.0953
|
406,176,001
|
$
0.01-$0.24
|
The intrinsic value of the outstanding warrants at December 31, 2014 and December 31, 2013 is $-0-.
iMEDICOR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014
Summary of Options:
On July 1, 2013, the Company granted 100,000,000, options to Robert McDermott. The options vest as follows: 25,000,000 immediately, 25,000,000 on each of July 1, 2014, 2015, and 2016. On July 3, 2014, pursuant to the terms of his employment agreement, the Company granted 235,000,000, three-year options to Robert McDermott. The options vest as follows: 117,500,000 immediately,
58,750,000 on July 3, 2015 and 58,750,000 on July 3, 2016. Also on July 3, 2014, the Company granted 3,300,000 three year options to Donald Douglas. All of these options vested immediately. On January 1, 2014, the Company granted 50,000,000 options each to Donald Douglas and Srini Parthasarthy pursuant to their employment agreements of the same date. Options for each individual vest 12,500,000 immediately and 12,500,000 on each annual anniversary of the employment agreements. In addition, the Company granted
15,000,000 options to Don Sproat pursuant to his employment agreement of December 15, 2014. 7,500,000 options vested immediately and another 7,500,000 vests on December 15, 2015. For the six months ended December 31, 2014, the Company recorded
$1,046,114
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 December 31,
2014 were as follows:
Exercise Price
|
$0.0038-$0.01492
|
Term
|
|
1-4 years
|
Volatility
|
|
206%-305%
|
Risk Free Rate of Return
|
0.11% - 1.02%
|
As of December 31, 2014, the remaining unamortized stock compensation expense is
$1,684,819
which will be recognized through June 30, 2017.
The Company has various outstanding Common Stock purchase warrants, options, convertible debt, and Series A and B Preferred Stock. Due to an insufficiency of authorized common shares, there is not enough Common Stock in the event that all convertible securities and outstanding warrants and options were to be converted or exercised, respectively. The Company is reporting
derivative liabilities for the warrants of $753,363 and $894,231 as well as for options and Preferred Stock of $571,346 and $558,446 for December 31, 2014 and June 30, 2014, respectively. As of December 31 and June 30, 2014, there were 35.75 shares of Series A convertible Preferred Stock and 51.83 and 38.70 shares of Series B convertible Preferred Stock outstanding, respectively. (See Note 10).
9.
LIABILITY FOR UNISSUED COMMON STOCK SUBSEQUENTLY ISSUED
At December 31, 2014, the Company was obligated to issue 250,000,000 shares of Common Stock which arose from several agreements. A summary of the shares and subsequent issuances of Common Stock is as follows:
Recipient
|
|
Purpose
|
|
|
Issue Date
|
Sonoran
|
|
Omnibus Loan Extension
|
150,000,000
|
$
1,200,000
|
01/09/15
|
Smith
|
|
Line of Credit Guarantee
|
50,000,000
|
$
500,000
|
01/09/15
|
Sonoran
|
|
Loan Extension
|
50,000,000
|
$
107,572
|
Not issued
|
|
|
250,000,000
|
$
1,807,572
|
|
Common Stock issued for guarantees and loan extension modifications are valued at the trading closing price of the Company’s Common Stock on the agreement date of the guarantee or loan extension (See Note 10).
iMEDICOR, INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2014
10.
SUBSEQUENT EVENTS
For purposes of disclosure in the financial statements, the Company has evaluated subsequent events through the date the financial statements were issued.
The Company launched the iCoreExchange, the iCoreMD, and the iCoreDental cloud-based software products during the first quarter of fiscal year 2015. The iCoreExchange has approximately 1000 users at June 30, 2016.
On December 12, 2014 John Schneller resigned as a Board Member and the Company’s Chief Financial Officer. On December 15, 2014 Don Sproat was hired as Chief Financial Officer. Mr. Warner resigned from the Board of Directors on December 19, 2014. In addition, the Company hired a Vice President of Sales on March 1, 2015 and a Director
of Software Integration on April 6, 2015. The Company’s former Chief Technical Officer, Mr. Srini Parthasarthy, mutually agreed to end his employment with the Company on December 31, 2015. The Vice President of Sales separated from the Company on December 23, 2015.
On June 7, 2016, Board Members JD Smith, Jeff Stellinga, and Robert McDermott were elected by a majority of the voting power of the shareholders to serve until the next annual meeting of the shareholders of the Company.
On July 1, 2015, Chief Executive Officer, Robert McDermott executed a three-year Employment Agreement with the Company. In addition, on January 1, 2016, Chief Financial Officer, Don Sproat executed a two-year Employment Agreement with the Company. (See Exhibits 10.1 and 10.2).
Further, the Company initiated a Bridge Loan offering under Rule 506(b) during the second quarter of fiscal 2015. The total Bridge Loan offering was $4,000,000 (subsequently increased to $10,000,000) of which $3,584,654 had been subscribed as of August 31, 2016. The Bridge Loan provides for an 18% annual interest rate with the loan maturing on December
31, 2016, as extended by signed amendments from the original December 31, 2015 maturity date. The loan principal and accrued interest are convertible into the Company’s Common Stock pursuant to the Subscription Agreement executed by the Convertible Bridge Note investors. In addition, Bridge Loan investors received a warrant to purchase Common Shares in the amount of one share for each dollar of principal invested. At the same time, the associated warrant exercise period was extended from June 30, 2018 to
December 31, 2019. (See Exhibit 10.3).
The Company’s Line of Credit with Western State Bank had been in default since January 30, 2016. However, on May 16, 2016, the bank renewed the Company’s Line of Credit for an amount of $500,000 with the same interest terms of a floor rate of 6.5% or Wall Street Journal Prime + 1.0% whichever is higher. Interest is payable monthly and the maturity date is September
30, 2016. The Line of Credit is guaranteed by an investor in the Company. The Bank did apply a $250,000 certificate of deposit that was partial security against the principal owed shortly after the default.
In addition, as of February 23, 2016, the Company was in default on its note payable to Genesis Financial Corporation in the principal amount of $155,000 plus accrued interest of $23,250. Genesis has agreed to extend the maturity of the note to February 23, 2017 for an extension fee of 2% of the principal which amounts to $3,100. The loan is secured by a security interest
in an iMedicor investor’s assets. On June 30, 2016, the Company paid Genesis the accrued interest, extension fee, and prepayment of interest through the maturity date of the note in the amount of $47,275.
The Company has secured additional non-Bridge Loan related loans from Mr. Jerry Smith in the amount of $1,330,000 as of August 31, 2016. The loans each carry interest at 18% per annum and accrued interest and principal balances are due December 31, 2016.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 December 9, 2015 and the 10-K/A amended on May 6, 2016. 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
In 2014 we decided to focus all our sales and development efforts on creating and providing a product for the health care market that allows medical providers, hospitals, clearing houses, labs, local physicians and dentists a software product that enables them to transfer patient health information via the internet without violating HIPAA law. The goal was to provide the
health community with a product that did not alter their current workflow while, at the same time, providing a productivity tool for the offices with the ultimate outcome resulting in more robust communication and better health outcomes for the patient. We accomplished our goals and launched the product in the calendar year 2014. After deploying our product and speaking to our customers, we realized there was a great need in the marketplace for a cloud based, customizable and HIPAA compliant Electronic Health
Record software product. We began developing a medical Electronic Health Record software and launched our first custom built, customizable Electronic Medical Health system for the medical community in 2014. Shortly thereafter we expanded our Electronic Health Record system software to include dental practice software.
Presently we have two Electronic Health Record systems - iCoreMD and iCoreDental. Both were “ONC” certified in November of 2015 meeting all clinical, security and interoperability requirements of the Federal government. ONC certification also allows providers to receive money from the Federal EHR incentive program. This program was launched to help providers
move from paper to a digital format or from a non-ONC certified software to an ONC certified software. The program was formed with the intention to achieve better health outcomes based on the reporting that ONC collects. We plan on marketing and securing Medical and Dental State associations as a preferred vendor to help reach their members with our product the iCoreExchange, our HIPAA compliant email exchange. This will create a recurring revenue stream for us while at the same time expanding our product through
referrals as the medical community shares Patient Health Information via our product.
After deployment of the iCoreExchange, we are planning on going back to the State Associations and having them endorse our other products the iCoreMD and iCoreDental allowing us to reach a large market share with backing from the associations.
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 the Company’s Form 10-Q for the quarterly period ended December 31, 2014, which have been prepared in accordance with generally accepted accounting principles as recognized in the United States of America. 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, derivative liabilities, 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 and cash equivalents was
$59,608
, at December 31, 2014 compared to
$190,820
at June 30, 2014. Net cash declined by
$131,212
for the six months ended December 2014. The use of cash for the six months ended December 31, 2014 is primarily attributed
to funding Company operations.
Net cash used in operating activities for the six months ended December 31, 2014 was $881,008, a decrease from the corresponding period ended December 31, 2013 of 39% attributed primarily to a reduction in consulting fees. Net cash used in investing activities was
$170,265
for the six month period ended December 31, 2014 an increase
from
$20,380
for the corresponding period ended December 31, 2013. The increase in investing activities in 2014 was primarily due to an increase in capitalized software development costs. Net cash provided by financing activities was
$920,061
for the six months ended December 31, 2014 as compared to
$1,014,083
for the corresponding period ended December 31, 2013. The Company had a greater reliance on bridge
loans as opposed to sales of common stock for funds during the six-month period ending December 31, 2014 compared to the corresponding period ending December 31, 2013.
The Company continues to operate at a loss and is projected to do so until at least the end of fiscal 2017. 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 unaudited 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 $57,166,047, $10,123,477 and $7,398,884 respectively at December 31, 2014. The Company is delinquent on several of its debt and equity-related obligations. The Company’s activities have been primarily financed through bridge loans, convertible debentures, and private placements of equity securities. The Company seeks to raise additional capital through the issuance of debt or equity securities to fund its operations. Such financing may not be
available on terms satisfactory to the Company, if at all. (See Notes 5 and 10).
Currently, management intends to develop a vastly improved healthcare communications system and attract alliances with strategic partners to generate revenues that will sustain the Company. 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.
Results of Operations
The following table sets forth statement of operations data of the Company for the periods indicated:
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|
|
|
|
|
|
|
|
31,
2014
|
31,
2013
|
31,
2014
|
31,
2013
|
Revenues
|
$
99,309
|
$
38,610
|
$
244,927
|
$
107,430
|
Costs of Sales
|
41,004
|
11,396
|
70,851
|
67,621
|
General and Administrative
|
780,164
|
1,008,800
|
2,270,182
|
1,881,599
|
Depreciation and Amortization
|
37,879
|
-
|
51,533
|
-
|
Loss from Operations
|
$
759,738
|
$
981,586
|
$
2,147,639
|
$
1,841,790
|
Revenues
The Company's revenues for the three months ended December 31, 2014 increased approximately 157% compared to the corresponding period ended December 31, 2013. Revenues for the six months ended December 31, 2014 increased
128%
compared to the corresponding period ended December 31, 2013. These increases were due primarily to increased
Meaningful Use revenue. “Meaningful Use compliant” is a term relating to the qualification for Federal incentive funds under the Federal Meaningful Use incentive Funds Program. The Meaningful Use program pays both medical and dental healthcare providers up to $63,750 and iMedicor receives 20% of the amount a healthcare provider is paid under this government program for the Company’s Meaningful use consulting effort on their behalf.
Cost of Sales
Cost of sales for the three and six months ended December 31, 2014 increased approximately
260%
and 5% compared to the corresponding periods ended December 31, 2013. These increases were primarily attributable to increased costs relating to secure computer server service.
General and Administrative Expenses
General and administrative expenses for the three months ended December 31, 2014 decreased approximately
23%
compared to the corresponding period ended December 31, 2013. For the six month periods ended December 31, the Company’s general and administrative expenses increased by approximately
21%
compared
to the corresponding period ended December 31, 2013. The six month period increase was primarily due to a significant increase in options expense recognized in the amount of $1,046,114 as compared to $532,045 in the corresponding period ended December 31, 2013.
Loss from Operations
Loss from operations for the three months ended December 31, 2014 decreased 23% compared to the corresponding period ended December 31, 2013. For the six month period ended December 31, 2014, the loss from operations increased 17% compared to the corresponding period ended December 31, 2013. The increase in loss from operations for the six month period was primarily attributed
to an increase in options expense of approximately $514,000.