p3
7
any default interest (equal to 15% per annum) for dividends which the Company
has elected to pay in cash but has failed to pay on a timely basis.
In addition, in the event of the occurrence of certain events (the
"Triggering Events"), including the failure of the Registration Statement to be
declared effective within 180 days of the date of issuance, the delisting of the
Common Stock for a period of five consecutive days and the Company's breach of
any representations, warranties or covenants in the Documents, the Investors
have the right to require the Company to redeem all or a portion of such
Investor's Series B Preferred. The redemption price per share is the same as the
redemption price per share in the event of a Major Transaction.
Warrants
Along with the Series B Preferred, the Company issued common stock warrants
to the investors. Subject to the vesting schedule described below, each warrant
entitles its holder to 200 shares of Common Stock for (i) each issued share of
the Series B Preferred held on the applicable vesting date and (ii) each share
of the Series B Preferred converted prior to the applicable vesting date at the
Fixed Conversion Price. The Warrants expire five years after they are issued.
The vesting dates of the Warrants are (i) the date which is 120 days after the
date of issuance of the applicable Series B Preferred Shares; (ii) the date
which is 300 days after the date of issuance of the applicable Series B
Preferred Shares and (iii) the date which is 480 days after the date of issuance
of the applicable Series B Preferred Shares. The exercise price of each Warrant
is 125% of the average of the closing bid prices of the Company's Common Stock
for the five consecutive trading days immediately preceding the applicable
vesting date.
Investor Call Option
For every (i) unconverted Series B Preferred share held by the investors on
the first anniversary of the closing and (ii) preferred share converted at the
Fixed Conversion Price prior to the first anniversary of the closing, the
investors have the right to subscribe for an additional preferred share and
related warrants under the same terms and conditions of the original closing
(revised to reflect the Company's then current common stock market price). Each
investor may exercise this right only at such time when the closing market price
of the Company's common stock is greater than the Fixed Conversion Price.
Accounting Treatment
Preferred shares that are redeemable only in the event of a contingency
must be classified as redeemable even if the occurrence of the contingency is
deemed remote. Since the redemption of the securities could possibly occur
through a Major Transaction, the Company has accounted for these securities as
redeemable securities and accreted to the redemption amount of 115% of the
Liquidation Value. The accretion reduced income applicable to common
shareholders and is disclosed separately from income applicable to common
shareholders on the face of the income statement.
8
Item 2 Management's Discussion and Analysis of Financial Condition and Results
------------------------------------------------------------------------------
of Operations
-------------
When used in this discussion, the words "believes", "anticipates",
"expects" and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties,
which could cause actual results to differ materially from those projected.
Readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof. The Company undertakes no
obligation to republish revised forward-looking statements to reflect events or
circumstances after the date hereof or to reflect the occurrence of
unanticipated events. Readers are also urged to carefully review and consider
the various disclosures made by the Company which attempt to advise interested
parties of the factors which affect the Company's business, in this report, as
well as the Company's periodic reports on Forms 10-KSB, 10QSB and 8-K filed with
the Securities and Exchange Commission.
Overview
--------
During 1998, the Company engaged in only one type of business, the offering
of the MedCare Program, as described below. On January 21, 1999, the Company
formed a new, wholly owned subsidiary of the Company, Medcareonline.com, Inc. In
January 1999, the Company, through Medcareonline.com, inc., announced its
intention to offer a comprehensive healthcare portal offering adult gender
specific health information. As of June 30, 1999, the Company has not generated
any revenues from Medcareonline.com.
The "MedCare Program" is a discrete package of equipment, software and
services developed by MedCare to assist physicians in providing non-
pharmaceutical, non-invasive treatment to patients suffering from urinary
incontinence ("UI") and other pelvic disorders, including pelvic pain, chronic
constipation, fecal incontinence and disordered defecation. The MedCare Program
is used by physicians to support a treatment plan based primarily on behavioral
modification techniques such as electromyography ("EMG") biofeedback, pelvic
floor muscle exercise, and bladder and bowel retraining. Utilizing the MedCare
Program, physicians help patients activate and strengthen the various sensory
response mechanisms that maintain bladder and bowel control. Therapy is provided
through computerized instrumental EMG biofeedback and is based on operant
conditioning strategies whereby specific physiological responses are
progressively shaped, strengthened and coordinated. The MedCare Program is
available through the practices of physicians, either in a private office,
clinic, or a hospital setting.
To date, the Company has not received significant revenues due to the early
stage nature of the Company's business and has incurred ongoing operating losses
due to costs related to research, business development, website development,
management and staff recruitment, establishing training systems and providing
ongoing training, development of advertising and marketing programs, and other
costs associated with establishing corporate infrastructure necessary for
contracting with additional physicians for utilization of the MedCare Program on
a national basis. Although planned principal operations have commenced,
substantial revenues have yet to be realized.
9
Results of Operations
---------------------
Revenues. The Company experienced a 264% increase in revenues over last
year's second quarter results with revenues of $553,090 and $151,815 for the
three months ended June 30, 1999 and 1998, respectively. Revenues for the six
month period ended June 30, 1999 increased 150% from $378,823 in 1998 to
$947,152. As of June 30, 1999, the Company had 40 MedCare Program sites
established versus 19 sites as of June 30, 1998. The Company has also introduced
a new version of the MedCare Program to physicians which requires each new
physician to share the up front costs, pay the clinician's salary and pay
MedCare a set monthly management fee. Under the new version, the physician
enjoys a potentially higher revenue stream, while at the same time allows
MedCare to reach a greater number of doctors that were previously excluded from
the MedCare Program.
To date, the Company has not relied on any revenues for funding. During the
next several years, the Company expects to derive the majority of its potential
revenues from the commencement of operations of the MedCare Program at
additional sites in the United States, and possibly select foreign markets. In
addition, during 1999, the Company expects to begin generating revenue from the
sale of advertising from its new wholly-owned subsidiary, Medcareonline.com.
General and Administrative Expenses. During the three months ended June 30,
1999, the Company incurred $1,287,258 in general and administrative expenses, a
decrease of 2% from second quarter 1998 expenses of $1,320,125. General and
administrative expenses for the six month period ended June 30, 1999 increased
28% from $2,085,835 to $2,679,674. The decrease in the second quarter is
primarily attributable to lower advertising costs, bad debt expenses and a one-
time penalty assessed last year associated with the registration of the Series A
preferred stock. This decrease was offset by additional salary and operating
expenses related to the additional MedCare sites open in 1999 versus 1998.
Interest Income. Interest income was $31,763 and $52,459 for the quarters
ended June 30, 1999 and 1998, respectively. Interest income for the six month
period ended June 30, 1999 decreased from $95,128 to $55,796. The decrease is
primarily attributable to the lower amount of cash invested in interest bearing
accounts earlier in 1999. Interest earned in the future will be dependent on
Company funding cycles and prevailing interest rates.
Preferred Stock Deemed Dividend. In the second quarter of 1999, the
Company, pursuant to Regulation D, Rule 506, issued 400 shares of Series B
preferred stock (par value $0.25) and related warrants for $4,000,000 ($10,000
per share). The Company has accounted for these securities as redeemable
securities and accreted to the redemption amount of 115% of the Liquidation
Value resulting in a reduction to income available to common shareholders of
$748,636. See Note 2 to the financial statements for additional details
regarding this transaction.
Provision for Income Taxes. As of June 30, 1999, the Company's accumulated
deficit was $8,917,233. Accordingly, the Company has recorded a full valuation
allowance against any income tax benefit to date.
10
Liquidity and Capital Resources
-------------------------------
As of June 30, 1999, the Company's cash balance was $4,788,076 compared to
$2,826,086 as of December 31, 1998. On May 18, 1999, the Company, pursuant to
Regulation D, Rule 506, issued 400 shares of Series B preferred stock (par value
$0.35) and related warrants for $4,000,000 ($10,000 per share). See Note 2 of
the financial statements for additional details. The Company has financed its
operations primarily through private placement of Common Shares, Preferred
Shares and the exercise of Stock Options.
The Company's future funding requirements will depend on numerous factors.
These factors include the Company's ability to establish and profitably operate
current and future MedCare Program locations, recruit and train qualified
management and clinical personnel, compete against any potential technological
advances in the treatment of urinary incontinence and other afflictions of the
pelvic floor area, and the Company's ability to compete against other better
capitalized corporations who offer alternative or similar treatment options for
urinary incontinence and other afflictions of the pelvic floor area.
Due to the "start up" nature of the Company's business, the Company expects
to incur losses as it expands its business. The Company may raise additional
funds through private or public equity investment in order to expand the range
and scope of its business operations. The Company may seek access to the private
or public equity but there is no assurance that such additional funds will be
available for the Company to finance its operations on acceptable terms, if at
all. |
