Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with our consolidated financial statements and the notes thereto in Part II, Item 8 to this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations. Actual results and the timing of events may differ significantly from those projected in forward- looking statements due to a number of factors, including those set forth in Item 1A "Risk Factors" of this Annual Report on Form 10-K.
Given these uncertainties, readers of this filing and investors are cautioned not to place undue reliance on such forward-looking statements.
Overview and Recent Events
Medical Alarm Concepts Holding, Inc. was organized in mid 2008. The operation was financed with a considerable amount of toxic convertible debt. This type of financing, along with several other issues, prevented the Company from realizing a robust growth rate for its first few years of operation. Since that time considerable management time has been spent and investor money utilized to turn the Company's operation around. As of the date of this filing, Medical Alarm Concepts is currently experiencing a robust growth rate, quality relationships with quality customers, a significantly improved balance sheet, and most importantly, the Company has now reached operational positive cash flow status.
The Company's product is called the MediPendant�, which is a personal emergency alarm that is mainly purchased by adults for their aging parents. While it is primarily a device for older people, there is also a market for those who are physically disabled, as well as for persons living alone. The MediPendant� device has significant feature and function advantages over other personal medical alarms in the marketplace today. Approximately 70% of all medical alarms currently being sold in the United States are first-generation technologies that require the user to speak and listen through a central base station unit. If the user of one of these older generation products is not within speaking or listening distance to the base station, the user may not be heard by the operator in the centralized emergency monitoring center.
The MediPendant� enables the wearer to simply speak and listen directly through the pendant in the event of an emergency. The MediPendant� is designed to be worn in the bath or shower and offers a 600-foot range so that the wearer can operate the unit from virtually anywhere within their home or on their property.. The product is extremely durable, very reliable and offers an extremely long battery life
The MediPendant� has strong intellectual property patent protection. The patent protects a unique feature of the product, which is voice prompts that alert the user of the operational status of the device and that help is being summoned upon alarm activation.
During December of 2011, the Company announced the MediPendant� would be distributed by Costco Wholesale Corporation. Costco is one of the largest retailers in not only the United States, but throughout the world with approximately 75,000,000 customers. The Company's relationship with this retailer has been strong, sales are occurring on a daily basis, and customer satisfaction is high. The Company successfully runs sales programs at Costco including email blasts, Costco.com coupons, and assorted other promotions. The MediPendant� product will continue to be included in Costco promotions with more scheduled for later in 2014 and early 2015. The MediPendant� has now received 28 product reviews on the retailer's website, 21 of which are "5 out of 5 Star" ratings. The average rating is "4.5 Stars" out of 5 Stars
The Company has also had successes internationally with new distribution agreements in Denmark and Ireland. Additionally, the Company is currently working on a distribution/joint venture with JTT-EMS, which is a company located just outside of Beijing, China. Medical Alarm Concepts is expecting steady growth from its international markets extending into 2014. The Company also distributes the MediPendant� through Internet marketing and through various outside call centers. Significant investment is planned to expand sales opportunities relative to these areas.
The Company received an investment led by strategic partner, JTT-EMS LTD of Shijiazhuang, China. Under the terms of the investment, JTT-EMS LTD purchased Common Stock in a private placement transaction and has indicated to the Company that it plans to hold these shares as a long-term investment. The financing, including additional investments by current shareholders total up to approximately $330,000. There are no warrants or options associated with this investment. As more fully noted below, funds received will primarily be used to rebuild inventory levels to meet the growing demand and to pay professional fees associated with returning the Company to fully reporting status.
On December 10, 2013, the Company entered into a Global Settlement Agreement (the "Agreement") with the holder of its credit line and major shareholders. Under the terms of the agreement, all of the Company's credit line and accrued interests on credit line were forgiven and all of the convertible debt would be converted to common shares, except for the balance of $25,908.
In exchange for the credit line cancellation and the conversion of convertible debt, both parties agreed on the following terms: 1) the management team agreed to modify its September 19, 2011 agreement with the Company giving up all anti-dilution rights, 2) the Company agreed to take steps to increase the number of authorized shares to accommodate the debt conversions and would complete a reverse split of its shares, 3) The Company would file a registration statement with the SEC, and 4) the Company would continue to file past due periodic reports with the SEC on Forms 10-Q and 10-K in order to return the Company to full reporting status, a process that is complete upon the filing of this 10-K.
We believe upcoming balance sheets, on which we expect to be free of nearly all long-term debt and free of warrants, options and minimal outstanding preferred stock, will more accurately reflect the true value of our growing company.
The Company expects calendar years 2014 and 2015 to show continued growth in both monthly recurring revenues and distribution sales, which will allow the Company to realize sustainable positive operating cash flow. We believe the growth rate and the positive operating cash flow we are currently realizing is sustainable into 2015 and beyond.
These consolidated financial statements are presented on the basis that we will continue as a going concern. The going concern concept contemplates the realization of assets and satisfaction of liabilities in the normal course of business.
As disclosed in note 3 to the accompanying consolidated financial statements, the Company has working capital deficit of $635,937, did not generate cash from its operations, had stockholders' deficit of $2,036,440 and had operating losses for past two years. These circumstances, among others, raise substantial doubt about the Company's ability to continue as a going concern.
While the Company is attempting to generate sufficient revenues, the Company's cash position may not be enough to support the Company's daily operations. Management intends to raise additional funds by way of a public or private offering. Management believes that the actions presently being taken to further implement its business plan and generate sufficient revenues provide the opportunity for the Company to continue as a going concern. While the Company 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. The ability of the Company to continue as a going concern is dependent upon the Company's ability to further implement its business plan and generate sufficient revenues.
The consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
Results of Operations
Net sales generated during the years ended June 30, 2014 and 2013 were $1,153,693 and $572,712, respectively; representing a 101% or $580,981 increase, resulting from a change in strategic business direction toward more widespread product distribution and away from reliance on only a few resellers and distributors. This Company believes this change in business direction will lead to stronger growth and margins and higher overall sales during future periods. During 2014 and 2013, net sales were generated from sales to distributors, resellers and from direct sales to consumers who pay the Company for monthly monitoring services.
Cost of Revenue
Cost of revenue incurred during years ended June 30, 2014 and 2013 were $324,503 and $441,788, respectively, representing a 27% or $117,285 decrease. The decrease of cost of sales was mainly due to the Company changed its strategic business direction and generated more revenue from providing monitoring services to customers. Revenue from monitoring services normally generate higher gross profit.
Gross profit generated during fiscal 2014 and 2013 was $829,190 and $130,924, representing a 533% or $698,266 increase. The gross profit margin for 2014 and 2013 was 72% and 23%, respectively. The increase in gross profit margin was mainly due to more revenue generated from monitoring services which has higher gross profit margin.
Selling expenses incurred during fiscal 2014 and 2013 was $212,133 and $244,162, respectively. The $32,029 was a 13% decrease compared to the previous period. During fiscal 2014, the Company began to shift its sales emphasis more toward consumer marketing, which contributed to the reduction in sales expenses.
General and Administrative
General and administrative expenses for fiscal 2014 and 2013 were $1,695,423 and $628,273, respectively; representing 170% or $1,067,150 increase. During the year ended June 30, 2014, the Company issued 1,493,669 shares of common stocks to management pursuant to Global Settlement Agreement and recorded stock compensation expense of $ 955,948. The Company also issued 50,000 shares of common stocks to a shareholder for consulting services, during the year ended June 30, 2014, which was valued at $38,500. During the year ended June 30, 2013, stock compensation expense was $28,267.
Change in Fair Value of Derivative Instrument
Changes in fair value of derivative instrument generated $1,514,947 and $4,500,057 income during fiscal 2014 and 2013, respectively. This was due to a lower value of the derivative liability and lower amount of convertible notes outstanding at June 30, 2014.
Interest expense for fiscal 2014 and 2013 were $211,540 and $569,460, respectively. The $357,920 or 62% decrease in interest expense was mainly due to decreased amount of interest expense recorded on the excess of derivative liability over the amount of the convertible debt, which was recorded as interest expense at the inception of the note, amortization of debt discount and interest expense for credit line and convertible notes.
Net income generated during 2014 and 2013 was $225,041 and $3,189,086 income respectively for the reasons stated above.
Liquidity and Capital Resources
As of June 30, 2014 and 2013, we had $7,673 and $5,857 in cash, respectively.
During fiscal 2014 and 2013, operating activities used net cash of $25,684 and $497,120, respectively. Main reasons for the $471,436 or 95% decrease in net cash used in operating activities were outlined below:
1. Net income generated during 2014 and 2013 was $225,041 and $3,189,086, respectively;
2. Stock issued for services was $994,448 and $28,267 in 2014 and 2013, respectively;
3. Changes in fair value of derivative instrument during 2014 and 2013 generated non-cash income of $1,514,947 and $4,500,057, respectively;
4. Non-cash interest expense during 2014 and 2013 was $28,991 and $337,857, respectively;
5. During fiscal 2014 and 2013, the increased of accounts receivable generated net cash inflow of $33,249 and $10,792, respectively.
6. The increase of accrued expenses and other current liabilities resulted net cash inflow of $20,524 and $191,389, respectively.
7. During fiscal 2014 and 2013, the increase of deferred revenue generated net cash inflow of $105,206 and $207,044, respectively.
During fiscal 2014and 2013, financing activities generated net cash inflow of $27,500 and $482,400, respectively. The decrease of $454,900 or 94% was mainly due the following reasons.
1. Cash received from loan receivable during 2013 was $60,000, in contrast, during 2014, there was no transaction in the same nature;
2. Proceeds from convertible notes were $58,000 during 2013, in contrast, there is no transaction in similar nature during 2014;
3. During 2014 and 2013, repayment of credit line incurred net cash outflow of $nil and $10,750, respectively;
4. Proceeds from issuance of common stock generated net cash inflow of $22,500 and $346,150 for the year ended June 30,2014 and 2013, respectively;
5. During 2013, proceeds from related party loan generated net cash inflow of $29,000; there was no transaction in similar nature during 2014
6. During 2014, proceeds from note payable, net of repayment were $5,000. However, there was no transaction in similar nature during fiscal 2013.
We believe we can satisfy our cash requirements for the next twelve months with our current cash flow from business operations, although there can be no assurance to that effect. If we are unable to satisfy our cash requirements, we may be unable to proceed with our plan of operation. We do not anticipate the purchase or sale of any significant equipment. We also do not expect any significant additions to the number of employees. The foregoing represents our best estimate of our cash needs based on current planning and business conditions. In the event we are not successful in reaching our initial revenue targets, additional funds may be required, and we may not be able to proceed with our business plan for the development and marketing of our core services. Should this occur, we may be forced to suspend or cease operations.
We anticipate incurring operating losses in the foreseeable future. Therefore, our auditors have raised substantial doubt about our ability to continue as a going concern.
Off-Balance Sheet Arrangements
At June 30, 2014, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, we are not exposed to any financing, liquidity, market or credit risk that could arise had we engaged in such relationships.
Recent Accounting Pronouncements
See Note 2 to the Consolidated Financial Statements under Item 8, Part II.