[May 15, 2013] MMRGLOBAL, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations Tweet (Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the description of our business appearing in our Annual Report on Form 10-K for the year ended December 31, 2012, filed with the SEC on April 1, 2013 (the "Form 10-K"). This discussion contains forward-looking statements, which inherently involve risks and uncertainties. Please see "Cautionary Note Regarding Forward-Looking Statements" below. Our actual results could differ materially from those anticipated in these forward- looking statements for many reasons, including the risks faced by us described in "Risk Factors" in Item 1A of the Form 10-K. Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains certain forward-looking statements. The words "anticipate," "expect," "believe," "plan," "intend," "will" and similar expressions are intended to identify such statements. Although the forward-looking statements in this Quarterly Report on Form 10-Q reflect the good faith judgment of our management, such statements are subject to various risks and uncertainties, including but not limited to the following: º Our ability to obtain financing to fund our operations; º Our inability to generate sufficient cash flow to service our debt obligations; º The ability to generate subscribers for our products and services given the current competitive landscape; º Our ability to adapt our products to conform to any technical specifications necessary to benefit from stimulus package funding; º Our ability to raise dilutive and non-dilutive capital in order to meet our financial obligations and invest in our business to grow revenues, including risks related to our trading in the Over the Counter market; º Our ability to launch new products or to successfully commercialize our existing or planned products; º Managing costs while building an effective sales and service delivery organization for our products with our small management team; º Our ability to maximize our legacy biotechnology assets and otherwise protect our intellectual property assets; º Our ability to enter into marketing arrangements with large membership and affinity organizations for our products and maintain and grow subscribers from such arrangements, such as those noted above, particularly after the initial introductory period; and º The possible invalidity of the underlying assumptions and estimates related to our business and market; º Conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors and legislative, judicial and other governmental authorities and officials; and º Possible changes or developments in economic, business, industry, market, legal and regulatory circumstances. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Any of such assumptions could be inaccurate. You should not place undue reliance on these forward-looking statements, which are based on our current views and assumptions. In evaluating these statements, you should specifically consider various factors, including the foregoing risks and those outlined under "Risk Factors" in Item 1A of the Form10-K. Our forward-looking statements represent estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. Overview Background We provide secure and easy-to-use online Personal Health Records ("PHRs") and electronic safe deposit box storage solutions, serving consumers, healthcare professionals, employers, insurance companies, professional organizations and affinity groups. MyMedicalRecords enables individuals and families to access their medical records and other important documents, such as birth certificates, passports, insurance policies and wills, anytime from anywhere using the Internet. The MyMedicalRecords Personal Health Record is built on proprietary, patent pending, issued and applied for technologies to allow documents, images and voicemail messages to be transmitted and stored in the system using a variety of methods, including fax, phone, or file upload without relying on any specific electronic medical record platform to populate a user's account. The Company's professional offering, MMRPro, is designed to give physicians' offices an easy and cost-effective solution to digitizing paper-based medical records and sharing them with patients in real time. Since receiving the first notices of allowance in late 2011, the U.S. Patent and Trademark Office has issued the Company a total of four patents and one additional notice of allowance pertaining to the "Method and System for Providing Online Medical Records" and "Method and System for Providing Online Records". Such patents had been applied for as early as 2005 and the Company believes these patents along with the remaining pending and applied for claims represent a competitive barrier to entry and create a competitive advantage for the Company which the Company is looking to leverage through licensing agreements. For a description of our corporate organizational history prior to the date hereof, please see Note 1 to our financial statements. Source of Revenues We derive our revenues from the provision of services, which are comprised of facilitating electronic access to consumer medical records and other vital documents, as well as international licensing of our services. We offer our services to subscribers either on a direct subscription basis or an "access" basis through various types of organizations, and in both cases, we record these revenues under "Subscriber" in our income statement. On a direct subscription basis, which we use when we market our products direct to consumers or wholesale through corporations to their employees, or through affinity and membership organizations to their members, the subscriber pays us directly with a credit card or PayPal account either on a monthly or annual plan. On an access basis, which we currently use only with corporations, affinity and membership organizations, hospitals and other business to business customers, we charge a monthly fee to the organization based on the number of users who will have access to our services through such organization, whether or not such users actually enroll. During the three months ended March 31, 2013 and 2012, the Company received $25,380, and $44,846 from subscriber revenues, respectively, which represents 20.8% and 26.0% of our revenues for such periods, respectively. 14 -------------------------------------------------------------------------------- We also derive our revenues from the sale of our MMRPro system, which includes a high-tech scanner, various licenses to use third party software, a license to use MMR's proprietary MMRPro application software, dedicated telephone lines, secure online storage and warranties. Installation and training are provided as part of the agreement. Software licenses, telephone lines, online secure storage and warranties are provided over the three year term of the agreement. Our customers pay these contracts in advance and are not refundable. We allocate the revenue derived from these arrangements among all the deliverables, based on the relative selling price of each deliverable. With the exception of MMR's proprietary MMRPro application software, we used third party evidence to set the selling prices used for this allocation. During the three months ended March 31, 2013 and 2012, the Company received $32,238, and $21,580 from MMRPro revenues, respectively, which represents 26.4% and 12.5% of our revenues for such periods, respectively. On September 27, 2012, the Company signed an agreement with VisiInc PLC, which is incorporated in this filing as Exhibit 10.1, for the sale of a minimum of 1,275 MMR Pro systems through a large reseller of medical products and services to health care professionals. MMRPro will be bundled with other Visi products and marketed as VISI MMRPro. The VISI MMRPro systems are being sold through the Seagate VAR and OEM channels, which includes a syndicate of Seagate VARs, as well as through the Burkhart Dental channel, as part of a Seagate/Visi/MMR/Via3 product bundle. The entire product bundle will be featured at the Synnex VAR conference "Varnex" in Las Vegas on November 14, 2012 to an estimated 700 VAR partners. The bundle offering also includes Seagate's Network Attached Storage ("NAS") Boxes (NAS440), which, when connected to VISI MMRPro, will store documents and images created in the VISI MMRPro system in the NAS boxes, as well as in MMRPro. Initially, the Agreement calls for exclusivity in the dental market through Burkhart Dental ("Burkhart"), which has an estimated 24,000 dental office clients. Burkhart has already begun the process of installing MMRPro systems in several of its dental clients' offices. Although the Agreement is based on selling exclusively to the dental channel, VISI has subsequently requested exclusive rights to include, legal, accounting and other verticals. As a result, the Company believes the number of units may increase. We are also generating revenues from the licensing of our biotech assets, which may include non-refundable license and up-front fees, non-refundable milestone payments that are triggered upon achievement of a specific event and future royalties or lump-sum payments on sales of related products. We record these licensing revenues under "License Fees - Biotech" in our income statement. We are sometimes paid an upfront license fee and milestone payments and we recognized these fees as revenue as payments were received. During the three months ended March 31, 2013, the Company received $3,000, and $100,000 from license fees revenues, respectively, which represents 2.5% and 57.9% of our revenues for such periods, respectively. We also have generated revenues from licensing the sale and marketing of our services internationally and, to a lesser extent, from ancillary fee payments including web and marketing development services, amongst others. We record these licensing revenues under "License Fees" and other ancillary revenues under "Other Revenues" in our income statement. When we enter into a licensing arrangement, we are sometimes paid an upfront license fee and typically receive ongoing royalty payments that are often based on a percentage of revenue earned by our licensee. We recognize these fees over the license period. When we receive ancillary one-time payments, we record them when services or products are delivered. In addition, we plan on generating future revenues from the licensing of our biotech and health IT patents. In the third quarter of 2012, we retained the law firm of Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor LLP (Liner) to lead the effort. With Liner's assistance, we will pursue markets that rely on the Company's patented health IT technologies, including hospitals, healthcare providers and physician group practices using document management, imaging, faxing and/or sharing of paper-based medical records into digital online Personal Health Records. The Liner firm will protect and monetize the Company's intellectual property, including the past, present and future use by third parties of its health IT and Biotech patents. Liner will also work with existing consultants and bankers to identify markets and potential infringers, including healthcare IT service vendors and healthcare providers. We will record those fees as revenue as payments are received. These fees may include non-refundable license and up-front fees, non-refundable milestone payments that are triggered upon achievement of a specific event and or future royalties or lump-sum payments on sales of related products. Cost of Revenue Our cost of revenue includes the cost of maintaining our voice and fax mailboxes, long-distance call transport costs, fax and voice call processing costs, credit card transaction processing costs, web hosting and management fees, website maintenance and support costs, costs associated with creating and mailing enrollment packages to our subscribers and the cost of scanners. Cost of revenue also includes customer service costs. We also charge to cost of revenue our direct selling costs, which include commissions paid to sales representatives who sell our wholesale and access based accounts. Operating Expenses The largest component of our operating expenses is our general and administrative expenses, which include personnel salaries and benefits, office rent and supplies, insurance costs, fees for legal and professional services, as well as our expenses for corporate telecommunications and internet access not associated with our products. Our operating expenses also include sales and marketing expenses (which include expenses associated with attending trade shows and travel costs, as well as a portion of personnel salaries allocated to sales and marketing activities), as well as technology development expenses (which includes expenses related to research and development as well as a portion of personnel salaries allocated to development activities). Recent Accounting Pronouncements For a description of recent accounting pronouncements and how we apply such pronouncements to our financial statements, see the accompanying notes to our consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. Factors Affecting Future Results Intellectual Property Since its inception, MMR's health IT business has evolved from a development company, to a provider and reseller of Personal Health Records and document imaging and scanning systems (MMR Services), to a Licensor of MMR's intellectual property. Corroborating the value of protecting the Company's intellectual property, inventions and other IP by investing millions of dollars in the inventing and building of a global patent portfolio, a special report published by the Michael Bass Research Group on January 22, 2013 concluded that the range of value of the Company's U.S. patents could reach between $600 million to $1.1 billion in revenue. (http://michaelbass.com/PDF/Patent_Valuation.pdf). This was based on what is described as conservative estimates based on a market projected to reach a GDP value of $19 billion. Subsequently, Michael Bass issued an updated valuation report on May 2, 2013 based on the issuance by the Japan Patent Office of Patent No. 5191895. The Japanese patent, issued on February 8, 2013, increases the valuation by $200 million, from the initial report of $600 million to $1.1 billion, to $800 million to $1.3 billion. 15 -------------------------------------------------------------------------------- Continuing into 2013, we remained focused on maximizing the value of our intellectual property portfolio, particularly the seven U.S. health IT patents that have been granted to date. The Company's health IT patent portfolio, which we have been building since 2005, currently includes our U.S. patents (with a total of 177 claims), 22 pending U.S. patent applications (with hundreds of pending claims), six international patents including two in Australia with others in New Zealand, Singapore, Japan and Mexico, a Notice of Allowance received for our Canadian patent application in March 2013, and 13 other pending patent applications in foreign countries. These patents have the potential effect of enabling the Company to control a dominant marketplace position in personal healthcare, being well-positioned to benefit from the explosion in health IT globally. The full term of the Company's health IT patents will not expire until September 12, 2025 or after. Significantly, in the U.S., because our health IT patents were filed in advance of the relevant Meaningful Use requirements that address patients' electronic access to health information, we believe that our patent portfolio makes it difficult for eligible healthcare professionals and hospitals to fully qualify for incentives under the HITECH Act without licensing from MMR. Since September 2012, MMR, through the law firm Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor LLP, began offering licenses to hospitals, group practices, pharmacies, laboratories, and EMR and PHR providers. As a result, the Company continued to announce licensing agreements with several vendors in the first quarter of 2013, including Interbit Data and Fairway Physicans Insurance Company, while aggressively pursuing infringement claims that resulted in litigation actions being commenced against Walgreen Co. in January 2013, WebMD in February 2013, and, subsequently, Quest Diagnostics, Inc. in April 2013. The Company also announced in February 2013 that it was considering possible patent infringement in Singapore. The Company's health IT portfolio, which includes issued patents on our MyMedicalRecords, MyEsafeDepositBox and MMRPro document imaging and management systems, is in addition to our portfolio of biotech patents. MMR acquired significant intellectual property assets from the merger with Favrille and continues to seek ways to exploit and monetize those assets, which include, but are not limited to, data from the Company's pre-merger clinical vaccine trials, the FavId™/Specifid™ vaccine, and the anti-CD20 antibodies. MMRGlobal Health Information Technology Patents Through our wholly owned subsidiary, MyMedicalRecords, Inc., the Company currently has seven U.S. patents - Nos. 8,117,045; 8,117,646; 8,121,855; 8,301,466; 8,321,240; 8,352,287; and 8,352,288 - as well as additional applications and continuation applications. The patents are directed at a "Method and System for Providing Online Medical Records" and a "Method and System for Providing Online Records," and involve inventions pertaining to Personal Health Records, Patient Portals and other Electronic Health Record systems. We received Notices of Allowance from the United States Patent and Trademark Office for the first three patent applications in December 2011, which were subsequently issued in February 2012 as, U.S. Patent No. 8,117,045, U.S. Patent No. 8,117,646 and U.S. Patent No. 8,121,855. Together, these patents have a total of 81 claims. Headed into the fourth quarter 2012, we received Notices of Allowance from the USPTO for the next two patent applications: U.S. Patent No. 8,301,466 was issued in October 2012 and expands existing patent coverage for communication of health information from healthcare providers to web-based services through multiple forms of electronic messaging. The Company's fifth patent, U.S. Patent No. 8,321,240, was issued in November 2012, taking only 10 months to issue from its filing date of January 17, 2012. MMR's two most recent U.S. patents, U.S. Patent Nos. 8,352,287 and 8,352,288, with claims totaling 57, were issued in January 2013 after being allowed on November 28 and December 3, respectively. Significantly, claims in the sixth patent expanded MMR's patent portfolio with additional claims directed toward a Web-based service to access and collect health records from different types of service providers, including, but not limited to, retail pharmacies as well as hospitals, providers and other healthcare professionals providing services over the Internet. The health records, including prescriptions, may be collected from service providers using various types of messaging including email, facsimile, uploads, and voice. The seventh patent further raised the bar for our PHR intellectual property in that there are additional claims related to collecting insurance information, calendaring, and other features which are already provided by MMR's products and services. Claims in MMR's most recent patent address how healthcare providers send requested patient information to the patient, caretaker, provider or user by various means, including voice, fax, email or other electronic formats connected to a Personal Health Record system, patient portal or other locations on the Web. They also cover how users collect Personal Health Information on the Web or at other destination addresses without the healthcare provider having to enter specific personal identification numbers of the user. The information collected includes but is in not limited to a patient's medical history, chart notes, vaccination records, laboratory and other test results, prescriptions, and X-rays and images, as well as birth certificates and other important documents such as wills and advance directives. Internationally, the Company has patents issued, pending and applied for in 12 countries of commercial interest. Six of the patents issued are in Australia, New Zealand, Singapore, Mexico and, on February 8, 2013, Japan. A Notice of Allowance in Canada (Serial #2,615,128) was received in March 2013. With the Canadian NOA, the Company's health IT intellectual property looks to include all of North America. MMR also has 14 other pending patent applications in foreign countries further including, Hong Kong, Israel, South Korea, Japan, Mexico, Europe, China. There are also five pending Patent Cooperation Treaty ("PCT") applications. The Company also has hundreds of patent claims in pending U.S. applications including 22 U.S. utility and provisional patent applications related to health information technology. These include applications directed towards a Mobile Platform for Personal Health Records, a Method and System for Managing Personal Health Records with Telemedicine and Personal Health Monitoring Device Features, Prepaid Card Services related to Personal Health Records, a Universal Patient Record Conversion Tool, Aggregation of Data from Third Party Systems into a Personal Health Record Account, Electronic Health Records in Clinical Trials, a Data Exchange with Personal Health Record Service, Delivery of Electronic Medical Records or Electronic Health Records into a Personal Health Records Management System, a Health Record with Inbound and Outbound Fax Functionality, a Method and System for Providing Online Medical Records with Emergency Password. The Company believes that many of the pending claims will ultimately be allowed including both health IT and non-health IT/medical applications which are pending in the Company's entire patent portfolio. Our patent portfolio was created in conjunction with the intellectual property law boutique of McKee, Voorhees & Sease, P.L.C. ("MVS"). MVS has worked with MMR from the beginning and continues to assist in building U.S. and international patent portfolios in the health information technology and biotechnology areas. Starting in 2014, Stage 2 Meaningful Use requirements under the HITECH Act mandate that patients receive timely online access to their personal health information. Specifically, in order to qualify for funds under the government's EHR Incentive Programs managed by the Centers for Medicare & Medicaid Services, eligible professionals need to provide more than 50 percent of their patients the ability to view, download and transmit their health information online within four business days of the information being available to the EP and hospitals need to provide the same within 36 hours after discharge from the hospital. The Company believes that the claims in its patent portfolio provide solutions necessary and desirable for healthcare providers to meet those requirements. Because the MMR HIT patents issued thus far have priority dates in advance of the relevant Meaningful Use requirements, the Company believes that its patent portfolio makes it difficult for hospitals and eligible healthcare professionals to fully qualify for incentives under the HITECH Act without licensing from MMR. Also, because of the government incentives now focused on patient engagement, there will continue to be increased interest and need by hospitals and physician groups to deploy Web-based patient portals that have access to medical records. After the patent issuances of 2011, 2012 and 2013 to date, MMR believes it holds significant foundational patents under a "Method and System for Providing Online Medical Records" and "Method and System for Providing Online Records" and that the patents are relevant to any provider who transmits Electronic Health Records in that they limit their ability to communicate without infringement. As a result, the process of enforcement and licensing of its patent portfolio through the law firm, Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor LLP, has continued to build throughout the first quarter of 2013 including a campaign of contacting hospitals, medical groups, pharmacies and other healthcare professionals as part of efforts to license the MMR IP. In addition to enforcement actions against Walgreen Co., WebMD and Quest Diagnostics, Inc., The Liner law firm is also representing the Company in the collection of $30 million dollars under the Company's Settlement and Patent License Agreement with SCM as further described in our Litigation Matters section herewith. 16 -------------------------------------------------------------------------------- Exploiting MMRGlobal Biotech Assets and Patents Although the Company's primary business is the Web-based storage and management of personal and professional health and vital records, we acquired intellectual property rights to certain biotech assets through the 2009 Merger with Favrille, Inc. which currently includes three U.S. patents, five U.S. pending patent applications, eight patents in foreign countries and 15 pending patent applications in foreign countries. Tremendously exciting for the Company was the subsequent announcements in April 2013 of two Notices of Allowance for our anti-CD20 monoclonal antibody assets, which follow the granting of our first such patent in Mexico in August of last year for "Antibodies and Methods for Making and Using Them." As announced on April 15, 2013, we received a Notice of Allowance from the United States Patent and Trademark Office, U.S. Serial No. 11/855,943, for our first U.S. patent to be granted for the Company's anti-CD20 monoclonal antibody IP. Shortly thereafter, on April 22, 2013, we announced that the Australian Patent Office had issued a Notice of Allowance for the Company's anti-CD20 monoclonal antibody assets, #2007338607, under the same title, "Antibodies and Methods for Making and Using Them" The Australian NOA was significant to the Company in that it further reinforced the value of the U.S. and Mexico antibody patents. These patents for the Company's anti-CD20 monoclonal antibodies have particular utility in fighting cancers and are considered important assets of the Company based on benefits and commercial value demonstrated by Rituxan®, an anti-CD20 monoclonal antibody with reported sales of USD $7.285 billion in 2012, which is due to go off patent in 2015. The Company has been working to perfect the patent condition of these biotech assets for over four years. As a result, MMRGlobal now has biotech patents and patent applications pending in 13 foreign countries of commercial interest that provide competitive advantages for this biotechnology. Currently, the Company's biotech patent portfolio includes U.S. and foreign patents with expiration dates of August 2021 or later, relating to the manufacture of the B-cell vaccines. The issued antibody patents (and other patents which may issue relating to this technology) have substantially later expiration dates of September 2027 or later. Additional patent applications once granted may obtain additional term of biotech patent protection. MMRGlobal's biotech patents include the B-Cell vaccine patents and patent applications entitled "Method and Composition for Altering a B Cell Mediated Pathology" which relate to methods of manufacturing compositions for B-cell vaccines used in the fight against lymphoma and potentially other forms of cancer, including U.S. Patents 6,911,204, 8,114,404 and 8,133,486. An additional manufacturing divisional patent application was filed with the Mexican Industrial Property Institute in the third quarter of 2012 after the awarding of a second Mexican patent No. MX302477 in June 2012 to further enhance the protection of the manufacturing patents already issued in various countries, including the U.S. In January 2013, the Company announced approval of its European Union patent (European Patent No. 01979228.2) for methods of manufacturing the B-cell vaccines which has also resulted in the regional patent undergoing validation in various countries selected by the Company as having commercial interest in the technology. The European Union patent is currently being translated and undergoing validation procedures in the following countries: United Kingdom, France, Germany, Switzerland, Spain, Italy, the Netherlands, Denmark, Sweden, Finland, Ireland and Belgium. Pre-Merger, the Company spent more than $100 million in development of the biotech assets comprised of patents, patient samples and data from the FavId™/Specifid™ idiotype vaccine trials and our proprietary anti-CD20 antibody panels to treat B-cell lymphoma and additional B-Cell mediated conditions such as rheumatoid arthritis. Subsequent to the Merger, we have recovered additional intellectual property, including certain physical assets used by Favrille, Inc. in the form of over 1,800 patient tissue samples, samples of the B-Cell vaccine, a collection of insect cells used in the manufacture of the vaccine and other materials collected during the Company's pre-Merger FavId™/Specifid™ vaccine trials. The insect cells are of a particular kind believed to be susceptible to a particular baculovirus infection providing unique utility including Trichoplusia ni (Hi-5) and Spodoptera Frugiperda (Sf9) cells which are important to the Company and a material element in its issued patents as well as pending patent applications. Beginning in June 2009, we filed various national phase filings from the Patent Cooperation Treaty (PCT) patent application directed to anti-CD20 monoclonal antibody assets. In addition to the above, national phase filings are pending in major European, Asian, North American, and South American markets, including in the United States, Australia, Brazil, Canada, China, Hong Kong, Europe, India, Japan, and South Korea. Starting in May 2010, we successfully revived Favrille's original U.S. Patent No. 6,911,204 directed to treating B-cell pathologies. Additional U.S. B-cell pathologies patent applications were also successfully revived and as recently as February 14, 2012 a second and third U.S. Patent Nos. 8,114,404 and 8,133,486 have been awarded to protect certain embodiments of the manufacturing of the vaccine. Additional U.S. applications are pending and under examination before the U.S. Patent and Trademark Office. We are taking further actions to perfect the condition of the patent applications in various other countries offering a potential competitive advantage for this B-cell technology. Although we make no guarantees as to the status of certain patents and patent applications, we are acting to pursue and maintain available patent protection relating to our patents and filings including but not limited to the FavId™/Specifid™ vaccine intellectual property portfolio in the United States and major foreign markets of interest. Three foreign patents have also been awarded in Singapore and Mexico. On December 22, 2010, the Company entered into a non-exclusive agreement with Celgene to license the use of the Company's clinical and scientific data (originated by Favrille) related to targeted immunotherapies for cancer and other disease treatments to stimulate a patient's immune response and certain other confidential information. In consideration for the rights granted under the Agreement, Celgene agreed to pay the Company certain upfront fees and development milestones. When a milestone is reached it automatically triggers a payment to MMR. In addition to our patent litigation firm, Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor, we continue to work with scientists, consultants and experienced venture capitalists to assist us in generating revenue through licensing agreements as would be usual and customary in that industry. Moreover, we plan to continue pursuing license agreements with companies like Celgene that have expertise in the area of biotechnology and specifically in treating lymphomas and other cancers, and which can benefit from the use of our clinical and scientific data. Other Intellectual Property and Trademarks We own the URL and domain name for the web address www.MyMedicalRecords.com. We also own the domain names www.MyMedicalRecordsMD.com , www.MMRPro.com andwww.MMRPatientView.com for use with MMRPro and own the domain namewww.MyEsafeDepositBox.com for use with our MyEsafeDepositBox product. We also own the source code for our products. As we continue to develop our products, we continue to register our tradenames and logos as trademarks and service marks and will seek to protect the copyrights in the initial and any other proprietary content that we develop to support our MyMedicalRecords PHR, MyEsafe and MMRPro products. We also own the source code for a handheld software program, developed to operate on the Palm operating system, which allows Palm users to create a personal medical history on a personal data assistant, or PDA, so that they can have access to this information while traveling and in the event an Internet connection is not available. The Company plans on developing applications to use MyMedicalRecords and MMRPro products on other handheld devices. Competition MyMedicalRecords PHR Though the Company believes that no other product in the marketplace compares to what we provide in comprehensive offerings, especially given our patents as a barrier to entry, there are other PHR providers in the consumer health information management marketplace today that compete for our services. These include MyMediConnect, NoMoreClipboard.com, Dossia, FollowMe,WebMD Health Manager, ZweenaHealth, and HealthVault®, although the last is more of a personal health platform that offers multiple solutions. In addition, we compete with Internet and patient-portals offered by EMR Vendors, insurance companies, hospitals and HMOs for their policyholders and patients. 17 -------------------------------------------------------------------------------- Each of our competitors offers varying PHR products and services for online storage and access to medical records at varying price points (at the basic "free" level, with minimal recordkeeping capability and usually includes advertising). However, we believe our MyMedicalRecords PHR product offers unique features that distinguish it from those of our competitors. In particular, we believe our MyMedicalRecords PHR product offers greater ease of use and accuracy than our competitors' products because copies of the actual medical records, such as laboratory test results and radiology reports can be either faxed or uploaded directly into the user's MyMedicalRecords PHR account using a patented integrated system, rather than requiring users to input the data themselves, which may result in transcription errors, or go through a third party, which could result in more time, additional costs and can raise the issue of privacy. Competitors may offer limited document management capability for PHRs; they have to be scanned and uploaded by the user and they do not allow users to easily manage stored information with the same sophistication as the MMR PHR. In addition, these services do not offer integrated outbound fax directly from the user account, or if they do, we believe they could be infringing on our patents, which means that users of competitive products have to print out and manually handle paper or go through third party intermediaries in order to share information with other providers along the continuum of care. In addition, while hospital patient, HMO patient. insurance policyholder and employer-based Internet-portals allow users to see certain information regarding test results, prescriptions or claims data, and may even give patients the ability to set appointments and communicate with doctors, these portals only allow users to view data from that specific provider, and if a user changes his or her healthcare provider, insurance carrier or employer, the information may not be available in the future. Our MyMedicalRecords PHR product is designed to offer our customers a single secure online repository for all of their health information and records, from every provider, so that this information is available any time a MyMedicalRecords PHR user needs to access and share it, and our service is completely portable, meaning it stays with the member though changes in health plans, healthcare providers and employers. Moreover, the MyMedicalRecords account covers an entire family of up to 10 members, whereas other services typically only cover an individual or charge for additional family members. We also believe the enhanced features offered at the same price point with our MyMedicalRecords PHR product, such as outbound fax, document management, emergency login, appointment and prescription reminders and voice messaging features, offer consumers unique and attractive advantages that separate our MyMedicalRecords PHR product from the competition. In addition, competing services may raise consumer awareness about the need for access to personal health information. While this increased awareness may increase the marketability of our MyMedicalRecords PHR product, growth in the consumer health information management marketplace may also attract new entrants. However, while we believe that greater ease of use and array of enhanced features distinguish our MyMedicalRecords PHR product from those of our competitors, many of our competitors may have greater resources and more experience in this market, and can modify their product offerings to make them more competitive, including attempting to replicate some features of our MyMedicalRecords PHR product. We have also sought to protect our proprietary technology through patents in both the U.S. and overseas. See "Intellectual Property - Patents" below. MyEsafeDepositBox Our MyEsafeDepositBox product competes with a number of online backup and electronic data storage services. The increasing use of external hard drives and flash drives to backup data also has the potential to compete with online data storage services such as our MyEsafeDepositBox product. We believe that MyEsafeDepositBox is a superior product when compared with products such as My Vault Storage or Allianz Protect in that it permits multiple service providers, such as insurance agents or lenders, to fax documents directly into a user's account. In addition, much like the MyMedicalRecords PHR, the MyEsafeDepositBox service also offers outbound fax and emergency login features which further differentiate us in the marketplace. We also have the ability to provide private label branding that affords banks, insurance companies, escrow services and other financial and legal businesses to provide not only a useful product but creates brand awareness and loyalty. MMRPro MMRPro competes with scanning services that market their services to doctors seeking to convert their historical paper records into electronic files, as well as EMR systems. Scanning services typically do not provide the doctor with an integrated end- to-end system that not only scans the record, but automatically sorts it by patient and by patient chart tab. Most scanners merely digitize patient records and store them either on a local drive or a Local Area Network drive, which requires the doctors to have an IT consultant manage their online records. Since MMRPro is a "Software As Service" model, the scanner records are sent to a web- hosted application with redundant data storage facilities and MMR handles the physical storage and management of patient data in compliance with HIPAA's Privacy Rule and Security Standards. This not only relieves doctors of having to worry about their in-house records management, it also allows them to access patient records from any Internet-connected computer as well as to deploy a copy of a record for the patient. MMRPro also competes with EMR systems that offer doctors the opportunity to make their entire office paperless. However, many doctors, particularly solo and small group practitioners, are still resisting EMRs with a high cost of conversion and the difficulty and expense associated with maintaining an EMR system. MMRPro provides an efficient alternative and or transition to a full-blown EMR for many thousands of dollars less cost. MMRPro also features a patient portal, MMRPatientView, which is a requirement of meaningful use and is both integrated with our end-to-end system or can be incorporated as a separate module within any EMR system, as is being done in partnership with Interbit Data for the MEDITECH EMR platform. Marketing and Sales Marketing Update Demand for both our consumer and professional medical records products is driven primarily by the U.S. healthcare market and the health information technology market. We are expanding our consumer market through strategic partnerships with nurse advocates, local pharmacies, home healthcare specialists, and medical supply companies, all of whom have significant one-on-one relationships with patients who can benefit immediately from the use of our PHR. Likewise, we have created a retail consumer model through the use of prepaid Personal Health Record cards, which will be sold through retail brick and mortar outlets. On the professional side, demand is increasing in the field of ambulatory surgical centers and EMR systems as well as other clinics looking for an elegant and cost-effective scanning and document management solution. We also view specialty practice areas such as pediatrics, chronic care illnesses and geriatrics as fertile grounds for expanding the MMRPro solution with the integrated patient portal MMRPatientView. With the use of teleconsulting and telemedicine becoming increasingly prevalent in healthcare, our MyMedicalRecords PHR solution provides a well-suited platform to facilitate collaboration between patients and their doctors and other healthcare providers with the ease of use and integration the solution provides. Through the Company's relationship with ngConnect and Alcatel-Lucent, we have launched a telemedicine reporting module inside the MyMedicalRecords PHR and are further working on identifying strategic partners to send medical information through our portal. One such identified partner will give us the ability to integrate wellness data, such as meal planning, nutritional and biometric information.We are also actively working with ng Connect to assist the Company in taking our Personal Health Record products and services into Alcatel- Lucent's government and telecommunications clients. Additionally, we are continuing to work with major telecommunications companies to bring the MyMedicalRecords.com Personal Health Record to Smartphones. We continue to be actively involved in meetings with Verizon. The Company believes that its patents give us a competitive advantage when negotiating services with the major carriers since many mobile phones receive fax. 18 -------------------------------------------------------------------------------- As previously reported, we are working with 4medica to integrate our PHR with laboratory reporting services which is used by tens of thousands of doctors nationwide. Once this application is available, information will be put directly into subscribers' accounts and users will be able to view their laboratory report results in binary format, meaning they will also be able to chart and graph this data. The ability for consumers to directly access their lab report results is also a national initiative being driven by the Department of Health and Human Services which under "new rules" seeks to expand the rights of patients to gain access to test results reports directly from labs using health IT solutions. We also are working with 4Medica to create a "fax portal" for their 30,000 doctors to facilitate better handling of the still large number of lab results that are paper-based in their network. That portal, which creates a significant new revenue stream for the Company, was completed in September and was made available by 4medica to its client doctors late in 2012. We also have completed our initial implementation with the 4medica Electronic Medical Record system. Now when consumers enroll in the MyMedicalRecords Personal Health Record, their data is sent into 4medica in HL7 format so that a Medical Record Number (MRN) can be established in 4medica. In addition, we are integrating a document signing tool into our PHR for a wellness clinic customer. When this integration is completed in Q2 2013, users will be able to fill out patient registration and authorization forms from within the PHR. Selected data in the forms will be sent as HL7 into the 4medica EMR so that patient demographics are fully populated in the EMR. The forms themselves will be passed to the EMR as well in PDF format, meaning that all relevant forms and data can be populated into the EM before the patient presents at the clinic. Because we are sending data in standard HL7 and PDF formats, this will work with 4medica as well as any EMR system. Under the Health Information Technology for Economic and Clinical Health Act (HITECH), which was part of the 2009 American Recovery and Reinvestment Act (stimulus bill), a core "Meaningful Use" objective requires that for physicians to qualify for government incentive payments, they need to provide more than 50% of their patients with timely electronic copies of their personal health information in Stage 1, transitioning to the same measure of patients being provided the ability to view online, download and transmit their health information in Stage 2, and at least 90% of patients in Stage 3 by 2014. This is believed to be spurring eligible healthcare professionals to seriously focus on how they will offer Personal Health Records to their patients. As a result, the Company entered into such strategic partnerships in the last year as we have with UST Global and Interbit Data, the latter to provide our MMRPatientView portal to users of the MEDITECH EMR system. MEDITECH is being used by more than 650 hospitals nationwide. Although the solution is only deployed for MEDITECH at this time, we believe that it can work with virtually any EMR platform, which opens up a significant new market opportunity for us. On the professional side, after nearly three years of development, the Company launched the modules that enable physicians to receive and send faxes from inside a fully functional EMR. Partnered with 4medica, we began incorporating our EMR/EHR Fax Communications Gateway in 4medica's Certified Meaningful Use Integrated Electronic Health Record (4medica iEHR®) at the end of June. 4medica provides the industry's leading cloud clinical integration platform and solutions and the program will also use MMR's patented document management and imaging solution to facilitate electronic consultations for both inbound and outbound referral letters. 4medica will pay monthly minimum usage and patent licensing fees based on the size of the Gateway plus a 20% royalty on revenues generated from healthcare providers. We plan to continue to take advantage of the burgeoning consumer health information market and leverage federal legislation and initiatives. Beyond HITECH, we believe that the healthcare reform legislation passed by Congress and signed by the President into law in March 2010 (Patient Protection and Affordable Care Act, or ACA) also represents a significant behavioral shift in how consumers will manage their healthcare because of the requirement that most everyone have insurance. After the U.S. Supreme Court heard oral arguments challenging the law during the last week of March 2012, the Court announced its ruling on June 28 to uphold most of the healthcare reform law, which includes the individual mandate requiring most U.S. residents to have health insurance. Although the ruling did not touch directly on health IT or affect the federal incentive programs for EMR/EHR adoption, healthcare reform is now able to move forward with greater clarity. The challenges created by the influx of newly insured to better manage the cost of their care along with the administrative efficiencies mandated by the ACA should see greater demand for health IT solutions such as those provided by MMR. With government mandates and stimulus building both awareness and momentum for personal and electronic health records, others not directly affected by Meaningful Use incentives are driving healthcare technology to control healthcare spending, and we began recalibrating our marketing and sales strategies in 2012 to allocate resources in these areas. These include pharmacies that can offer patients drug interaction tools within a PHR and prescription refill reminders, the patient-centered medical home where caregivers placed PHRs at the top of their list of technologies that can best support their practice issues, retailers who can use this as a tool to create stickiness and build loyalty programs at the point-of-sale, and the world of telemedicine where data from remote patient monitoring devices is transmitted by smartphones into a patient's PHR for sharing by the entire medical team, such as what the Company is doing with Alcatel-Lucent. It should also be noted that demand is not solely U.S.-centric. As health IT spreads around the globe, and other countries intensify their focus on controlling healthcare costs through the improved use of information technology, we are seeing increased demand internationally. This expansion and increased demand is evidenced by the Company's agreements in China, Australia and other countries in development to offer Personal Health Record and electronic document management and imaging services. Moreover, in a global economy, companies are increasingly sending employees overseas, a practice which is expected to increase demand for our MyMedicalRecords PHR or MyEsafeDepositBox among ex-pats, particularly in Europe and the Middle East. Additionally, the growth of health IT at home and abroad is further impetus for ensuring the protection and enforcement of our patents worldwide. Sales Update MyMedicalRecords PHR We continue to focus on multiple sales verticals such as independent pharmacies, pharmacy chains and other mass merchandisers, visiting nurses, caregivers, patient advocates, in-home sales affiliates, hospitals and medical supply companies. The Company believes that it will be able to efficiently and profitably gain traction in these markets to create revenue that will allow us to focus on many larger strategic, international licensing opportunities such as the MMR's agreements with Unis-Tonghe in China and VisiInc in Australia, which take long periods of time and significant capital to incubate and develop to their full revenue potential. As the January 1, 2014 deadline for Meaningful User nears, we believe both providers and consumers will show increased interest in Personal Health Records. In addition, our increasing ability to integrate with Electronic Medical Record systems will increase consumer and provider acceptance of our PHR solution as well. In addition, the Company is working to create partnership programs with caregivers who can distribute its product to patients who most need a Personal Health Record. The Company is in the process of launching its program with VIDA Senior Resource, Inc., a family owned and operated community resource organization headquartered in Boise, Idaho, which provides senior home care services nationwide through a network of certified owned and operated agencies. It is estimated that our product will be sold to some 50,000 patients. It is important to note that VIDA will be selling the PHR at a significantly higher price point, $19.95 per month or $199.95 annually, than it is currently being sold direct to consumer on the Company's Website The programs the Company has created for Vida are requiring significant lead time, training and testing to deploy. We also continue to actively work with E-mail Frequency and its partners on embedding MyMedicalRecords in benefit programs as part of a suite of healthcare products and services. 19 -------------------------------------------------------------------------------- The Company recently introduced a new enhanced service called Personal Touch, in which a credentialed health professional collects the medical records on behalf of a MyMedicalRecords.com subscriber, then works with the subscriber to organize the records and put them into the PHR. The Company believes that the new service will help to speed-up adoption of the PHR product because it removes the need for the user to collect his or her own medical records, thus providing a tremendous convenience. The Personal Touch service also is sold at a premium price - $179.95 annually instead of $99.95 annually. Initial test marketing of the product has shown very promising metrics and we believe that the Personal Touch concierge service can make a significant contribution to our subscriber revenues beginning in Q3 as the marketing program expands after successful testing of the concept. The above is in addition to our ongoing main sales channels focused on healthcare professionals, direct to consumer, corporate sales, insurance companies, affinity group and membership organizations. In addition, our technology partnership with Interbit Data is helping to create sales opportunities with hospitals who already use Interbit products and services. Our interoperable Patient Portal solution, which was announced at HIMSS 2013 in March, incorporates the ability to present both PDF and discrete user data from hospital EMR systems. MMRPro Sales of MMRPro are being directed at physicians, particularly small group and sole practitioners who still do not have any way to digitize the paper in their offices and who do not want to invest the hundreds of thousands of dollars necessary to implement an EMR system, community hospitals and other clinics which do not have the funds or technology resources to invest in a fully functional EMR system, surgery centers and specialty clinics, and EMR and EHR vendors who are looking for a way to bring a patient portal into their systems without having to build their own import modules. We also work with document imaging sales and distribution channels, and the Company is utilizing distribution networks of companies who already sell other products into doctor offices. These distribution partners also help increase our integration and support network. We are also continuing to build relationships with companies managing Ambulatory Surgical Centers (ASCs), and in the second quarter we signed two additional agreements with, Regent Surgical Health to install MMRPro systems. The MMRPro systems were installed at facilities managed by Regent in Fort Myers, Florida and New Brunswick, New Jersey. The Company expects additional agreements in Chicago, Illinois this quarter. These sales are in addition to previous sales of MMRPro systems for Regent, a leading surgery center management and development company that currently manages more than 20 facilities nationwide. Additionally, through our partnership with Interbit Data, we created a joint software solution that allows hospitals and other clinical facilities to use a Meaningful Use certified solution to instantly make health information available to patients securely over the Internet using MMRPatientView from any EMR system without first having to scan, fax or print any documents. The Interbit Data-MMR module, which the Company presented at the International MUSE Conference in May-June, is already being installed in hospitals and is certified for Meaningful Use with MEDITECH systems. In 2012, we announced a new business arrangement with Fujitsu Computer Products of America, Inc., one of the world leaders in scanning solutions, which incorporates MMRPro with their new ScanSnap N1800 Network Scanner. Utilizing a proprietary interface created by DocuFi, the document imaging solution offers smaller physician offices, community hospitals and surgery centers the MMRPro system as a lower cost service alternative to digitize medical records. In September, the Company signed an Agreement with VisiInc, which has committed to selling an initial 75 units, of which the first 25 have been delivered, the next 25 are scheduled to be delivered by the end of the fourth quarter, and the remaining 25 in the first quarter of 2013. Starting in the second quarter of 2013, the agreement calls for the reseller to purchase or license a guaranteed minimum of 100 additional MMRPro systems per quarter over the life of the three- year contract, which represents a minimum of $5 million to $16.8 million in revenues in addition to $1,050,000 for the first 75 units. VisiInc's primary focus is distributing the MMRPRo product into the dental channel, which represents a new opportunity for the Company. The first dental offices were installed in Q4 2012 with continuing installations occurring in Q1 2013. International Licensing While the U.S. holds the largest share of the global EMR market, health IT is a growth industry internationally, expected to increase from $99.6 billion in 2010 to $162.2 billion in 2015, representing a CAGR of 10.2 percent from 2010 to 2015. Countries sharing a common goal to control healthcare costs are looking to EMR and PHR solutions to achieve this. The global demand is evidenced by the Company's agreements in China and Australia to offer Personal Health Record and electronic document management and imaging services. Moreover, in a global economy, companies are increasingly sending employees overseas, a practice which is expected to increase demand for our MyMedicalRecords PHR among ex-pats, particularly in Europe and the Middle East. Also, medical tourism is on the rise with estimates of a $100 billion market, and this fueling the need for medical records that are truly universal and can be accessed anytime from anywhere. It should be noted that the growth of health IT at home and abroad is further impetus for ensuring the protection and enforcement of our patent portfolio worldwide. Last year, in June 2012, the Company received its official business license from the Chinese Government to operate the Unis Tonghe MMR International Health Management Service Co., Ltd. Joint Venture (the "JV"). The license enables the JV to develop medical information management software, medical information technology software, health records management systems, and provision of related services, including the Company's Personal Health Record systems. The JV is positioned to offer its products and services to the Chinese government, hospitals, healthcare facilities and to the public, and is valid through 2042. The completion of the definitive Joint Venture agreement between MMR and Unis- Tonghe Technology (Zhengzhou) Co., Ltd., or UNIS, was first announced in January 2010, with the cooperation to build a customized version of MMR's proprietary PHR services and professional document imaging and management solutions in China. During the application and registration process of responding to requests from the Chinese Government, the JV has already been installing early stage EMR systems in three hospitals in Henan Province, with a population of over 100 million. The JV has also been participating in formal government bids to commence numerous medical records projects in China. Unis is a subsidiary of Unisplendour Corporation Limited (SHE: 00938) (www.thunis.com), one of China's leading IT firms. Subsequently, the Company announced on April 30, 2013, following meetings in Los Angeles with Luo Jianhui, Unisoft Group/Unis-Tonghe Technology Vice President and Chairman, that MMR and Unis-Tonghe will begin offering an Electronic Medical Records system with an integrated MyMedicalRecords Personal Health Record to be sold through the Joint Venture, Unis Tonghe MMR International Health Management Service Co., Ltd. MMR will begin building the first integrated version of the system in the U.S. working with licensees and existing strategic business partners. The platform will utilize MMR's patented PHR systems to offer two-way connectivity with any EMR or EHR system in hospitals and other ambulatory care centers. The system will also use an integrated HL7 interface to populate data from the UNIS/MMR system directly to patients through their PHR including chart notes, lab test results, medication lists and other discrete protected patient data. The Joint Venture was originally formed to only sell MMR's patented Personal Health Record technologies under license to the JV. The plan was for the JV to sell the UNIS/MMR products and services to hospitals, physician groups and consumers in China. However, at this time both sides see a benefit in delivering a total turnkey system which includes MMR PHRs integrated into the system. The Chinese government has mandated regulations and initiatives for healthcare including health IT, which include financial incentives that are similar to those in the U.S. and could help drive EMR and PHR revenues to the Joint Venture. We have begun to leverage our resources in China with other U.S. partners on the ground in China including Alcatel-Lucent to help manage our relationships in China locally. The Company has asked Alcatel Lucent as a 51% owner of Shanghai Bell to help manage the Unis relationship in China. 20 -------------------------------------------------------------------------------- In September 2012, the Company announced the signing of an agreement with our Australian licensee, VisiInc PLC, incorporated in the Company's third quarter filing as Exhibit 10.1. The Agreement calls for the sale of more than 1,000 MMRPro systems through a large reseller of medical products and services to healthcare professionals. As of September 30, 2012, we had delivered the first 25 MMRPro systems. Since that time, the Company is continuing scheduled deliveries. MMRPro will be bundled with other Visi products and marketed as VISI MMRPro, which is being sold through the Seagate VAR and OEM channels including the Burkhart Dental channel. The Company is also working on installations in Europe under an agreement with a large Kodak reseller. We have been invited to visit and present our products for use in a joint venture in Qatar and are working with consultants in that region. We are also meeting with potential strategic partners in countries where our patents are issued such as New Zealand and Singapore, to leverage our global patent portfolio. Value Added Reseller ("VAR") Networks On September 27, 2012, the Company signed an agreement with VisiInc PLC, which is incorporated in this filing as Exhibit 10.1, for the sale of a minimum of 1,275 MMR Pro systems through a large reseller of medical products and services to health care professionals. As of September 30, 2012, we had delivered the first 25 MMRPRo systems. In addition, the agreement obligates VisiInc PLC to purchase a minimum of 50 MMRPro by the first quarter of 2013. MMRPro will be bundled with other Visi products and marketed as VISI MMRPro. The VISI MMRPro systems are being sold through the Seagate VAR and OEM channels, which includes a syndicate of Seagate VARs, as well as through the Burkhart Dental channel, as part of a Seagate/Visi/MMR/Via3 product bundle. The entire product bundle will be featured at the Synnex VAR conference "Varnex" in Las Vegas on November 14, 2012 to an estimated 700 VAR partners. The bundle offering also includes Seagate's Network Attached Storage ("NAS") Boxes (NAS440), which, when connected to VISI MMRPro, will store documents and images created in the VISI MMRPro system in the NAS boxes, as well as in MMRPro. Initially, the Agreement calls for exclusivity in the dental market through Burkhart Dental ("Burkhart"), which has an estimated 24,000 dental office clients. Burkhart has already begun the process of installing MMRPro systems in several of its dental clients' offices. Although the Agreement is based on selling exclusively to the dental channel, VISI has subsequently requested exclusive rights to include, legal, accounting and other verticals. As a result, the Company believes the number of units may increase. Results of Operations for the three months ended March 31, 2013 as Compared to the three months ended March 31, 2012 Revenues. Revenues for the first quarter of 2013 were $122,028, a decrease of $50,770 or 29.4% compared to $172,798 in 2012. The decrease for the quarter was primarily due to lower biotech license fees which varied based on the milestones reached in the same period as compared to prior year, and offset by an increase of other income. Cost of revenue. Cost of revenue decreased by $148,706, or 85%, from $174,849 for the first quarter of 2012 to $26,143 in 2013. The decrease was primarily due to decreased website hosting fees and website maintenance and support fees. Gross profit as a percentage of revenues was $95,885, or 78.6% for the first quarter of 2013, as compared to $(2,051), or 1.2% in 2021. Gross profit increased for the three months ended March 31, 2013 primarily due to lower cost of revenue as compared to prior year. Operating expenses. Total operating expenses increased by $16,171, or 1.1%, from $1,456,387 in the first quarter of 2012 to $1,472,558 in 2013. General and administrative expenses decreased by $44,204, or 4.7%, from $933,766 in the first quarter of 2012 to $889,562 in 2013. The decrease for the quarter was driven primarily by lower option expense and salary expense, offset by higher legal fees. Sales and marketing expenses increased by $106,379, or 23.5%, from $452,644 in the first quarter of 2012 to $559,023 in 2013. The increase for the quarter was primarily due to higher marketing consulting fees, offset by lower option expense and salary expense. Technology development expenses decreased by $46,004, or 65.7%, from $69,977 in the first quarter of 2012 to $23,973 in 2013. The decrease for the quarter was primarily due to an overall decrease in product management expenses. Interest and Other Finance Charges, Net. We had interest and other finance charges, net of $135,148 for the first quarter of 2013, an increase of $9,385 from $125,763 in 2012. The increase was primarily due to higher non-cash interest expense attributed to the conversion feature issued with Convertible Promissory Notes, offset by lower line of credit interest expense. Net loss. As a result of the foregoing, we had a net loss of $1,511,821 for the first quarter of 2013 compared to a net loss of $1,584,201 for the first quarter of 2012. Going Concern As more fully described in Note 1 to the consolidated financial statements appearing above in this Quarterly Report on Form 10-Q, our independent registered public accounting firm included an explanatory paragraph in their report on our 2012 financial statements for the year ended December 31, 2012 related to the uncertainty of our ability to continue as a going concern. As of March 31, 2013, our current liabilities of $9,029,600 exceeded our current assets of $756,371 by $8,273,229. For a description of our management's plan regarding our ability to continue as a going concern, please see Note 1 to the financial statements included above. Liquidity and Capital Resources As of March 31, 2013, the Company's current liabilities exceeded its current assets by $8.27 million. We have incurred net losses of $1,511,821 and $1,584,201 for the three months ended March 31, 2013 and 2012, respectively. At the current level of borrowing, we require cash of $275,000 per year to service our debt. Furthermore, not including debt service, in order to continue operating our business, we use an average of $278,000 in cash per month, or $3.3 million per year. At this rate of cash burn, over the next twelve months, the Company's existing current assets will sustain our business for approximately five to nine months. 21 -------------------------------------------------------------------------------- In addition to the above cash burn from operations, we will be required to obtain additional financing in order to meet the obligations for installment payments of $621,000 under the Creditor Plan and our obligations under the secured indebtedness to The RHL Group under the Seventh Amended Note (which had a balance of $1,532,451 at March 31, 2013), amongst other debt obligations. Such obligations are currently due and payable pursuant to the terms of the notes. The components of the RHL Group Note payable and the related balance sheet presentation as of March 31, 2013 are as follows: $1,053,946, which is included in the line of credit, related party; and $478,505 for other obligations due to The RHL Group, which is included in related party payables. Traditionally, we have relied on the sale of stock and convertible debt as well as draws from the RHL Group line of credit to finance our activities. As of March 31, 2013, we had a line of credit with The RHL Group in the amount of $4.5 million. As of March 31, 2013, availability under this line of credit was $1.77 million. Furthermore, we may utilize portions of our standby equity facility with Granite as needed. Additionally, we raised $493,750 and $956,000 in convertible debt during 2013 and 2012, respectively. We expect to continue offering a limited amount of convertible debt in 2013. The Company also expects sales from MMRPro, its prepaid Personal Health Record cards, and fees from patent licensing agreements to generate revenue and gross profit that will significantly improve its monthly sales and reduce annual cash burn from operations. Cash Flows for the three months ended March 31, 2013 compared to three months ended March 31, 2012 Net cash used in operating activities for the three months ended March 31, 2013 was $777,543, compared to $636,978 used in the similar period in 2012. In 2013, we had a net loss of $1,511,821, less non-cash adjustments (depreciation, amortization, common stock and warrants issued for services and interest, and stock compensation expense) of $342,731, less changes in operating assets and liabilities of $391,547. In 2012, cash used in operating activities included net loss of $1,584,201, less similar non-cash adjustments of $382,977, plus changes in operating assets and liabilities of $264,246. Compared to 2012, non-cash adjustments in 2013 were slightly lower primarily due to a decrease in stock-based compensation expense and payables accrual adjustments, offset by an increase in common stock issued for services. Net cash used in investing activities in the three months ended March 31, 2013 and 2012 totaled $146,394 and $147,243 respectively. Compared to 2012, investing activities in 2013 were lower mainly due to a decrease in MMRPro and website development costs stemming from lower negotiated rates. Net cash provided by financing activities in the three months ended March 31, 2013 and 2012 totaled $958,248 and $547,579, respectively. Financing activities primarily included proceeds generated from the issuance of convertible notes, common shares and net proceeds from draw downs on our line of credit from The RHL Group, Inc., a significant stockholder wholly-owned by Robert H. Lorsch, our Chairman and Chief Executive Officer. Compared to 2012, financing activities in 2013 were higher primarily due to an increase in convertible notes activities. As of March 31, 2013, we had cash and cash equivalents of $70,966, compared to $74,461 as of March 31, 2012. Description of Indebtedness The RHL Group For a description of our indebtedness to The RHL Group, please See Note 3 - Related Party Note Payable, included above in this Quarterly Report on Form 10-Q. The RHL Group Note payable had a balance of $1,532,451 at March 31, 2013. The components of the RHL Group Note payable and the related balance sheet presentation as of March 31, 2013 are as follows: $1,053,946, which is included in the line of credit, related party; and $478,505 related to other obligations due to The RHL Group which are included in related party payables. Total interest expense on this note for the three months ended March 31, 2013 and 2012 amounted to $36,551 and $35,451 respectively. The unpaid interest balances as of March 31, 2013 and December 31, 2012 were $43,450 and $35,451, respectively. Convertible Notes On various dates between January 31, 2013 and March 22, 2013, we entered into fourteen different Convertible Promissory Notes (the "Notes") with eleven different unrelated third-parties for principal amounts totaling $493,750 with fixed conversion price from $0.020 to $0.028. Under the terms of the agreement, the principal amount owed under the Note became due and payable one year from the investment date provided that, upon ten (10) days' prior written notice to the holder, we may, in our sole discretion, extend the maturity date for an additional six month term. The Notes have the option to be converted into a total of 24,035,715 shares of our common stock. These Notes bear interest at a rate of 6% per annum payable in cash or shares of common stock or a combination of cash and shares of common stock at the option of the Company. The loan discounts for the convertible note feature totaled to $73,500 and was amortized to interest. As of March 31, 2013, all notes had been converted. As of March 31, 2013, a total of $762,607 of Convertible Notes remained outstanding and the Company or the holders had not elected to convert their Note balances into shares of our common stock. Commitments and Contingencies For information relating to our commitments and contingent liabilities, please see Note 5 to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. Off-Balance Sheet Arrangements On January 4, 2010, we entered into a Cooperation Agreement with UNIS, which we refer to as the "Cooperation Agreement". Under the Cooperation Agreement, UNIS and the Company agreed to form the JV for the purpose of deploying our Personal Health Record services and document imaging and management solutions in China. We will own 40% of the JV and UNIS will own 60% and each party will have the right to designate two members of the JV's board of directors, with the fifth member being a Chinese citizen mutually designated by us and UNIS. Under the Cooperation Agreement, board actions will require the approval of more than three of the five members of the JV's board of directors and no material actions may be taken unless all board members are present and voting at the meeting. Under the Cooperation Agreement, UNIS and the Company will contribute an aggregate of 50 million RMB to the joint venture, based on each party's respective ownership, in the form of intellectual property rights, equipment, brand value, cash and such other consideration as may be agreed upon by the parties. Each party's obligation to contribute to the joint venture is subject to a number of conditions, including obtaining all necessary approvals of and licenses from the Chinese government, as well as the joint venture meeting its budget, goals and objectives at the time contributions are due. Under the Cooperation Agreement, each party's contributions will be made over a period of sixty months. 22 -------------------------------------------------------------------------------- For a more complete description of the terms of the Cooperation Agreement, please see Exhibit 10.26 in our annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 31, 2010. On August 10, 2010, the Company entered into a Supplementary Agreement for the purpose of clarifying certain non-material terms of the original Cooperation Agreement mentioned above. On July 2, 2012, the Company received its official business license from the Chinese government to operate the JV. The JV is officially licensed with the Chinese government and is approved to operate and generate revenue. The license enables the JV to develop medical information management software, medical information technology software, health records management systems, and provision of related services, including the Company's Personal Health Record systems. The JV will offer its products and services to the Chinese government, hospitals, healthcare facilities, and to the public and is valid through 2042. The Company's entry into the Cooperation Agreement described above constitutes the creation of a direct financial obligation. [ Back To TMCnet.com's Homepage ]