Prospectus |
Filed pursuant to Rule 424(b)(2) |
Offering Up to 100,000,000
Shares
Common Stock
This prospectus relates to the offer and resale of up to 100,000,000 shares of our common stock, par value $0.001 per share, or the "Shares," by the selling stockholder, Granite State Capital, LLC, or "Granite." Granite has agreed to purchase 100,000,000 shares pursuant to the investment agreement we entered into with Granite on April 16, 2012. Subject to the terms and conditions of such investment agreement, which is referred to in this prospectus as the "Investment Agreement," we have the right to "draw," or sell, up to $15 million in shares of our common stock to Granite. This arrangement is sometimes referred to as the "Facility."
We will not receive any proceeds from the resale of the Shares offered by Granite. We will, however, receive proceeds from the sale of shares to Granite pursuant to the Facility. When we draw an amount of the Shares, the per share purchase price that Granite will pay to us in respect to such draw will be determined in accordance with a formula set forth in the Investment Agreement. Generally, with respect to each draw, Granite will pay us a per share purchase price equal to ninety-five percent (95%) of the lowest daily volume weighted average price, or the "VWAP," of our common stock during the five consecutive trading day period beginning on the trading day immediately following the day on which Granite receives our draw notice and ending on and including the date that is four trading days after the date of our draw notice.
Granite may sell the shares of common stock from time to time at the prevailing market price on the OTCQB, the OTC Bulletin Board, or on an exchange if our shares of common stock become listed for trading on such an exchange, or in privately negotiated transactions. Granite is an "underwriter" within the meaning of the Securities Act of 1933, as amended, or the "Securities Act," in connection with the resale of our common stock under the Facility.
Our common stock is quoted on the OTCQB, the OTC market tier for companies that are reporting with the SEC, under the symbol "MMRF," and on the OTC Bulletin Board under the symbol "MMRF.OB." The last reported sale price of our common stock on the OTC Bulletin Board on April 30, 2012 was $0.02 per share.
Investing in the offered securities involves a high degree of risk, including those risks set forth in the "Risk Factors" section of this prospectus, as well as those set forth in any prospectus supplement.
We will be responsible for all fees and expenses incurred in connection with the preparation and filing of this registration statement, provided, however, we will not be required to pay any underwriters' discounts or commissions relating to the securities covered by the registration statement.
You should read this prospectus and any prospectus supplement carefully before you decide to invest. You should not assume that the information in this prospectus is accurate as of any date other than the date of this prospectus.
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the accuracy or adequacy of this prospectus. Any representation to the contrary is a criminal offense.
______________________________
The date of this prospectus is May 31, 2012
TABLE OF CONTENTS
|
Page |
|
|
ii |
|
|
1 |
|
|
9 |
|
|
16 |
|
|
16 |
|
|
17 |
|
|
19 |
|
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
|
44 |
|
55 |
|
|
57 |
|
|
62 |
|
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT |
|
62 |
|
65 |
|
|
66 |
|
|
68 |
|
|
69 |
|
|
69 |
|
|
69 |
|
|
69 |
|
|
F-1 |
______________________________
This prospectus is part of a registration statement we filed with the Securities and Exchange Commission. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information or to make any representation on behalf of our Company that is different from that contained in this prospectus. You should not rely on any unauthorized information or representation. This prospectus is an offer to sell only the securities offered by this prospectus under circumstances and in jurisdictions where it is lawful to do so. The information in this prospectus is complete and accurate only as of the date on the front cover of this prospectus, regardless of the date of delivery of this prospectus or of any sales of these securities. Our business, financial condition, results of operations and prospects may have changed since the date of this prospectus. This prospectus may be used only in jurisdictions where it is legal to sell these securities.
______________________________
i
CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS
This prospectus 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 prospectus reflect the good faith judgment of our management, such statements are subject to various risks and uncertainties, including but not limited to those discussed or incorporated by reference herein. Actual results and the timing of selected events may differ materially from those anticipated in these forward-looking statements. Except as required by applicable law, we disclaim any duty to update any forward-looking statement to reflect events or circumstances that occur after the date on which such statement is made. The forward-looking statements included herein are necessarily based on various assumptions and estimates and are inherently subject to various risks and uncertainties, including risks and uncertainties relating to the possible invalidity of the underlying assumptions and estimates and possible changes or developments in economic, business, industry, market, legal and regulatory circumstances and 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. Assumptions related to the foregoing involve judgments with respect to, are subject to various risks and uncertainties, including but not limited to those discussed or incorporated by reference herein. Actual results and the timing of selected events may differ materially from those anticipated in these forward-looking statements as a result of, 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.
Readers are cautioned not to place undue reliance on forward-looking statements. They reflect opinions, assumptions, and estimates only as of the date they were made, and we undertake no obligation to publicly update or revise any forward-looking statements in this prospectus, whether as a result of new information, future events, future circumstances or otherwise, except as required by law.
______________________________
ii
This summary highlights the information contained elsewhere in this prospectus. Because this is only a summary, it does not contain all of the information that you should consider before buying shares of our common stock. You should read the entire prospectus and any prospectus supplements carefully, especially the sections entitled "Cautionary Statement Regarding Forward Looking Statements," "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations," together with our financial statements and the related notes included elsewhere in this prospectus and in any prospectus supplements related thereto, before deciding to purchase shares of our common stock.
MMRGlobal, Inc.
Depending upon the context, the terms "MMRGlobal," "MMR," "Company," "we," "our" and "us," refers to either MMRGlobal, Inc. (formerly known as MMR Information Systems, Inc.) alone, or MMRGlobal, Inc. and its subsidiaries collectively. The term "MMRIS" refers to MyMedicalRecords, Inc., our wholly-owned subsidiary.
Organizational History
MMRGlobal was originally incorporated as Favrille, Inc., or "Favrille," in Delaware in 2000, and before the Merger (as defined below), operated under a different management team as a biopharmaceutical company focused on the development and commercialization of targeted immunotherapies for the treatment of cancer and other diseases of the immune system. In May 2008, Favrille's ongoing Phase 3 registration trial for its lead product candidate failed to show a statistically significant improvement in the treatment of patients with follicular B-cell non-Hodgkin's lymphoma, and accordingly, Favrille decided to sell all of its equipment related to manufacturing of this product, as well as other personal property in an auction. On September 9, 2008, this auction was consummated and Favrille received $3.2 million in net proceeds from the sale of the assets. With the disposition of all of its equipment and other personal property, Favrille ceased to engage in any operations and became a "shell company" as such term is defined in Rule 12b-2 of the Exchange Act.
Agreement and Plan of Merger and Reorganization
On November 8, 2008, Favrille entered into an Agreement and Plan of Merger and Reorganization, or the "Merger Agreement," with its wholly-owned subsidiary Montana Merger Sub, Inc., a Delaware corporation, or the "Merger Sub," and MMRIS, pursuant to which Merger Sub merged with and into MMRIS, with MMRIS continuing as the surviving corporation and a wholly-owned subsidiary of Favrille. We refer to this transaction, which closed on January 27, 2009 and which became effective on February 9, 2009, as the "Merger." Following the Merger, the holders of MMRIS equity prior to the Merger, on a fully diluted basis, owned or had the right to acquire approximately 60.3% of Favrille's equity, the holders of Favrille's equity prior to the Merger, on a fully diluted basis, owned approximately 33.2% of Favrille's equity, and certain beneficiaries under the Creditor Plan (which consist of our former officers and former directors and their affiliates) had the right to own up to approximately 6.5% of Favrille's equity. The Creditor Plan is described in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and a copy is filed as Exhibit 10.5 to our annual report on Form 10-K for the year ended December 31, 2009.
As a result of the Merger, MMRIS became Favrille's wholly-owned subsidiary, its legal name became MyMedicalRecords, Inc. and our status as a "shell company," as such term is defined in Rule 12b-2 of the Exchange Act, ceased. Although Favrille was the legal acquirer, the Merger is accounted for as a reverse acquisition in accordance with U.S. generally accepted accounting principles, or "GAAP." Under this method of accounting, Favrille is treated as the "acquired" company for financial reporting purposes. This determination was primarily based on the fact that MMRIS's former shareholders held a majority of the equity of the consolidated company immediately following the Merger, MMRIS's operations comprise the ongoing operations of the consolidated entity immediately following the Merger and MMRIS's senior management and director designees assumed control of the consolidated company at the time of the Merger. Thus, upon the consummation of the Merger, Favrille became our company (i.e., the Company).
MMRIS was incorporated in Delaware in 2005 and is headquartered in Los Angeles, California.
In connection with the Merger, on February 9, 2009, we changed our legal entity name from Favrille, Inc. to MMR Information Systems, Inc. Subsequently, on June 16, 2010, we changed our legal entity name from MMR Information Systems, Inc. to MMRGlobal, Inc., which we believe more accurately reflects the nature of our operations. On March 8, 2011 we formed a subsidiary, which we named MMR Life Sciences Group, Inc., or "Life Sciences," exclusively to maximize the value of our biotech assets including the company's anti-CD 20 antibodies and related FavID vaccine technologies acquired by MMRIS through the Merger. As of the date of this registration statement, the assets have not been transferred to the subsidiary but we are currently working toward completing such transfer.
1
Our Company and Business Subsequent to the Merger
As of the closing date of the Merger, we adopted MMRIS's business of empowering consumers to manage their Personal Health Records and other important documents, whether paper-based or digital, and by doing so, to better control and organize their lives overall. Starting in 2005, MMR filed patents for a universal Personal Health Record ("PHR") that could be used by any person or any healthcare professional anywhere in the world regardless of the technology on the other end. The Patents are entitled "Methods and System for Providing On-Line Medical Records" and "Methods and System for Providing On-Line Records." Today, we provide patented secure online storage and document management solutions for personal health records and other important documents, such as insurance policies, driver license, IDs, passports, estate planning documents, advance directives and photos, as well as legal and travel documents, amongst others.
The Company expanded its operations and added a line of document storage and management solutions for healthcare professionals, designed to eliminate paper, allow them to operate without dramatically changing the way a medical office operates and allow them to store and share health records with their patients on a real-time basis.
We are also in the business of licensing our intellectual property, which is comprised of biotech assets, including patents, patient samples, anti CD-20 antibodies and others intellectual property, as well as a portfolio of patents pertaining to health information technology.
Our consumer product, "MyMedicalRecords," is an easy-to-use, secure web-based Personal Health Record system, or "PHR," which allows documents, images and voice mail messages to be transmitted in and out of our system using a variety of methods, including fax, voice and file upload, and is not dependent upon any specific electronic medical records, or "EMR," platform. Our system also converts documents it receives by fax into PDF files. Using encryption technology, the system receives these files, as well as voice files and any other uploaded files, including data exported from Telemedicine systems, and stores them in the consumer's personal account, secured by a unique user ID and multiple password combination. A notification is sent to up to three user e-mail addresses (including text-enabled cell and smartphones) whenever a new record is received. Users can then access their files via the Internet and take advantage of an intuitive, customized filing system that allows them to categorize, annotate and file their records for easy access, organization and retrieval. Users can also print, download, e-mail or fax their records from their account, giving our customers greater control over their own Personal Health Records and other information, which they can share with healthcare providers and others as they move through the continuum of care.
We are currently selling our MyMedicalRecords PHR product direct to consumers, to corporations as an employee benefit, physicians, small hospitals, surgery centers and other healthcare professionals, including veterinarians, and to affinity organizations as a "value-added" service for their members or clients. We recently introduced a Prepaid Personal Health Record Card, which the Company plans on offering through retailers. We also sell to insurance companies and plan to sell through financial services organizations in the future. The PHR is offered both via the MyMedicalRecords web site and as a private-label product. When sold to employers and/or affinity groups, the Company counts members as individuals who have received paid access to the MMR system through their employers benefit program or as a member benefit from a respective affinity group. The Company then counts users as the individuals in that member group that activate and commence usage of their individual PHR account. In addition, the MyMedicalRecords PHR is an important component of the MMRPro professional document management and imaging system, which we are selling to physician offices and other healthcare professionals (see section on "MMRPro" for additional information).
Our "MyEsafeDepositBox" service is geared toward small businesses, the financial services, insurance and legal service industries. MyEsafeDepositBox is based on the same technology and architecture as our MyMedicalRecords PHR product. However, rather than focusing on storing medical records, MyEsafeDepositBox is designed to provide secure on-line storage for medical records and vital financial, legal and insurance documents, such as wills and advanced directives. MyEsafeDepositBox.com may be used as a virtual online "safe" and could serve as an essential part of any household's or business's disaster preparedness plan.
In September 2009, we introduced our MMRPro product, which provides physician offices with a powerful and cost-effective solution to the costly and time-consuming challenge of digitizing paper-based medical records, as well as providing doctors the ability to have access to those records through a private portal at MyMedicalRecordsMD.com (go to www.MMRPro.com for more information). MMRPro also features an integrated e-Prescribe automated drug order entry system. In addition, it automatically deploys records that patients can view and print out through a free patient portal, MMRPatientView.com. MMRPro also includes a "stimulus program" that allows doctors the opportunity to earn administrative reimbursements when their patients upgrade from the free MMRPatientView.com portal to a full-featured, paid MyMedicalRecords PHR.
We recognize the critical nature of managing an individual's health information requires that our products and advances be implemented with the utmost care to protect the privacy and confidentiality of our customers' data. The Health Insurance Portability and Accountability Act of 1996, commonly referred to as "HIPAA," requires covered entities to protect the privacy and confidentiality of the protected health information, or PHI, of their patients and customers. Although we are not a covered entity (as that term is defined in HIPAA), we consider it important to take into account the Privacy and Security Standards, and other requirements of HIPAA, when implementing our products and services and believe that we meet and/or exceed current HIPAA standards.
2
The Health Information Technology for Economic and Clinical Health Act, commonly referred to as "HITECH," enacted on February 17, 2009 as part of the American Recovery and Reinvestment Act, expanded HIPAA's reach beyond that of just covered entities. Now, business associates, defined as an entity that performs a function, activity, or service on behalf of a covered entity and that requires use or access to the PHI of the covered entity, and vendors of Personal Health Records that use or access PHI, must also comply with the HIPAA's Security Standards and many of HIPAA's Privacy Standards.
MMR is not a business associate under HIPAA's three-prong test because MMR would not be considered part of a covered entity's workforce (the first prong) and does not "perform a service on behalf of a covered entity" (the second prong), as the beneficiary of the PHR is the patient, not the covered entity, and the covered entity has no obligation to maintain PHRs on its patients (only medical records). Even so, MMR is re-examining its policies and procedures and reviewing its relationships with all necessary parties to ensure compliance with HITECH and its associated regulations. One of the primary goals of HITECH is to ensure that individuals are notified when there has been (or there is a strong possibility of) a breach of the individual's PHI - a requirement that MMR recognizes and fully supports.
We plan to continue to take advantage of the burgeoning consumer health information market and leverage federal legislation, including the HITECH Act. We believe that the healthcare reform legislation passed by Congress and signed by the President into law in March 2010 (the Patient Protection and Affordable Care Act), could represent a significant behavioral shift in how consumers will manage their healthcare because of the requirement that nearly everyone have insurance. The U.S. Supreme Court heard oral arguments challenging the law during the last week of March 2012 but has not yet issued a ruling on the case. Yet, even with the future of the insurance mandate uncertain, we believe health IT, a largely bipartisan issue, will continue to expand to make Personal Health Records an essential part of patients' lives (as a result of the ever present need to achieve cost savings and improved health outcomes). Modernizing the healthcare system also has significant implications for physicians and other healthcare providers, and we expect that as these physicians and healthcare providers look for cost-efficient ways to digitize their patient records, MMRPro will gain continued awareness and acceptance among the medical provider community. We also believe that, as medical costs and insurance costs increase, and benefits decrease, healthcare consumers will require greater control over their personal (and their families') health and health information.
Our MyMedicalRecords PHR product is designed to enable consumers to store their important medical records and data in one central and secure place where they can manage those records and control how they are accessed and shared. The market for the Company's products is significant. While every healthcare consumer in the U.S., as well as those in other countries, interested in managing their family's health using health information technology, are potential users of our MyMedicalRecords PHR product, we believe that the product has most appeal to these particular market niches:
3
Because of the similarity in functionality between our MyMedicalRecords PHR product and our MyEsafeDepositBox product, we market these products through some of the same channels. The crossover marketing strategy for our MyMedicalRecords PHR product and MyEsafeDepositBox product(s) focuses primarily on the following channels:
Our MMRPro product is an integrated, end-to-end service that gives physicians and other healthcare providers, an easy and cost-effective way to scan and digitize patient medical files, manage those files through a virtual patient chart and give patients up-to-date access to those records through an integrated patient portal. MMRPro is being marketed to:
The Company is an Independent Software Vendor of Kodak, which manufactures the scanner and scanning software used in the MMRPro system. As a result, MMR utilizes resources of Kodak distribution channels to sell this product into doctor offices nationwide. The Company has also announced that it is entering into a similar agreement with Fujitsu to provide hardware and software solutions to deploy its professional products and services.
The Company was one of the first Integrated Service Providers on Google Health, which discontinued services effective January 2, 2012 but is allowing existing users to access and migrate their data up until January 1, 2013; however, in 2011, we signed an agreement with Microsoft® HealthVault™ and are planning to integrate our services with their platform during 2012.
We continue to work with scientists, experienced investment bankers, venture capitalists and consultants to assist us in generating revenue through the licensing of our biotech assets, which could include milestone payments, as the term is generally used in the industry. We will also explore partnerships with manufacturers and or investors of and in Biotech products and services.
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, one of our biotech assets. 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, South Korea and Mexico.
The Company has relied upon numerous consultants in its efforts to accelerate bringing to market its anti-CD20 monoclonal antibodies. Anti-CD20 antibodies are useful in treating B-Cell malignancies, including Non-Hodgkin Lymphoma (NHL) and additional B-Cell mediated conditions such as rheumatoid arthritis. The Company understands the anti-CD20 antibody assets are potential candidates for the next generation of a Rituximab-type therapy. Rituximab is marketed under the trade name Rituxan® in the United States by Biogen Idec and Genentech (wholly owned member of the Roche Group) and under the name MabThera® by Roche in the rest of the world except Japan, where it is co-marketed by Chugai and Zenyaku Kogyo Co. Ltd. Rituxan® is one of the world's most successful monoclonal antibodies with US $6.6 billion reported total sales in 2010.
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 related to targeted immunotherapies for cancer and other disease treatments to stimulate a patient's immune response. In consideration for the rights granted under the agreement, Celgene agreed to pay the Company certain upfront fees and milestones payments. When a milestone is reached it automatically triggers a payment to MMR.
For a complete description of our business, please see the section entitled "Our Business."
4
Summary Financial Data
Because this is only a summary of our financial information, it does not contain all of the financial information that may be important to you. Therefore, you should carefully read all of the information in this prospectus and any prospectus supplement, including the financial statements, their explanatory notes and the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations," before making a decision to invest in our common stock. The information contained in the following summary is derived from our financial statements for the three months ended March 31, 2012 and 2011 and the years ended December 31, 2011 and 2010.
Three Months Ended | Years Ended | ||||||||||||
March 31, | December 31, | ||||||||||||
2012 | 2011 | 2011 | 2010 | ||||||||||
Revenues | $ | 172,798 | $ | 571,981 | $ | 1,419,648 | $ | 972,988 | |||||
Cost of revenues | 174,849 | 159,433 | 609,212 | 663,372 | |||||||||
Gross profit (loss) | (2,051) | 412,548 | 810,436 | 309,616 | |||||||||
Other operating expenses | 1,456,387 | 1,681,671 | 7,214,436 | 7,289,021 | |||||||||
Loss from operations | (1,458,438) | (1,269,123) | (6,404,000) | (6,979,405) | |||||||||
Other expenses | (125,763) | (461,269) | (2,480,427) | (10,920,647) | |||||||||
Net loss | $ | (1,584,201) | $ | (1,730,392) | $ | (8,884,427) | $ | (17,900,052) | |||||
Net loss per share: | |||||||||||||
Basic and diluted | $ | 0.00 | $ | (0.01) | $ | (0.03) | $ | (0.08) |
Our Principal Executive Offices
Our principal executive offices are located at 4401 Wilshire Blvd., Suite 200, Los Angeles, California 90010. Our telephone number is (310) 476-7002 and our website address is www.MMRGlobal.com. Information contained on our website does not constitute part of this prospectus.
Market Data and Industry Information
We obtained the market data and industry information contained in this prospectus from internal surveys, estimates, reports and studies, as appropriate, as well as from market research, publicly available information and industry publications. Although we believe our internal surveys, estimates, reports, studies and market research, as well as industry publications, are reliable, we have not independently verified such information, and as such, we do not make any representation as to its accuracy.
5
Summary of the Offering
This prospectus relates to the resale of up to 100,000,000 shares of our common stock by Granite (representing 26.7% of the outstanding shares before the Offering and 21.1% of the outstanding shares following the Offering). Granite will acquire our common stock pursuant to the terms and conditions of the Investment Agreement.
The Investment Agreement with Granite provides that Granite is committed to purchase from us, from time to time, up to $15,000,000 of our common stock over the course of 36 months. We may draw on the Facility from time to time, as and when we determine appropriate in accordance with the terms and conditions of the Investment Agreement. The amount we are entitled to draw in any one notice shall be up to either 1) 200% of the average daily volume of our common stock for the 3 trading days prior to the applicable draw notice date, multiplied by the average of the 3 daily closing prices immediately preceding the draw date, or 2) $500,000. When we draw an amount of the Shares, the per share purchase price that Granite will pay to us in respect to such draw will be determined in accordance with a formula set forth in the Investment Agreement. Generally, with respect to each draw, Granite will pay us a per share purchase price equal to ninety-five percent (95%) of the lowest daily volume weighted average price, or the "VWAP," of our common stock during the five consecutive trading day period beginning on the trading day immediately following the day on which Granite receives our draw notice and ending on and including the date that is four trading days after the date of our draw notice. of the initial number of shares issuable by us and purchasable by Granite under the Facility is 100,000,000 shares , representing 26.7% of the outstanding shares before the Offering and 21.1% of the outstanding shares following the Offering.
Shares of common stock offered by us |
None. |
|
|
Common stock outstanding as of April 23, 2012 |
374,009,083 |
|
|
Shares of common stock offered by the Selling Stockholder |
|
|
|
Shares of common stock outstanding following the Offering: |
474,009,083 |
|
|
Offering Price |
To be determined by the prevailing market price for the shares at the time of the sale or in privately negotiated transactions. |
|
|
Use of proceeds |
We will not receive any proceeds from the sale of shares by the selling stockholder. We will, however, receive proceeds from the sale of shares to Granite under the Facility. We intend to use such proceeds for working capital, reduction of indebtedness, acquisitions and other general corporate purposes. See "Use of Proceeds" for additional information. |
|
|
Risk Factors |
An investment in our common stock is speculative and involves substantial risks. You should read the "Risk Factors" section beginning on page XX of this prospectus for a discussion of certain factors to consider carefully before deciding to invest in shares of our common stock. |
|
|
Plan of Distribution |
The shares of common stock covered by this prospectus may be sold by the selling stockholder in the manner described under "Plan of Distribution." |
|
|
Stock Symbol |
Our common stock is quoted on the OTCQB, the OTC market tier for companies that are reporting with the SEC, under the symbol "MMRF," and on the OTC Bulletin Board, or OTCBB, under the symbol "MMRF.OB." |
6
Investment Agreement
We entered into the Investment Agreement on April 16, 2012. Pursuant to the Investment Agreement, Granite committed to purchase up to $15,000,000 of our common stock over the course of 36 months. The aggregate number of shares issuable by us and purchasable by Granite under the Investment Agreement is 100,000,000.
We may draw on the Facility from time to time, as and when we determine appropriate in accordance with the terms and conditions of the Investment Agreement. The maximum amount that we are entitled to draw in any one notice is either (i) two hundred percent (200%) of the average daily volume (U.S. market only) of our common stock for the three (3) Trading Days prior to the applicable date of a draw notice, multiplied by the average of the three (3) daily closing prices immediately preceding the date of the applicable draw or (ii) five hundred thousand dollars ($500,000). The purchase price shall be set at ninety-five percent (95%) of the lowest daily VWAP of our common stock during the Pricing Period. There are restrictions applied during each Pricing Period. For example, we are not entitled to deliver another draw during any Pricing Period.
There are circumstances under which we will not be entitled to make a draw from Granite, including the following:
There is no guarantee that we will be able to meet the foregoing conditions, any other conditions under the Investment Agreement or that we will be able to draw down any portion of the amounts available under the Investment Agreement.
The registration statement covers 100,000,000 shares of common stock under the Investment Agreement. In order to meet the full allotment of 100,000,000 shares authorized under the Investment Agreement, the Company's common stock would have an assumed VWAP of $0.15 less the 5% discount. Thus, if our share price rises above $0.15 per share, we will not be able to draw down in excess of the $15 million maximum. Likewise, if our share price fails to rise or falls, we are limited to the 100,000,000 shares registered under this registration statement and may not be able to draw the full $15 million.
The net tangible book value per share before and after the distribution, assuming the full $15 million is raised, will be $(0.017) and $0.018, respectively. The amount of the increase in such net tangible book value per share attributable to the cash payments made by Granite will be $0.032. The amount of the immediate dilution from the public offering price which will be absorbed by such purchasers will be $0.06.
The issuance of our shares of common stock under the Investment Agreement will have no effect on the rights or privileges of existing holders of common stock, except that the economic and voting interests of each stockholder will be diluted as a result of the issuance of our shares. Although the number of shares of common stock that stockholders presently own will not decrease, these shares will represent a smaller percentage of our total shares that will be outstanding after any issuances of shares of common stock to Granite. If we draw down amounts under the Investment Agreement when our share price is decreasing, we will need to issue more shares to raise the same amount than if our stock price was higher. Such issuances will have a dilutive effect and may further decrease our stock price. An example of the effect of issuing shares when our stock price is comparatively low is set forth below.
7
Under the Investment Agreement, the purchase price of the shares to be sold to Granite will be at a discount of 5% from the lowest VWAP of our common stock during the Pricing Period. The table below illustrates an issuance of shares of common stock to Granite under the Investment Agreement for a hypothetical draw amount of $50,000 at an assumed VWAP of $0.03.
Draw Down |
|
|
|
|
|
Price to be Paid by |
|
Number of Shares |
Amount |
|
VWAP |
|
% Discount |
|
Granite |
|
to be Issued |
$50,000 |
|
$0.03 |
|
5% |
|
$ 0.029 |
|
1,724,138 |
By comparison, if the VWAP of our common stock was lower than $0.03, the number of shares that we would be required to issue in order to have the same draw down amount of $50,000 would be larger, as shown by the following table:
Draw Down |
|
|
|
|
|
Price to be Paid by |
|
Number of Shares |
Amount |
|
VWAP |
|
% Discount |
|
Granite |
|
to be Issued |
$50,000 |
|
$0.025 |
|
5% |
|
$ 0.024 |
|
2,083,333 |
Accordingly, the difference of the second example outlined above from the first example outlined above, would be dilution of an additional 359,195 shares issued due to the lower stock price. In effect, a lower price per share of our common stock means a higher number of shares to be issued to Granite, which equates to greater dilution of existing stockholders. The effect of this dilution may, in turn, cause the price of our common stock to decrease further, both because of the downward pressure on the stock price that would be caused by a large number of sales of our shares into the public market by Granite, and because our existing stockholders may disagree with a decision to sell shares to Granite at a time when our stock price is low, and may in response decide to sell additional numbers of shares, further decreasing our stock price.
We are limited in the maximum number of shares that we may be required to obtain funds from the Investment Agreement to 100,000,000 shares. The actual number of shares which may be sold under the Investment Agreement is dependent upon our trading volume and share price, which varies from day to day. If we issue and sell all shares under the Facility, our stockholders could experience significant downward pressure on the price of our common stock
We entered into the Investment Agreement with the intention to grow our business, which in turn should increase our value. Because of the nature of the Investment Agreement, it appears unlikely that we will be able to draw down the full $15 million without significant positive value being added as a result of the aggregate draw downs. In addition, as reflected above, if our share price declines significantly and we still desire to draw down on the Investment Agreement, we will have to file one or more additional registration statements.
The Investment Agreement further provides that the Company and Granite are each entitled to customary indemnification from the other for any losses or liabilities we or it suffers as a result of any breach by the other of any provisions of the Investment Agreement, our registration rights agreement with Granite, or as a result of any lawsuit brought by a third-party arising out of or resulting from the other party's execution, delivery, performance or enforcement of the Investment Agreement or the registration rights agreement.
The Investment Agreement also contains representations and warranties of each of the parties. The assertions embodied in those representations and warranties were made for purposes of the Investment Agreement and are subject to qualifications and limitations agreed to by the parties in connection with negotiating the terms of the Investment Agreement. In addition, certain representations and warranties were made as of a specific date, may be subject to a contractual standard of materiality different from what a stockholder or investor might view as material, or may have been used for purposes of allocating risk between the respective parties rather than establishing matters as facts.
Granite further agreed that during the term of the Investment Agreement, neither Granite nor any of its affiliates, nor any entity managed or controlled by it, will, or cause or assist any person to, enter into or execute any short sale of any shares of our common stock as defined in Regulation SHO promulgated under the Exchange Act.
8
Registration Rights Agreement
Pursuant to the terms of a Registration Rights Agreement, dated April 16, 2012, between Granite and us, we are obligated to file one or more registration statements with the SEC to register the resale by Granite of shares of common stock issued or issuable under the Investment Agreement. We are obligated to file with the SEC an initial registration statement on Form S-1 of which this prospectus forms a part by May 7, 2012, covering the resale of the 100,000,000 shares of common stock. We are obligated to use all commercially reasonable efforts to have the initial registration statement declared effective by the SEC within 90 days after the closing date.
RISK FACTORSAn investment in our common stock involves a high degree risk. Before making a decision to invest in shares of our common stock, you should carefully consider the following risk factors, as well as the other information contained in this prospectus. If any of the following risks actually occur, our business, financial condition, results of operations and prospectus could be materially adversely affected. If this were to occur, the trading price of our common stock could decline significantly and you may lose all or part of your investment in our common stock.
Risks Related to Our Business
Risks Related to Our Business
It is anticipated that we will continue to incur losses and negative cash flow from operations for the foreseeable future and our ability to continue is a going concern.
Historically, we have generated only minimal revenue. While our business includes personal healthcare record and storage products that are currently available, we are nevertheless still at an early stage in developing a business model that will enable us to generate significant revenue from the use of our products. Prior to the Merger, MMR financed its operations primarily through private placements of MMR capital stock and from secured loans from The RHL Group, Inc., a wholly-owned affiliate of MMR's founder and Chief Executive Officer, and our current Chairman, President and Chief Executive Officer, Robert H. Lorsch. Although we expect to continue to receive financing from The RHL Group, we have also continued to incur losses from operations and need additional sources of financing to fund our operations until we develop a profitable business. Even with additional funds from The RHL Group, there is no assurance that we will be able to generate sufficient revenue and working capital to fund our operations and create a sustainable going concern. As a result, it is expected that we will continue to incur operating losses for the foreseeable future.
If we fail to obtain additional financing, we will be unable to fund our operations.
We expect that the cash used in our operations will increase for the next several years. As of December 31, 2011, the Company's current liabilities exceeded its current assets by $6.6 million. Furthermore, during the year ended December 31, 2011, the Company incurred losses of $8.9 million, of which $4.5 million was non-cash related. At the current level of borrowing, the Company requires cash of $275,000 per year to service its debt. Furthermore, not including debt service, in order to continue operating its business, the Company uses an average of $278,000 cash per month, or $3.3 million per year. In addition to the above cash burn from operations, the Company 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 subordinated secured indebtedness to The RHL Group (which note payable had a balance of $1,574,312 at December 31, 2011), among other debt obligations. Such obligations are currently due and payable pursuant to the terms of the note. At this rate of cash burn, over the next twelve months, our existing current assets will sustain our business for approximately three to six months.
Although we generate some cash from our operations, we will need additional financing in order to fund operations until we can become cash flow positive, which is not expected to occur in the foreseeable future. For a description and copy of the Creditor Plan see Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" below and Exhibit 10.5.
Other than to meet the Creditor Plan obligations, our future funding requirements will depend on many factors, including:
9
If additional debt financing is raised in the future, we may be required to grant lenders a security interest in all or a portion of our assets and issue warrants to acquire our equity securities, resulting in dilution to our stockholders. In addition, any such debt financing may involve restrictive covenants, including limitations on our ability to incur additional debt, limitations on our ability to acquire or assign intellectual property rights and other operating restrictions that could adversely impact our ability to conduct our business. Further, our ability to raise funding through the sale of equity securities will be significantly limited by our existing authorized but unissued common stock. Following the Merger, we have a limited amount of available common stock and any changes to our certificate of incorporation to increase our authorized share capital would require a vote of our stockholders, which could be time consuming and costly to obtain.
Future additional funding may not be available on acceptable terms, or at all. If we are unable to raise additional capital when required or on acceptable terms, then we may have to significantly delay, scale back or discontinue the development or commercialization of one or more of our products.
We have been, and may continue to be, unable to generate sufficient cash flow to service our debt obligations.
Our ability to make payments on our indebtedness and to fund our operations, working capital and capital expenditures, depends on our ability to generate cash in the future, which is subject to our ability to execute on our business plan, and also to general economic, industry, financial, competitive, operating, and other factors that are beyond our control.
MMR has a secured credit facility with The RHL Group, with all outstanding amounts due thereunder being guaranteed by us. As of December 31, 2011, the aggregate principal amount owed under The RHL Group credit facility was approximately $1,574,312.
As of December 31, 2011, we owed an aggregate of approximately $1,254,681 in principal amount to certain of our former employees and creditors, as evidenced by promissory notes issued to the same in connection with the Merger. We are obligated to make 18 monthly payments to such employees and creditors beginning August 2, 2009. We have not yet made any of the payments due and payable to such employees and creditors, and thus they are entitled to exercise such rights as may be available to them under applicable law.
We cannot assure you that our business will generate sufficient cash flow from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay amounts due on our existing indebtedness or to fund our other liquidity needs. Thus, we may need to refinance all or a portion of our indebtedness on or before maturity. Our ability to refinance our indebtedness or obtain additional financing will depend on, among other things:
As a result, we may not be able to refinance any of our indebtedness on commercially reasonable terms, or at all. If we do not generate sufficient cash flow from operations, and additional borrowings or refinancings or other proceeds are not available to us, we may not have sufficient cash to enable us to meet all of our obligations, thereby potentially rendering us insolvent.
The level of our indebtedness could adversely affect our financial condition.
We have significant debt service obligations. As of December 31, 2011, the aggregate principal amount owed under all of our outstanding debt was approximately $2.6 million. The level of our indebtedness could have important consequences. For example, it could:
We are a company with limited operating history and currently have only a small management team and staff, which could limit our ability to effectively seize market opportunities and grow our business.
Our operations are subject to all of the risks inherent in a growing business enterprise, including the likelihood of operating losses. As a smaller company with a limited operating history, our success will depend, among other factors, upon how we manage the problems, expenses, difficulties, complications and delays frequently encountered in connection with the growth of a new business, products and channels of distribution, and current and future development, as well as in the competitive emerging healthcare records management business.
10
In addition, as a company with a limited operating history we have only a small management team and staff to grow our business and manage the risks inherent in a growing business enterprise. These factors could limit our ability to effectively seize market opportunities and grow our business.
Any significant limitation or failure of our technology systems that are critical to our operations could constrain our operations.
We are highly dependent upon the use of third-party technology systems to operate our business. Any failures in these systems could disrupt our business and subject us to losses. Moreover, although we have in place certain disaster recovery plans and backup servers, we may experience system delays and interruptions as a result of natural disasters, power failures, acts of war, and third-party failures. Potential system failures and the cost necessary to address them could result in material financial loss or costs, regulatory actions, breach of client contracts, reputational harm or legal claims and liability, which in turn could negatively impact our business prospects, results of operations and financial condition.
We may not be able to continue to maximize our legacy biotechnology assets or protect our proprietary rights, which may hurt our competitive position and future revenues.
We will only be able to protect our proprietary rights from unauthorized use by third parties to the extent that these rights are covered by valid and enforceable patents or are effectively maintained as trade secrets and are otherwise protectable under applicable law. We will attempt to protect our proprietary position by filing and maintaining U.S. and foreign patent applications related to our proprietary products, technology, inventions and improvements that are important to the development of our business.
The patent positions of biotechnology and biopharmaceutical companies involve complex legal and factual questions and, therefore, enforceability cannot be predicted with certainty. Patents, if issued, may be challenged, invalidated or circumvented. Thus, any patents that we own or license from third parties for future products may not provide any protection against competitors. Pending patent applications we may file in the future, or those we may license from third parties, may not result in patents being issued. Also, patent rights may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, others may independently develop similar technologies or duplicate any technology that we have developed or we will develop. The laws of some foreign countries may not protect our intellectual property rights to the same extent as do the laws of the United States.
In addition to patents for future and current products, we own a substantial portfolio of assets acquired from Favrille, including data, samples, and other intellectual property rights. We currently seek protection for these assets, in part, through confidentiality and proprietary information agreements. These agreements may not provide meaningful protection or adequate remedies for proprietary technology in the event of unauthorized use, transfer or disclosure of confidential and proprietary information. The parties may not comply with or may breach these agreements. Furthermore, our trade secrets may otherwise become known to, or be independently developed by, competitors.
Our success will further depend, in part, on our ability to operate without infringing the proprietary rights of others. If our activities infringe on patents owned by others, we could incur substantial costs in defending ourselves in suits brought against a licensor or us. Should our products or technologies be found to infringe on patents issued to third parties, the manufacture, use and sale of our products could be enjoined, and we could be required to pay substantial damages. In addition, we, in connection with the development and use of our products and technologies, may be required to obtain licenses to patents or other proprietary rights of third parties, which may not be made available on terms acceptable to us.
We are highly dependent on our Chief Executive Officer and the loss of him could have a material adverse effect on our business and results of operations. Further, we may not be able to attract qualified officers to replace him or other key management personnel necessary to grow our business.
We are highly reliant on the services of our Chief Executive Officer, Robert H. Lorsch. If Mr. Lorsch left, it could have a material adverse effect on our business and results of operations. Further, we must continue to hire experienced managers to continue to grow our business. As a company with limited operating history, we may have difficulty attracting and retaining new individuals. If we are not successful in attracting management, it could have a material adverse effect on our ability to grow our business, which would adversely affect our results of operations and financial condition.
We face substantial competition.
While we believe that our MyMedicalRecords products occupies a unique niche in the marketplace, other companies offer similar services that compete for subscriber enrollment and healthcare professionals from the same patient and physician population, and could compete more directly with us by developing processes and technology functionally similar to those that form our MyMedicalRecords products. MMRPro competes with scanning services that market their services to doctors seeking to convert their historical paper records into electronic files, as well as Electronic Medical Record systems. MMRPro also competes with EMR systems that offer doctors the opportunity to make their entire office paperless. Most of these competitors are larger, more deeply funded companies. To the extent they have more success in obtaining market share and customer acceptance of their products, it could have a negative effect on our ability to grow our business, which could have a material adverse effect on our results of operations and financial condition.
11
Our growth will depend on our ability to develop our brand and any failure to do so could limit our business prospects, which could have a material adverse effect on our results of operations and financial condition.
We believe that establishing a strong brand will be critical to achieving widespread acceptance and adoption of our products and services. Promoting and positioning our brand will depend largely on the success of our marketing efforts, distribution channels and ability to provide high quality service. Establishing a significant brand presence for an on-line company often requires substantial marketing investment, and many "dot.com" companies have failed to generate the necessary adoption rates even after such a process. Brand promotion activities may not yield increased revenues, and even if they do, any increased revenues may not offset the expenses we incur in building the MyMedicalRecords brand. If we are not successful in building the MyMedicalRecords brand, it could limit our business prospects, which could have a material adverse effect on our results of operations and financial condition.
The handling of medical records is highly regulated. Not only could we be subject to substantial liability for mishandling records if we fail to comply with applicable requirements or if third-parties gain unauthorized access to records or servers but our products may need constant revisions or modifications to comply with an increasingly complex regulatory regime.
The proper handling of health information, what is included in a patient's medical records is subject to extensive state and federal regulations and legal requirements, and we anticipate incurring significant costs to keep informed of and in compliance with such regulations and requirements. The volume and complexity of the regulations is daunting and many have changed substantially in recent years and all are subject to the uncertainties of interpretation.
We recognize the critical nature of managing an individual's health information requires that our products and advances be implemented with the utmost care to protect the privacy and confidentiality of our customers' data. The Health Insurance Portability and Accountability Act of 1996, commonly referred to as HIPAA, requires covered entities to protect the privacy and confidentiality of the protected health information, or PHI, of their patients and customers. Although we are not a covered entity (as that term is defined in HIPAA), we consider it important to take into account the Privacy and Security Standards and other requirements of HIPAA when implementing our products and services and believe that we meet and/or exceed current HIPAA standards.
The Health Information Technology for Economic and Clinical Health Act, commonly referred to as HITECH, enacted on February 17, 2009 as part of the American Recovery and Reinvestment Act, expanded HIPAA's reach beyond that of just covered entities. Now, business associates, defined as an entity that performs a function, activity, or service on behalf of a covered entity and that requires use or access to the PHI of the covered entity, and vendors of Personal Health Records that use or access PHI, must also comply with the HIPAA's Security Standards and many of HIPAA's Privacy Standards. One of the key obligations under HITECH is the requirement to notify individuals when there has been (or there is a strong possibility of) a breach of the individual's PHI.
Further, our products and services may become subject to greater regulation, particularly at the federal level. We may have to reduce, enhance or remove certain offerings to comply with new regulatory standards. If we are not able to effectively modify our product and service offerings to adapt to stricter standards, it could have a material adverse effect on our ability to grow our business and our results of operations and financial condition.
Because of the types of agreements that we enter into with our customers for our products, there is a time lag between the date of the agreement or license and product launch and revenue generation, which may be significant.
In the ordinary course of our business, we enter into agreements with certain customers that typically provide for customization of our product. The degree of customization can vary from simple modifications required to co-brand to highly tailored product modifications, which require significant development efforts on our part. Because these customer arrangements typically do not provide for payment of revenues until product launch, there is often a time lag between the date we enter into an agreement or license with a particular customer and when we begin generating revenues. This time lag can be significant in some cases a year or longer especially when there is a high degree of customization or translation involved requiring extensive product development efforts. Thus, even if we are successful in negotiating agreements and licenses with many customers to co-brand or private label our products for such customers, because of the nature of our arrangements with our customers, there is a risk that it may be some time before we generate revenues from such arrangements, if at all.
Third parties claiming that we infringe their proprietary rights could cause us to incur significant legal expenses and prevent us from selling our products.
The software and Internet industries are characterized by the existence of a large number of patents, trademarks and copyrights and by frequent litigation based on allegations of patent infringement or other violations of intellectual property rights. In addition to our biotechnology assets, as we expand our product offerings into areas where larger companies with large patent portfolios compete, the possibility of an intellectual property claim against us grows. We could receive claims that we have infringed the intellectual property rights of others, including claims regarding patents, copyrights and trademarks. Any such claim, with or without merit, could result in costly litigation and distract management from day-to-day operations. If we are not successful in defending such claims, we could be required to stop selling our products, pay monetary amounts as damages, enter into royalty or licensing arrangements, or satisfy indemnification obligations that we have with some of our customers.
12
Our executive officers and directors may have interests that are different from, or in addition to, those of our stockholders generally.
Our executive officers and directors may have interests that are different from, or are in addition to, those of our stockholders generally. These interests include having subordinated debt with a balance of $1,574,312 at December 31, 2011 secured by a security interest in substantially all of our assets, the provision and continuation of indemnification and insurance arrangements for our directors, as well as certain other interests described elsewhere in this prospectus. Notably, our current President, Chairman and Chief Executive Officer, Robert H. Lorsch, may be deemed to beneficially control a total of 31.8% of our voting capital stock, as of December 31, 2011, including shares issuable upon exercise of options and warrants held by Mr. Lorsch and The RHL Group. Because of his high percentage of beneficial ownership, Mr. Lorsch may be able to control matters requiring the vote of stockholders, including the election of our board of directors and certain other significant corporate actions. This control could delay, defer or prevent others from initiating a potential merger, takeover or other change in our control, even if these actions would benefit our other stockholders and us. This control could adversely affect the voting and other rights of our stockholders and could depress the market price of our common stock.
Risks Related to Our Common Stock
Investors who purchase shares of our common stock should be aware of the possibility of a total loss of their investment.
An investment in our common stock involves a substantial degree of risk. Before making an investment decision, you should give careful consideration to the risk factors described in this section in addition to the other information contained in this prospectus. The risk factors described herein, however, may not reflect all of the risks associated with our business or an investment in our common stock. You should invest in our Company only if you can afford to lose your entire investment.
Our current management holds significant control over our common stock and they may be able to control our Company indefinitely.
Our management has significant control over our voting stock which may make it difficult to complete some corporate transactions without their support and may prevent a change in control. As of April 23, 2012, our directors and executive officers as a whole, may beneficially own approximately 85,884,688 shares or 23% of our outstanding common stock, assuming that the warrants and options (exercisable as of 60 days from April 23, 2012) were exercised. Certain of our officers and directors disclaim beneficial ownership of certain shares included in the description above. The above-described significant stockholders may have considerable influence over the outcome of all matters submitted to our stockholders for approval, including the election of directors. In addition, this ownership could discourage the acquisition of our common stock by potential investors and could have an anti-takeover effect, possibly depressing the trading price of our common stock.
Our stock price is expected to continue to be volatile, and the market price of our common stock may drop further.
The market price of our common stock could continue to be subject to significant fluctuations. Moreover, the stock markets in general have experienced substantial volatility that has often been unrelated to the operating performance of individual companies. These broad market fluctuations may also adversely affect the trading price of our common stock. In the past, following periods of volatility in the market price of a company's securities, stockholders have often instituted class action securities litigation against those companies. Such litigation, if instituted, could result in substantial costs and diversion of management attention and resources, which could significantly harm our operating results, financial condition, profitability and/or reputation.
We do not expect to pay cash dividends, and accordingly, stockholders must rely on stock appreciation for any return on their investment.
We anticipate that we will retain our earnings, if any, for future growth and therefore do not anticipate paying cash dividends in the future. As a result, only appreciation of the price of our common stock will provide a return to stockholders. Investors seeking cash dividends should not invest in our common stock.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws, each as amended to date, and applicable Delaware law may prevent or discourage third parties or our stockholders from attempting to replace our management or influence significant decisions.
Provisions in our amended and restated certificate of incorporation and amended and restated bylaws may have the effect of delaying or preventing a change in control of our company or our management, even if doing so would be beneficial to our stockholders. These provisions include:
13
We are also subject to provisions of the Delaware corporation law that, in general, prohibit any business combination with a beneficial owner of 15% or more of our common stock for three years unless the holder's acquisition of our stock was approved in advance by our Board of Directors. Together, these charter and statutory provisions could make the removal of management more difficult and may discourage transactions that otherwise could involve payment of a premium over prevailing market prices for our common stock.
There is currently a limited trading market for our common stock, which may limit our stockholders' ability to sell shares of our stock.
Our common stock is currently quoted on the OTCQB and the OTC Bulletin Board, or OTCBB. Because of the limited trading volume on the on the OTCQB and OTCBB of our common stock and the penny stock regulations described below, our investors may not be able to sell their shares due to the absence of a trading market.
We are subject to penny stock regulations and restrictions, which could make it difficult for stockholders to sell their shares of our stock.
SEC regulations generally define "penny stocks" as equity securities that have a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. We do not fall within any exemptions from the "penny stock" definition and are subject to Rule 15g-9 under the Exchange Act, which regulations are commonly referred to as the "Penny Stock Rules." The Penny Stock Rules impose additional sales practice requirements on broker-dealers prior to selling penny stocks, which may make it burdensome to conduct transactions in our shares. Accordingly, it may be difficult to sell shares of our stock, and because it may be difficult to find quotations for shares of our stock, it may be impossible to accurately price an investment in our shares. In addition to the Penny Stock Rules, we are unable to utilize the safe harbor provisions of the Forward Looking Statements sections of the Exchange Act. There can be no assurance that our common stock will qualify for an exemption from the Penny Stock Rules in the future. In any event, we are subject to Section 15(b)(6) of the Exchange Act, which gives the SEC the authority to restrict any person from participating in a distribution of a penny stock if the SEC determines that such a restriction would be in the public interest.
The Financial Industry Regulatory Authority, or FINRA, sales practice requirements may also limit a stockholder's ability to buy and sell our stock.
In addition to the Penny Stock Rules described above, FINRA has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low-priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, FINRA believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. FINRA requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares.
A significant amount of our issued and outstanding shares of common stock are restricted securities and may not be freely resold to the public. When the restriction on any or all of these shares is lifted, and the shares are sold in the open market, the price of our common stock could be adversely affected.
A significant amount of our issued and outstanding shares of common stock are "restricted securities" as defined under Rule 144 promulgated under the Securities Act of 1933, as amended, and may only be sold pursuant to an effective registration statement or an exemption from registration, if available. Although Rule 144 may not be immediately available to permit resale of such shares, once available, and given the number of shares that would no longer be restricted, sales of shares by our shareholders, whether pursuant to Rule 144 or otherwise, could have an immediate negative effect upon the price of our common stock.
When we issue additional shares in the future, it will likely result in the dilution of our existing stockholders.
Our certificate of incorporation authorizes the issuance of up to 650,000,000 shares of common stock with a $0.001 par value and 5,000,000 preferred shares with a par value of $0.001. As of April 23, 2012, 374,009,083 common shares were issued and outstanding and no shares of preferred stock were issued and outstanding. If we issue any additional shares, such issuance will cause a reduction in the proportionate ownership and voting power of all current stockholders. Further, such issuance may result in a change of control of our corporation.
14
Moreover, in the past, we issued warrants and options to acquire shares of common stock. As of April 23, 2012, we had warrants, options and convertible notes to purchase an aggregate of 123,448,741 shares of our common stock. In addition, the issuance of any shares for acquisition, licensing or financing efforts, upon conversion of any preferred stock or exercise of warrants and options, pursuant to our equity compensation plans, or otherwise may result in a reduction of the book value and market price of the outstanding shares of our common stock.
Risks Related to this Offering
We are registering the resale of up to 100,000,000 shares of common stock which may be issued to Granite under the Facility. The resale of such shares by Granite could depress the market price of our common stock and you may not be able to sell your investment for what you paid for it.
We are registering the resale of up to 100,000,000 shares of common stock under the registration statement of which this prospectus forms a part. We may issue up to 100,000,000 shares to Granite pursuant to the Facility. As of April 23, 2012, there were 374,009,083 shares of our common stock issued and outstanding. The sale of these shares into the public market by Granite could depress the market price of our common stock and you may not be able to sell your investment for what you paid for it.
Existing stockholders could experience substantial dilution upon the issuance of common stock pursuant to the Facility.
This prospectus relates to the resale of up to 100,000,000 shares of our common stock by Granite. As of April 23, 2012, we had 374,009,083 shares outstanding. The sale by Granite of all shares pursuant to this prospectus would result in a substantial dilution to our stockholders' current ownership.
Furthermore, the Investment Agreement contemplates our issuance of up to 100,000,000 shares of our common stock to Granite, subject to certain restrictions and obligations. If the terms and conditions of the Investment Agreement are satisfied, and we choose to exercise our draw rights to the fullest extent permitted and sell 100,000,000 shares of our common stock to Granite, our existing stockholders' ownership will be further diluted by such sales. Consequently, the value of your investment may decrease.
Granite will pay less than the then-prevailing market price for our common stock under the Facility.
The common stock to be issued to Granite pursuant to the Investment Agreement will be purchased at a 5% discount to the lowest daily volume weighted average price, VWAP, of our common stock during the five consecutive trading day period beginning on the trading day immediately following the date of delivery of a draw notice by us to Granite, subject to certain exceptions. Therefore, Granite has a financial incentive to sell our common stock upon receiving the shares to realize the profit equal to the difference between the discounted price and the market price. If Granite sells the shares, the price of our common stock could decrease.
We may not be able to access sufficient funds under the Facility when needed.
Our ability to make a draw from Granite and obtain funds under the Facility is limited by the terms and conditions in the Investment Agreement, including restrictions on when we may exercise our draw rights, restrictions on the amount we may draw from Granite at any one time, which is determined in part by the trading volume of our common stock, and a limitation on our ability to make a draw from Granite to the extent that it would cause Granite to beneficial own more than 4.99% of our common stock. Accordingly, the Facility may not be available to satisfy all of our funding needs, even if we are able and choose to take full advantage of the Facility.
15
We will not receive any proceeds from the resale of our common stock offered by Granite. However, we will receive proceeds from the sale of our common stock to Granite pursuant to the Investment Agreement. The proceeds from our draws under the Facility will be used to support the commercialization of our current and future product candidates, for general working capital needs, and for other purposes that our board of directors, in its good faith, deems to be in our best interest.
All net proceeds from the sale of the common stock covered by this prospectus will go to the selling stockholder. See "Selling Stockholder" and "Plan of Distribution" described below.
SELLING STOCKHOLDERThe information provided in the table and discussions below has been obtained from Granite, the selling stockholder. The table below identifies the selling stockholder and shows the number of shares of common stock beneficially owned by it before and after this offering, and the numbers of shares offered for resale by the selling stockholder. Our registration of these shares does not necessarily mean that the selling stockholder will sell all or any of their shares of common stock. However, the "Shares Beneficially Owned After Offering" columns in the table assume that all shares covered by this prospectus will be sold by the selling stockholder and that no additional shares of common stock will be bought or sold by the selling stockholder. No estimate can be given as to the number of shares that will be held by the selling stockholder after completion of this offering because the selling stockholder may offer some or all of the shares and, to our knowledge, there are currently no agreements, arrangements or understanding with respect to the sale of any of the shares. In addition, the selling stockholder may have sold, transferred or otherwise disposed of, or may sell, transfer or otherwise dispose of, at any time or from time to time since the date on which it provided the information regarding the shares, all or a portion of the shares of common stock beneficially owned in transactions exempt from the registration requirements of the Securities Act. As used in this prospectus, "selling stockholder" includes the person or persons listed in the table below, and the donees, pledgees, transferees or other successors-in-interest selling shares received from the named selling stockholder as a gift, pledge, distribution or other transfer.
The following table sets forth the name of the selling stockholder, and if applicable, the nature of any position, office, or other material relationship which the selling stockholder has had, within the past three years, with us or with any of our predecessors or affiliates, the amount of shares of our common stock beneficially owned by the stockholder prior to the offering, the amount being offered for the stockholder's account, and the amount to be owned by such stockholder after completion of the offering. Beneficial ownership is determined in accordance with Rule 13d-3(d) promulgated by the Securities and Exchange Commission under the Exchange Act, and generally includes voting or investment power with respect to securities. The number and percentage of shares beneficially owned is determined in accordance with Rule 13d-3 of the Exchange Act and is not necessarily indicative of beneficial ownership for any other purpose. Applicable percentage ownership is based on 374,009,083 shares of common stock outstanding as of April 23, 2012. Except as otherwise noted, we believe that the stockholder named in the table has sole voting and investment power with respect to all shares of common stock shown as beneficially owned by it, subject to applicable community property laws.
|
|
Shares Beneficially Owned |
|
|
|
Shares Beneficially Owned |
||||
Beneficial Owner |
|
Ownership |
|
Percentage |
|
Shares
Being |
|
Number of |
|
Percentage |
Granite State Capital, LLC (2) |
|
1,000,000 |
|
* |
|
100,000,000 |
(3) |
1,000,000 |
|
* |
_____________
* Percentage of shares owned does not exceed one percent.
(1) This column assumes the selling stockholder sells all of its shares being offered pursuant to this prospectus.
(2) Granite State Capital, LLC is a Delaware limited liability company. Theodore Smith is the president of Granite with voting and investment power over the shares.
(3) Represents the maximum number of shares issuable by us and purchasable by Granite under the Investment Agreement, all of which are being offered by the selling stockholder under this prospectus.
16
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock was traded on The Nasdaq Global Market under the symbol "FVRL" from our initial public offering until our delisting on October 3, 2008. On October 3, 2008, our common stock began trading over-the-counter on the OTC Bulletin Board under the symbol "FVRL.OB". Following the Merger, we changed our name from Favrille, Inc. to MMR Information Systems, Inc. In conjunction with the name change, we changed our stock symbol to "MMRF." Our common stock is quoted on the OTCQB, the OTC market tier for companies that are reporting with the SEC, under the symbol "MMRF," and on the OTC Bulletin Board, or OTCBB, under the symbol "MMRF.OB." On June 15, 2010, we changed our name to MMRGlobal, Inc.
Holders
As of December 31, 2011, we had approximately 3,111 stockholders, including beneficial owners of the common stock whose shares are held in the names of various dealers, clearing agencies, banks, brokers and other fiduciaries, which includes an additional 161 registered stockholders of record as a result of the Merger.
Price Range
The market for our common stock is limited and volatile. The following table sets forth the range of high and low high and low closing prices for our common stock for each of the periods indicated as reported by the OTC Bulletin Board. The prices quoted below reflect inter-dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transaction prices.
High |
Low |
||||
2011 |
|||||
January 1, 2011 - March 31, 2011 |
0.095 |
0.057 |
|||
April 1, 2011 - June 30, 2011 |
0.067 |
0.029 |
|||
July 1, 2011 - September 30, 2011 |
0.047 |
0.029 |
|||
October 1, 2011 - December 31, 2011 |
0.054 |
0.026 |
|||
2010 |
|||||
January 1, 2010 - March 31, 2010 |
0.170 |
0.079 |
|||
April 1, 2010 - June 30, 2010 |
0.320 |
0.129 |
|||
July 1, 2010 - September 30, 2010 |
0.155 |
0.070 |
|||
October 1, 2010 - December 31, 2010 |
0.098 |
0.060 |
Dividends
We have never declared or paid any cash dividends on our capital stock. We currently intend to retain all of our future earnings, if any, to finance the growth and development of our business. We do not intend to pay cash dividends on our common stock for the foreseeable future. Any future determination related to dividend policy will be made at the discretion of our Board of Directors.
17
Securities Authorized for Issuance Under Equity Compensation Plans
The following table sets forth certain information with respect to our equity compensation plans as of April 23, 2012.
Equity Compensation Plan Information | ||||||||
Plan category |
Number of securities to be issued upon exercise of outstanding options, warrants and rights |
Weighted-average exercise price of outstanding options, warrants and rights |
Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) |
|||||
(a) | (b) | ( c ) | ||||||
Equity compensation plans approved by security holders | 13,834,557 | $ | 0.13 | - | (1) | |||
Equity compensation plans not approved by security holders | 4,400,000 | $ | 0.07 | 22,600,000 | (2) | |||
Total | 18,234,557 | $ | 0.23 | 22,600,000 | ||||
(1) These options were issued under the 2001 Equity Incentive Plan. The 2001 Plan expired in June 5, 2011, therefore no further shares of Common Stock are reserved for issuance under this plan. | ||||||||
(2) Includes a total of 27 million shares of our Common Stock reserved for issuance under the 2011 Equity Incentive Plan, for which the Company is seeking stockholder approval. |
18
Organizational History
MMRGlobal Inc. (referred to herein, unless otherwise indicated, as "MMR", "MMRIS," the "Company," "we," "us," and "our") was originally incorporated as Favrille, Inc. ("Favrille") in Delaware in 2000, and since its inception and before the Merger (as defined below), operated under a different management team as a biopharmaceutical company focused on the development and commercialization of targeted immunotherapies for the treatment of cancer and other diseases of the immune system. In May 2008, our ongoing Phase 3 registration trial for our lead product candidate failed to show a statistically significant improvement in the treatment of patients with follicular B-cell non-Hodgkin's lymphoma, and accordingly, we determined to sell all of our equipment related to manufacturing of this product, as well as other personal property in an auction. On September 9, 2008, this auction was consummated and we received $3.2 million in net proceeds from the sale of the assets. With the disposition of all of our equipment and other personal property, we ceased to engage in any operations and became a "shell company" as such term is defined in Rule 12b-2 of the Exchange Act.
Agreement and Plan of Merger and Reorganization
On November 8, 2008, we entered into an Agreement and Plan of Merger and Reorganization, or the Merger Agreement, with our wholly-owned subsidiary Montana Merger Sub, Inc., or the Merger Sub, a Delaware corporation, and MMR, pursuant to which Merger Sub would merge with and into MyMedicalRecords.com, Inc. ("MMR"), a private company formed in January 19, 2005, whose primary purpose was to create a Personal Health Record product with a telecommunications backbone and infrastructure, with MMR continuing as the surviving corporation and a wholly-owned subsidiary of our company. We refer to this transaction, which closed on January 27, 2009 and which became effective on February 9, 2009, as the Merger. Following the Merger, the holders of MMR equity prior to the Merger, on a fully diluted basis, owned or had the right to acquire approximately 60.3% of our equity, the holders of our equity prior to the Merger, on a fully diluted basis, owned approximately 33.2% of our equity, and certain beneficiaries under the Creditor Plan (which consist of our former officers and former directors and their affiliates) had the right to own up to approximately 6.5% of our equity. The Creditor Plan is described in Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" and filed as Exhibit 10.1on our report on Form 8-K filed on November 13, 2008.
As a result of the Merger in January 2009, MMR became our wholly-owned subsidiary and its legal name became MyMedicalRecords, Inc. Although we are the legal acquirer, the Merger is accounted for as a reverse acquisition in accordance with U.S. generally accepted accounting principles, or GAAP. Under this method of accounting, Favrille was treated as the "acquired" company for financial reporting purposes. This determination was primarily based on: the fact that MMR's former shareholders held a majority of the equity of the consolidated company, MMR's operations comprise the ongoing operations of the consolidated entity, and MMR's senior management and director designees assumed control of the consolidated company.
In addition, upon the closing of the Merger on January 27, 2009, MMR became our wholly-owned operating subsidiary and we ceased being a "shell company" as such term is defined in Rule 12b-2 of the Exchange Act.
On February 9, 2009, and in connection with the Merger, the Company changed its legal entity name from Favrille, Inc. to MMRGlobal, Inc. Subsequently, on June 16, 2010, the Company changed its legal entity name to MMRGlobal, Inc., which we believe more accurately reflects the nature of our operations.
On March 8, 2011 we formed a subsidiary, which we named MMR Life Sciences Group, Inc., exclusively to maximize the value of our biotech assets including the company's anti-CD 20 antibodies and related FavID™ vaccine technologies acquired by MyMedicalRecords, Inc. through the merger with Favrille. As of this date the assets have not been transferred to the subsidiary but we are in the process to do so.
Our Company and Business Subsequent to the Merger
As of the closing date of the Merger, we adopted MMR's business of empowering consumers to manage their Personal Health Records and other important documents, whether paper-based or digital, and by doing so, to better control and organize their lives overall. Starting in 2005, MMR filed patents for a universal Personal Health Record ("PHR") that could be used by any person or any healthcare professional anywhere in the world regardless of the technology on the other end. The patents are entitled "Methods and System for Providing Online Medical Records" and `"Methods and System for Providing Online Records." Today, we provide patented secure online storage and document management solutions for Personal Health Records and other important documents such as insurance policies, driver's license, IDs, passports, estate planning documents, advance directives, photos, as well as legal and travel documents among others.
The Company expanded its operations and added a line of document storage and management solutions for healthcare professionals, designed to eliminate paper, allow them to operate without dramatically changing the way a medical office operates and allow them to store and share health records with their patients on a real-time basis.
19
We are also in the business of licensing our intellectual property which is comprised of biotech assets including patents, patient samples, anti-CD20 antibodies and others intellectual property as well as a portfolio of patents pertaining to health information technology. As a result of these licensing activities, we have signed Licensing Agreements for more than $40 million to date. More than $15 million of it pertains to biotech and $30 million to the Settlement and Patent License Agreement with Surgery Center Management, LLC, which is discussed in further detail in the "Customers" section.
Business Overview
The following description of our business relates to our current business and operations.
We offer a suite of secure, online products that empower consumers and professionals alike to manage medical records and other important documents in their life and business, whether paper-based or digital. These online products include: (i) Our Patented MyMedicalRecords.com, an on-line Personal Health Record (PHR) secure system for the entire family including pets; (ii) Our Patented MyEsafeDepositBox, an on-line secure document storage system; (iii) Our Patented MMRPro, an integrated scanning and web-based document management solution for medical providers; and (iv) numerous private label PHR and MyEsafeDepositBox storage solutions including MyBlueButton.com for veterans to upload their health information from their HealtheVet account into an MMR account, NRAeSafe, Chartis Insurance, MedicAlert, E-Mail Frequency LLC and others. Through our product offerings, we are part of a growing trend in which people are increasingly trusting on-line services as a way for them to store and manage critical, sensitive information such as medical records, financial records and vital documents.
In late 2009, we released our electronic document storage and management system for healthcare professionals, particularly small to mid-size physician practices that are still largely or entirely paper-based, Our professional solution, which we refer to as MMRPRo, incorporates an integrated patient portal accessible through www.mmrpatientview.com in response to the need to provide patients with timely access to their medical records. In 2010 we added the MMR Stimulus Program to the MMRPro product offerings which helps healthcare professionals recoup some or all of the cost of managing patient's Personal Health Records. Videos on our products can be found at www.mmrtheatre.com. The Company's television commercials can be viewed at www.mmrontv.com.
We also continue efforts to maximize the current and future value, of the intellectual property that we acquired from Favrille when the Merger was completed in January 2009 as well as the various health IT patents the Company has in several stages from applied-for to issued. These assets include, but are not limited to the exploitation and licensing of, patents, data and samples from the Company's pre-Merger clinical vaccine trials, the FavId™/Specifid™ vaccine, the anti-CD20 antibodies, and the licensing of the Company's biotech and Health IT Patents which include more than 186 additional pending claims and which have the potential effect of enabling the Company to control a dominant marketplace position in personal healthcare.
Products and Services
Our suite of secure, web-based products all are built on proprietary, patented and patent-pending technologies that allow users to easily store, organize, retrieve and share information in a timely and secure manner from anywhere in the world.
Our consumer product, "MyMedicalRecords," is an easy-to-use, secure web-based Personal Health Record system, or PHR, which allows documents, images and voice mail messages to be transmitted in and out of our system using a variety of methods, including fax, voice and file upload and doesn't need to rely on any specific electronic medical records (EMR) platform to maintain medical records. Our platform converts documents it receives by fax into PDF files. Using encryption technology, the system receives these files, as well as voice files and any other uploaded files including data exported from Telemedicine systems, which are all stored in the consumer's personal account secured by a unique user ID and multiple password combination. A notification is sent to up to three user e-mail addresses (including text-enabled cell and smartphones) whenever a new record is received. Users can then access their files via the Internet and take advantage of an intuitive, customized filing system that allows them to categorize, annotate and file their records for easy access, organization and retrieval. Users can also print, download, e-mail or fax their records from their account, giving our customers greater control over their own Personal Health Records and other information, which they can share with healthcare providers and others as they move through the continuum of care.
We are currently selling our MyMedicalRecords PHR product direct to consumers, to corporations as an employee benefit, physicians, small hospitals, surgery centers and other healthcare professionals including veterinarians, and to affinity organizations as a "value-added" service for their members or clients. We recently introduced a Prepaid Personal Health Record Card which the Company plans on offering through retailers. We also sell to insurance companies and plan to sell through financial services organizations in the future. The PHR is offered both via the MyMedicalRecords web site and as a private-labeled product. When sold to employers and/or affinity groups the Company counts members as individuals who have received paid access to the MMR system through their employers benefit program or as a member benefit from a respective affinity group. The Company counts users as the individuals in that member group that activate and commence usage of their individual PHR account. In addition, the MyMedicalRecords PHR is an important component of the MMRPro professional document management and imaging system which we are selling to physician offices and other healthcare professionals (See section on "MMRPro").
20
Our "MyEsafeDepositBox" service is geared toward small businesses, the financial services, insurance and legal service industries. MyEsafeDepositBox is based on the same technology and architecture as our MyMedicalRecords PHR product. However, rather than focusing on storing medical records, MyEsafeDepositBox is designed to provide secure on-line storage for medical records and vital financial, legal and insurance documents such as wills and advanced directives. MyEsafeDepositBox.com may be used as a virtual on- line "safe" and could serve as an essential part of any household's or business's disaster preparedness plan.
In September 2009, we introduced our MMRPro product which provides physician offices with a powerful and cost-effective solution to the costly and time-consuming challenge of digitizing paper-based medical records, as well as providing doctors the ability to have access to those records through a private portal at MyMedicalRecordsMD.com (go to MMRPro.com for more information). MMRPro also features an integrated e-Prescribe automated drug order entry system. It also automatically deploys records that patients can view and print out through a free patient portal, MMRPatientView.com. MMRPro also includes a "stimulus program" that allows doctors the opportunity to earn administrative reimbursements when their patients upgrade from the free MMRPatientView.com portal to a full-featured, paid MyMedicalRecords PHR.
We recognize the critical nature of managing an individual's health information requires that our products and advances be implemented with the utmost care to protect the privacy and confidentiality of our customers' data. The Health Insurance Portability and Accountability Act of 1996, commonly referred to as HIPAA, requires covered entities to protect the privacy and confidentiality of the protected health information, or PHI, of their patients and customers. Although we are not a covered entity (as that term is defined in HIPAA), we consider it important to take into account the Privacy and Security Standards and other requirements of HIPAA when implementing our products and services and believe that we meet and/or exceed current HIPAA standards.
The Health Information Technology for Economic and Clinical Health Act, commonly referred to as HITECH, enacted on February 17, 2009 as part of the American Recovery and Reinvestment Act, expanded HIPAA's reach beyond that of just covered entities. Now, business associates, defined as an entity that performs a function, activity, or service on behalf of a covered entity and that requires use or access to the PHI of the covered entity, and vendors of Personal Health Records that use or access PHI, must also comply with the HIPAA's Security Standards and many of HIPAA's Privacy Standards.
As a vendor of PHRs, we are implementing policies and procedures, and reviewing our relationships with all necessary parties, to ensure our compliance with HITECH and its associated regulations. MMR is not a business associate under HIPAA's three-prong test. While MMR would not be considered part of a covered entity's workforce (the first prong). Similarly, the Company would not meet the second prong of the test because the Company does not "perform a service on behalf of a covered entity" -since the beneficiary of the PHR is the patient, not the covered entity, and the covered entity has no obligation to maintain PHRs on its patients - only medical records.
Nonetheless, MMR is re-examining its policies and procedures and reviewing its relationships with all necessary parties to ensure compliance with HITECH and its associated regulations, much like MMR's efforts have been with regards to HIPAA and its regulations. One of the primary goals of HITECH is to ensure that individuals are notified when there has been (or there is a strong possibility of) a breach of the individual's PHI - a requirement that MMR recognizes and fully supports.
We plan to continue to take advantage of the burgeoning consumer health information market and leverage federal legislation, including the HITECH Act. 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) could represent a significant behavioral shift in how consumers will manage their healthcare because of the requirement that most everyone have insurance. The U.S. Supreme Court is scheduled to hear oral arguments challenging the law during the last week of March 2012. Even with the future of the insurance mandate uncertain, we believe health IT, a largely bipartisan issue, will continue to expand to make Personal Health Records an essential part of patients' lives as a result of the ever present need to achieve cost savings and improved health outcomes. Modernizing the healthcare system also has significant implications for physicians and other healthcare providers and we expect that as these physicians and healthcare providers look for cost-efficient ways to digitize their patient records, MMRPro will gain continued awareness and acceptance among the medical provider community. We also believe that as medical costs and insurance costs increase, and benefits decrease, healthcare consumers will require greater control over their personal (and their family's) health and health information.
Our MyMedicalRecords PHR product is designed to enable consumers to store their important medical records and data in one central and secure place where they can manage those records and control how they are accessed and shared. The market for the Company's products is significant. While every healthcare consumer in the U.S., as well as those in other countries, interested in managing their family's health using health information technology, are potential users of our MyMedicalRecords PHR product, we believe that the product has most appeal to these particular market niches:
21
Because of the similarity in functionality between our MyMedicalRecords PHR product and our MyEsafeDepositBox product, we market these products through some of the same channels. The crossover marketing strategy for our MyMedicalRecords PHR product and MyEsafeDepositBox product(s) focuses primarily on the following channels:
Our MMRPro product is an integrated, end-to-end service that gives physicians and other healthcare providers, an easy and cost-effective way to scan and digitize patient medical files, manage those files through a virtual patient chart and give patients up-to-date access to those records through an integrated patient portal. MMRPro is being marketed to:
The Company is an Independent Software Vendor of Kodak, which manufactures the scanner and scanning software used in the MMRPro system. As a result, MMR utilizes resources of Kodak distribution channels to sell this product into doctor offices nationwide. The Company has also announced that it is entering into a similar agreement with Fujitsu to provide hardware and software solutions to deploy its professional products and services.
The Company was one of the first Integrated Service Providers on Google Health, which discontinued services effective January 2, 2012 but is allowing existing users to access and migrate their data up until January 1, 2013, however in 2011 we signed an agreement with Microsoft® HealthVault™ and are planning to integrate our services with their platform during 2012.
We continue to work with scientists and experienced venture capitalists and consultants to assist us in generating revenue through licensing agreements as would be usual and customary in the biotech industry and which could include milestone payments as the term is generally used in the industry. We will also explore partnerships with manufacturers and or investors of and in Biotech products and services. These are assets and other intellectual property that we acquired from our reverse merger with Favrille. Those assets include, but are not limited to, data from our pre-Merger clinical vaccine trials, the FavId™/Specifid™ vaccine, the anti-20 antibodies and certain patient samples.
22
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. 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, South Korea and Mexico.
The Company has relied upon numerous consultants in its efforts to accelerate bringing to market its anti-CD20 monoclonal antibodies. Anti-CD20 antibodies are useful in treating B-Cell malignancies, including Non-Hodgkin Lymphoma (NHL) and additional B-Cell mediated conditions such as rheumatoid arthritis. The Company understands the anti-CD20 antibody assets are potential candidates for the next generation of a Rituximab-type therapy. Rituximab is marketed under the trade name Rituxan® in the United States by Biogen Idec and Genentech (wholly owned member of the Roche Group) and under the name MabThera® by Roche in the rest of the world except Japan, where it is co-marketed by Chugai and Zenyaku Kogyo Co. Ltd. Rituxan® is one of the world's most successful monoclonal antibodies with US $6.6 billion reported total sales in 2010.
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 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.
Our Products
MyMedicalRecords - An On-line Personal Health Record (PHR)
Our MyMedicalRecords PHR product, principally accessible at www.mymedicalrecords.com, delivers an easy-to-use, web-based medical records and health information storage, retrieval and management system for consumers. Our MyMedicalRecords PHR product allows for paper-based medical records such as lab reports, radiology reports, MRI reports and progress notes to be transmitted via fax to a secure mailbox that is created when a user enrolls in the service. Our MyMedicalRecords PHR product is designed to allow a user to fax his or her health records or other vital documents into a personal MyMedicalRecords PHR account via a dedicated telephone number, which we refer to as the user's "Lifeline." This unique telephone number is assigned to the user upon enrollment. A user can also upload digital files, such as x-rays, scans or other medical images, as well as other vital documents into his or her account directly from a personal computer through any Internet browser. In addition, the MyMedicalRecords PHR accepts voice messages.
Our MyMedicalRecords PHR product is bilingual in English and Spanish and allows users to store and segregate information for up to 10 family members in a single account. It is a patient-controlled Personal Health Record that provides portability for the user, which means our MyMedicalRecords PHR can stay with the individual through changes in doctors, jobs and insurers.
The MyMedicalRecords PHR takes advantage of the one piece of equipment found in virtually every doctor's office-a fax machine. Healthcare providers can transmit documents to a patient's MyMedicalRecords PHR mailbox without making any changes to existing patient or practice management software. Our MyMedicalRecords PHR product can be used to provide secure storage for a variety of important confidential records, including:
In addition, users can store important legal, insurance and financial documents, as well as copies of identification documents such as passports and driver's license in their MyMedicalRecords PHR account.
23
The MyMedicalRecords.com Personal Health Record allows patients to store and manage their records
and share information with providers, as they move along the continuum of care.
How it Works
Most providers, regardless of size, rely on fax to move medical records. In fact the average physician receives more than 1,000 faxed pages per month even if they have an EMR or other electronic system. We have based our service on the efficient and effective conversion of faxed documents, uploaded documents, voice files and, more recently, telemedicine, pharmacy and laboratory data. We convert fax into encrypted Portable Document Format, or PDF files using proprietary patented technology. Users are then able to annotate and file these records using a simple, intuitive, on-line document management system. At the same time, users can upload records into their account and organize them using the same file management system as is used for faxed documents. Records can be shared by downloading and sending them from the user's e-mail or transmitted using the system's integrated outbound fax capability.
24
25
We sell our MyMedicalRecords PHR product direct to consumers on a monthly and annual subscription basis. We use the Internet as a distribution channel where consumers can enroll in our service online. We are in the process of establishing a distribution channel through retail where consumers will be able to purchase a Prepaid Personal Health Record card at a retail store and write their emergency password on the back of the card.
The prepaid retail card will be manufactured as a high quality credit-card style. The package surrounding it will provide information on the PHR service to encourage both initial purchase and then active use. Because the prepaid card is high quality, emergency personnel will be able to find it in a user's wallet in the event of a medical emergency, thus reinforcing the special Emergency Log in feature of the MMR product. The Company plans to have a magnetic stripe on the back of the card as well, which will allow us to offer the prepaid product in conjunction with pharmacy or store loyalty programs.
Current direct to consumer pricing for our MyMedicalRecords PHR product for a family that permits storing information for up to 10 people is $99.95 for an annual subscription or $9.95 for a monthly subscription when purchased over the Internet. We also occasionally offer free trials and discounted pricing as a way to incentivize consumer acceptance of our MyMedicalRecords PHR product. The retail price point may be different than what the product is being sold for on the Internet.
For special key account programs, such as healthcare providers that would like to make the service available to patients, corporations who want to offer the service as a benefit to employees, insurance companies who offer this to policyholders, or affinity groups and other organizations who want to offer the service to their members, we provide different access-based pricing plans, which vary based on the number of people in the organization and the expected use of the product across the organization's members. For large corporate or key accounts, we co-brand or private label our site. Some examples of private label sites include:
In the first quarter of 2012, during the Consumer Electronics Show ("CES") and the Healthcare Information and Management Systems Society Conference ("HIMSS") in Las Vegas, we unveiled a Prepaid Personal Health Record card which will be offered at retail stores such as supermarkets and drug stores throughout the United States and will be redeemable for a Personal Health Record account on the MyMedicalRecords.com platform. In addition, we will begin offering personalized Prepaid Personal Health Record cards for physicians and hospitals. Instead of leaving the doctor's office with an appointment reminder card, healthcare professionals can hand out a Personal Health Record access card which gives their patients the ability to create and manage a comprehensive online Personal Health Record. The system also includes a document management system, a MyEsafeDepositBox, the ability to send records by outbound fax, prescription drug database and the ability to generate appointment and prescription reminders. Additionally, the cards can be custom designed so that hospitals and medical offices can use them as a cost-effective incentive to patients and outpatients to better manage their health and reinforce where they receive their care. The prepaid PHR card is actually a physician's business card with a purpose. By placing access to a full-featured PHR at the point of care, the cards call attention to the importance of having a Personal Health Record which can improve care, reduce costs and even make the difference in saving a patient's life.
Additional Product Features
Our MyMedicalRecords PHR product offers users multiple ways to enter their personal medical information, including by fax, voice or digital file upload as well as through customized web service links. We believe this integrated capability makes our MyMedicalRecords PHR product easier to use and more accessible to potential customers and healthcare professionals. This gives us a unique competitive advantage in the marketplace and creates a barrier to competitive entry. In addition to the core document conversion, storage and retrieval capabilities, our MyMedicalRecords PHR product provides a layer of useful, value-added interactive tools to help users better manage their personal and/or their families' medical records. These tools include:
26
The Company believes that these enhancements will increase usability and make it easier for consumers to view their important medical records.
The Company is working with UST Global to create a mobile application for its MyMedicalRecords.com Personal Health Record. This mobile application has already been deployed in beta mode for Android tablets and smartphones. A mobile version for iOS (iPhones and iPads) is currently under development.
Other Applications for Our MyMedicalRecords PHR Product Technologies
We believe our MyMedicalRecords PHR product technology presents potential market opportunities beyond its core "Personal Health Records" storage and management purpose. In the wake of recent hurricanes, tsunamis, earthquakes, fires and other disasters, a great deal of emphasis has been placed on families having a secure place to store their records and vital documents where they cannot be lost or damaged. Our MyMedicalRecords PHR product addresses this need because it allows for the fax transmission, upload and storage of insurance, financial and other personal documents, as well as a place to store digital files such as photographs. We believe this recent emphasis provides us with an opportunity to expand our core market and use our MyMedicalRecords PHR product technology to create the essential "safe deposit" box for all important documents and records of a family or small business. The MyEsafeDepositBox virtual storage product extends the MyMedicalRecords technology into these additional markets.
Currently, the MyMedicalRecords PHR platform is the backbone of the MyBlueButton.com initiative where veterans and Department of Defense personnel can upload their health information from their MyHealtheVet account to a MyMedicalRecords Personal Health Record, where they can easily manage all their medical data and other important information in one secure location. In addition to safely storing their Blue Button data file, each MyMedicalRecords account comes with a password-protected voice mailbox, inbound and outbound fax, a drug interaction tool and many other features to manage and track their health. MyMedicalRecords also allows them to store medical records for their family members, including pets, in one account.
27
MyEsafeDepositBox - An On-line Secure Document Storage System
Our MyEsafeDepositBox product is based on the same technology and architecture as the MyMedicalRecords PHR, however, rather than focusing on medical records, it is designed to meet the needs of businesses and individuals who are looking for a simple, efficient and economical way to securely store important legal, insurance and financial documents that they cannot afford to lose. Such documents may include copies of insurance policies, deeds of trust, passport, birth certificate, photos of property and other vital documents in addition to medical records that are critical to retrieve in the event of a natural disaster such as an earthquake, hurricane, flood or fire.
We believe that the MyEsafeDepositBox product offers distinctive value in the online storage market due to our telecommunications platform enabling users to fax vital records directly into their MyEsafeDepositBox account without having to first scan paper-based records and have access to a computer to upload information, though the system can receive and store uploaded documents as well. It also permits service providers, such as insurance agents or lenders, to fax documents directly into a user's secure online account. Users also benefit from the ability to sort, store and manage their vital records, while also using a free form text search to find records stored in their account with specific annotations. Our ability to provide private label branding of this product affords banks, insurance companies, escrow services and other financial and legal businesses to provide not only a useful product but also a product that reinforces that business's identity.
In addition, we believe our MyEsafeDepositBox product may also serve as a valuable tool for younger consumers who would not otherwise utilize a Personal Health Record storage system, but are looking for a secure way to organize their personal information to take better control over their financial affairs
Pricing for MyEsafeDepositBox is similar to the MyMedicalRecords Personal Health Record. Suggested retail price is $9.95 per month or $99.95 annually, and is also made available to corporations and membership groups on an access-fee basis.
MyMedicalRecordsMD also known as MMRPro - An Integrated Scanning and Web-Based Document Management Solution for Medical Providers
MyMedicalRecords Pro, or MMRPro was launched in late 2009. This product provides physician practices, particularly smaller practices that are still largely or entirely paper based and are resistant to making the significant investment required to convert to an Electronic Medical Records, or EMR system, a powerful, integrated solution that enables them to scan, digitize, store, manage, retrieve and share records with patients through a managed "Software As Service" web application created and managed by the Company.
A typical EMR implementation costs well in excess of $100,000 and can take several weeks or months to integrate into a doctor's practice. Even worse, during this implementation, a doctor's office is asked to significantly reduce their patient load by as much as 50% which means that the practice loses one-half of its revenue during the implementation period and possibly longer. In a healthcare economy where patient load is critical to a doctor's financial success, this can be very problematic. MMRPro is sold on a three-year license, which includes all hardware, software and system management; a typical four doctor practice would pay $21,600 for the system, which could be financed over the life of the license.
How It Works
At the core of the MMRPro system is a Kodak Scan Station scanner with a special version of Kodak's Capture Pro document imaging software already installed. The system featuring MMRPro is not sold as a stand-alone product by Kodak and must be purchased through MMR. The Company is in the process of adding other scanner manufacturers to the MMRPro system.
28
As part of the installation of MMRPro in a medical office, a library of the forms most used in that office on a daily basis is created. When a patient arrives at the office, the demographic information about the patient is ported to the MMRPro system. That information is then converted to a multi-dimensional encrypted bar code which is printed on all forms used in the office that will follow the patients. The bar code is unique to every patient. Each section of a patient's chart is also identified in the barcode.
All records generated from an appointment carry the patient's unique bar code. If the patient brings any third party records or health history records, the bar code is printed on a cover sheet to go in front of these records. At the end of an appointment, all paper records for the patients, including progress notes, lab reports, radiology reports and previous medical history after reviewed and approved by the doctor, are scanned into MMRPro and automatically sorted and filed into the correct tabs of a virtual patient chart that has been created online by the system. The files are securely stored Doctors can annotate these scanned records with free-form text notes and search those notes later on making it easy to retrieve specific records.
Once documents have been scanned, doctors or their staff can access them from any Internet-connected computer through the MMRPro doctor portal. In addition, when records are scanned the MMRPro system instantly deploys a copy of the record that the patient can view through a free patient portal, MMRPatientView.com. The Company believes that the ability to instantly share records with patients gives doctors the ability to more efficiently manage and operate their practices because they and their staff are not continually being asked to retrieve patient records. MMRPro also allows for secure messaging between doctor's office and patients, as well as provides both inbound and outbound Internet fax capability, making it easier for a practice to share information with other health providers.
Additional MMRPro Features
29
The MMRPro "Stimulus Program"
In addition to its product functionality, MMRPro includes a "Stimulus Program" that creates cost-savings and revenue opportunity for its users; in fact, the Company believes its Stimulus Program can generate at least as much money for a doctor practice over a three-year term as the $44,000 that is possible through the HITECH Act over a five-year period. Visit www.mmrpro.com for more information or go to www.mmrtheatre.com and click on MMRPro to see a video about MMRPRo and the Stimulus Program.
The Company believes that MMRPro can ultimately eliminate the need for doctor office staff to go into patient charts to retrieve their records. The Company estimates that this can cost a doctor office as much as $50 per occurrence, when you take into account all of the labor and copying costs associated with retrieving a patient record. If MMRPro makes it possible for a doctor office to eliminate having to manually retrieve just one record per day, it would translate to a savings of more than $10,000 in a single year.
Doctors have the opportunity to earn administrative reimbursements when their patients upgrade from the free MMRPatientView portal to a full-featured, paid MyMedicalRecords Personal Health Record. The Company shares 30% of the subscription revenue from those upgrades with doctors on a monthly basis and believes that patient acceptance for the MyMedicalRecords PHR will be driven by the benefit of being able to store and manage medical records from all doctors for up to 10 family members, not just the one doctor and one family member capability of the free MMR-Patient-View Portal.
HIPAA and HITECH Considerations We recognize the critical nature of managing an individual's health information requires that our products and advances be implemented with the utmost care to protect the privacy and confidentiality of our customers' data. The Health Insurance Portability and Accountability Act of 1996, commonly referred to as HIPAA, requires covered entities to protect the privacy and confidentiality of the protected health information, or PHI, of their patients and customers. Although we are not a covered entity (as that term is defined in HIPAA), we consider it important to take into account the Privacy and Security Standards and other requirements of HIPAA when implementing our products and services and believe that we meet and/or exceed current HIPAA standards.30
The Health Information Technology for Economic and Clinical Health Act, commonly referred to as HITECH, enacted on February 17, 2009 as part of the American Recovery and Reinvestment Act, expanded HIPAA's reach beyond that of just covered entities. Now, business associates, defined as an entity that performs a function, activity, or service on behalf of a covered entity and that requires use or access to the PHI of the covered entity, and vendors of Personal Health Records (PHRs) that use or access PHI, must also comply with the HIPAA's Security Standards and many of HIPAA's Privacy Standards. One of the key obligations under HITECH is the requirement to notify individuals when there has been (or there is a strong possibility of) a breach of the individual's PHI.
MMR is not a business associate under HIPAA's three-prong test. MMR would not be considered part of a covered entity's workforce (the first prong), nor does MMR perform a function or activity on behalf of the covered entity (the second prong of the business associate test) as the covered entity must maintain medical records, not PHRs, on its patients. Finally, MMR does not "perform a service on behalf of a covered entity" (the third prong of the business associate test) since the beneficiary of the PHR is the patient, not the covered entity. Thus, while MMR is not a business associate, it is a "vendor of PHRs" - although MMR does not fit squarely into that category as that term is defined in HITECH either.
Nonetheless, MMR is re-examining its policies and procedures and reviewing its relationships with all necessary parties to ensure compliance with HITECH and its associated regulations, much like MMR's efforts have been with regards to HIPAA and its regulations. One of the primary goals of HITECH is to ensure that individuals are notified when there has been (or there is a strong possibility of) a breach of the individual's PHI - a requirement that MMR recognizes and fully supports.
The Market for Our Products
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, and home healthcare specialists, all of whom have significant one-on-one relationships with patients who can benefit immediately from the use of our PHR. Likewise, we are creating 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 as well as other clinics looking for an elegant and cost effective scanning and document management solution. Management also sees 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. In addition, as the use of teleconsulting and telemedicine becomes more prevalent, the MMRPro solution should provide a perfect platform to facilitate collaboration between doctors and other healthcare providers with the ease of use and access the solution provides.
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 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, which have been valued at $300 to $800 million.
In light of the continued occurrence of natural and man-made disasters, demand for our MyEsafeDepositBox product will be driven by relief and educational organizations, as well as by consumers, small businesses, with international focus based on tools that help in disaster preparedness.
Healthcare and Health IT Industry
Health information technology (HIT) is the linchpin of efforts to reform the U.S. healthcare system and adoption of electronic and Personal Health Records continues to be at the center of the national healthcare agenda. Recognized as essential to controlling costs, improving care and saving lives, health IT was included in the American Recovery and Reinvestment Act of 2009 (stimulus bill) within which the Health Information Technology for Economic and Clinical Health Act (HITECH) provisions allocated more than $27 billion to modernize healthcare operations through "meaningful use" of health IT. The effects of this were seen in just under three years after the passage of HITECH, with physicians adopting a basic EHR system having doubled from 17% in 2008 to 34% in 2011 (CDC/NCHS, November 2011).
Even with lingering economic weakness, health IT is expected to continue opening widespread market opportunities in the healthcare industry, which is poised to grow at CAGR of approximately 13% during 2010-2015. The stakes are high: with healthcare spending having reached $2.6 trillion, or 17.5 percent of GDP, in 2010 and expected to soar to $6.5 trillion by 2016, the demand for solutions that control healthcare spending and deliver more efficient care will continue to drive health IT adoption (US e-health Market Analysis, July 2011 / Deltek, Inc. December 2011).
31
A year after the passage of ARRA and HITECH, President Obama signed into law the Patient Protection and Affordable Care Act, or PPACA, a major overhaul of the United States healthcare and health insurance industries that at its core would require some 32 million Americans to purchase health insurance. Oral arguments challenging the healthcare reform law are scheduled to be heard by the U.S. Supreme Court at the end of March 2012. Should the legislation be upheld, we anticipate increased demand for the cost savings inherent in the use of electronic medical records, particularly the benefits to patients by having a Personal Health Record. However, we believe repeal will not adversely affect our products and services, since from a legislative stand point, health IT has remained largely bipartisan. Moreover, a key driver for increased investment in health IT is a projected near-doubling of the federal healthcare expenditures from $766 billion in 2011 to $1.4 trillion in 2020, due largely to an expected 123% increase in the population of those aged 65 and older by 2050 and dominated by the Internet-savvy baby boom generation. (Miliard, HealthCareIITNews, December 2011)
Taken together, the forces between the need to control healthcare spending and HIT mandates to help achieve this create positive market conditions for the Company's MMRPro and MyMedicalRecords PHR solutions. Furthermore, factors driving demand for our products and services bring into focus additional market opportunities. For instance, the doubling of basic EHR/EMR adoption by physicians since 2008 is a positive trend and additional results show that EMR implementation is now on the radar of a majority of healthcare practitioners. Significantly for the Company, over half the nation's physicians are still practicing in a paper-based world yet increasingly evaluating the need to implement electronic medical records systems if they can mitigate traditional barriers such as cost, unachievable and unusable meaningful use requirements, workflow interruptions and privacy concerns. Given about 50% of U.S. practices consist of one to five doctors where about 65% of all physician visits occur and that the majority of these practices are still using paper-based systems to manage patient charts, there is tremendous opportunity for niche market share for our MMRPro, MMRPatientView and MyMedicalRecords products.
We believe that MMR's strategic partnership with Kodak to distribute MMRPro as an end-to-end solution throughout Kodak's sales channels continues to position the Company to penetrate small-to mid-size physician practices with a cost-effective entry-level EMR system that offers an integrated patient portal and an e-Prescribe module. Further, value propositions for MMRPro in today's constantly evolving healthcare market is its SaaS platform that can work with any EMR system, its cost effectiveness and ease-of-use in light of the fact that doctors remain concerned about the cost of installing expensive, complex systems that interfere with office workflow, and the Company's response to ensure privacy protections for patients covered under HIPAA's Privacy and Security Rules within HITECH.
Additional drivers of health IT which are expected to become more prevalent are multi-platform, multi-channel models of healthcare delivery. According to health economist Jane Sarasohn-Kahn, mobile apps, home-based monitors, Wi-Fi scales, text messaging and e-mail communication will gain traction in the coming years to ensure patients stay well. (iHealthBeat, December 2011). MMR is well-positioned to benefit from multiple technology integrations, demonstrated by our partnership with the Alcatel-Lucent ng Connect Program announced in 2011. We anticipate more strategic partnerships with wireless providers as a result of our integrated telecommunications platform which delivers a PHR that allows medical records to be shared among all healthcare professionals involved in a patient's care using TeleHealth platforms.
In summary, given healthcare's prominence in the national debate, the role of health IT in cost containment and improved patient outcomes, the driving force of HITECH stimulus, America's changing demographics underscored by the first wave of baby boomers entering Medicare in 2011, and the PHR requirement for meaningful use of an EHR, we believe our products, which are cost-effective and highly usable, will benefit from the HIT value propositions in the marketplace. Even with the challenges and uncertainties healthcare providers face in their day-to-day practice, we anticipate they will continue to move away from outdated paper-based systems and focus on spending strategic dollars on health IT as ROI given economic stimulus, the transition of healthcare to more of an outcomes-based reimbursement model, increasing peer pressure and the fact that that increasing numbers of patients are becoming informed healthcare consumers who demand it.
Drivers for MyMedicalRecords PHR Market
Meaningful use criteria require physicians to provide 50% of their patients' electronic copies of their personal health information in Stages 1 and 2 and at least 90% of patients in Stage 3 by 2014 and this is starting to spur eligible healthcare professionals to seriously focus on how they will offer Personal Health Records driven by the HITECH provisions. 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.
Fueling the need for digitized personal medical records and the key challenge to cost containment in the healthcare industry is treating those with chronic conditions. About 10% of the population accounts for 63% of spending on health services, and 21% of health spending is for only 1% of the population. (Department of Health and Human Services, AHRQ). What is needed is a Personal Health Record that can be the main source of information between the primary care physician, specialists and the other health entities involved in the individual's care. With coordinated access to a patient's health information, there is continuity of care that can lead to cost reductions by eliminating unnecessary repeat tests and avoiding preventable medical injuries. According to the much cited Rand Corporation study published in 2005, in addition to the estimated $346 billion that could be saved annually through the use of health IT, the study projected that $82 billion to $100 billion in savings could be realized in coordination across the continuum of care.
32
With government stimulus creating both awareness and momentum, others not directly affected by meaningful use incentives are driving healthcare technology to control healthcare spending, such as employers incorporating Personal Health Records into workforce wellness programs to increase productivity, health plans offering PHRs to patients to maintain data that monitors health progress in addition to claims data, pharmacies who 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 technology 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.
Also helping to create momentum for PHRs while bridging the public and private sectors are initiatives spearheaded by Department of Human Health Services Secretary Kathleen Sebelius, U.S. Surgeon General Regina Benjamin, M.D., and National Coordinator for health IT Farzad Mostashari that are being used to build awareness and stimulate involvement. One of these, "Take the Pledge," engages both data and non-data holders such as employers and health IT vendors to pledge their support in enabling patients/consumers/employees to have instant access to their personal health information through Personal Health Records. Social media and video contests are also being increasingly used to build PHR communities. MMR joined with over 250 other companies to "Take the Pledge" and we are expanding our presence across the Internet using social media to engage consumers on the value of having a Personal Health Record for themselves and their family. In summary, with increasing use of EHRs requiring patients be provided their personal health information in the form of a Personal Health Record, the development of mobile health apps (an estimate 500 million individuals are expected to be using mobile healthcare applications within the next five years), the rise of the patient-centered medical home, and the use of social media to engage consumers in their healthcare, we believe PHRs have a strong future as part of an overall health IT strategy. Moreover, the MyMedicalRecords PHR - Internet-based for 24/7 access, personally-controlled, easy to use, portable, affordable, and private and secure, fulfills what surveys reveal consumers are most looking for in a PHR, which is access to information online, privacy, the ability to track immunizations and monitor lab reports, communicate with doctors, and correct mistakes in their records.
Drivers for MMRPro Market
Doctors are under increasing pressure to make their offices "digital" as mandated by the Federal Government in order to qualify for incentive payments of $44,000 per physician through Medicare and $63,750 per physician through Medicaid under the HITECH Act. Stimulus funds from HITECH are paid out in three stages of "meaningful use" over a five-year period; for example, a doctor under Medicare who qualifies for funds in 2010 will receive payments beginning in 2011 through 2015. Doctors who wait until 2013 or 2014 to have EHRs in place will be eligible for smaller bonuses. Because of the short time horizons and high costs involved, many eligible professionals, despite the stimulus funds, were until recently resistant to using full-blown Electronic Medical Record systems. Studies cited in a Congressional Budget Office Report show that a three-doctor practice could spend as much as $162,000 in the first year to install and maintain a system. This doesn't include the "hidden" costs of lost revenue from having to reduce patient load and also delays in billing while a new system is being implemented.
Regardless of the early resistance by practitioners, increasing numbers of doctors are moving forward and embracing health information technology. A stunning example of this is that while only a small amount of physicians have met Stage 1 meaningful use criteria (an estimated 3,880 providers) there has been a two-fold increase since 2008 in those who have adopted an EMR/EHR system. This is positive for the Company's MMRPro system because of how it functions as a cost-effective bridge to a full blown Electronic Health Records system while at the same time providing an integrated Patient Portal/Personal Health Record whose attachment is even greater in Stage 3 of meaningful use. And because the fax machine is currently the predominant means physicians use to share information with other doctors, and we believe this number is a great deal higher between doctors and patients, MMRPro's electronic fax capability enables them to run their practice like they always have while digitizing their office. Additionally, with the MMR Stimulus Program, incentives are offered either in place of or in addition to meaningful use payments, where it has been acknowledged that the perks offered by the government may not be enough by themselves to get doctors on board. And when meaningful use incentives are removed from the equation altogether, as is the case with non-eligible professionals such as long-term acute care, rehabilitation and psychiatric hospitals, our end-to-end, user-friendly solutions enable clinical data to be digitized and available across all sites of care.
As a result, the Company sees a significant niche opportunity to provide an efficient, cost-effective system that helps healthcare professionals take the required first step to any form of digital office - scanning and digitizing patient records. The Company believes that the simplicity and elegance of MMRPro makes it attractive to the many thousands of medical offices, community hospitals and other healthcare providers who are still paper-bound and searching for a way to start their digital conversion. As David Blumenthal, former National Coordinator for Health Information Technology, wrote in a perspective piece published in the "New England Journal of Medicine, "It is inconceivable that the health system in the U.S. will indefinitely resist a force that is transforming modern civilization and that offers almost infinite promise for improved and more efficient care." He added that the next generation of healthcare providers, "those weaned on the Internet, Twitter, Facebook, the iPad, and the iPhone" will insist on an electronic system. (Walker, "MedPage Today", 12/22/2011)
33
Drivers for MyEsafeDepositBox Market
The primary market driver for our MyEsafeDepositBox product is the need for individuals and businesses to be able to easily, efficiently and securely maintain backup copies of paper-based financial, insurance, legal and other vital business and personal documents that can be retrieved at anytime from anywhere over an Internet-connected device, This is especially true during a disaster, where records can be inaccessible or permanently destroyed. Eventually, as consumers continue to grow less reliant on paper, MyEsafeDepositBox can also be marketed as helping them in reduce their carbon footprint.
Online storage is a growth industry that can be viewed as rebounding from the economic recession. According to International Data Corporation's, or IDC's, Worldwide Storage Software Qview, 2011 sales of storage software increased 11.6% over 2010 to $14.16 billion led by data protection and recovery. (StorageNewsletter.com). In-Stat reported the previous year that with home networking adoption passing 50% of households in North America and 13% worldwide, the consumer network storage market is seeing continued growth and is expected to grow at a compound annual growth rate of nearly 40% between 2009 and 2014.
Both companies and individuals are continuing to seek solutions that will allow them to safely backup - and quickly restore - any lost data. We believe that our MyEsafeDepositBox product meets the need of a sub-set of this vast data storage market, and we target individuals and businesses that want to find a secure, web-based solution for storing their most critical personal, financial, legal and insurance records, rather than those looking to back up the entire contents of their computer hard drive or corporate network.
In addition, the need for individuals to augment their personal plans for disaster preparedness is reflected in a Red Cross poll that showed seven of 10 respondents were only somewhat prepared for a disaster, with 59% to 73% having no specific evacuation plan. For businesses, the need to implement a disaster recovery plan can be the key to their survival. In the publication, "The Definitive Handbook for Business Management," cited by Hewlett-Packard, it states that between 60% and 90% of companies that don't have a disaster plan find themselves out of business within 24 months of experiencing a major disaster. As natural and man-made disasters continue to grow - from hurricanes, earthquakes, and floods to computer viruses and even terrorist attacks - a common denominator for recovery is access to information and documentation, and we believe our MyEsafeDepositBox product meets this need by offering users a safe and easy way to store, access and recover all of their important documents and vital records online.
Customers
To date, we have signed agreements for our MyMedicalRecords PHR product, our MyEsafeDepositBox product, corporate employee benefits and affinity and membership group markets, MMRPRo, and licensing agreements to license our Biotech and Healthcare intellectual property ("IP"). Our core products are sold directly to retail consumers, physicians and corporations while our Biotech and Healthcare IP is being licensed to pharmaceutical and other health IT companies. We have provided the patients of participating hospitals with the use of our MyMedicalRecords PHR product free of charge when they are discharged from inpatient facilities.
We also offer a private label of our MyMedicalRecords PHR product for Medic-Alert, who we believe to be the largest provider of Personal Health Records in the world, which offers it as an enhancement to their existing PHR service; Chartis Insurance (formerly AIG) which offers it to their policy holders beginning with their Global, Marine & Energy worker's compensation policies, and the National Rifle Association. We also have corporate clients who provide our MyMedicalRecords PHR product to their employees as a free benefit, and affinity group and membership clients who bundle the product as a "value added" service to their constituents. We receive compensation under these agreements either on a per enrolled account basis or on an access basis in which we are paid based on the number of persons who are eligible to sign up for our service, regardless of the number that actually enrolls. In 2011 we signed an agreement with Microsoft® HealthVault™ and are planning on integrating our products with their platform in 2012.
We are continuing to expand these relationships and identify additional private label opportunities.
In the affinity and membership group area, we continue to see increased opportunities and believe this to be the lowest hanging fruit in as organizations want to give their members access to the MyMedicalRecords Personal Health Record or MyEsafeDepositBox; the Company expects that these groups will continue to create new programs that bundle the MyMedicalRecords PHR and MyEsafeDepositBox virtual storage vault with their services. On December 21, 2010, MMRGlobal, Inc., entered into a Non-Exclusive License Agreement with Celgene Corporation ("Celgene"). Pursuant to the terms of the Agreement, the Company licensed to Celgene, on a non-exclusive basis, the use of the Company's clinical and scientific data relating 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, upon achievement of development milestones, milestone payments plus any expenses. The Agreement contains customary provisions, as to the term of the Agreement, representations, warranties, and indemnities by each of the Company and Celgene and was filed in the 2009 10-K as an Exhibit to the filing.
34
On December 9, 2011, we entered into a Non-Exclusive Settlement and Patent License Agreement with Surgery Center Management, LLC whereby the Company agreed to release SCM from prior patent infringement claims and granted SCM, on a non-exclusive basis, a license covering the Licensed Patents, which amongst other things, covers certain Licensed Products and/or Licensed Services to develop, make, have made, use, sell, lease, license, demonstrate, market and distribute the Licensed Products and/or Licensed Services under SCM's brand or private label for channel or distribution partners who purchase the SCM branded or Licensed Products and/or Licensed Services for resale to end customers.
In consideration for the rights granted under the Agreement, SCM agreed to pay the Company $30 million dollars (the "Initial License Fee") with a minimum of $5 million dollars in upfront fees with the explicit understanding and requirement that the Settlement and Release portions of the Agreement become effective solely upon SCM's payment in full of the Initial License Fee. SCM also agreed to pay MMR additional royalties of ten percent (10%) of gross revenue at such time as an initial Two Hundred Million U.S. Dollars ($200,000,000 USD) of gross revenues are accrued on any Units sold, used or otherwise transferred pursuant to the terms of the Agreement.
The initial $5 million dollar payment became payable to MMR on December 23, 2011, with five additional $5 million payments to be made on November 15th each year for the next five years. The Agreement contains customary provisions, as to the term of the Agreement, representations, warranties, and indemnities by each of the Company and SCM and was filed with the Securities and Exchange Commission as Exhibit 10-1 on Form 8-K on January 17, 2012.
The Company is currently seeking payment on the initial $5 million. As of December 31, 2011, three of the four revenue recognition criteria of Staff Accounting Bulletin No. 104 had been met (persuasive evidence of an arrangement exists, delivery has occurred, the price is fixed and determinable). The Company will not recognize revenue until such time as collection is reasonably assured. The Company is currently in litigation against SCM and we believe SCM has accounts receivable in excess of $200 million and other assets sufficient to pay the amounts due upon a successful outcome
During 2011, our three largest customers (Celgene $500,000, E-Mail Frequency $140,000, and Chartis $100,000) accounted for approximately 55% of our total revenue. Due to the contributions of these customers to our consolidated revenue, the Company is somewhat dependent upon its relationships with these customers.
Sales & Marketing Strategies
MyMedicalRecords PHR
Our marketing strategy for our MyMedicalRecords PHR product calls for continued focus on four main sales channels:
35
MyEsafeDepositBox
Because of the similarity in functionality between our MyEsafeDepositBox product and our MyMedicalRecords PHR product, we market these products through many of the same channels. Both products are designed to offer users the ability to fax, upload and store important and private records or documents in a secure electronic environment, safe from fire or flood, and secure from the threat of identity theft. Thus, for example, we market our MyMedicalRecords PHR product to insurance companies as an additional benefit for health insurance policy holders, while at the same time marketing our MyEsafeDepositBox product to insurance companies that may offer it to their risk and casualty policy customers. In addition, we market our MyEsafeDepositBox to financial institutions and legal service providers as a safe and secure way for their customers to store important and private documents provided by these companies.
MyMedicalRecords Pro
The Company is in the process of enhancing the MMRPro platform as well as broadening its distribution and sales channels. The Company believes that, as the calendar draws closer to the January 1, 2014 mandate for doctors to share an electronic copy of a health record with patients, MMRPro will gain accelerated acceptance with clinicians because of the fact that the product automatically creates a patient facing copy of scanned records through its MMRPatientView portal. The Company also believes that the successful adoption of the MMRPro product by its existing customer base will help simplify and possibly shorten the sales process as it acquires new customers.
In addition to working with document imaging sales and distribution channels, MMRGlobal is utilizing distribution networks of companies who already sell other products into doctor offices. These distribution partners also help increase the Company's integration and support network.
The Company also plans to utilize lead generation and telemarketing/appointment setting tools as a way to build a pipeline of customer opportunities that can be sold direct by MMR or through its distribution partners.
In 2011, MMRGlobal signed an Agreement with Interbit Data (Natick, MA). The two companies have created a joint software solution that will allow 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 the MMRPatientView portal from any EMR system without first having to scan, fax or print any documents. The Interbit Data-MMR module is already being installed in hospitals and is certified for meaningful use with MEDITECH systems. MEDITECH is being used by more than 650 hospitals nationwide. Although the solution is only deployed for MEDITECH at this time, MMR believes that it can work with virtually any EMR platform, which opens up a significant new market opportunity for MMRGlobal.
Licensing and Exploitation of Health IT Patents
The Company owns intellectual property rights to patents related to the Method and System for Providing Online Medical Records both in the US and in other international territories, and is actively working with consultants on ways to monetize these assets to identify products that infringe upon our patents as well as licensing opportunities with other health IT companies regarding the use of the assets. The Company has already reached one such agreement with Surgery Center Management as specified above under the Customers section.
Licensing and Exploitation of Other Legacy Biotech Assets
Although the Company's primary business is personal and professional health records and document imaging systems, pursuant to the Merger, the Company acquired intellectual property rights to certain biotech assets, including the FavId™/Specifid idiotype vaccine and our proprietary anti-CD20 antibody panels to treat B-cell lymphoma. On April 14, 2010, the Company also announced the existence of intellectual property in the form of approximately 140 patient samples collected during the Company's pre-merger FavId/Specifid vaccine trials.
Based on information discovered in 2010 the Company believes that these assets could have significant value which is not reflected on the Company's balance sheet at this time. Through May of 2008 pre-merger Favrille had spent more than $100 million on the creation and development of intellectual property, which includes clinical trials, related data, patient samples, patents, and other forms of intellectual property and the possible use of more than $200 million dollars in related tax loss carry forwards.
36
The Company is actively working with consultants on ways to monetize these assets to identify licensing and or manufacturing opportunities with biopharmaceutical companies, academic institutions, research organizations and others regarding the use of the assets. The Company has already reached one such agreement with Celgene.
Clinical Research Sales Strategy
The Company has filed patents for the design of an Electronic Health Record monitoring feature that uses the company's patented technologies to monitor patients in clinical trials. The Company believes that such a product offering can reduce the cost of managing clinical trial results and generate long term users of the Company's product. The Company will target biotech companies and pharmaceutical manufactures to purchase this product to obtain better monitoring of patient results and patient involvement.
Telemedicine Strategy
The Company has filed patents for the Method and System for Managing Personal Health Records with Telemedicine and Health Monitoring Device Features that incorporate the company's patented technologies. The Company believes that such a product offering can reduce the cost of long term, acute or extended healthcare and generate long term users of the Company's product. The Company is working with companies such as Alcatel-Lucent and their ng Connect division to more fully develop this offering.
Additional On-Going Marketing Strategies
In addition to the main marketing channels discussed above, we have also identified other potential markets for increasing sales of our products:
International Licensing
We exploit our intellectual property, technology and our MyMedicalRecords brand internationally. On January 4, 2010, we announced the completion of a definitive Joint Venture Agreement ("the "Unis JV") with Unis-Tonghe Technology (Zhengzhou) Co., Ltd., or Unis, to form a joint venture to build a customized version of MMR's proprietary PHR services (www.mymedicalrecords.com) and professional document imaging and management solutions in China.
37
Unis is a subsidiary of Unisplendour Corporation Limited (SHE: 00938) (www.Unis.cn), one of China's leading IT firms. Our technology will support a Unis medical records development project for sale to China's public and private hospitals. China has an initiative to create health information systems to electronically acquire, store and transport individual health records. Our senior management and technology executives have met with counterparts from Unis-Tonghe and Nihilent, MMR's technology partner in India, together for a collaborative session on requirements to integrate the MyMedicalRecords Personal Health Record and the MMRPro system (www.mmrpro.com) into a health IT platform that could be deployed throughout China's healthcare market.
Pursuant to requests from the Chinese Government, the Company has continued to respond to requests for changes in the Unis JV including changes as recent as March 27, 2012. As a result, the Company is responding to requests to amend the Cooperation Agreement and required amendments with Unis-Tonghe Technology Co, or UNIS.
Further, under the joint venture Cooperation Agreement, Unis and MMR agreed to form a joint venture in China for the purpose of deploying our Personal Health Record services and document imaging and management solutions as part of a total Electronic Medical Record, or EMR, solution in China. Ultimately, upon approval of the venture by the Chinese government, we will own 40 % of the joint venture and Unis will own 60%.
Despite the delays in approvals by the government, the Unis JV has already installed early stage EMR systems in three hospitals in China and we are working to add our PHR to these existing systems by the third quarter 2012. The Unis-Tonghe MMR International Health Management Service Co., LTD. Joint Venture has also begun participating in formal government bids to commence numerous medical records projects in China, which include continuing to offer MMR's Personal Health Record services and other related products. Meanwhile, the JV partners continue to actively be involved in supporting each other on Chinese government projects utilizing our patented and patent-pending technologies and platforms and features and have recently deployed full-time technical support in China. In November 2010, Unis-Tonghe submitted the Unis/MMR Joint Venture bid for the right to offer our products in Henan Province, whose population is nearly 100 million people or one third of the population of the United States. In February 2012, Unis and MMR spent a week in the United States around the HIMSS Conference and Exhibition collaborating on installing services in existing Joint Venture hospital systems in China.
As a result of lead times to develop customized EMR solutions in response to government specifications, this effort could take several years. In the meantime, we have begun to leverage our resources in China with other U.S. partners on the ground in there including Kodak and Alcatel-Lucent to help manage our relationships in China locally. As a result, we could begin selling MMRPro in conjunction with Alcatel-Lucent in China and Kodak resellers throughout the Asia Pacific region.
In June of this year, MMRGlobal and Australian company VisiInc PLC entered into an agreement to sell MMRGlobal' s patented consumer and professional health IT products and services on the Visi™ platform utilizing the Vistime product in the health technology market in Australia, which is projected to be as much as $2.4 billion (USD$2.6 billion). The License Agreement calls for minimum performance guarantees to be paid to MMR starting in 2012. VISI PLS markets and sells Vistime, a multi-file format, real-time 3D viewer for retrieval and viewing of large files, including medical imaging systems such as MRIs, scans and sonograms, over any Internet connection, including dial-up. The system allows physicians and patients to view and discuss medical records including radiology images in an online meeting format. Vistime integrated with MMR's MyMedicalRecords PHR and will allow collaboration of multiple specialists in real time. This feature is not currently part of any PHR.
The Company is also working on installations in Europe under an agreement with a Kodak reseller. We have been invited to visit and present our products in Qatar and are working with consultants in that region. The Company is also working with VisiInc on licensing our products to their partners in Russia. Because of our patents in countries like Singapore, we are seeking similar license deals with companies like VisiInc to leverage our global patent portfolio.
Principal Suppliers and Supply Contracts
We currently contract with various third-party telecommunications carriers, data centers and other information technology service providers and developers to develop and maintain our products.
In 2010, we terminated our agreement with an outside vendor, which previously hosted one of our product websites and provided fax and voice messaging services and the toll-free numbers used by the Company's customers to access their accounts. We paid this outside vendor a monthly website hosting fee and additional usage fees for fax, voice messaging and toll-free number services. Our contract was effective until September 2009, but automatically renewed, and continued to renew until we terminated it about November 2010. We replaced that vendor with our own health information call processing platform and communications exchange network which the Company calls the Asteria system. Asteria significantly reduces the Companies reliance on outside vendors and recurring costs. At the same time the Company entered into direct contracts with our carriers for Direct Inward Dial or "DID" and toll-free numbers terminating at our new telecommunications platform.
38
We contract collocation and hosting services from several certified data centers who monitor, manage and maintain our systems and storage facilities that service our production websites. Scheduled, non-escalatory, monthly payments are made for all collocation and hosting services. The data center Agreements are renewed automatically each year and a termination option is available to either party upon a six month prior written notice. On March 14, 2011 we renewed the agreement for another year and the agreement automatically renews on a month-to-month basis.
We contract with an outside vendor to house, manage and maintain the production servers that host our MyMedicalRecords PHR and MyEsafeDepositBox and MMRPro applications and store user related data. We pay a monthly fee for the management and technical support services required to maintain and operate its servers, which are housed in two separate data centers. Our agreement with this vendor is effective until terminated by either party. In 2011, we renewed a revised and amended agreement for another year with this vendor which automatically renews after one year on a month-to-month basis.
We contract with a third-party for the development and maintenance of the software applications necessary to run our MyMedicalRecords PHR, MyEsafeDepositBox and MyMedicalRecords Pro products. Our outside developer supports our software development needs through a team of software engineers, programmers, quality control personnel and testers, who work with our internal product development team on all aspects of application development, design, integration and support of our products. Under our development contract, we own the intellectual property rights over all software applications developed pursuant to the contract. We pay our developer a per-project fee for the development services provided and a monthly fee for support and maintenance services. Our agreement with this developer renews automatically for one year periods subject to the right of either party to terminate the Agreement by giving six months written notice.
On September 16, 2009, we entered into a Licensing and Sales Commission Agreement, or the Licensing Agreement with E-Mail Frequency, LLC, which we refer to as the Licensor, and David T. Loftus, which we refer to as the Consultant. The License Agreement was filed as Exhibit 10.1 to our Quarterly Report on Form 10-Q for the Quarter Ended September 30, 2009. Pursuant to the Licensing Agreement, we agreed to exclusively license from the Licensor the usage of the Licensor's direct marketing database of street addresses, cellular phone numbers, e-mail addresses and other comprehensive data, or the Database. In addition, we engaged the services of the Consultant to assist in the use of the Database. Under the terms of the Licensing Agreement, we paid a $250,000 one-time consulting fee to the Consultant in the form of 2,777,778 shares of restricted common stock, which we refer to as the Consulting Fee. In addition to the Consulting Fee, we will pay the Licensor a percentage of actual revenue received by us from successful sales made pursuant to use of the Database. The Licensing Agreement has a five-year term, but may be terminated by us after the Licensing Agreement has been in effect for one year after the effective date of the Licensing Agreement. Upon such termination, we will be obligated to pay the Licensor its fees owed under the Licensing Agreement for the remainder of the term in addition to eight times the total fees paid to the Licensor over the last three months of use of the Licensing Agreement. Effective September 1, 2011, we signed and Amendment to the Agreement dated September 16, 2009 to provide licensor a non-exclusive right to target, market and exploit the Employee Benefits market.
In the event that we are unable to continue to obtain supply, development or maintenance services from any of our suppliers or developers, we believe that we would be able to utilize other suppliers, developers, or maintenance services to continue the development and operation of our products. In selecting our current supply, development and maintenance vendors with which we have agreements, we received competitive bids from other vendors who would have been able to provide equivalent services. Thus, we believe that the marketplace for such services is broad enough that we would be able to reach commercially reasonable terms for the continued development of our products within the termination periods provided in each agreement.
Disaster Recovery Plan
We have a disaster recovery plan in place that is designed to ensure the safekeeping of records stored in a user's MyMedicalRecords PHR, MyEsafeDepositBox, MyMedicalRecordsMD and MMRPatientView accounts, while maintaining continuity of our services should our main server site be affected by a natural or man-made disaster. We have two standby disaster recovery sites, one site is in Omaha and the other site is 150 miles from Kansas City where our main production servers are located. We backup and encrypt the database holding our customers' records to servers housed in this "hot" standby disaster recovery site so that both systems contain identical information on a near-real-time basis. In addition, our main production site has redundancy measures built-in at all levels of the infrastructure and is designed to facilitate maximum availability of our product websites. Our backup and recovery encryption and processes are FIPS 140-2 compliant.
Competition
MyMedicalRecords PHR
Though the Company believes that no other product in the marketplace compares to what we have to offer, especially given our patents as a barrier to entry, there are other Personal Health Record providers in the consumer health information management marketplace today that compete for our services. These include myMediConnect, NoMoreClipboard.com, AccessMyRecords, Dossia, WebMD Health Manager, and HealthVault®, although the last is more of a personal health platform that offers multiple solutions, for which MMR is currently developing based on an agreement with Microsoft® HealthVault® this year. In addition, we compete with Internet-portals offered by insurance companies, hospitals and HMOs for their policyholders and patients.
39
Each of our competitors offers varying PHR products and services for on-line 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 faxed or uploaded directly into the user's MyMedicalRecords PHR account, 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. Our MyMedicalRecords PHR is designed to allow a user or provider to send a medical record directly into a MyMedicalRecords PHR account from any fax machine, anywhere in the world, and once received, the user can then store and manage those records in a personalized filing system with 16 file folders.
Competitors may offer limited document management capability for Personal Health Records; 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, 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. Moreover, we believe our integrated fax offering alone can save members as much as $300 a year as compared to using similar electronic fax services.
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 on-line 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. All of the competing services, raise consumer awareness about the need for access to personal health information and 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, 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 on-line 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 on-line 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 believe the portability of MyEsafeDepositBox creates a product advantage in the marketplace because users are not required to do business with any particular bank. Users also benefit from not having restrictions placed on the amount of storage capability in their account unless they upgrade to more costly subscriptions. Our ability to provide private label branding affords banks, insurance companies, escrow services and other financial and legal businesses to provide not only a useful product but also reinforces that business's identity.
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 Electronic Medical Record 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 on-line 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 privacy and security guidelines. 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.
40
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 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.
Intellectual Property
Patents
In September 2005, we filed a utility patent application on key elements of our proprietary process with the United States Patent and Trademark Office. This patent application and two related patent applications were allowed in December 2011 and issued in February 2012 as U.S. Patent No. 8,121,855, U.S. Patent No. 8,117,045, and U.S. Patent No. 8,117,646. Together these patents have a total of 81 claims. The full term of these patents will not expire until October 2027.
In 2012, we filed additional continuation patent applications in the U.S. for this technology, requesting prioritized examination. In March 2007, we filed a separate application for our Emergency "Read Only" Password service (see discussion above under "- Our Products- MyMedicalRecords - An On-line Personal Health Record (PHR) - Additional Product Features - Emergency Log in For Physicians and Other Emergency Response Personnel"). In May 2006, we filed a patent application with Australian authorities pursuant to the Patent Cooperation Treaty, which was awarded on May 29, 2008. A second patent application with Australian authorities was awarded on December 24, 2009. A patent application filed pursuant to the Patent Cooperation Treaty was awarded in Singapore on January 30, 2009. A patent application filed pursuant to the Patent Cooperation Treaty was awarded in New Zealand on December 7, 2010. In March 2012 we received notice that Mexico has allowed our pending patent application. Currently other foreign patent applications and related U.S. applications are pending. In April 2011, a U.S. patent application and Patent Cooperation Treaty patent application were filed which were based on a provisional patent application filed April 2010 and are directed toward the use of electronic health records in clinical trials. In September 2011, a U.S. patent application and Patent Cooperation Treaty patent application were filed which were based on a provisional patent application filed September 2010 and directed toward a universal patient record conversion tool. In January 2012 and February 2012 we filed provisional patent applications directed toward a mobile platform for Personal Health Records. In January and February 2012 we filed provisional patent applications directed toward prepaid cards for services related to Personal Health Records. In January and February 2012 we filed provisional patent applications directed toward a method and system for managing Personal Health Records with telemedicine and personal health monitoring device features. We intend to pursue patent protection in other countries where we may offer our products in the future. We consider patent protection an important element of a sound intellectual property portfolio, although we do not anticipate being able to prevent our competition from using other methods to achieve similar ends.
Currently, the Company also has 186 patent claims still pending across nine other pending U.S. utility patent applications related to health information technology. In addition, the Company has a total of two PCT applications pending and seven U.S. provisional patent applications pending.
Other Assets
The Company acquired significant intellectual property assets from the merger with Favrille and is in the process of exploiting and monetizing those assets, which include, but are not limited to, data from the Company's pre-merger clinical vaccine trials, the Specifid vaccine, and the anti-CD20 antibodies.
The Company has been working to perfect the patent condition of these biotech assets obtained from the reverse merger with Favrille for more than two and a half 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 patents with expiration dates of August 2021. Additional patent applications once granted may obtain additional term of biotech patent protection.
We successfully revived Favrille's original U.S. Patent No. 6,911,204 directed to treating B-cell pathologies on May 27, 2010. Additional U.S. B-cell pathologies patent applications were also successfully revived and as recently as February 14, 2012 a second U.S. Patent 8,114,404 has been awarded to protect certain embodiments 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™ 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.
41
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. 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, South Korea and Mexico.
The Company has relied upon numerous consultants in its efforts to accelerate bringing to market its anti-CD20 monoclonal antibodies. Anti-CD20 antibodies are useful in treating B-cell malignancies, including Non-Hodgkin Lymphoma (NHL) and additional B-cell mediated conditions such as rheumatoid arthritis. The Company understands the anti-CD20 antibody assets are potential candidates for the next generation of a Rituximab-type therapy. Rituximab is marketed under the trade name Rituxan® in the United States by Biogen Idec and Genentech (wholly owned member of the Roche Group) and under the name MabThera® by Roche in the rest of the world except Japan, where it is co-marketed by Chugai and Zenyaku Kogyo Co. Ltd. Rituxan® is one of the world's most successful monoclonal antibodies with reported total sales in 2008 in excess of US $5.4 billion.
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.
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 and www.MMRPatientView.com for use with MyMedicalRecords Pro and own the domain name www.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 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.
Research and Development
In 2011 and 2010, MMR spent $322,666 and $322,942, respectively, on research and development activities.
Properties
Currently, as a virtual Internet-based company we have minimal needs for office space to conduct our day-to-day business operations. On May 1, 2009, we entered into a lease agreement to lease office space in Beverly Hills, California. The lease was month-to-month and required a monthly payment of $7,667 commencing in June 2009. This lease was terminated in September, 2010. Effective September 1, 2010, we entered into a lease agreement to lease the current office space in Los Angeles, California. The lease requires a monthly payment of $5,500 commencing in September 2010. Effective November 1, 2010, we entered into a lease agreement to lease additional space adjacent to the current office space in Los Angeles, California. The lease requires an additional monthly payment of $3,193 commencing in November 2010. Both current leases will expire on August 31, 2013.
Employees
As of December 31, 2011, we employed a total of nine full-time employees and regularly use the full-time services of an additional four consultants. The Company also relies on a team of more than 35 developers and programmers located in India and Omaha, Nebraska.
Legal Proceedings
From time to time, we are involved in various legal proceedings generally incidental to our business. While the result of any litigation contains an element of uncertainty, our management presently believes that the outcome of any known, pending or threatened legal proceeding or claim, individually or combined, will not have a material adverse effect on our financial statements.
42
On July 31, 2011, Ropers, Majeski, Kohn and Bentley ("Ropers"), a national firm with offices in San Francisco, Redwood City, San Jose, Los Angeles, New York and Boston, filed a civil complaint on behalf of MyMedicalRecords.com ("MMR- US") in the Superior Court For the State of California, County of Los Angeles. Named as defendants in that case are Taylor Armstrong, Russell Armstrong and a corporation known as NuWay Digital Systems. Among other things, the Complaint alleges that Taylor Armstrong and her husband Russell Armstrong breached a 2007 settlement agreement between themselves and MMR-US. The settlement agreement entitles MMR-US to liquidated damages of $1,000,000 for the first such breach and $250,000 for each ensuing breach. To date, three breaches have been alleged. Ropers continues to investigate and will amend the Complaint in the event that additional breaches are uncovered. The complaint has been served on Ms. Armstrong individually, and she has answered. The pre- trial discovery process has commenced. Trial is set in July 2012. The parties have engaged in an extensive mediation; however, it would be premature to conclude that the matter will be fully settled prior to trial.
On January 26, 2012, we filed a complaint against certain a former officer of pre-merger Favrille, Inc., and other potential defendants (the "Favrille Defendants") that the Company believes may have committed wrongful acts relating to the misappropriation of Favrille's intellectual and personal property. Information leading to the decision to file the lawsuit was discovered as a result of the filing of a lawsuit by The RHL Group, Inc., a creditor of MMRGlobal. The RHL Group lawsuit was filed against Dan Gold, a former officer and director of Favrille, and other defendants for wrongful acts relating to the misappropriation of Favrille's intellectual and personal property. MMR's board of directors consented to having the law firm that represented the RHL Group, Inc. represent MMR Global, Inc.
MMR has recently asked Ropers to substitute in as counsel of record in the lawsuit that is now pending in San Diego County, California against the Favrille Defendants. In the complaint, MMR seeks damages for unauthorized removal and conversion of MMR assets including tissue and other samples that were wrongfully converted by the defendants. Damages may be as high as $5,000,000. Some of MMR's damage may be covered by first party insurance. The matter is in the initial stages of the litigation process. No trial date is set and discovery has yet to commence.
At this time the potential recovery for damages is unknown. There is no attorneys' fees provision, so if the lawsuit ends unfavorably for us, the only damages could be for attorneys' fees, costs and expenses incurred by the Company for its representation and certain indemnification provisions in the Agreement and Plan of Merger and Reorganization between Favrille and MyMedicalRecords.com, Inc. The matter is currently in the early stages of litigation and counsel does not have enough facts at this time to predict the possibilities of either a favorable or unfavorable outcome.
On December 9, 2011, MyMedicalRecords, Inc. entered into a Non-Exclusive Settlement and Patent License Agreement (the "Agreement") with Surgery Center Management LLC ("SCM"). In consideration for the rights granted under the Agreement and in consideration of a settlement and release agreement, SCM contracted to pay MyMedicalRecords, Inc. the sum of $30 million with a minimum of $5 million payable on December 23, 2011 and $5 million per year for five consecutive years. After numerous attempts to collect the past due amount of $5 million, on January 19, 2012, MyMedicalRecords, Inc. filed a lawsuit in the Superior Court of the State of California for the County of Los Angeles for breach of contract. The contract contains an arbitration clause and the Company has demanded arbitration for the $30 million allegedly due. This matter is currently in the initial pleading stages and counsel does not have enough facts at this time to predict the chances of either a favorable or unfavorable outcome, nor does counsel have any facts upon which to base any information regarding collectability.
MMR is facing one claim from Sunil Singhal, a former employee. Mr. Singhal was employed as Executive Vice President of Technology and Product Development at MMR. He was placed on a 30-day administrative leave on February 13, 2012, on February 29, 2012 was given a 30-day notice of termination as approved by the Board of Directors, and on March 30, 2012 was officially terminated. No lawsuit has been filed and defense of the claim has been tendered to MMR's insurance carrier.
Reports
We make available free of charge through our website, www.MMRGlobal.com, our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or to furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934 as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Any information that is included on or linked to our Internet site is not a part of this report or any registration statement that incorporates this report by reference.
You may also read and copy any materials we file with the SEC at the SEC's Public Reference Room, located at 100 F Street, NE, Washington, DC 20549, on official business days during the hours of 10:00 am to 3:00 pm. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
43
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
You should read the following discussion of our financial condition and results of operations together with our financial statements and related notes included elsewhere in this prospectus. This discussion may contain forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those anticipated in these forward-looking statements due to known and unknown risks, uncertainties and other factors, including those risks discussed under "Risk Factors" and elsewhere in this prospectus.
Business overview
Background and Basis of Presentation
As described above, on January 27, 2009, we consummated a transaction with MMR through a merger of our wholly-owned subsidiary with and into MMR pursuant to the terms of the Merger Agreement. In connection with the Merger, MMR became our wholly-owned subsidiary, with the former stockholders of MMR collectively owning (or having the right to acquire) shares of our common stock representing approximately 60.3% of the voting power of our capital stock on a fully diluted basis.
For accounting purposes, the Merger was treated as a reverse acquisition with MMR being the accounting acquirer. Accordingly, the historical financial results prior to the Merger are those of MMR and replace our historical financial results as we existed prior to the Merger. Our results of operations are included in MMR's financial results beginning on January 27, 2009.
The Company was incorporated in Delaware in 2005 and is headquartered in Los Angeles, CA. Effective February 9, 2009 MMR changed its corporate name to MMR Information Systems, Inc., or MMRIS after completion of the reverse merger with Favrille. We provide secure and easy-to-use online PHRs and electronic safe deposit box storage solutions, serving consumers, healthcare professionals, employers, insurance companies, unions and professional organizations and affinity groups. MMRIS enables individuals and families to access their personal and emergency medical records and other important documents, such as birth certificates, passports, insurance policies and wills anytime from anywhere using the Internet. The MMR products are built on proprietary, patented 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, MMR Pro, 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.
Source of Revenues
We generate our revenues from services, which are comprised of providing electronic access to consumer medical records and other vital documents and from the licensing of our services. We recognize revenue only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and we reasonably are assured of collectability of the resulting receivable.
Our subscriber revenues consist of annual and monthly recurring retail subscriptions and usage-based fees, which are primarily paid in advance by credit card, and corporate accounts that are based on either an access-fee or actual number of users, and in each case billed in advance at the beginning of each month of service. We defer the portions of annual recurring subscription fees collected in advance and recognize them on a straight line basis over the subscription period.
We grant exclusive licenses for the sale and marketing of our services in international territories in consideration of an up-front license fee and an ongoing royalty. The royalty fee is usually a percentage of revenue earned by the licensee and there usually are certain minimum guarantees. We defer the recognition of license fee revenues received in advance from international licensees for the grant of the license and recognize them over the period covered by the agreement. We defer the recognition of minimum guaranteed royalty payments received in advance and recognize them over the period to which the royalty relates. We include all such revenues under "License Fees." In those cases where a license agreement contains multiple deliverables, we account for the agreement in accordance with ASC 605-25, Revenue Recognition - Multiple-Element Arrangements.
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, and costs associated with creating and mailing enrollment packages to our subscribers. 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.
44
Operating Expenses
The largest component of our operating expenses are 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).
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowances for doubtful accounts, the valuation of deferred income taxes, tax contingencies, long-lived and intangible assets, valuation of derivative liabilities and stock-based compensation. These estimates are based on historical experience and on various other factors that it believes to be reasonable under the circumstances. Actual results could differ from those estimates. For additional information relating to these and other accounting policies, see note 2 to our financial statements appearing elsewhere in this registration statement on Form S-1.
Revenue Recognition
Our revenues are derived from services, which are comprised of providing electronic access to consumer medical records and other vital documents and from the licensing of its services. We recognize revenue for such services only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and collectability of the resulting receivable is reasonably assured.
Our subscriber revenues consist of annual and monthly recurring retail subscriptions and usage-based fees, which are primarily paid in advance by credit card, and corporate accounts that are based on either an access-fee or actual number of users, and in each case billed in advance at the beginning of each month of service. We defer the portion of annual recurring subscription fees collected in advance and recognize them on a straight line basis over the subscription period.
We grant exclusive licenses for the sale and marketing of our services in international territories in consideration of an up-front license fee and an ongoing royalty. The royalty fee is usually a percentage of revenue earned by the licensee and there usually are certain minimum guarantees. License fee revenues received in advance from international licensees for the grant of the license are deferred and recognized over the period covered by the agreement. Minimum guaranteed royalty payments received in advance are deferred and recognized over the period to which the royalty relates. All such revenues are included under "License Fees and Other." In those cases where a license agreement contains multiple deliverables, the agreement is accounted for in accordance with ASC 605-025 (formerly EITF 00-21, "Revenue Arrangements with Multiple Deliverables"). As of the date hereof, we no longer had any active international licensing agreements.
We recognize revenue on sales of our MMRPro system in accordance with ASC 605-25, Revenue Recognition, Multiple-Element Arrangements. We have also adopted Accounting Standards Update ("ASU") 2009-13, "Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force" effective January 1, 2010.
Our multiple-deliverable arrangements consist solely of our MMRPro product. Significant deliverables within these arrangements include sophisticated scanning equipment, various licenses to use third party software, a license to use our proprietary MMRPro application software, installation and training, dedicated telephone lines, secure online storage and warranties.
We determined all elements to be separate units of accounting as they have standalone value to the customers and/or they are sold by other vendors on a standalone basis. Delivery of the hardware and certain software elements of these arrangements occur at the inception of the agreement. We deliver installation and training at the inception of the agreement. We provide other software licenses, telephone lines and online secure storage over the three year term of the agreement. We include warranties in the arrangements, however the third party product manufacturer, and not us, is obligated to fulfill such warranties. The contracts are paid in advance and are not refundable.
We allocate the revenue derived from these arrangements among all the deliverables. We base such allocation on the relative selling price of each deliverable. With the exception of our proprietary MMRPro application software, we use third party evidence to set the selling prices used for this allocation. In all such cases, third parties sell the same or very similar products. For the MMRPro application software, we estimate the selling price based on recent discussions regarding licensure of that particular application on a standalone basis. To date, we have not licensed this software on a standalone basis.
We recognize the allocated revenue for each deliverable in accordance with SEC Staff Accounting Bulletin ("SAB") No. 104, Topic 13: Revenue Recognition. Under this guidance, we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable and collectability is reasonably assured. This result in us recognizing revenue for the hardware, certain software and the warranties upon delivery to the customer, for the installation and training upon completion of these services, and ratably over the contract period for the software licenses, telephone lines and online secure storage.
45
Revenue from the licensing of our biotech assets 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. For agreements that provide for milestone payments, such as the Celgene Agreement, we adopted ASC 605-28-25, Revenue Recognition, Milestone Method.
Accounting for Income Taxes and Uncertain Tax Positions
We account for income taxes in accordance with ASC 740-10, Income Taxes. We recognize deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. We record a valuation allowance related to a deferred tax asset when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. We classify interest and penalties as a component of interest and other expenses. To date, we have not been assessed, nor have we paid, any interest or penalties.
We measure and record uncertain tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.
Intangible Assets
We account for website development costs in accordance with the provisions of ASC 350-50 (formerly Emerging Issues Task Force, or EITF, No. 00-2, "Accounting for Website Development Costs") and ASC 985-20 (formerly SFAS No. 86 "Accounting for the Costs of Computer Software to Be Sold, Leased, or Otherwise Marketed"). Pursuant to these provisions we capitalize internally developed website costs when the website under development has reached technological feasibility. These costs are amortized, typically over an estimated life of five years, using the larger of the amount calculated using the straight-line method or the amount calculated using the ratio between current period gross revenues and the total of current period gross revenues and estimated future gross revenues. At each balance sheet date, we evaluate the unamortized capitalized website costs compared to the net realizable value. The amount by which the unamortized capitalized website costs exceed its net realizable value is written off. The determination of estimated future gross revenues requires the exercise of judgment and assumptions by our management and actual results could vary significantly from such estimates.
Impairment of Long-Lived Assets and Intangibles
We evaluate long-lived assets and identifiable intangible assets with finite useful lives in accordance with ASC 350-30 and ASC 360 (formerly SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets), and accordingly, management reviews our long-lived assets and identifiable intangible assets with finite useful lives for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. We recognize an impairment loss when the sum of the future undiscounted net cash flows expected to be realized from the asset is less than its carrying amount. If an asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Considerable judgment is necessary to estimate the fair value of the assets and accordingly, actual results could vary significantly from such estimates. Our most significant estimates and judgments relating to the long-lived asset impairments include the timing and amount of projected future cash flows.
Share-Based Compensation
We account for share-based compensation in accordance with ASC 718-20, Awards Classified as Equity. We apply ASC 718-20 in accounting for stock-based awards issued to employees under the recognition of compensation expense related to the fair value of employee share-based awards, including stock options and restricted stock. Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. Judgment is required in estimating the amount of share-based awards expected to be forfeited prior to vesting. If actual forfeitures differ significantly from these estimates, share-based compensation expense could be materially impacted.
We account for options and warrants issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. We treat options and warrants issued to non-employees the same as those issued to employees with the exception of determination of the measurement date. The measurement date is the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete. Options and warrants granted to consultants are valued at their respective measurement dates, and recognized as expense based on the portion of the total consulting services provided during the applicable period. As further consulting services are provided in future periods, we will revalue the associated options and warrants and recognize additional expense based on their then current values.
46
We estimate the fair value of each stock option on the date of grant using the Black-Scholes option pricing model. We determine assumptions relative to volatility and anticipated forfeitures at the time of grant. We base the assumptions used in the Black-Scholes models upon the following data: (1) our use of the contractual life of the underlying non-employee warrants as the expected life; the expected life of the employee options used in this calculation is the period of time the options are expected to be outstanding and has been determined based on historical exercise experience; (2) in the absence of an extensive public market for our shares, the expected stock price volatility of the underlying shares over the expected term of the option or warrant was taken at approximately the mid-point of the range for similar companies at the various grant dates; (3) we base the risk free interest rate on published U.S. Treasury Department interest rates for the expected terms of the underlying options or warrants; (4) we base expected dividends on historical dividend data and expected future dividend activity; and (5) we base the expected forfeiture rate on historical forfeiture activity and assumptions regarding future forfeitures based on the composition of current grantees.
Recent Accounting Pronouncements
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force, that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. As a result of these amendments, multiple-deliverable revenue arrangements will be separated in more circumstances than under existing U.S. GAAP. The ASU does this by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. A vendor will be required to determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. This ASU also eliminates the residual method of allocation and will require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the overall arrangement proportionally to each deliverable based on its relative selling price. Expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance are also required under the ASU. The ASU does not apply to arrangements for which industry specific allocation and measurement guidance exists, such as long-term construction contracts and software transactions. The ASU is effective beginning January 1, 2011. The Company has adopted this standard on the Company's financial statements since January 1, 2010.
In October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements - a consensus of the FASB Emerging Issues Task Force, that reduces the types of transactions that fall within the current scope of software revenue recognition guidance. Existing software revenue recognition guidance requires that its provisions be applied to an entire arrangement when the sale of any products or services containing or utilizing software when the software is considered more than incidental to the product or service. As a result of the amendments included in ASU No. 2009-14, many tangible products and services that rely on software will be accounted for under the multiple-element arrangements revenue recognition guidance rather than under the software revenue recognition guidance. Under the ASU, the following components would be excluded from the scope of software revenue recognition guidance: the tangible element of the product, software products bundled with tangible products where the software components and non-software components function together to deliver the product's essential functionality, and undelivered components that relate to software that is essential to the tangible product's functionality. The ASU also provides guidance on how to allocate transaction consideration when an arrangement contains both deliverables within the scope of software revenue guidance (software deliverables) and deliverables not within the scope of that guidance (non-software deliverables). The ASU is effective beginning January 1, 2011.The Company has adopted this standard on the Company's financial statements since January 1, 2010.In January 2010, the FASB issued ASU No. 2010-6, "Improving Disclosures About Fair Value Measurements," that amends existing disclosure requirements under ASC 820 by adding required disclosures about items transferring into and out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures about purchases, sales, issuances, and settlements relative to level 3 measurements; and clarifying, among other things, the existing fair value disclosures about the level of disaggregation. This ASU became effective during the first quarter of 2010, except for the requirement to provide level 3 activities of purchases, sales, issuances, and settlements on a gross basis, which becomes effective beginning the first quarter of 2011. The adoption of this standard didn't have a material impact on our financial statements.
Going Concern
As of March 31, 2012, our current liabilities of $7,962,459 exceeded our cash and cash equivalents of $74,461. As of December 31, 2011, the Company's current liabilities exceeded its current assets by $6.58 million. Furthermore, during the years ended December 31, 2011, and 2010, the Company incurred losses of $8.88 million and $17.90 million, respectively.
47
At December 31, 2011 and December 31, 2010, the Company had $311,103 and $363,689, respectively, in cash and cash equivalents. Historically, the Company issued capital stock and received funds from The RHL Group, Inc. (a significant shareholder wholly-owned by the Company's Chairman and Chief Executive Officer) to operate its business. Although, the Company received additional funding from The RHL Group pursuant to the Third Amended and Restated Note dated April 29, 2009, it nevertheless will still be required to obtain additional financing in order to meet installment payment obligations resulting from settlement payments with various creditors, which we refer to as the Creditor Plan and the previously existing obligations under the subordinated secured indebtedness to The RHL Group, which note payable had a balance of $1,574,312 at December 31, 2011. The components of the RHL Group Note payable and the related balance sheet presentation as of December 31, 2011 are as follows: $1,349,312, which is included in the line of credit, related party payable; $225,000, which is related to deferred salary and consulting expenses is included in related party payables; and $72,589, for various deferred amounts.
As a result of the above, there is uncertainty about the Company's ability to continue as a going concern.
Management's plan regarding this matter is to continue to utilize its available line of credit with The RHL Group (see Note 3 and Note 1 to the Consolidated Financial Statements for the year ended December 31, 2011 and the three months ended March 31, 2012, respectively, included elsewhere in this filing). At December 31, 2011, there was approximately $1,176,000 available under The RHL Group line of credit. Furthermore, we already began and plan to continue to utilize portions of our standby equity line facility with Dutchess as needed. In addition, the Company plans to continue to sell additional debt and equity securities, continue to settle its existing liabilities through issuance of equity securities, explore other debt financing arrangements, continue to increase its existing subscriber and affiliate customer base and sell MMRPro products to obtain additional cash flow over the next twelve months. There can be no assurance that funds from these sources will be available when needed or, if available, will be on terms favorable to us or to our stockholders. If additional funds are raised by issuing equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities may provide for rights, preferences or privileges senior to those of the holders of our common stock.
If the Company is unable to utilize its available line of credit with The RHL Group, or its equity line of credit with Dutchess, or obtain suitable alternative debt or equity financing, it may adversely affect the Company's ability to execute its business plan and continue as a going concern.
Results of Operations
Comparison of Year Ended December 31, 2011 to Year Ended December 31, 2010
The following table sets forth items in our statements of operations for the periods indicated:
Years Ended | |||||||||||||
December 31, | |||||||||||||
2011 | 2010 | ||||||||||||
Revenues | |||||||||||||
Subscriber | $ | 312,430 | $ | 447,459 | |||||||||
MMR Pro | 463,097 | 225,413 | |||||||||||
License fees | 500,000 | 250,000 | |||||||||||
Other revenues | 144,121 | 50,116 | |||||||||||
Total revenues | 1,419,648 | 972,988 | |||||||||||
Cost of revenues | 609,212 | 663,372 | |||||||||||
Gross profit | 810,436 | 309,616 | |||||||||||
General and administrative expenses | 4,469,845 | 4,288,652 | |||||||||||
Sales and marketing expenses | 2,419,925 | 2,677,427 | |||||||||||
Technology development | 324,666 | 322,942 | |||||||||||
Loss from operations | (6,404,000) | (6,979,405) | |||||||||||
Change in valuation of derivative liabilities | (36,745) | (5,862,568) | |||||||||||
Interest and other finance charges, net | (2,443,682) | (5,058,079) | |||||||||||
Net loss | $ | (8,884,427) | $ | (17,900,052) | |||||||||
Net loss per share: | |||||||||||||
Basic and diluted | $ | (0.03) | $ | (0.08) | |||||||||
Weighted average common shares outstanding: | |||||||||||||
Basic and diluted | 288,853,993 | 214,265,303 |
48
Revenues.
Revenues increased by $446,660, or 45.9%, to $1,419,648 for the year ended December 31, 2011 from $972,988 for the year ended December 31, 2010 due to an increase in MMRPro sales, Biotech licensing, and other revenues related to website integration and development for private label applications for E-mail Frequency, in spite of a decrease in subscriber revenues from the loss of the Alexian Brother's revenue as a result of their migration to an in-house MEDITECH EMR.
Cost of revenue. Our cost of revenue decreased to $609,212 for the year ended December 31, 2011 from $663,372 for the year ended December 31, 2010, primarily due to changes in service providers and the development of our own cost-savings platform. The cost of revenue as a percentage of sales decreased by 8.2% from 68.2% in 2010 to 42.9% in 2011. Accordingly, we had an increase in gross margin to 57.1% for year ended December 31, 2011, as compared to 31.8% for the similar period in 2010.
Operating expenses. The following table sets forth the individual components of our operating expenses for the year ended December 31, 2011 and 2010:
Years Ended | ||||||||||||
December 31, | ||||||||||||
2011 | 2010 | |||||||||||
General and administrative expenses | $ 4,469,845 | $ 4,288,652 | ||||||||||
Sales and marketing expenses | 2,419,925 | 2,677,427 | ||||||||||
Technology development | 324,666 | 322,942 | ||||||||||
Total | $ 7,214,436 | $ 7,289,021 |
Operating expenses decreased 4.9% to $7,214,436 for the year ended December 31, 2011, from $7,289,021 for the year ended December 31, 2010. This was primarily due to the decrease in our sales and marketing expenses, offset by slightly higher general and administrative expenses as explained below.
General and administrative expenses increased by $181,193 or 4.2% in 2011, compared to the similar period in 2010. The increase was driven primarily by higher consulting fees and amortization expense.
Sales and marketing expenses decreased by 257,502 or 9.6% in 2011 as compared to the similar period 2010 primarily due to the deployment of the MMRGlobal Infocom network, a proprietary health information and communications network that enables the Company to reduce infrastructure costs while upgrading our services to include VoIP Gateways and virtualized service options that enhance the operation of our proprietary health IT products.
Technology development expenses remained relatively flat in 2011 as compared to 2010.
Change in valuation of derivative liabilities. In November 2007, Favrille issued warrants to purchase 4.4 million shares of common stock in conjunction with a registered direct offering of common stock and warrants. We assumed these outstanding warrants as a result of the Merger on January 27, 2009. The value associated with these warrants was recorded as a liability utilizing the Black- Scholes valuation model, and revalued at the end of each quarter. The change in valuation of the warrants from the beginning to the end of the period is recorded as change in valuation of derivative liabilities. We recorded a change in valuation of the warrants of $88,997 during both years ended December 31, 2011 and 2010.
We also had certain non-employee options and warrants outstanding which were accounted for as derivatives as there was a possibility, although remote, that the Company may not have enough authorized shares to settle its 12% Convertible Promissory Note obligations using common stock. The event giving rise to this condition was the first Convertible Note the Company entered into on July 16, 2009. We remedied this condition on May 5, 2010 when all convertible notes were converted into common stock and warrants granted in connection with the convertible notes were exercised. On May 5, 2010, we again valued these contracts using the Black- Scholes option valuation model and we recorded the difference between the value at December 31, 2009 of $1,534,824 and the value at May 5, 2010 of $7,397,392, as a loss on change in value of derivatives for the year ended December 31, 2010 of $5,862,568. On May 5, 2010, we reclassified the value of the derivative liabilities back into equity. Since then, no additional valuation was recorded.
The change in valuation of derivative amounts impacting our statement of operations for the year ending December 31, 2011 and 2010 was a non-cash expense.
49
Interest and Other Finance Charges, Net. We had net interest and other financing charges, net of $2,443,682 for the year ended December 31, 2011, a decrease of $2,614,397 from $5,058,079 for the year ended December 31, 2010. The decrease was primarily due to lower non-cash interest expense attributed to the conversion feature and warrant issued in conjunction with Convertible Notes.
Net loss. As a result of the foregoing, we had a net loss of $8,884,427 for the year ended December 31, 2011 compared to a net loss of $17,900,052 for the year ended December 31, 2010.
Comparison of Three Months Ended March 31, 2012 to Three Months Ended March 31, 2012
The following table sets forth items in our statements of operations for the periods indicated:
Three Months Ended | |||||||
March 31, | |||||||
2012 | 2011 | ||||||
(Unaudited) | (Unaudited) | ||||||
Revenues | |||||||
Subscriber | $ | 44,846 | $ | 61,659 | |||
MMR Pro | 21,580 | 10,322 | |||||
License fees | 100,000 | 500,000 | |||||
Other revenues | 6,372 | - | |||||
Total revenues | 172,798 | 571,981 | |||||
Cost of revenues | 174,849 | 159,433 | |||||
Gross profit (loss) | (2,051) | 412,548 | |||||
General and administrative expenses | 933,766 | 1,007,861 | |||||
Sales and marketing expenses | 452,644 | 588,996 | |||||
Technology development | 69,977 | 84,814 | |||||
Loss from operations | (1,458,438) | (1,269,123) | |||||
Interest and other finance charges, net | (125,763) | (461,269) | |||||
Net loss | $ | (1,584,201) | $ | (1,730,392) | |||
Net loss per share: | |||||||
Basic and diluted | $ | (0.00) | $ | (0.01) | |||
Weighted average common shares outstanding: | |||||||
Basic and diluted | 366,241,123 | 241,541,304 |
Revenues.
Revenues for the first quarter of 2012 were $172,798, a decrease of $399,183 or 69.8% compared to $571,981 in 2011. The decrease for the quarter was primarily due to lower biotech-related license fees from Celgene, which varied based on the milestones reached in the first quarter of 2011 vs. the same period in 2012.
Cost of revenue.
Cost of revenue increased by $15,416, or 9.7%, from $159,433 for the first quarter of 2011 to $174,849 in 2012. The increase for the quarter was primarily due to increased amortization of website development costs. Gross profit as a percentage of revenues was 1.2% for the first quarter of 2012, as compared to 72.1% in 2011 Gross profit as a percentage of revenues decreased primarily due to lower biotech licensing fees received from Celgene.
50
Operating expenses.
The following table sets forth the individual components of our operating expenses for the three months ended March 31, 2012 and 2011:
Three Months Ended | ||||||
March 31, | ||||||
2012 | 2011 | |||||
(Unaudited) | (Unaudited) | |||||
General and administrative expenses | $ | 933,766 | $ | 1,007,861 | ||
Sales and marketing expenses | 452,644 | 588,996 | ||||
Technology development | 69,977 | 84,814 | ||||
Total | $ | 1,456,387 | $ | 1,681,671 |
Total operating expenses decreased by $225,284, or 13.4%, from $1,681,671 in the first quarter of 2011 to $1,456,387 in 2012. General and administrative expenses decreased by $74,095, or 7.4%, from $1,007,861 in the first quarter of 2011 to $933,766 in 2012. The decrease in the first quarter of 2012 as compared to the first quarter of 2011 was driven primarily by a reduction in stock-based compensation expenses of approximately $230,000, lower consulting fees of $49,000, offset by an increase of legal fees of approximately $78,000.
Sales and marketing expenses decreased by $136,352, or 23.2%, from $588,996 in the first quarter of 2011 to $452,644 in 2012. The decrease in the first quarter of 2012 as compared to the first quarter of 2011 was primarily due to lower sales consulting fees of approximately $63,000, a decrease in trade shows expenses of $42,000, decrease in marketing travel expenses of $31,000.
Technology development expenses decreased by $14,837, or 17.5%, from $84,814 in the first quarter of 2011 to $69,977 in 2012. The decrease in the first quarter 2012 as compared to the first quarter of 2011 was primarily due to lower stock-based compensation expenses of approximately $14,000.
Change in valuation of derivative liabilities.
In November 2007, Favrille issued warrants to purchase 4.4 million shares of common stock in conjunction with a registered direct offering of common stock and warrants. We assumed these outstanding warrants as a result of the Merger on January 27, 2009. The value associated with these warrants was recorded as a liability utilizing the Black-Scholes valuation model, and revalued at the end of each quarter. The change in valuation of the warrants from the beginning to the end of the period is recorded as change in valuation of derivative liabilities. There was no change in valuation for the first quarter of 2012.
We also had certain non-employee options and warrants outstanding which were accounted for as derivatives as there was a possibility, although remote, that the Company may not have enough authorized shares to settle its 12% Convertible Promissory Note obligations using common stock. The event giving rise to this condition was the first Convertible Note the Company entered into on July 16, 2009. We remedied this condition on May 5, 2010 when all convertible notes were converted into common stock and warrants granted in connection with the convertible notes were exercised. On May 5, 2010, we again valued these contracts using the Black-Scholes option valuation model and we recorded the difference between the value at December 31, 2009 of $1,534,824 and the value at May 5, 2010 of $7,397,392, as a loss on change in value of derivatives for the year ended December 31, 2010 of $5,862,568. On May 5, 2010, we reclassified the value of the derivative liabilities back into equity. Since then, no additional valuation was recorded.
There was no change in the valuation of derivative liabilities for the three months ended March 31, 2012.
Interest and Other Finance Charges, Net.
We had interest and other finance charges, net of $125,763 for the first quarter of 2012, a decrease of $335,506 from $461,269 in 2011. The decrease was primarily due to higher non-cash interest expense attributed to the conversion feature and warrant issued with Convertible Promissory Notes.
Net loss.
As a result of the foregoing, we had a net loss of $1,584,201 for the first quarter of 2012 compared to a net loss of $1,730,392 for the first quarter of 2011.
51
Merger Negotiations
During the second half of fiscal 2011 and a portion of the first quarter of fiscal 2012, the Company was involved a series of continuing negotiations with JER, Inc. and Skin Cancer and Reconstructive Surgery Specialists of Beverly Hills regarding a potential major corporate transaction. For a number of business, legal and strategic reasons, negotiations have been on hold. The potential transaction took approximately seven months of management's time and impacted management's ability to focus on our core business, which had a negative effect on our revenues during the first quarter of fiscal 2012. Management has since refocused its efforts on the Company's core business and expects revenues to improve during the second quarter of fiscal 2012.
Liquidity and Capital Resources
Comparison of Year Ended December 31, 2011 to Year Ended December 31, 2010
As of December 31, 2011, the Company's current liabilities exceeded its current assets by $6.6 million. Furthermore, during the year ended December 31, 2011, the Company incurred losses of $8.9 million. At the current level of borrowing, the Company requires cash of $275,000 per year to service its debt. Furthermore, not including debt service, in order to continue operating its business, the Company uses an average of $285,000 cash per month, or $3.4 million per year. At this rate of cash burn, over the next twelve months, the Company's existing current assets will sustain the business for approximately three to six months.
In addition to the above cash burn from operations, the Company 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 subordinated secured indebtedness to The RHL Group (which note payable had a balance of $1,574,312 at December 31, 2011), among other debt obligations. Such obligations are currently due and payable pursuant to the terms of the note.
To finance its activities, the Company has relied on the issuance of stock and debt to the RHL Group. At December 31, 2011, the Company had a line of credit with the RHL Group in the amount of $3 million. Availability under this line of credit was $1.18 million as of December 31, 2011.
Furthermore, we may continue to utilize portions of our standby equity line facility with Dutchess as needed. Additionally, during 2011, we raised $1,800,858 in convertible debt. We expect to continue offering a limited amount of convertible debt in 2012. The Company also expects sales from MMRPro and its prepaid Personal Health Record cards to generate revenue and gross profit that will significantly improve its monthly sales and reduce annual cash burn from operations.
Cash Flows
Net cash used in operating activities for the year ended December 31, 2011 was $2,845,222, compared to $4,212,300 used in the similar period in 2010. In 2011, we had a net loss of $8,884,427, less non-cash adjustments (depreciation, amortization, common stock and warrants issued for services and interest, change in valuation of derivative liabilities, gain or loss of disposition of assets, stock compensation expense and the non-cash write-down of assets) of $4,825,408, plus changes in operating assets and liabilities of $1,213,797. In 2010, cash used in operating activities included net loss of $17,900,052, less similar non-cash adjustments of $14,436,241, less changes in operating assets and liabilities of $748,489. Compared to 2010, non-cash adjustments in 2011 were lower primarily due to the change in valuation of derivative liabilities, issuance of common stock and warrants for services and lower amortization of loan discount. Net operating assets were lower in 2011 due to decrease in business activity, the change in valuation of derivative liabilities and lower amortization of loan discount.
Net cash used in investing activities total $538,634 in 2011, compared to net cash provided by investing activities of $540,344 in 2010. In 2011, in addition to the normal spending for equipment, the Company also invested in patent applications, and MMRPro website development. In 2010, in addition to the normal spending for equipment, patent applications, and MMRPro website development costs, the Company also invested $56,000 in MMX Holdings, LLC as an effort to integrate MMRPro into the MMX dashboard-based financial and operating management tool for ambulatory surgical centers.
Net cash provided by financing activities totaled $3,331,270 during 2011, compared to $4,628,567 in 2010. Financing activities primarily included proceeds generated from the issuance of common shares and net proceeds from draw downs on our line of credit from the RHL Groups, Inc., a significant stockholder wholly-owned by Robert H. Lorsch, our chairman, Chief Executive Officer and President. Higher financing activities in 2010 were primarily from the issuance of convertible notes.
As of December 31, 2011, we had cash and cash equivalents of $311,103, compared to $363,689 at December 31, 2010.
52
Comparison of Three Months Ended March 31, 2012 to Three Months Ended March 31, 2012
As of March 31, 2012, the Company's current liabilities exceeded its current assets by $7.44 million. We have incurred net losses of $1,584,201 and $1,730,392 for the three months ended March 31, 2012 and 2011, 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 three months.
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 subordinated secured indebtedness to The RHL Group under the Fifth Amended Note (which had a balance of $1,648,472 at March 31, 2012), 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, 2012 are as follows: $1,119,207, which are included in the line of credit, related party; and $279,265, which is related to deferred salary and other expenses and $250,000, which is related to consulting fees, are included in related party payables. We recorded the loan origination fees mentioned above as a note discount and we are amortizing them over the Fourth Amended Note maturity period. As of March 31, 2012, the remaining unamortized origination fee was $16,667.
To finance our activities, we have relied on the issuance of stock and debt to the RHL Group. At March 31, 2012, we had a line of credit with The RHL Group in the amount of $3 million. As of March 31, 2012, availability under this line of credit is $0.9 million.
Furthermore, we may continue to utilize portions of our standby equity facility with Dutchess as needed. Additionally, during 2011, we raised $1,800,858 in convertible debt. We expect to continue offering a limited amount of convertible debt in 2012. The Company also expects sales from MMRPro and its prepaid Personal Health Record cards to generate revenue and gross profit that will significantly improve its monthly sales and reduce annual cash burn from operations.
Cash Flows
Net cash used in operating activities for the three months ended March 31, 2012 was $636,978, compared to $357,604 used in the similar period in 2011. In 2012, we had a net loss of $1,584,201, less non-cash adjustments (depreciation, amortization, common stock and warrants issued for services and interest, change in valuation of derivative liabilities, gain or loss of disposition of assets, stock compensation expense and the non-cash write-down of assets) of $382,977, less changes in operating assets and liabilities of $564,246. In 2011, cash used in operating activities included net loss of $357,604, less similar non-cash adjustments of $905,560, plus changes in operating assets and liabilities of $467,228. Compared to 2011, non-cash adjustments in 2012 were lower primarily due to a decreased in stock-based compensation expense and lower amortization of loan discount.
Net cash used in investing activities in the three months ended March 31, 2012 and 2011 totaled $147,243 and $117,491 respectively. Compared to 2011, investing activities in 2012 were higher mainly due to an increase in patent applications.
Net cash provided by financing activities in the three months ended March 31, 2012 and 2011 totaled $547,579 and $268,941, 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 2011, financing activities in 2012 were higher primarily due to various short- term borrowings.
As of March 31, 2012, we had cash and cash equivalents of $74,461, compared to $157,535 at March 31, 2011.
Off-Balance Sheet Arrangements
We believe that our entry into the Cooperation Agreement described above and as follows constitutes the creation of a direct financial obligation. 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 us agreed to form a joint venture in China for the purpose of deploying our Personal Health Record services and document imaging and management solutions in China. We will own 40% of the joint venture and UNIS will own 60% and each party will have the right to designate two members of the joint venture'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 joint venture's board of directors and no material actions may be taken unless all board members are present and voting at the meeting.
53
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.
For a more complete description of the terms of the Cooperation Agreement, please see Exhibit 10.26, filed with our annual Report on Form 10-K for the year ended December 31, 2009, filed 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.
The Company's entry into the Cooperation Agreement described above constitutes the creation of a direct financial obligation.
Commitments and Contingencies
For information relating to our commitments and contingent liabilities, please see Note 9 and Note 5 to our Consolidated Financial Statements for the year ended December 31, 2011 and the three months ended March 31, 2012, respectively.
54
MANAGEMENT
Executive officers and directors
The following table lists the names and ages as of December 31, 2011, and positions of the individuals who serve as our directors and executive officers:
Name |
Age |
Position |
Robert H. Lorsch |
62 |
Chairman of the Board; President and Chief Executive Officer |
Douglas H. Helm |
70 |
Director, Nomination and Corporate Governance Committee Chair and Executive Committee |
Mike Finley |
51 |
Director, Audit and Compensation Committee |
Bernard Stolar |
65 |
Director, Audit Committee Chair and Compensation Committee |
Jack Zwissig |
63 |
Director, Compensation Committee Chair and Audit Committee |
Ingrid Safranek |
39 |
Vice President of Finance and Chief Financial Officer |
Richard Lagani |
50 |
Executive Vice President of Sales |
Ralph Salazar |
66 |
Executive Vice President, Telecommunications & Carrier Relations |
Sunil Singhal* | 56 | Executive Vice President of Technology and Product Development |
* Mr. Singhal's employment was terminated effective March 30, 2012. |
Robert H. Lorsch, Chairman of the Board; Chief Executive Officer.
Mr. Lorsch has served as the Chairman, President and Chief Executive Officer of the Company since 2005. He is also Chairman and Chief Executive Officer of The RHL Group, Inc., a private equity and business management consulting firm Mr. Lorsch formed in April 1998. In 1994, he co-founded SmarTalk TeleServices, Inc., leading the company through a successful public offering in 1996 and building it into one of the largest providers of prepaid telecommunications products and services. Mr. Lorsch served as its Chairman and Chief Executive Officer until February 1998, following which SmarTalk moved its headquarters from Los Angeles to Dublin, Ohio with different management The Company's assets were subsequently liquidated and sold to AT&T in March 1999. In 1986, Mr. Lorsch founded the Lorsch Creative Network, a consulting company that developed marketing, advertising and interactive sales promotions campaigns for nationally and internationally recognized clients. In 1998 Lorsch Creative Network became The RHL Group, Inc. Mr. Lorsch has served on the Personal Health Record Steering Committee of the Healthcare Information and Management Systems Society from 2006 to 2007. He spent more than 25 years as a Member of the Board of Trustees of the California Science Center where the Robert H. Lorsch Family Pavilion stands as a gateway to the Science Center. He currently is a Member of the Board of Governors, Cedars-Sinai Medical Center; and has served since 1998 as Member of the Board and of the Executive Committee of D.A.R.E. America. He has also served as a National Vice President of Muscular Dystrophy and as a Member of the Board of the Sheriff's Youth Foundation. Mr. Lorsch has received numerous honors and awards, including D.A.R.E. America's "Future of America Award"; the Muscular Dystrophy Association's "Humanitarian of the Year Award"; and the Starlight Children's Foundation's "Golden Wish Award." Mr. Lorsch was also awarded the Private Sector Initiatives Citation, or C-Flag, from the White House during the Reagan Administration for his commitment to raising millions of dollars for financing state and local earthquake preparedness education. Following the Merger, Mr. Lorsch continues to serve as Chairman of the Board of MMR and acts as its President and Chief Executive Officer.We believe that Mr. Lorsch's qualifications to continue to serve on our Board of Directors include his 40 years' experience as chief executive officer of various successful corporations he founded, his knowledge of business management consulting, his experience as a member of numerous organizational committees, his position as our current President and Chief Executive Officer and his direct responsibility for all areas of our operations.
Douglas H. Helm, Director. Mr. Helm is the managing member of Helm Consulting Group LLC, a global consultancy firm. From 2002 to 2009 he was associated with Employers Direct Corporation, Agoura Hills, CA, serving in various capacities including marketing consultant, Vice President and Chief Marketing & Sales Officer of Employers Direct Insurance Company and Chief Operating Officer of its benefit subsidiary, Plenary Insurance Services, until its sale in October 2009. Mr. Helm has over 40 years of experience in insurance and information services and has worked internationally in Russia, China and Europe. Mr. Helm majored in Labor Economics at the University of Washington and received a J.D. from Northwestern School of Law in 1973. Mr. Helm is a member of the Oregon State Bar.
We believe that Mr. Helm's qualifications to continue to serve on our Board of Directors include his 40 years of experience in insurance and information services, his experience in marketing and consulting, his experience in the positions he has gained as vice president, chief marketing & sales officer and chief operating officer, and his legal background.
55
Mike Finley, Director. Mr. Finley is a respected leader in the telecommunications industry long-recognized for creating and growing businesses. He currently serves as Vice President, Global Carrier and Distribution Business Development for Qualcomm. Previously, he was President of the West Region for Sprint Nextel from 2006 to 2008 and a Senior Vice President of Sprint Corporation. He joined Nextel in 2002 as Area Vice President of Southern California and was promoted following the Sprint Nextel merger to Senior Vice President of General Business for the U.S. Prior to joining Nextel, Mr. Finley was a Senior Vice President of Wingcast, a JV between Ford Motor Company and Qualcomm which developed telematic products for Ford vehicles. From 1993 to 2001, Mr. Finley served as President of Verizon Wireless in Southern California, Vice President and General Manager in Sacramento and was Vice President of Sales in Ohio for Airtouch Cellular. Prior to joining Airtouch, he held positions with Cellular One and McCaw Cellular. He began his career in communications in 1985 as a co-founder of Celluland, a national franchise which created an alternative distribution approach in advance of consumer marketing of wireless products. Mr. Finley is a graduate of Creighton University with a BSBA in Marketing and the General Manager Program in Executive Education at Harvard Business School. He currently serves as a Board Member of the Los Angeles Sports and Entertainment Commission, Member of the Region 1 Homeland Security Advisory Council, and Member of the Creighton University Hall of Fame. Mr. Finley also served as a Member of the Board of Advisors at MMRGlobal, Inc., which he vacated on joining the Company's Board of Directors.
We believe that Mr. Finley's qualifications to continue to serve on our Board of Directors include his vast expertise in the telecommunications industry with specific marketing expertise in the mobile technology sector and his experience in senior management positions at large corporations.
Bernard Stolar, Director. Mr. Stolar currently serves as a consultant to the video games industry and is a marketing and strategic planning advisor for our wholly-owned subsidiary, MMR. From February 2007 to September 2008, Mr. Stolar served as Games Industry Evangelist for Google, Inc., where his responsibilities included building in-game advertising. From February 2006 until its purchase by Google, Inc. in February 2007, Mr. Stolar was the Chairman of the Board of Adscape Media. Prior to this, from January 2002 to November 2002, Mr. Stolar was President and Chief Operating Officer of BAM! Entertainment, where he helped transform the company from a content provider for hand-held electronics into a developer and marketer of interactive entertainment for next generation video game consoles. From January 2000 until the division was sold in April 2001, Mr. Stolar served as President of Mattel Interactive, where he was responsible for all of Mattel's software, on-line and computer-enhanced toys. Mr. Stolar also served as President and Chief Operating Officer of Sega of America, Inc. from June 1996 to October 1999 and as an Executive Vice President with Sony Computer Entertainment of America from 1994 to June 1996.
We believe that Mr. Stolar's qualifications to continue to serve on our Board of Directors include his marketing and strategic planning experience, his experience as chairman of the board of Adscape Media, and his experience as president and chief operating officer of various companies.
Jack Zwissig, Director. Since 1992, Mr. Zwissig has served as Chief Executive Officer of Zwissig and Associates, a consulting and executive leadership training firm that primarily concentrates on the designing and implementing of corporate culture change, including mergers and acquisitions. Throughout his tenure as head of Zwissig and Associates, Mr. Zwissig has offered consulting, marketing and advertising services to some of America's leading corporations and has led numerous corporate teambuilding workshops and seminars, both in the U.S. and abroad. Mr. Zwissig received a B.S. in Marketing and Management and a M.B.A. from Santa Clara University.
We believe that Mr. Zwissig's qualifications to continue to serve on our Board of Directors include his 18 years of experience as chief executive officer of a consulting and executive leadership training firm, his knowledge of marketing and management, and his business
Ingrid Safranek, Chief Financial Officer. Ms. Safranek was appointed as the Chief Financial Officer on December 17, 2009. She has been a Certified Public Accountant in California since 2006. She worked for Deloitte & Touche, LLP from 2002 to 2006, where she was part of the audit teams for large and small, private and public clients such as Computer Sciences Corporation, Infonet (later acquired by British Telecom), Candle! Corporation (later acquired by IBM), Primedia, Inc., Gold Circle Entertainment, and the Performing Arts Center, among others. Ms. Safranek's focus was on the technology, media and entertainment industries. She also owned Goldstein Enterprises, a management consulting firm that served numerous clients by providing them with business practices analyses and software application development in order to streamline day-to-day operations and maximize efficiency. Among her clients as owner of Goldstein Enterprises are Nestle USA, Warner Bros. Studios and RJR Fashion Fabrics. Ms. Safranek received a B.A. in Business Economics with a minor in Accounting from U.C.L.A.
Ralph Salazar, Executive Vice President, Telecommunications & Carrier Relations. In his position as Vice President, Telecommunications and Carrier Relations, Rafael "Ralph" Salazar is responsible for MMRGlobal's network planning, engineering, operations and worldwide carrier relations. He leads the Company's global effort to deliver premier service, operational excellence and network performance. Mr. Salazar has more than 30 years of experience in the telecommunications industry across numerous functional areas that include research and development, technology planning, product delivery, customer service and major facilities construction and operations. Prior to joining MMRGlobal, Mr. Salazar held technology and management leadership positions with Pac Bell, NBC TV/Radio, Summer Olympic Games, EBU International World Cup Soccer, Smartalk TeleServices and AT&T, where he dealt with carriers in Europe, Asia and the Americas. He concentrated his education curriculum in the fields of electronic engineering, radio and television broadcasting, computer technology, wireless communications, finance and business administration, and has taught multiple customer service seminars and technology training courses.
56
Richard Lagani, Executive Vice President of Sales. Richard Lagani is a seasoned insurance and business professional with over 22 years of industry experience. He is a trained lawyer and has spent several years in private practice litigating cases for the insurance industry. Prior to coming to MMRGlobal, Richard spent over 15 years with Chartis in various roles with increasing responsibility ranging from running the organization's complex claims unit for financial institutions to working within the organization's financial institutions underwriting unit focusing primarily on Errors and Omissions, General Liability, and Director's & Officer's coverage. He has a strong background in reinsurance and spent several years handling legal reinsurance issues for Chartis' global reinsurance unit, both domestically and internationally. While in this role, he was asked to speak on reinsurance issues by some of the country's leading conference organizers. During his time handling reinsurance matters, he developed a strong understanding of the strategic importance of reinsurance within large insurance organizations. He also developed a keen sense of how reinsurance can used to structure complex insurance transactions to provide higher limits of coverage that may not have been available under conventional insurance as well as the critical nature of proper accounting methodologies. Most recently, he served as SVP and COO of Chartis' Product Development group where he was responsible for the day to day operations of the unit. In addition, in this role he worked closely with Chartis' senior management developing strategies for the organization's global operating units and identifying business opportunities and strategic partnerships to keep Chartis on the cutting edge of product development and ahead of its competition. He is also presently a member of the committee working with the Office of the Director of National Intelligence to develop better ways for the intelligence committee to communicate with financial institutions.
EXECUTIVE COMPENSATIONThe following table summarizes the compensation earned by each "named executive officer" of MMR for the past two fiscal years, determined on the basis of rules adopted by the SEC relating to "smaller reporting companies."
Summary Compensation Table
All | |||||||||||||
Stock | Option | Other | |||||||||||
Name | Year | Salary | Award (1) | Award (1) | Compensation | Totals | |||||||
Robert Lorsch | 2011 | $ | 180,000 | $ | - | $ | 30,000 | (7) | $ | 59,846 | (6) | $ | 269,846 |
Chief Executive Officer | 2010 | $ | 180,000 | $ | - | $ | 380,736 | (2) | $ | 128,478 | (3) | $ | 689,214 |
Ingrid Safranek | 2011 | $ | 120,000 | $ | - | $ | 40,000 | (10) | $ | - | $ | 160,000 | |
Chief Financial Officer | 2010 | $ | 111,860 | $ | - | $ | 245,056 | (4) | $ | - | $ | 356,916 | |
Sunil Singhal (*) | 2011 | $ | 120,000 | $ | - | $ | - | $ | - | $ | 120,000 | ||
EVP of Technology | 2010 | $ | 8,864 | $ | - | $ | 76,723 | (5) | $ | - | $ | 85,587 | |
and Product Development | |||||||||||||
Richard Lagani | 2011 | $ | 115,500 | $ | - | $ | 24,000 | (9) | $ | - | $ | 139,500 | |
EVP of Sales | 2010 | $ | - | $ | - | $ | - | $ | - | $ | - | ||
Ralph Salazar | 2011 | $ | 80,000 | $ | - | $ | 40,000 | (8) | $ | - | $ | 120,000 | |
VP, Telecommunications | 2010 | $ | - | $ | - | $ | - | $ | - | $ | - | ||
and Carrier Relations |
1 |
Option and stock awards above are disclosed at their aggregate grant date fair values as calculated under FASB ASC 718 (formerly SFAS 123(R)). Assumptions made for the purpose of computing these amounts are discussed in Note 2 of the Notes to the Consolidated Financial Statements included in our annual report on Form 10-K for the fiscal year ended December 31, 2011. |
2 |
Mr. Lorsch was granted 4,000,000 stock options to purchase shares of our common stock on January 27, 2010 with an exercise price of $0.10 per share. The grant date fair value of these options amounted to $380,736. |
3 |
During the year ended December 31, 2011, other compensation includes $36,000 of auto allowance. Also during 2010, Mr. Lorsch was paid $77,166 as a finder's fee for investors on MMR Global's convertible notes and the Company paid $15,312 on behalf of Mr. Lorsch for a life insurance policy under which MMR is 50% beneficiary. |
4 |
Ms. Safranek was granted 600,000 stock options to purchase shares of our common stock on January 21, 2010 with an exercise price of $0.125 per share, and 1,000,000 stock options on June 15, 2010 with an exercise price of $0.18 per share. The aggregate grant date fair value of these options amounted to $245,056. |
5 |
Mr. Singhal was granted 1,000,000 stock options on December 31, 2010 with an exercise price of $0.10 per share. The grant date fair value of these options amounted to $76,723. |
57
6 |
During the year ended December 31, 2012, other compensation includes $35,500 of auto allowance. Also during 2012, the Company paid $24,346 on behalf of Mr. Lorsch for a life insurance policy under which MMR is 50% beneficiary. |
7 |
Mr. Lorsch was granted 240,000 warrants to purchase shares of our common stock on March 10, 2011 with an exercise price of $0.13 per share. The grant date fair value of these options amounted to $30,000. |
8 |
Mr. Salazar was granted 500,000 stock options to purchase shares of our common stock on December 27, 2011 with an exercise price of $0.08 per share. The grant date fair value of these options amounted to $40,000. |
9 |
Mr. Lagani was granted 300,000 stock options to purchase shares of our common stock on December 27, 2011 with an exercise price of $0.08 per share. The grant date fair value of these options amounted to $24,000. |
10 |
Mrs. Safranek was granted 500,000 stock options to purchase shares of our common stock on January 3, 2011 with an exercise price of $0.08 per share. The grant date fair value of these options amounted to $40,000. |
(*) |
Mr. Singhal's employment was terminated effective March 30, 2012. |
Outstanding Equity Awards at Fiscal Year-End
The following table provides information on all outstanding equity awards held by our named executive officers as of December 31, 2011.
Option/Warrant Awards | ||||||
Number of Securities Underlying Exercisable Options / Warrant (#) |
Number of Securities Underlying Unexercised Unearned Option/Warrant (#) |
Option/Warrant Exercise Price ($) |
Vesting Date |
Option/Warrant Expiration Date |
||
Robert Lorsch | 8,460,000 | - | $ | 0.100 | 8/6/2009 | 1/27/2014 |
Chief Executive Officer | 1,333,333 | 2,666,667 | $ | 0.125 | 1/27/2011 | 1/27/2020 |
Ingrid Safranek | 600,000 | - | $ | 0.130 | 1/21/2010 | 1/21/2015 |
Chief Financial Officer | 1,000,000 | - | $ | 0.180 | 9/15/2010 | 6/15/2020 |
250,000 | 250,000 | $ | 0.080 | 1/3/2011 | 1/3/2021 | |
Richard Lagani | 726,786 | 573,214 | $ | 0.080 | 12/28/2013 | 10/28/2021 |
EVP of Sales | ||||||
Ralph Salazar | 375,000 | 125,000 | $ | 0.170 | 8/12/2010 | 4/12/2020 |
Vice President, Technology | 375,000 | 125,000 | $ | 0.230 | 9/1/2010 | 6/1/2020 |
and Carrier Affairs | 150,000 | 150,000 | $ | 0.100 | 12/21/2010 | 12/21/2020 |
20,833 | 479,167 | $ | 0.080 | 12/28/2013 | 12/28/2021 | |
Sunil Singhal (*) | 500,000 | 500,000 | $ | 0.100 | 10/1/2010 | 10/1/2015 |
EVP of Technology | 500,000 | 500,000 | $ | 0.100 | 12/13/2010 | 12/13/2020 |
and Product Development | ||||||
(*) | Mr. Singhal's employment was terminated effective March 30, 2012. |
Employment Agreements
The Company has employment agreements with its Chief Executive Officer, Robert H. Lorsch, its Chief Financial Officer, Ingrid Safranek, its Executive Vice President of Technology and Product Development, Sunil Singhal (Mr. Singhal's employment was terminated effective March 30, 2012), its Vice President Telecommunications & Carrier Relations, Rafael "Ralph" Salazar, and its Executive Vice President, Richard Lagani. Under each employment agreement, the executive officers receive a base salary, subject to annual increases as determined by the board of directors, certain benefits as set forth in the employment agreements, and an annual bonus at the discretion of the board of directors.
58
On January 29, 2009, we entered into an employment agreement with our Chief Executive Officer, Robert H. Lorsch, with an initial term ending on December 31, 2011, subject to successive automatic extension unless we or Mr. Lorsch elect not to extend. Under the terms of his agreement, Mr. Lorsch shall serve as both our President and Chief Executive Officer and President and Chief Executive Officer of our wholly-owned subsidiary, MMR. The agreement provides for a base salary of $15,000 per month, subject to an upward increase and with an annual bonus and stock option grants in such amounts, if any, as the Board of Directors may determine in its sole discretion. Mr. Lorsch receives a monthly auto allowance, reimbursement of certain life insurance premiums, reimbursement for certain other insurance coverage and is entitled to participate in benefits generally made to our senior executives.
On December 28, 2011, the Board of Directors agreed to renew Mr. Lorsch's employment agreement effective January 1, 2012 for an additional three year term ending on December 31, 2014. The employment agreement called for annual bonus and stock option grants as determined by the Board in its sole discretion. In negotiating the renewal, it was pointed out that such bonuses and grants had never been issued under the employment agreement. Therefore, the Board approved an annual bonus of $150,000 for each of the last three years payable under the following conditions: (a) in the event of a change of control; or (b) any portion of the bonus could be paid in any quarter in which the Company would achieve profitability excluding non-cash expenses after payment of such portion of the bonus; or (c) any portion of the bonus amount may be used to convert options or warrants at $0.125 per share or above. With regard to the obligation to award options, the Board agreed to visit that obligation after the resolution of numerous pending transactions that had kept the Company in a trading blackout period. Accordingly, on January 9, 2012, the Company, its subsidiary and Mr. Lorsch entered into an amendment to the Lorsch Employment Agreement (the "Renewal") with an effective date of January 1, 2012. The term of the Renewal expires on December 31, 2014, but may be extended automatically for successive additional one-year periods at the expiration of the then-current term unless written notice of non-extension is provided to Mr. Lorsch with at least 90 days prior notice to the expiration of such term. Mr. Lorsch's current annual base salary will remain unchanged under the Renewal with the understanding that, as in the past, portions of the payments could be deferred into future periods. Mr. Lorsch may terminate the agreement upon 30 days written notice without reason or for good reason (as defined in the agreements) if we fail to cure acts or omissions constituting good reason within 30 days. If Mr. Lorsch's employment is terminated by us without cause or voluntarily by Mr. Lorsch for good reason, Mr. Lorsch will be entitled to year of salary at his then current rate of pay, including all monthly benefits, and the pro rata portion of the annual bonus otherwise due Mr. Lorsch. In the event of his disability, Mr. Lorsch would be entitled to receive compensation equal to 60% of his base salary as then in effect. Mr. Lorsch's employment agreement includes provisions that prohibit Mr. Lorsch from disclosing our confidential information and trade secrets and competing with us during the term of his employment agreement or soliciting our employees for 12 months following termination of employment.
On March 28, 2012, the Company granted Mr. Lorsch in consideration for services and performance during 2011 and the first quarter of 2012 an option to purchase 1,250,000 shares of Common Stock at a price of $0.06 per share. No other options have been granted in nearly two years because the Company has been in an extended lock up due to various ongoing potential corporate transactions. The options vest annually over two years and expire ten years from the date of issuance.
We also have entered into a consulting agreement with The RHL Group, Inc., which is wholly-owned by Mr. Lorsch that provides for a monthly fee of $25,000 plus reimbursement of expenses including medical insurance. The RHL Group provides consulting, operational and technical services to the Company, which we refer to as the RHL Services. As part of the RHL Services, the RHL Group provides the Company with unrestricted access to its internal business and relationship contact database of more than 10,000 persons and entities, which includes clients of the RHL Group and other individuals which may hold value to the Company. The RHL Group also provides infrastructure support to the Company, including allowing the Company unlimited access to its facilities, equipment, and data, information management and server systems. In addition to allowing the Company the use of its office support personnel, the RHL Group has also consented to allow the Company to utilize the full-time services of Mr. Lorsch as the Company's President, Chairman and Chief Executive Officer, which requires substantial time and energy away from his required duties as The RHL Group's Chairman and Chief Executive Officer. In addition, The RHL Group has made its President, Kira Reed, available as the Company's spokesperson. Ms. Reed, who is Mr. Lorsch's spouse, also manages the Company's social networking activities.
On January 26, 2010, we entered into an employment agreement with Ingrid Safranek as our Chief Financial Officer. Under the employment agreement, Ms. Safranek receives a base salary of $8,750 per month, subject to periodic increases as determined by the board of directors, certain benefits as set forth in the employment agreement, and an annual bonus at the discretion of the board of directors. Ms. Safranek's employment agreement which was effective until June 15, 2010, was extended until June 15, 2011 and her base salary was increased to $10,000 per month. On December 10, 2010, the Board approved an amendment to Ms. Safranek's employment agreement to extend the term for an additional year commencing on January 1, 2011 and to increase her base salary to $13,000 per month with the understanding that, it could be necessary to defer the current increase and certain payments or benefits into future periods. On December 28, 2011, the Board extended the current employment agreement for an additional two year term and approved an increase in her monthly base salary to $15,000 with the understanding that, it could be necessary to defer the current increase and certain payments or benefits into future periods.
59
The current term of Ms. Safranek's employment agreement is effective until December 31, 2013 and will automatically renew for successive 12 month periods unless terminated at least 30 days prior to the end of the term. The employment agreement may be terminated by the Company without cause (as defined in the agreement) upon 90 days written notice or for cause if Ms. Safranek fails to cure the acts or omissions constituting cause within 90 days. If Ms. Safranek's employment is terminated by the Company for cause or voluntarily by Ms. Safranek without good reason, she will not be entitled to receive any severance payments or benefits under the employment agreement. If Ms. Safranek's employment is terminated by the Company without cause or voluntarily by Ms. Safranek for good reason, Ms. Safranek will be entitled to one year of salary at her then current rate of pay, including all monthly benefits, and the pro rata portion of the annual bonus otherwise due Ms. Safranek. In the event of her disability, Ms. Safranek would be entitled to receive compensation equal to 60% of her base salary as then in effect. Ms. Safranek's employment agreement includes provisions that prohibit her from disclosing our confidential information and trade secrets and competing with us during the term of his employment agreement or soliciting our employees for 12 months following termination of employment.
On December 13, 2010, we entered into an employment agreement with Sunil Singhal as our Executive Vice President of Technology and Development. Under the employment agreement, Mr. Singhal received a base salary of $15,000 per month with the understanding that, it could be necessary to defer a portion of the salary and certain payments or benefits into future periods, subject to annual increase as determined by the board of directors, certain benefits as set forth in the employment agreement, and an annual bonus at the discretion of the board of directors.
The term of Mr. Singhal's employment agreement was effective until December 13, 2012; however, Mr. Singhal's employment was terminated effective March 30, 2012. The employment agreement allowed Mr. Singhal to be terminated by the Company with cause (as defined in the agreement) upon 30 days written notice or for cause if Mr. Singhal failed to cure the acts or omissions constituting cause within 30 days. Mr. Singhal's employment was terminated by the Company for cause and was not entitled to receive any severance payments or benefits under the employment agreement. If Mr. Singhal's employment had been terminated by the Company without cause or voluntarily by Mr. Singhal for good reason, Mr. Singhal would have been entitled to one year of salary at his then current rate of pay, including all monthly benefits, and the pro rata portion of the annual bonus otherwise due Mr. Singhal. Mr. Singhal's employment was terminated effective March 30, 2012.
On June 15, 2010, we entered into an employment agreement with Rafael "Ralph" Salazar as our Vice President Telecommunications & Carrier Relations. Under the employment agreement, Mr. Salazar received a base salary of $6,667, subject to annual increase as determined by the board of directors, certain benefits as set forth in the employment agreement, and an annual bonus at the discretion of the board of directors. Mr. Salazar's employment agreement was effective until June 15, 2012. On December 28, 2011, the Board extended the current employment agreement for an additional two year term and approved an increase in his base salary to $10,833 per month with the understanding that, from time to time, it could be necessary to defer certain payments or benefits into future periods.
The current term of Mr. Salazar's employment agreement is effective until December 31, 2013 and will automatically renew for successive 12 month periods unless terminated at least 60 days prior to the end of the term. The employment agreement may be terminated by the Company without cause (as defined in the agreement) upon 30 days written notice or for cause if Mr. Salazar fails to cure the acts or omissions constituting cause within 30 days. If Mr. Salazar's employment is terminated by the Company for cause or voluntarily by Mr. Salazar without good reason, he will not be entitled to receive any severance payments or benefits under the employment agreement. If Mr. Salazar's employment is terminated by the Company without cause or voluntarily by Mr. Salazar for good reason, Mr. Salazar will be entitled to three months of salary at his then current rate of pay, including all monthly benefits, and the pro rata portion of the annual bonus otherwise due Mr. Salazar.
On April 1, 2011, we entered into an employment agreement with Richard Lagani as our Executive Vice President. Under the employment agreement, Mr. Lagani received a base salary of $12,000 per month, subject to annual increase as determined by the board of directors, certain benefits as set forth in the employment agreement and an annual bonus at the discretion of the board of directors. The current term of Mr. Lagani's employment agreement is effective until April 30, 2013 and will automatically renew for successive 12 month periods unless terminated at least 30 days prior to the end of the term. The employment agreement may be terminated by the Company without cause upon 30 days written notice or for cause (as defined in the agreement) immediately. If Mr. Lagani's employment is terminated by the Company for cause or voluntarily by Mr. Lagani without good reason, he will not be entitled to receive any severance payments or benefits under the employment agreement. If Mr. Lagani's employment is terminated by the Company without cause or voluntarily by Mr. Lagani for good reason, Mr. Lagani will be entitled to two months' severance (if during the first year of the agreement), four months' severance (if during the second year of the agreement) and six months' severance (after two years of service), including all monthly benefits, and the pro rata portion of the annual bonus otherwise due Mr. Lagani.
60
Director Compensation
The following table sets forth certain information with respect to the compensation paid to our non-employee directors for the fiscal year ended December 31, 2012:
Fees | Option | Stock | Other | |||||||||||
Name | Year | Earned (1) | Grant (2) | Grant (2) | Compensation (3) | Totals | ||||||||
Hector V. Barretto Jr. (**) | 2011 | $ | 15,500 | $ | - | $ | - | $ | 37,494 | $ | 52,994 | |||
Douglas Helm | 2011 | $ | 20,500 | $ | - | $ | - | $ | $ | 20,500 | ||||
George Rebensdorf (***) | 2011 | $ | 9,000 | $ | - | $ | - | $ | 25,000 | $ | 34,000 | |||
Bernard Stolar | 2011 | $ | 22,500 | $ | - | $ | - | $ | 50,000 | $ | 72,500 | |||
Jack Zwissig | 2011 | $ | 17,500 | $ | - | $ | - | $ | 6,983 | $ | 24,483 | |||
Mike Finley | 2011 | $ | 6,000 | $ | 63,000 | (4) | $ | - | $ | - | $ | 69,000 |
1. |
Amounts represented director fees earned in 2011. Unpaid balances are reflected as a component of related party payables in the consolidated balance sheet as of December 31, 2011. |
|
2. |
Option and stock awards above are disclosed at their aggregate grant date fair values as calculated under FASB ASC 718 (formerly SFAS 123(R)). Assumptions made for the purpose of computing these amounts are discussed in Note 2 of the Notes to the Consolidated Financial Statements included in our annual report on Form 10-K for the fiscal year ended December 31, 2011. |
|
3. |
Other compensation represents additional fees earned by each respective director for consulting services performed. |
|
4. |
Mr. Finley was granted 1,050,000 warrants to purchase shares of our common stock on October 19, 2011 with an exercise price of $0.06 per share. The aggregate grant date fair value of these options amounted to $63,000. |
|
(**) |
Mr. Barretto resigned from the Board on September 30, 2011. |
|
(***) |
Mr. Rebensdorf resigned from the Board on April 25, 2011. |
61
Our board of directors is divided into three classes, with each class serving a staggered three-year term. Our current directors and corresponding terms are as follows:
Director |
Class |
Expiration of Term |
Robert H. Lorsch |
Class II |
2014 Annual Meeting |
Douglas H. Helm |
Class I |
2013 Annual Meeting |
Jack Zwissig |
Class I |
2013 Annual Meeting |
Mike Finley |
Class III |
2012 Annual Meeting |
Bernard Stolar |
Class III |
2012 Annual Meeting |
Corporate Governance Principles
We are committed to maintaining the highest standards of business conduct and corporate governance. We have adopted a Code of Business Conduct and Ethics for our directors, officers and employees. Our Certificate of Incorporation, Bylaws and the Board of Directors committee charters provide additional framework for our corporate governance principles.
Our business, property and affairs are managed under the direction of the Board of Directors. The Board of Directors selects the senior management team, which is charged with the day-to-day operations of the Company's business. Members of the Board of Directors are kept informed of the Company's business through discussions with the Chief Executive Officer, other senior officers and the Company's counsel, by reviewing materials requested by them or otherwise provided to them and by participating in meetings of the Board of Directors and its committees. Having selected the senior management team, the Board of Directors acts as an advisor and counselor to senior management, monitors its performance and proposes or makes changes to the senior management team when it deems necessary or appropriate.
Independence of Directors
Although our common stock is no longer listed on the NASDAQ Global Market and we are no longer subject to the NASDAQ Listing Rules, our Board of Directors determined that each of the following directors would be deemed "independent" under NASDAQ Stock Market LLC rules: Messrs. Finley, Helm, Stolar and Zwissig. These people represent a majority of our Board of Directors. Mr. Lorsch, the Chairman of our Board and our Chief Executive Officer and would not be deemed independent. Messrs. Stolar, Zwissig and Finley are members of our Compensation Committee and Mr. Zwissig is the Chairman. Messrs. Helm and Zwissig are members of our Nominating and Corporate Governance Committee and Mr. Helm is the Chairman. Messrs. Stolar, Zwissig and Finley are members of our Audit Committee, but Messrs. Stolar and Zwissig would not be deemed to be independent under the more stringent independence requirements for Audit Committee members set forth in NASDAQ Listing Rule 5605(2). Mr. Stolar is Chairman of the Audit Committee.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners
The following tables sets forth certain information as of April 23, 2012, as to shares of our common stock beneficially owned by: (1)each person known by us to beneficially own five percent or more of the outstanding shares of our common stock; (2) each of our named executive officers listed in the summary compensation table; (3)each of our directors; and (4)all of our named executive officers and directors as a group.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission. Except as otherwise noted in the footnotes below, we believe, based upon information furnished to us, that each of the stockholders named in the tables have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to applicable community property laws.
Shares of common stock subject to options, warrants and convertible notes exercisable or convertible within 60 days from April 23, 2012 are deemed outstanding for computing the ownership percentage of the person holding such options, warrants or notes, but are not deemed outstanding for computing the ownership percentage of any other person.
62
Stockholders Known by Us to Own Over 5% of Our Common Stock
Name and Address of Beneficial Owner |
Amount and Nature of Beneficial Ownership |
Percent of Shares Beneficially Owned (1) |
||
David T. Loftus (2) | 40,163,523 | 10.32% | ||
E-Mail Frequency, LLC | ||||
800 N. Whittier Drive | ||||
Beverly Hills, California 90210 | ||||
Sherry Hackett (3) | 24,040,689 | 6.26% | ||
800 N. Whittier Drive | ||||
Beverly Hills, California 90210 |
(1) |
On April 23, 2012, we had 374,009,083 shares of common stock issued and outstanding. Shares of common stock subject to options, warrants and convertible notes exercisable or convertible within 60 days from April 23, 2012 are deemed outstanding for computing the ownership percentage of the person holding such options, warrants or notes, but are not deemed outstanding for computing the ownership percentage of any other person. |
||||||||
(2) |
Mr. Loftus' beneficial ownership consists of: (i) 22,271,569 shares of common stock owned by Mr. Loftus, which he has sole voting and dispositive control of; (ii) fully vested warrants to purchase 3,683,148 shares of common stock within 60 days from April 23, 2012; (iii) 11,431,028 shares of common stock issuable upon conversion of convertible note(s), subject to the rights to convert thereunder; and (iv) 2,777,778 owned by E-Mail Frequency, LLC. Mr. Loftus is the managing member of E-Mail Frequency, LLC and, in connection therewith, has shared voting and dispositive power with respect to the shares held by E-Mail Frequency, LLC. In preparing the information regarding the beneficial ownership of Mr. Loftus and E-Mail Frequency, LLC, we relied on the Schedule 13G/A jointly filed by Mr. Loftus and E-Mail Frequency, LLC with the Securities and Exchange Commission on May 7, 2012. |
||||||||
(3) |
Ms. Hackett's beneficial ownership consists of: (i) 13,727,778 shares of common stock held directly by Ms. Hackett; (ii) fully vested warrants to purchase 1,950,000 shares of common stock within 60 days from April 23, 2012; and (iii) 8,362,911 shares of common stock issuable upon conversion of convertible note(s), subject to the rights to convert thereunder. In preparing the information regarding the beneficial ownership of Ms. Hackett, we relied on the Schedule 13G/A filed by Ms. Hackett with the Securities and Exchange Commission on May 7, 2012. |
63
Named Executive Officers and Directors
Amount and Nature of | Percentage of Share | ||||||
Name and Address of Beneficial Owner (1) | Beneficial Ownership (2) | Beneficially Owned (2) | |||||
Robert H. Lorsch (3) | 69,579,274 | (4) | 17.3% | (4) | |||
RHL Group (5) | |||||||
P.O. Box 17034 | 49,330,520 | (4) | 12.8% | (4) | |||
Beverly Hills, California 90210 | |||||||
Ingrid Safranek (6) | 2,479,167 | * | |||||
Richard Lagani (7) | 857,143 | * | |||||
Ralph Salazar (8) | 900,000 | * | |||||
Sunil Singhal (9) | 1,000,000 | * | |||||
Hector V. Barreto, Jr. (10) | 4,933,408 | 1.3% | |||||
Doug Helm (11) | 2,094,791 | * | |||||
Mike Finley (12) | 50,000 | * | |||||
George Rebensdorf (13) | 4,816,799 | 1.3% | |||||
Bernie Stolar (14) | 5,322,384 | 1.4% | |||||
Jack Zwissig (15) | 4,601,929 | 1.2% | |||||
All Directors and Named Executive Officers as a Group (11 Individuals) (16) | 96,634,895 | 23.12% |
* |
Percentage of shares beneficially owned does not exceed one percent of issued and outstanding shares of stock. |
||||||||
(1) |
Unless otherwise stated, the business address of each named executive officer and director listed above is c/o MMRGlobal, Inc., 4401 Wilshire Blvd., Suite 200, Los Angeles, CA 90010. |
||||||||
(2) |
On April 23, 2012, we had 374,009,083 shares of common stock issued and outstanding. Shares of common stock subject to options, warrants and convertible notes exercisable or convertible within 60 days from April 23, 2012 are deemed outstanding for computing the ownership percentage of the person holding such options, warrants or notes, but are not deemed outstanding for computing the ownership percentage of any other person. |
||||||||
(3) |
Robert H. Lorsch is our President and Chief Executive Officer and also serves as Chairman of our Board of Directors. Mr. Lorsch's beneficial ownership consists of: (i) 6,068,754 shares of common stock owned by Mr. Lorsch, which he has sole voting and dispositive control of; (ii) options held by Mr. Lorsch to purchase 14,180,000 shares of common stock that are vested and exercisable within 60 days from April 23, 2012, which he has sole voting and dispositive control of; (iii) 36,454,892 shares of common stock owned by The RHL Group, Inc., and (iv) fully vested warrants to purchase an aggregate of 12,875,628 shares of common stock within 60 days from April 23, 2012 held by The RHL Group, Inc. Mr. Lorsch has a 100% ownership interest in The RHL Group, Inc. and serves as the entity's Chief Executive Officer. Therefore, Mr. Lorsch may be deemed to be the beneficial owner of the shares beneficially held by The RHL Group, Inc. and, in connection therewith, has shared voting and dispositive power with respect to the shares held by The RHL Group, Inc. In preparing the information regarding the beneficial ownership of Mr. Lorsch and The RHL Group, Inc., we relied on the Schedule 13D/A jointly filed by Mr. Lorsch and The RHL Group, Inc. with the Securities and Exchange Commission on April 23, 2012. |
||||||||
(4) |
The shares beneficially owned by The RHL Group, Inc. are also included in the calculation of beneficial ownership for Mr. Robert H. Lorsch, our President, Chief Executive Officer and Chairman of our Board of Directors, as Mr. Lorsch has shared voting and dispositive power with respect to the shares held by The RHL Group, Inc. |
||||||||
(5) |
The RHL Group, Inc.'s beneficial ownership consists of: (i) 36,454,892 shares of common stock; and (ii) fully vested warrants to purchase an aggregate of 12,875,628 shares of common stock within 60 days from April 23, 2012. Mr. Robert H. Lorsch has a 100% ownership interest in The RHL Group, Inc. and serves as the entity's chief executive officer. Therefore, Mr. Lorsch may be deemed to be the beneficial owner of the shares beneficially held by The RHL Group, Inc. and, in connection therewith, has shared voting and dispositive power with respect to the shares held by The RHL Group, Inc. In preparing the information regarding the beneficial ownership of Mr. Lorsch and The RHL Group, Inc., we relied on the Schedule 13D/A jointly filed by Mr. Lorsch and The RHL Group, Inc. with the Securities and Exchange Commission on April 23, 2012. |
||||||||
(6) |
Ms. Safranek serves as our Vice President of Finance and Chief Financial Officer. Ms. Safranek's beneficial ownership consists of (i) 525,000 shares of common stock; and (ii) 1,954,167 shares of common stock issuable upon the exercise of options that are exercisable within 60 days from April 23, 2012. |
64
(7) |
Mr. Lagani serves as our Executive Vice President of Sales. Mr. Lagani's beneficial ownership consists of 857,143 shares of common stock upon the exercise of warrants that are exercisable within 60 days from April 23, 2012. |
||||||||
(8) |
Mr. Salazar serves as our Executive Vice President, Telecommunications & Carrier Relations. Mr. Salazar's beneficial ownership consists of 900,000 shares of common stock issuable upon the exercise of options that are exercisable within 60 days from April 23, 2012. |
||||||||
(9) |
Mr. Singhal served as our Executive Vice President of Technology and Product Development until his employment was terminated effective March 30, 2012. Mr. Singhal's beneficial ownership consists of 1,000,000 shares of common stock issuable upon the exercise of options and warrants that are exercisable within 60 days from April 23, 2012. |
||||||||
(10) |
Mr. Barretto was a member of our Board of Directors until his resignation on September 30, 2011. Mr. Barretto's beneficial ownership consists of (i) 2,719,008 shares of common stock; and (ii) 2,214,320 shares of common stock issuable upon the exercise of options that are exercisable within 60 days from April 23, 2012. |
||||||||
(11) |
Mr. Helm is a member of our Board of Directors. Mr. Helm's beneficial ownership consists of: (i) 1,203,125 shares of common stock; and (ii) 891,666 shares of common stock issuable upon the exercise of options that are exercisable within 60 days from April 23, 2012. |
||||||||
(12) |
Mr. Finley is a member of our Board of Directors. Mr. Finley's beneficial ownership consists of 50,000 shares of common stock issuable upon the exercise of options that are exercisable within 60 days from April 23, 2012. |
||||||||
(13) |
Mr. Rebensdorf was a member of our Board of Directors until his resignation on April 25, 2011. Mr. Rebensdorf's beneficial ownership consists of (i) 2,101,807 shares of common stock; and (ii) 2,714,992 shares of common stock issuable upon the exercise of options that are exercisable within 60 days from April 23, 2012. |
||||||||
(14) |
Mr. Stolar is a member of our Board of Directors. Mr. Stolar's beneficial ownership consists of: (i) 1,740,457 shares of common stock; and (ii) 3,581,927 shares of common stock issuable upon the exercise of options that are exercisable within 60 days from April 23, 2012. |
||||||||
(15) |
Mr. Zwissig is a member of our Board of Directors. Mr. Zwissig's beneficial ownership consists of: (i) 1,828,595 shares of common stock; and (ii) 2,773,334 shares of common stock issuable upon the exercise of options that are exercisable within 60 days from April 23, 2012. |
||||||||
(16) |
The calculation of all directors and named executive officers as a group consists of eleven individuals. The shares beneficially owned by The RHL Group, Inc. are attributed to Mr. Robert H. Lorsh and accordingly, included in this calculation. The beneficial ownership of all directors and named executive officers as a group consists of: (i) 52,641,718 shares of common stock; and (ii) 43,993,177 shares of common stock issuable upon the exercise of options and warrants that are exercisable within 60 days from April 23, 2012. |
CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
Certain Current Related-Person Transactions
Our Board of Directors adopted a related party transaction policy, under which all related party transactions shall be presented to the disinterested directors of the Board for review and approval in advance of such transactions. If it is not feasible to obtain advance approval of a related party transaction, such transaction shall be subject to the ratification of the disinterested directors of the Board, and the Company may enter into such transaction prior to obtaining the approval of the disinterested directors only if the terms of such transaction allow it to be rescinded at no cost to the Company in the event it is not ratified by the disinterested directors of the Board.
Other than the agreements and other arrangements set forth below, since January 1, 2011, there have not been any transactions or series of similar transactions to which we were or are a party in which the amount involved exceeded or exceeds $120,000 and in which any director, executive officer, holder of more than 5% of any class of our voting securities, or any member of the immediate family of any of the foregoing persons, had or will have a direct or indirect material interest.
Our Chairman and Chief Executive Officer, Robert H. Lorsch, is also the Chief Executive Officer of The RHL Group, Inc. and owns all of the capital stock of The RHL Group, Inc. Mr. Lorsch directly, and indirectly through The RHL Group, Inc., beneficially owns approximately 18.6% our total outstanding voting stock. The RHL Group, Inc. has loaned money to MMR pursuant to a secured note. See "Description of Indebtedness-The RHL Group, Inc." above.
The RHL Group is an investment holding company which provides consulting, operational and technical services to the Company, which we refer to as the RHL Services. As part of the RHL Services, the RHL Group provides the Company with unrestricted access to its internal business and relationship contact database of more than 10,000 persons and entities, which includes clients of The RHL Group and other individuals which may hold value to the Company. The RHL Group also provides infrastructure support to the Company, including allowing the Company unlimited access to its facilities, equipment, and data, information management and server systems. In addition to allowing the Company the use of its office support personnel, The RHL Group also has consented to allow the Company to utilize the full-time services of Mr. Lorsch as the Company's President, Chairman and Chief Executive Officer, which requires substantial time and energy away from his required duties as The RHL Group's Chairman and Chief Executive Officer. In addition, The RHL Group has made its President, Kira Reed, available as the Company's spokesperson. Ms. Reed, who is Mr. Lorsch's spouse, also manages the Company's social networking activities.
65
On September 15, 2009, we entered into a five year agreement with E-Mail Frequency, LLC and David Loftus, Managing Partner of E-Mail Frequency, LLC, a significant stockholder of the Company. We will license an existing 80 million person direct marketing database (the "Database") of street addresses, cellular phone numbers, e-mail addresses and other comprehensive data with E-Mail Frequency. The agreement allows us to market, through the use of the Database, our MyMedicalRecords Personal Health Record, MyEsafeDepositBox virtual vault, and MMRPro document management system to physicians and their patients. Under the terms of the Agreement, we paid $250,000 to David Loftus as a one-time consulting fee in the form of 2,777,778 shares of our common stock. We recorded the $250,000 one-time licensee fee as a prepaid consulting fee and included in the prepaid expenses and other current assets as of December 31, 2009, less amortization of $12,500 included in operating expensed for the year ended December 31, 2009. Amortization expense for the year ended December 31, 2010 was $50,000. In addition, we incurred a total of $76,181 during the year ended December 31, 2010, toward business development services from E-Mail Frequency and Mr. Loftus. We did not incur any such expenses during the same periods in 2009. Furthermore, Mr. Loftus is a value-added-reseller of MMRPro systems and during the second quarter of 2010, Mr. Loftus purchased four MMRPro systems. We recognized revenues of $63,655 for the year ended December 31, 2010 from this sale. We included in related party payables at December 31, 2010, and 2009 of $19,103 and $50,577, respectively, in respect to these services. On April 15, 2011, we entered into a 6% Convertible Promissory Note with Mr. Loftus for a principal amount of $156,436 and warrants to purchase our common stock. On July 19, 2011, we entered into a 6% Convertible Promissory Note with Mr. Loftus for a principal amount of $157,422 and warrants to purchase our common stock. Effective September 1, 2011, we signed an amendment to the agreement, dated September 15, 2009, to provide licensor a non-exclusive right to target, market and exploit the Employee Benefits market.
The securities described above were issued to each of the foregoing persons or entities in reliance upon exemptions from registration pursuant to Section 4(2) under the Securities Act of 1933, as amended, and the rules promulgated thereunder. At the time of their issuance, the securities granted above were restricted securities for purposes of the Securities Act and the certificates representing such securities bear legends to that effect, unless a legal opinion has been issued for the removal of such legends. The exercise/conversion prices of the securities described above were equal to the closing price of our Common Stock as of the date of grant.
Creditor Plan Warrants
Pursuant to the terms and conditions of the Creditor Plan, on January 27, 2009, we issued warrants to acquire 9,999,992 shares of our common stock at an exercise price of $0.12 per share, which expire on January 26, 2014 to certain of our former officers, former directors and their affiliates who were willing to take such equity as partial or full payment for outstanding liabilities. This includes warrants to acquire an aggregate 4,222,834 shares of our common stock at an exercise price of $0.12 per share, which expire on January 26, 2014 to John Longenecker, Ph.D, Tamara Seymour, and Dan Gold our former Chief Executive Officer, former Chief Financial Officer and formed Chief Scientific Officer, respectively.
DESCRIPTION OF CAPITAL STOCKThis section summarizes certain of our authorized and outstanding securities and certain of the provisions of our amended and restated certificate of incorporation and our amended and restated bylaws, each as amended to date.
Description of capital stock
The following description of our capital stock and provisions of our certificate of incorporation and bylaws are summaries and are qualified in their entirety by reference to our certificate of incorporation and bylaws, respectively, copies of which have been filed with the SEC and are incorporated herein by reference.
General background
Our certificate of incorporation authorizes the issuance of up to 650,000,000 shares of common stock with a $0.001 par value and 5,000,000 preferred shares with a par value of $0.001. As of April 23, 2012, we had issued and outstanding 374,009,083 shares of common stock, held by approximately 3,111 stockholders of record.
Common stock
Except as required by law, holders of our common stock are entitled to vote on all matters as a single class, and each holder of common stock is entitled to one vote for each share of common stock owned. Holders of common stock do not have cumulative voting rights.
Holders of our common stock are entitled to receive ratably any dividends that may be declared by the board of directors out of legally available funds, subject to any preferential dividend rights of any outstanding preferred stock. Upon any liquidation, dissolution, or winding up of the Company, holders of our common stock are entitled to share ratably in all assets remaining available for distribution to stockholders after the payment of all debts and other liabilities and subject to the prior rights of any outstanding preferred stock.
66
Holders of our common stock have no preemptive, subscription, redemption or conversion rights. Our outstanding shares of common stock are validly issued, fully paid and nonassessable. The rights, preferences and privileges of holders of common stock are subject to, and may be adversely affected by, the rights of holders of shares of any series of preferred stock which we may designate and issue in the future without further stockholder approval.
Our common stock is quoted on the OTCQB, the OTC market tier for companies that are reporting with the SEC, under the symbol "MMRF," and on the OTC Bulletin Board, or OTCBB, under the symbol "MMRF.OB."
Preferred stock
Our board of directors is authorized (without further stockholder approval) to issue from time to time up to an aggregate of 5,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights, qualifications, limitations or restrictions of the shares of each series, including the dividend rights, dividend rates, conversion rights, voting rights, term of redemption including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of such series without further vote or action by the stockholders. No shares of preferred stock have been issued or are outstanding.
The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of the Company without further action by the stockholders and may adversely affect the market price of, and voting, economic and other rights of, holders of our common stock.
Anti-takeover effects of provisions of Delaware Law and our Charter and Bylaws
We are subject to the provisions of Section 203 of the DGCL. In general, Section 203 prohibits a publicly-held Delaware corporation from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless either:
For purposes of Section 203, "interested stockholder" is a person who, together with affiliates and associates, owns (or within three years prior, did own) 15% or more of the corporation's voting stock. A "business combination" includes a merger, asset sale or other transaction resulting in a financial benefit to such interested stockholder.
In addition, certain provisions of our certificate of incorporation and bylaws may be deemed to have an anti-takeover effect and may delay, defer or prevent a tender offer or takeover attempt that a stockholder might consider in its best interest, including those attempts that might result in a premium over the market price for the shares held by our stockholders. These provisions include:
The combination of the charter and bylaws provisions summarized above will make it more difficult for our existing stockholders to replace our board of directors, as well as for another party to obtain control of us by replacing our board of directors. Since our board of directors has the power to retain and discharge our officers, these provisions could also make it more difficult for existing stockholders or another party to effect a change in management. In addition, the authorization of undesignated preferred stock makes it possible for our board of directors to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change our control.
67
These provisions may have the effect of deterring hostile takeovers or delaying changes in our control or management. These provisions are intended to enhance the likelihood of continued stability in the composition of our board of directors and in the policies they implement, and to discourage certain types of transactions that may involve an actual or threatened change of our control. The provisions also are intended to reduce our vulnerability to an unsolicited acquisition proposal and discourage certain tactics that may be used in proxy fights. However, such provisions could have the effect of discouraging others from making tender offers for our shares and, as a consequence, they also may inhibit fluctuations in the market price of our shares that could result from actual or rumored takeover attempts. Such provisions may also have the effect of preventing changes in our management.
Transfer agent and registrar
The transfer agent and registrar for our common stock is Computershare (formerly known as BNY Mellon Shareowner Services LLC).
The purpose of this prospectus is to permit the selling stockholder to offer and resell up to an aggregate of 100,000,000 shares of our common stock at such times and at such places as it chooses. In this section of the prospectus, the term "selling stockholder" includes the partners, pledgees, donees, transferees or other successors-in-interest of the selling stockholder, which may sell shares received after the date of this prospectus from the selling stockholder as a pledge, gift, partnership or similar distribution or other non-sale related transfer. To the extent required, we may amend and supplement this prospectus from time to time to describe a specific plan of distribution. The decision to sell any shares offered pursuant to this prospectus is within the sole discretion of the selling stockholder.
The distribution of the common stock by the selling stockholder may be effected from time to time in one or more transactions. Any of the common stock may be offered for sale, from time to time, by the selling stockholder at prices and on terms then obtainable, at fixed prices, at prices then prevailing at the time of sale, at prices related to such prevailing prices, in privately negotiated transactions or otherwise. The common stock may be sold by one or more of the following:
Granite and any broker-dealers who act in connection with the sale of its shares are "underwriters" within the meaning of the Securities Act, and any discounts, concessions or commissions received by them and profit on any resale of the shares as principal may be deemed to be underwriting discounts, concessions and commissions under the Securities Act. Because the selling stockholder is an "underwriter" within the meaning of the Securities Act, it will be subject to the prospectus delivery requirements of the Securities Act, including Rule 172 thereunder.
The selling stockholder or its underwriters, dealers or agents may sell the common stock to or through underwriters, dealers or agents, and such underwriters, dealers or agents may receive compensation in the form of discounts or concessions allowed or reallowed. Underwriters, dealers, brokers or other agents engaged by the selling stockholder may arrange for other such persons to participate. Any fixed public offering price and any discounts and concessions may be changed from time to time. Underwriters, dealers and agents who participate in the distribution of the common stock may be deemed to be underwriters within the meaning of the Securities Act, and any discounts or commissions received by them or any profit on the resale of shares by them may be deemed to be underwriting discounts and commissions thereunder. The proposed amounts of the common stock, if any, to be purchased by underwriters and the compensation, if any, of underwriters, dealers or agents will be set forth in a prospectus supplement.
Unless granted an exemption by the SEC from Regulation M under the Exchange Act, or unless otherwise permitted under Regulation M, the selling stockholder will not engage in any stabilization activity in connection with our common stock, will furnish each broker or dealer engaged by the selling stockholder and each other participating broker or dealer the number of copies of this prospectus required by such broker or dealer, and will not bid for or purchase any of our common stock or attempt to induce any person to purchase any of the common stock other than as permitted under the Exchange Act.
68
We will not receive any proceeds from the sale of these shares of common stock offered by the selling stockholder. We shall use our reasonable efforts to prepare and file with the SEC such amendments and supplements to the registration statement and this prospectus as may be necessary to keep such registration statement effective and to comply with the provisions of the Securities Act with respect to the disposition of the common stock covered by the registration statement for the period required to effect the distribution of such common stock.
We are paying certain expenses (other than commissions and discounts of underwriters, dealers or agents) incidental to the offering and sale of the common stock to the public, which are estimated to be approximately $30,344. If we are required to update this prospectus during such period, we may incur additional expenses in excess of the amount estimated above. We have agreed to indemnify the selling stockholders against certain losses, claims, damages and liabilities, including liabilities under the Securities Act and the Exchange Act, subject to certain exceptions.
In order to comply with certain state securities laws, if applicable, the common stock will be sold in such jurisdictions only through registered or licensed brokers or dealers. In certain states the shares of common stock may not be sold unless they have been registered or qualified for sale in such state or an exemption from registration or qualification is available and is complied with.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURENot applicable.
LEGAL MATTERSSelected legal matters with respect to the validity of the securities offered by this prospectus will be passed upon for us by Stradling Yocca Carlson & Rauth, a Professional Corporation, Newport Beach, California.
EXPERTSThe financial statements as of and for the years ended December 31, 2011 and 2010, which are included in this prospectus, have been audited by Rose, Snyder & Jacobs, an independent registered public accounting firm, as stated in their report appearing herein. Such financial statements have been so included in reliance upon the report of such firm given upon their authority as experts in accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATIONWe have filed a registration statement on Form S-1 with the SEC for the securities offered pursuant to this prospectus. This prospectus, which constitutes a part of the registration statement, does not contain all of the information set forth in the registration statement and the exhibits and schedules thereto. Statements contained in this prospectus as to the contents of any contract or other document referred to are not necessarily complete and in each instance reference is made to the copy of such contract or other document filed as an exhibit to the registration statement, each such statement being qualified in all respects by such reference. For further information with respect to our Company and the common stock offered hereby, please refer to the registration statement and its exhibits and schedules.
We are subject to the information and periodic reporting requirements of the Securities Exchange Act of 1934, and in accordance therewith, file reports, proxy statements and other information with the SEC. Such reports, proxy statements, other information and a copy of the registration statement may be inspected by anyone without charge and copies of these materials may be obtained upon the payment of the fees prescribed by the SEC, at the SEC's Public Reference Room , located at Room 1580, 100 F Street, N.E., Washington, D.C. 20549. You may obtain information on the operation of this public reference room by calling 1-800-SEC-0330. The registration statement, including all exhibits and schedules and amendments, has been filed with the SEC through the Electronic Data Gathering Analysis and Retrieval (EDGAR) system and is available to the public on the SEC's web site at http://www.sec.gov.
69
Index to Consolidated Financial Statements Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets at December 31, 2011 and 2010 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2011 and 2010 F-4 Consolidated Statements Stockholders' Equity (Deficit) for the Years Ended December 31, 2011 and 2010
F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2011 and 2010 F-6 Notes to Consolidated Financial Statements F-7 Consolidated Balance Sheets at March 31, 2012 (Unaudited) and December 31, 2011 F-38 Consolidated Statements of Operations for the Three Months Ended March 31, 2012 (Unaudited) and 2011 (Unaudited) F-39 Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2012 (Unaudited) and 2011 (Unaudited) F-40 Notes to Consolidated Financial Statements F-41 F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Board of Directors and Shareholders of MMRGlobal, Inc. We have audited the accompanying consolidated balance sheets of MMRGlobal, Inc. (a Delaware corporation) and Subsidiaries as
of December 31, 2011 and 2010, and the related consolidated statements of operations, stockholders' deficit and cash flows for the
years then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is
to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with the standards established by the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the
effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated
financial position of MMRGlobal, Inc. and Subsidiaries as of December 31, 2011 and 2010, and the consolidated results of their
operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United
States of America. The accompanying consolidated financial statements have been prepared assuming that the Company will
continue as a going concern. As discussed in Note 1 to the consolidated financial statements, the Company has incurred significant
operating losses and negative cash flows from operations during the years ended December 31, 2011 and 2010. These conditions
raise substantial doubt about the Company's ability to continue as a going concern. Management's plans regarding those matters also
are described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of
this uncertainty /s/ Rose, Snyder & Jacobs LLP Rose, Snyder & Jacobs LLP Encino, California March 29, 2012 F-2
MMRGLOBAL, INC. The accompanying notes are an integral part of these consolidated financial statements F-3
MMRGLOBAL, INC. The accompanying notes are an integral part of these consolidated financial statements F-4
MMRGLOBAL, INC. The accompanying notes are an integral part of these consolidated financial statements F-5
MMRGLOBAL, INC. The accompanying notes are an integral part of these consolidated financial statements F-6
MMRGLOBAL, INC. 1. NATURE OF OPERATIONS AND BASIS OF PRESENTATION MMRGlobal, Inc., through its wholly-owned operating subsidiary, MyMedicalRecords, Inc., provides secure and easy-to-use
online Personal Health Records and MyEsafeDepositBox storage solutions, serving consumers, healthcare professionals, employers,
insurance companies, financial institutions, and professional organizations and affinity groups. Our PHR, marketed both directly via our
website at www.mymedicalrecords.com and as a private-label service, 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 an
Internet-connected device. The MyMedicalRecords Personal Health Record is built on proprietary, patented and patent-pending
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 an end-to-end electronic document management and imaging system
designed to give physicians' offices, community hospitals and surgery centers an easy and cost-effective solution to digitizing
paper-based medical records and sharing them with patients in a timely manner through an integrated patient portal, MMRPatientView. The
MMR Stimulus Program is offered with the MMRPro product offerings to help healthcare professionals recoup some or all of the cost of
digital conversion of patient charts when they upgrade patients from the free MMRPatientView portal to a full-featured
MyMedicalRecords PHR. MyMedicalRecords is an Independent Software Vendor Partner with Kodak to deliver an integrated turnkey
EMR solution for healthcare professionals. Through its merger with Favrille, Inc. in January 2009, the Company acquired intellectual
property biotech assets that include anti-CD20 antibodies and data and samples from its FavId™/Specifid™ vaccine clinical
trials for the treatment of B-cell Non-Hodgkin's lymphoma. On January 27, 2009, Favrille, Inc., or Favrille, conducted a reverse merger with MyMedicalRecords, Inc. ("MMR"),
which we refer to as the Merger. Pursuant to the terms of the Merger, all of the outstanding common and preferred stock of MMR was
cancelled and the former stockholders of MMR received an aggregate of 79,812,116 shares of Favrille common stock. On
February 9, 2009, MMR changed its corporate name to MMR Information Systems, Inc., or MMRIS after completion of the reverse
merger with Favrille. Effective June 15, 2010, MMRIS changed its corporate name to MMRGlobal, Inc. upon stockholder approval at
our annual stockholder meeting. The name change to MMRGlobal more accurately reflects our global business imprint. In addition,
MMRGlobal assumed the obligations of MMR under its outstanding stock options and warrants, which, pursuant to the terms of the
Merger, represents the right to receive an aggregate 12,787,080 shares of MMRGlobal common stock at the effective time of the
Merger. In connection with the Merger, MMR became our wholly-owned subsidiary, with the former stockholders of MMR collectively
owning shares of our common and preferred stock representing approximately 60.3% of the voting power of our outstanding capital
stock. For accounting purposes, the Merger was treated as a reverse acquisition with MMR being the accounting acquirer. Accordingly,
the historical financial results prior to the Merger are those of MMR. The results of operations for MMRIS are included in the Company's
consolidated financial results beginning on January 27, 2009 The presentation of consolidated statements of stockholders' equity (deficit) reflects the historical stockholders' equity (deficit) of
MMR through January 26, 2009. The effect of the issuance of shares of MMRGlobal's common stock in connection with the Merger and
the inclusion of MMRGlobal's outstanding shares of common stock at the time of the Merger is reflected in the accompanying
consolidated financial statements. MMR was incorporated in Delaware in 2005, MMRGlobal was incorporated in Delaware in 2000 and both are headquartered in Los
Angeles, CA. Principles of Consolidation The consolidated financial statements include the accounts of MMRGlobal, and its wholly-owned subsidiaries MMR and MMR
Life Sciences Group, Inc. We eliminated all intercompany transactions upon consolidation. F-7
Basis of Presentation and Going Concern The accompanying financial statements are prepared in accordance with U.S. generally accepted accounting principles, or
GAAP. GOING CONCERN As of December 31, 2011, the Company's current liabilities exceeded its current assets by $6.58 million. Furthermore, during
the years ended December 31, 2011, and 2010, the Company incurred losses of $8.88 million and $17.90 million, respectively. At December 31, 2011 and December 31, 2010, the Company had $311,103 and $363,689, respectively, in cash and cash
equivalents. Historically, the Company issued capital stock and received funds from The RHL Group, Inc. (a significant shareholder
wholly-owned by the Company's Chairman and Chief Executive Officer) to operate its business. Although, the Company received
additional funding from The RHL Group pursuant to the Third Amended and Restated Note dated April 29, 2009, it nevertheless will still
be required to obtain additional financing in order to meet installment payment obligations resulting from settlement payments with
various creditors, which we refer to as the Creditor Plan and the previously existing obligations under the subordinated secured
indebtedness to The RHL Group, which note payable had a balance of $1,574,312 at December 31, 2011. The components of the RHL
Group Note payable and the related balance sheet presentation as of December 31, 2011 are as follows: $1,349,312, which is included
in the line of credit, related party payable; $225,000, which is related to deferred salary and consulting expenses is included in related
party payables; and $72,589, for various deferred amounts. As a result of the above, there is uncertainty about the Company's ability to continue as a going concern. Management's plan regarding this matter is to continue to utilize its available line of credit with The RHL Group (see Note 3). At
December 31, 2011, there was approximately $1,176,000 available under The RHL Group line of credit. Furthermore, we already
began and plan to continue to utilize portions of our standby equity line facility with Dutchess as needed. In
addition, the Company plans to continue to sell additional debt and equity securities, continue to settle its existing liabilities through
issuance of equity securities, explore other debt financing arrangements, continue to increase its existing subscriber and affiliate
customer base and sell MMRPro products to obtain additional cash flow over the next twelve months. There can be no assurance that
funds from these sources will be available when needed or, if available, will be on terms favorable to us or to our stockholders. If
additional funds are raised by issuing equity securities, the percentage ownership of our stockholders will be reduced, stockholders may
experience additional dilution or such equity securities may provide for rights, preferences or privileges senior to those of the holders of
our common stock. If the Company is unable to utilize its available line of credit with The RHL Group, or its equity line of credit with Dutchess, or obtain
suitable alternative debt or equity financing, it may adversely affect the Company's ability to execute its business plan and continue as a
going concern. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) MANAGEMENT'S USE OF ESTIMATES The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue
and expenses during each reporting period. On an ongoing basis, management evaluates its estimates, including those related to
revenue recognition, allowances for doubtful accounts, the valuation of deferred income taxes, tax contingencies, long-lived and
intangible assets, valuation of derivative liabilities and stock-based compensation. These estimates are based on historical experience
and on various other factors that management believes to be reasonable under the circumstances, although actual results could differ
from those estimates. F-8
(b) CASH AND CASH EQUIVALENTS We consider cash equivalents to be only those investments that are highly liquid, readily convertible to cash and with
maturities of 90 days or less at the purchase date. We maintain our cash in bank deposit accounts that, at times, may exceed federally
insured limits. We have not experienced any losses in such accounts and believe that we are not exposed to any significant credit or
deposit risk on our cash. We had cash and cash equivalents of $311,103 and $363,689 as of December 31, 2011, and 2010,
respectively. (c) TRADE AND OTHER RECEIVABLES Receivables represent claims against third parties that will be settled in cash. The carrying value of receivables, net of an
allowance for doubtful accounts, if any, represents their estimated net realizable value. We estimate the allowance for doubtful
accounts, if any, based on historical collection trends, type of customer, the age of outstanding receivables and existing economic
conditions. If events or changes in circumstances indicate that specific receivable balances may be impaired, we give further
consideration to the collectability of those balances and the allowance is adjusted accordingly. We write off past due receivable
balances when collection efforts have been unsuccessful in collecting the amount due. (d) FAIR VALUE OF FINANCIAL INSTRUMENTS ASC 820-10, Fair Value Measurements and Disclosures, requires entities to disclose the fair value of financial
instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair
value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a
current transaction between willing parties. As of December 31, 2011, and 2010, the carrying value of accounts receivable, deposits,
related party payables, compensation payable, severance liabilities, and accounts payable and accrued expenses approximates fair
value due to the short-term nature of such instruments. The carrying value of short-term debt approximates fair value as the related
interest rates approximate rates currently available to us. We utilize ASC 820-10 for valuing financial assets and liabilities measured on a recurring basis. ASC 820-10 defines fair value,
establishes a framework for measuring fair value and GAAP and expands disclosures about fair value measurements. This standard
applies in situations where other accounting pronouncements either permit or require fair value measurements. ASC 820-10 does not
require any new fair value measurements. Accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and
minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value: Level 1: Quoted prices in active markets for identical or similar assets and liabilities. Level 2: Quoted prices for identical or similar assets and liabilities in markets that are not active or observable inputs other
than quoted prices in active markets for identical or similar assets and liabilities. Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the
assets or liabilities. In determining the appropriate fair value of the warrant liability, we used Level 3 inputs for our valuation methodology. We applied
the Black-Scholes model to value the warrant liability. See Note 11 for the inputs used in the Black-Scholes option valuation model. F-9
(e) PROPERTY AND EQUIPMENT We record property and equipment at cost. We record equipment under capital leases at the present value of the minimum
lease payments. We calculate depreciation using the straight-line method, based upon the following estimated useful lives: Furniture and Fixtures: 5 Years Computer Equipment: 5 Years When we retire or dispose of items, we charge or credit income for the difference between the net book value of the asset and the
proceeds realized thereon. We charge expenditures for maintenance and repairs to operations as incurred while we capitalize renewals and betterments. We have pledged as collateral all property and equipment, along with all of our other assets, for a line of credit from The RHL
Group, a related party (see Note 3 - Related Party Note Payable). (f) INTANGIBLE ASSETS Intangible assets are comprised of website and software development costs, domain names and patents. We account for
website and software development costs in accordance with ASC 350-50, Website Development Costs, and ASC 985-20,
Costs of Software to Be Sold, Leased or Marketed. Pursuant to ASC 350-50 and 985-20, we capitalize internally developed
website and software costs when the website or software under development has reached technological feasibility. We amortize these
costs, typically over an estimated life of five years, using the larger of the amount calculated using the straight-line method or the
amount calculated using the ratio between current period gross revenues and the total of current period gross revenues and estimated
future gross revenues. At each balance sheet date, we evaluate the unamortized capitalized website and software costs compared to
the net realizable value. We then write off the amount by which the unamortized capitalized website costs exceed its net realizable
value. During the years ended December 31, 2011 and 2010, there were no impairment charges recorded. We account for domain names and patents in accordance with ASC 350-30, General Intangibles Other than Goodwill. We
capitalize patent costs representing legal fees associated with filing patent applications and amortize them on a straight-line basis. We
are in the process of evaluating our patents' estimated useful life and will begin amortizing the patents when they are brought to the
market or otherwise commercialized. We amortize identifiable intangible assets over their estimated useful lives as follows: Website and Software Development Costs: 5 Years Domain Name: 5 Years Patents: 20 Years F-10
(g) IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES We account for long-lived assets, which include property and equipment and identifiable intangible assets with finite useful
lives (subject to amortization), in accordance with ASC 350-30. ASC 350-30 requires that we review long-lived assets for impairment
whenever events or changes in circumstances indicate that we may not recover the carrying amount of an asset. We measure
recoverability by comparing the carrying amount of an asset to the expected future undiscounted net cash flows generated by the asset.
If we determine that the asset may not be recoverable, or if the carrying amount of an asset exceeds its estimated future undiscounted
cash flows, we recognize an impairment charge to the extent of the difference between the fair value and the asset's carrying amount.
We had no impairment charges during the years ended December 31, 2011 and 2010. (h) REVENUE RECOGNITION We generate our revenues from services, which are comprised of providing electronic access to consumer medical records
and other vital documents and from the licensing of our services. We recognize revenue only when the price is fixed or determinable,
persuasive evidence of an arrangement exists, the service is performed, and we reasonably are assured of collectability of the resulting
receivable. Our subscriber revenues consist of annual and monthly recurring retail subscriptions and usage-based fees, which are primarily
paid in advance by credit card, and corporate accounts that are based on either an access-fee or actual number of users, and in each
case billed in advance at the beginning of each month of service. We defer the portions of annual recurring subscription fees collected
in advance and recognize them on a straight line basis over the subscription period. We grant exclusive licenses for the sale and marketing of our services in international territories in consideration of an up-front
license fee and an ongoing royalty. The royalty fee is usually a percentage of revenue earned by the licensee and there usually are
certain minimum guarantees. We defer the recognition of license fee revenues received in advance from international licensees for the
grant of the license and recognize them over the period covered by the agreement. We defer the recognition of minimum guaranteed
royalty payments received in advance and recognize them over the period to which the royalty relates. We include all such revenues
under "License Fees." In those cases where a license agreement contains multiple deliverables, we account for the agreement in
accordance with ASC 605-25, Revenue Recognition - Multiple-Element Arrangements. We recognize revenue on sales of our MMRPro system in accordance with ASC 605-25, Revenue Recognition, Multiple-Element
Arrangements. We have also adopted Accounting Standards Update ("ASU") 2009-13, "Revenue
Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force"
effective January 1, 2010. Our multiple-deliverable arrangements consist solely of our MMRPro product. Significant deliverables within these arrangements
include sophisticated scanning equipment, various licenses to use third party software, a license to use our proprietary MMRPro
application software, installation and training, dedicated telephone lines, secure online storage and warranties. We determined all elements to be separate units of accounting as they have standalone value to the customers and/or they are
sold by other vendors on a standalone basis. Delivery of the hardware and certain software elements of these arrangements occur at
the inception of the agreement. We deliver installation and training at the inception of the agreement. We provide other software
licenses, telephone lines and online secure storage over the three year term of the agreement. We include warranties in the
arrangements, however the third party product manufacturer, and not us, is obligated to fulfill such warranties. The third-party warranty
contracts are paid in advance and are not refundable. We allocate the revenue derived from these arrangements among all the deliverables. We base such allocation on the relative
selling price of each deliverable. With the exception of our proprietary MMRPro application software, we use third party evidence to set
the selling prices used for this allocation. In all such cases, third parties sell the same or very similar products. For the MMRPro
application software, we estimate the selling price based on recent discussions regarding licensure of that particular application on a
standalone basis. To date, we have not licensed this software on a standalone basis. We recognize the allocated revenue for each deliverable in accordance with SEC Staff Accounting Bulletin ("SAB") No.
104, Topic 13: Revenue Recognition. Under this guidance, we recognize revenue when persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the price is fixed and determinable and collectability is reasonably
assured. This results in us recognizing revenue for the hardware, certain software and the warranties upon delivery to the customer, for
the installation and training upon completion of these services, and ratably over the contract period for the software licenses, telephone
lines and online secure storage. Revenue from the licensing of our biotech assets 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. For agreements that provide for milestone payments, such as the Celgene Agreement, we adopted ASC 605-28-25,
Revenue Recognition, Milestone Method. F-11
(i) INCOME TAXES AND UNCERTAIN TAX POSITIONS We account for income taxes in accordance with ASC 740-10, Income Taxes. We recognize deferred tax assets and
liabilities to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. We record
a valuation allowance related to a deferred tax asset when it is more likely than not that some portion of the deferred tax asset will not
be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of
enactment. ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial
statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods,
disclosure and transition issues. We classify classifies interest and penalties as a component of interest and other expenses. To date,
we have not been assessed, nor have we paid, any interest or penalties. We measure and record uncertain tax positions by establishing a threshold for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not
recognition threshold at the effective date may be recognized or continue to be recognized. (j) ADVERTISING We expense advertising costs as we incur them. Advertising expense for the years ended December 31, 2011 and 2010 was
$86,323 and $224,846, respectively. (k) SHARE-BASED COMPENSATION We account for share-based compensation in accordance with ASC 718-20, Awards Classified as Equity. We apply
ASC 718-20 in accounting for stock-based awards issued to employees under the recognition of compensation expense related to the
fair value of employee share-based awards, including stock options and restricted stock. Determining the fair value of options at the
grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the
associated volatility and the expected dividends. Judgment is required in estimating the amount of share-based awards expected to be
forfeited prior to vesting. If actual forfeitures differ significantly from these estimates, share-based compensation expense could be
materially impacted. We account for options and warrants issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to
Non-Employees. We treat options and warrants issued to non-employees the same as those issued to employees with the
exception of determination of the measurement date. The measurement date is the earlier of (1) the date at which a commitment for
performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is
complete. Options and warrants granted to consultants are valued at their respective measurement dates, and recognized as expense
based on the portion of the total consulting services provided during the applicable period. As further consulting services are provided in
future periods, we will revalue the associated options and warrants and recognize additional expense based on their then current
values. We estimate the fair value of each stock option on the date of grant using the Black-Scholes option pricing model. We determine
assumptions relative to volatility and anticipated forfeitures at the time of grant. We valued grants of stock options and warrants during
the years ended December 31, 2011 and 2010 using the following assumptions. F-12
We base the assumptions used in the Black-Scholes models upon the following data: (1) our use of the contractual life of the
underlying non-employee warrants as the expected life; the expected life of the employee options used in this calculation is the period
of time the options are expected to be outstanding and has been determined based on historical exercise experience; (2) in the
absence of an extensive public market for our shares, the expected stock price volatility of the underlying shares over the expected
term of the option or warrant was taken at approximately the mid-point of the range for similar companies at the various grant dates; (3)
we base the risk free interest rate on published U.S. Treasury Department interest rates for the expected terms of the underlying
options or warrants; (4) we base expected dividends on historical dividend data and expected future dividend activity; and (5) we base
the expected forfeiture rate on historical forfeiture activity and assumptions regarding future forfeitures based on the composition of
current grantees
CONSOLIDATED BALANCE SHEETS
December 31,
December 31,
2011
2010
ASSETS
Current assets:
Cash and cash equivalents
$
311,103
$
363,689
Accounts receivable, less allowances of $80,000 in 2011 and $19,200 in 2010
312,196
436,740
Inventory
50,614
84,261
Prepaid expenses and other current assets
254,634
370,483
Total current assets
928,547
1,255,173
Long-term investments
Investment in equity securities, at cost
56,000
56,000
Total long-term investments
56,000
56,000
Property and equipment, net
27,683
42,931
Deposits
3,370
3,870
Intangible assets, net
1,212,661
870,433
Total assets
$
2,228,261
$
2,228,407
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit, related party, net of discounts of $66,667 in 2011 and $133,333 in 2010
$
1,435,056
$
984,842
Related party payables
785,636
1,254,681
Compensation payable
109,287
11,979
Severance liability
620,613
620,613
Accounts payable and accrued expenses
3,111,316
2,610,521
Deferred revenue
21,551
123,228
Derivative liability
-
88,997
Convertible notes payable, net of discounts
974,893
605,887
Notes payable, current portion
325,343
325,343
Notes payable, related party
125,000
-
Capital leases payable, current portion
2,635
11,125
Total current liabilities
7,511,330
6,637,216
Notes payable, less current portion
-
-
Total liabilities
7,511,330
6,637,216
Commitments and contingencies (See Note 9)
Stockholders' deficit:
Preferred stock - $0.001 per value, 5,000,000 shares authorized, 0 issued and outstanding.
-
-
Common stock, $0.001 par value, 650,000,000 shares authorized, 359,162,894
and 238,893,492 shares issued and outstanding as of December 31, 2011
and December 31, 2010, respectively
359,155
238,889
Additional paid-in capital
42,590,551
34,700,650
Accumulated deficit
(48,232,775)
(39,348,348)
Total stockholders' deficit
(5,283,069)
(4,408,809)
Total liabilities and stockholders' deficit
$
2,228,261
$
2,228,407
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended
December 31,
2011
2010
Revenues
Subscriber
$
312,430
$
447,459
MMR Pro
463,097
225,413
License fees
500,000
250,000
Other revenues
144,121
50,116
Total revenues
1,419,648
972,988
Cost of revenues
609,212
663,372
Gross profit
810,436
309,616
General and administrative expenses
4,469,845
4,288,652
Sales and marketing expenses
2,419,925
2,677,427
Technology development
324,666
322,942
Loss from operations
(6,404,000)
(6,979,405)
Change in valuation of derivative liabilities
(36,745)
(5,862,568)
Interest and other finance charges, net
(2,443,682)
(5,058,079)
Net loss
$
(8,884,427)
$
(17,900,052)
Net loss per share:
Basic and diluted
$
(0.03)
$
(0.08)
Weighted average common shares outstanding:
Basic and diluted
288,853,993
214,265,303
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEAR ENDED DECEMBER 31, 2011 AND 2010
Preferred Stock
Common Stock
Additional
Accumulated
Shares
Amount
Shares
Amount
Paid-In Capital
Deficit
Total
Balance as of December 31, 2009
-
$
-
173,689,343
$
173,689
$
14,458,052
$
(21,448,296)
$
(6,816,555)
Warrant exercise by related parties
-
-
2,306,605
2,307
286,019
-
288,326
Convertible debt issuances and warrants exercises
-
-
36,452,502
36,448
7,415,596
7,452,044
Reclassification of derivative liabilities and creation of note discount
-
-
-
-
7,489,220
-
7,489,220
Shares issued for services or reduction to liabilities
-
-
13,057,078
13,057
1,577,787
-
1,590,844
Shares issued for investment
800,000
800
55,200
56,000
Shares issued for financing activities
9,241,854
9,242
584,283
593,525
Stock option exercises
-
-
2,277,197
2,277
259,707
-
261,984
Stock based compensation
-
-
-
-
1,698,142
-
1,698,142
Warrant exercises
-
-
1,068,913
1,069
137,082
-
138,151
Warrants issued for services
-
-
-
-
739,562
-
739,562
Net loss
-
-
-
-
-
(17,900,052)
(17,900,052)
Balance as of December 31, 2010
-
-
238,893,492
238,889
34,700,650
(39,348,348)
(4,408,809)
Shares issued for services or reduction to liabilities
-
-
21,026,180
21,026
1,274,933
-
1,295,959
Convertible debt conversions and warrants exercises
-
-
67,532,908
67,531
1,663,735
-
1,731,266
Shares issued for financing activities
21,997,363
21,997
932,295
954,292
Stock option exercises
1,791,951
1,791
171,842
173,633
Stock based compensation
-
-
-
-
1,224,440
-
1,224,440
Warrant exercises
-
-
7,921,000
7,921
353,833
-
361,754
Warrants issued for services
-
-
-
-
541,979
-
541,979
Reclassification of derivative liabilities and creation of note discount
-
-
-
-
1,726,844
-
1,726,844
Net loss
-
-
-
-
-
(8,884,427)
(8,884,427)
Balance as of December 31, 2011
-
$
-
359,162,894
$
359,155
$
42,590,551
$
(48,232,775)
$
(5,283,069)
CONSOLIDATED STATEMENTS
OF CASH FLOWS
Year Ended December 31,
2011
2010
Operating activities:
Net loss
$
(8,884,427)
$
(17,900,052)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization
211,656
114,173
Allowance for doubtful accounts
60,800
19,200
Change in valuation of derivative liabilities
36,745
5,862,568
Warrants issued for services
541,979
739,562
Stock-based compensation
1,224,440
1,698,142
Common stock issued for services
506,827
1,590,844
Amortization of loan discount
2,214,908
4,411,752
Loan commitment fee amortization
28,053
-
Subtotal - Non-cash adjustments
4,825,408
14,436,241
Effect of changes in:
Accounts receivable
63,744
(426,538)
Inventory
33,647
(84,261)
Prepaid expenses and other current assets
115,848
241,654
Deposits
500
3,795
Accounts payable and accrued expenses
500,794
(368,701)
Related party payables
503,634
(238,702)
Compensation & severance payable
97,307
1,036
Deferred revenue
(101,677)
123,228
Subtotal - net change in operating assets & liabilities
1,213,797
(748,489)
Net cash used in operating activities
(2,845,222)
(4,212,300)
Investing activities:
Purchase of property and equipment
(7,779)
(25,776)
Filing of Biotech patents
(194,808)
(174,836)
Costs of continuing MMRPro and website development
(336,047)
(339,732)
Net cash used in investing activities
(538,634)
(540,344)
Financing activities:
Net proceeds from convertible notes
1,851,081
2,888,527
Net proceeds from warrant exercises
360,754
886,669
Proceeds from equity line of credit
954,292
593,525
Payments of capital lease
(8,490)
(7,661)
Repayments of line of credit, related party
-
5,523
Proceeds from stock option exercises
173,633
261,984
Net cash provided by financing activities
3,331,270
4,628,567
Net decrease in cash
(52,586)
(124,077)
Cash, beginning of period
363,689
487,766
Cash, end of period
$
311,103
$
363,689
Supplemental disclosures of cash flow information:
Cash paid for interest
$
21,493
$
6,007
Cash paid for income taxes
$
2,866
$
20,987
Supplemental disclosure of non-cash investing and financing activities:
Payment of payables through issuance of notes payable
$
24,387
$
107,875
Capitalized loan commitment fees payable
$
200,000
$
-
Investment in MMX Holdings through issuance of common stock
$
-
$
56,000
Conversion of convertible notes payable into common stock
$
1,731,266
$
2,101,342
Reclassification of derivative liabilities and creation of note discount
$
1,726,844
$
7,378,559
Prepayment for services through issuance of common stock
$
75,000
$
137,000
Payment of accounts payable and related party payables through issuance of common stock
$
1,295,959
$
1,127,805
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fair Value
Fair Value Measurements at December 31,
as of
Using Fair Value Hierarchy
Financial Instruments
December 31,
Level 1
Level 2
Level 3
Liabilities:
Warrant liability
$
88,997
$
-
$
-
$
88,997
Total at December 31, 2010
$
88,997
$
-
$
-
$
88,997
Warrant liability
$
-
$
-
$
-
$
-
Total at December 31, 2011
$
-
$
-
$
-
$
-
Years Ended
December 31, 2011
December 31, 2010
Expected life in years
0 - 5 Years
5 - 10 Years
Stock price volatility
144.34% - 148.34%
111.85% - 128.94%
Risk free interest rate
0.03% - 2.14%
2.38% - 3.87%
Expected dividends
None
None
Forfeiture rate
0%
0%
(l) NET INCOME/LOSS PER SHARE
We apply the guidance of ASC 260-10, Earnings Per Share for calculating the basic and diluted loss per share. We calculate basic loss per share by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding. We compute diluted loss per share similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential shares had been issued and if the additional shares were dilutive. We exclude common equivalent shares from the computation of net loss per share if their effect is anti-dilutive.
We excluded all potential common shares from the computation of diluted net loss per common share for the years ended December 31, 2011 and 2010 because they were anti-dilutive due to our net loss position. Stock options and warrants excluded from the computation totaled 105,960,214 and 82,435,524 shares for the years ended December 31, 2011 and 2010 respectively.
(m) RESEARCH, DEVELOPMENT AND ENGINEERING
We expense research, development and engineering costs as incurred and presented as technology development in the accompanying consolidated statements of operations. We capitalize and amortize costs for software development relating to our website incurred subsequent to establishing technological feasibility, in the form of a working model, over their estimated useful lives.
(n) RECENT ACCOUNTING PRONOUNCEMENTS
In October 2009, the FASB issued ASU No. 2009-13, Multiple-Deliverable Revenue Arrangements - a consensus of the FASB Emerging Issues Task Force, that provides amendments to the criteria for separating consideration in multiple-deliverable arrangements. As a result of these amendments, multiple-deliverable revenue arrangements will be separated in more circumstances than under existing U.S. GAAP. The ASU does this by establishing a selling price hierarchy for determining the selling price of a deliverable. The selling price used for each deliverable will be based on vendor-specific objective evidence if available, third-party evidence if vendor-specific objective evidence is not available, or estimated selling price if neither vendor-specific objective evidence nor third-party evidence is available. A vendor will be required to determine its best estimate of selling price in a manner that is consistent with that used to determine the price to sell the deliverable on a standalone basis. This ASU also eliminates the residual method of allocation and will require that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method, which allocates any discount in the overall arrangement proportionally to each deliverable based on its relative selling price. Expanded disclosures of qualitative and quantitative information regarding application of the multiple-deliverable revenue arrangement guidance are also required under the ASU. The ASU does not apply to arrangements for which industry specific allocation and measurement guidance exists, such as long-term construction contracts and software transactions. The ASU is effective beginning January 1, 2011. The Company has adopted this standard on the Company's financial statements since January 1, 2010.
In October 2009, the FASB issued ASU No. 2009-14, Certain Revenue Arrangements That Include Software Elements - a consensus of the FASB Emerging Issues Task Force, that reduces the types of transactions that fall within the current scope of software revenue recognition guidance. Existing software revenue recognition guidance requires that its provisions be applied to an entire arrangement when the sale of any products or services containing or utilizing software when the software is considered more than incidental to the product or service. As a result of the amendments included in ASU No. 2009-14, many tangible products and services that rely on software will be accounted for under the multiple-element arrangements revenue recognition guidance rather than under the software revenue recognition guidance. Under the ASU, the following components would be excluded from the scope of software revenue recognition guidance: the tangible element of the product, software products bundled with tangible products where the software components and non-software components function together to deliver the product's essential functionality, and undelivered components that relate to software that is essential to the tangible product's functionality. The ASU also provides guidance on how to allocate transaction consideration when an arrangement contains both deliverables within the scope of software revenue guidance (software deliverables) and deliverables not within the scope of that guidance (non-software deliverables). The ASU is effective beginning January 1, 2011.The Company has adopted this standard on the Company's financial statements since January 1, 2010.In January 2010, the FASB issued ASU No. 2010-6, "Improving Disclosures About Fair Value Measurements," that amends existing disclosure requirements under ASC 820 by adding required disclosures about items transferring into and out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures about purchases, sales, issuances, and settlements relative to level 3 measurements; and clarifying, among other things, the existing fair value disclosures about the level of disaggregation. This ASU
F-13
became effective during the first quarter of 2010, except for the requirement to provide level 3 activities of purchases, sales, issuances, and settlements on a gross basis, which becomes effective beginning the first quarter of 2011. The adoption of this standard didn't have a material impact on our financial statements.
3. RELATED PARTY NOTE PAYABLE
As contemplated by the Merger Agreement and the Creditor Plan, as a condition to the Merger, at the effective time of the Merger, MMR and The RHL Group, Inc. entered into an allonge to the RHL Note and the Security Agreement ("The Allonge") pursuant to which The RHL Group, Inc. agreed to suspend certain of its rights under the Security Agreement and the RHL Note until the earlier of (a) the date that we repay all amounts outstanding under any promissory notes issued to Old Favrille's creditors under the Creditor Plan, (b) the date that we deposit into an escrow fund the maximum amount of cash payable in satisfaction of the promissory notes issued to Old Favrille's creditors under the Creditor Plan or (c) ten days after the two year anniversary of the closing date of the Merger. The suspended rights include any right of The RHL Group, Inc. to (1) declare a default or event of default under the Security Agreement or the RHL Note, (2) accelerate the maturity date of the RHL Note, (3) exercise any of its principal remedies for a default or event of default under the Security Agreement, (4) assign the RHL Note, the proceeds of the RHL Note or to otherwise negotiate the RHL Note and (5) receive payment of the outstanding principal and interest owing under the RHL Note.
On April 29, 2009, we restructured our secured credit facility with The RHL Group, Inc. and entered into a Secured Credit Restructuring Agreement with MMR Information Systems, Inc., The RHL Group, Inc. and Robert H. Lorsch, our Chairman, Chief Executive Officer and President, or the Restructuring Agreement. We issued The RHL Group, Inc. a Third Amended and Restated Note, or the Third Amended Note, and MMR Information Systems, Inc. agreed to guaranty our obligations under the Third Amended Note, or the Guaranty. The Restructuring Agreement, Third Amended Note and Guaranty are filed as Exhibits to this current report on Form 10-K. As part of the Restructuring Agreement we terminated the Allonge.
The Third Amended Note amended and restated the RHL Note, matured November 30, 2009, and bore interest at the lesser of 10% or the highest rate then permitted by law, and is secured (similar to the RHL Note) by the Security Agreement. Although the reserve credit line has been increased to $3,000,000, The RHL Group, Inc. was only obligated to make a minimum of $100,000 of loans, advances and guarantees under the Third Amended Note within 30 days of execution pursuant to the Restructuring Agreement. Notwithstanding, the balance on the Note was $1,545,767 at December 31, 2009.
The RHL Group was due to receive, as an origination fee, or the Fee, a promissory note for $200,000, bearing interest at 10% per annum and due on demand. On August 17, 2009, the Company paid the 200,000 origination fee by granting 2,800,000 shares of common stock to The RHL Group.
On August 18, 2009, the Company and The RHL Group entered into a Waiver Agreement, pursuant to which, in consideration of The RHL Group's waiver of MMR's payment default under the Third Amended Note, the Company granted to The RHL Group a warrant to purchase an aggregate of 11,039,378 shares of the Company's common stock, with an exercise price equal to $0.13 per share, the closing price of the Company's common stock on the date immediately preceding the date of grant. Under the Waiver Agreement, The RHL Group agreed to waive MMR's payment default until August 31, 2009, which waiver period will automatically continue until The RHL Group notifies MMR otherwise. In addition, as repayment of the unpaid origination fee owed to The RHL Group by MMR in connection with the credit line restructuring, the Company granted to The RHL Group 2,800,000 shares of common stock.
On April 29, 2010, we, The RHL Group and Robert H. Lorsch entered into a Fourth Amended and Restated Secured Promissory Note, or the Fourth Amended Note, and we agreed to guaranty MMR's obligations under the Fourth Amended Note (the "Guaranty"). The Fourth Amended Note amends and restates the April 29, 2009 Third Amended and Restated Secured Promissory Note Agreement. The Fourth Amended Note matures April 29, 2011, and bears interest at the lesser of 10% or the highest rate then permitted by law, and is secured by the Security Agreement. The reserve credit line of the Fourth Amended Noted remains at $3,000,000. In connection with the Fourth Amended Note, The RHL Group received a $200,000 loan origination fee ("Fee") that was due and payable immediately. The RHL Group exercised warrants to purchase 1,600,000 shares of our common stock with an exercise price of $0.125 in consideration for the loan origination fee. On October 29, 2010 the Fourth Amended Note was renewed for an additional six-month term and The RHL Group received an additional $200,000 loan origination fee. In addition, The RHL Group received a warrant to purchase up to 2,614,684 shares of our common stock at an exercise price of $0.21 per share. This warrant is fully vested and is exercisable either in cash or on a cashless basis at any time prior to the fourth anniversary of the warrant's issuance.
On April 29, 2011, we, The RHL Group and Robert H. Lorsch entered into a Fifth Amended and Restated Secured Promissory Note, or the Fifth Amended Note, and we agreed to guaranty MMR's obligations under the Fifth Amended Note (the "Guaranty"). The Fifth Amended Note amends and restates the April 29, 2010 Fourth Amended and Restated Secured Promissory Note Agreement. The Fifth Amended Note matures April 29, 2012, and bears interest at the lesser of 10% or the highest rate then permitted by law, and is secured by the Security Agreement. The reserve credit line of the Fifth Amended Note remains at $3,000,000. In connection with the Fifth Amended Note, The RHL Group received a $200,000 loan origination fee ("Fee") that was due and payable immediately. The RHL Group exercised warrants to purchase 1,600,000 shares of our common stock with an exercise price of $0.125 in consideration for the loan origination fee. In addition,
F-14
The RHL Group received a warrant to purchase up to 2,796,566 shares of our common stock at an exercise price of $0.51 per share. This warrant is fully vested and is exercisable either in cash or on a cashless basis at any time prior to the fourth anniversary of the warrant's issuance.
The RHL Group Note payable had a balance of $1,574,312 at December 31, 2011. The components of the RHL Group Note payable and the related balance sheet presentation as of December 31, 2011 are as follows: $1,349,312, which are included in the line of credit, related party; $225,000, which is related to deferred salary and consulting expenses is included in related party payables; and $72,589, in various deferred amounts . We recorded the loan origination fees mentioned above as a note discount and we are amortizing them over the Fourth Amended Note maturity period. As of December 31, 2011, the remaining unamortized origination fee was $66,667.
Total interest expense on this note for the years ended December 31, 2011 and 2010 amounted to $119,710 and $170,940 respectively. The unpaid interest balances as of December 31, 2011 and 2010 were $24,145 and $10,262, respectively.
In conjunction with the loan agreement noted above, we were required to maintain certain financial covenants, including the requirement that we have at least $200,000 in cash in our bank accounts or such other amount as necessary to maintain operations through the subsequent thirty (30) days and timely pay any obligations due respecting payroll and all associated payroll taxes on and after December 31, 2011. As of December 31, 2011, we were in compliance with our financial covenants under the terms of the Fifth Amended Note.
Additional information regarding the Third Amended Note and the Restructuring Agreement is contained in our current report on Form 8- K filed with the SEC on, 2010.
Additional information regarding the Fourth Amended and Restated Note is contained in our current report on Form 10-Q filed with the SEC on May 17, 2010.
Additional information regarding the Fifth Amended and Restated Note is contained in our current report on Form 10-Q filed with the SEC on May 26, 2011.
4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets include the following:
December 31, | December 31, | |||||
2011 | 2010 | |||||
Prepaid consulting fees from issuance of common stock | $ | 198,029 | $ | 257,497 | ||
Prepaid insurance | 23,994 | 36,752 | ||||
Deferred financing costs (loan origination fees) | 919 | - | ||||
Prepaid trade shows | 27,165 | 17,375 | ||||
Prepaid other (Favrille) | 4,527 | 58,859 | ||||
Total prepaid expenses and other current assets | $ | 254,634 | $ | 370,483 |
F-15
5. PROPERTY AND EQUIPMENT
Property and equipment, at December 31, 2011 and 2010 consisted of the following.
December 31, | December 31, | |||||
2011 | 2010 | |||||
Furnitures and fixtures | $ | 3,170 | $ | 3,170 | ||
Computers and related equipment | 118,951 | 111,171 | ||||
122,121 | 114,341 | |||||
Less: Accumulated depreciation and amortization | (94,438) | (71,410) | ||||
$ | 27,683 | $ | 42,931 |
Included in computers and related equipment at December 31, 2011 and 2010 are assets under capital leases of $28,565. Included in accumulated depreciation at December 31, 2011 and 2010 are $27,137 and $21,424, respectively, related to assets under capital leases. Depreciation expense related to assets under capital leases for the years ended December 2011 and 2010 amounted to $5,713.
6. INTANGIBLE ASSETS
Intangible assets as of December 31, 2011 and 2010 consisted of the following.
Years Ended | ||||||
December 31, | December 31, | |||||
2011 | 2010 | |||||
Website development | $ | 803,823 | $ | 766,188 | ||
MMR Pro website development | 715,327 | 416,913 | ||||
Patents | 476,732 | 281,924 | ||||
Domain name | 86,375 | 86,375 | ||||
2,082,257 | 1,551,400 | |||||
Less: accumulated amortization | (672,596) | (483,967) | ||||
Reserve for impairment | (197,000) | (197,000) | ||||
$ | 1,212,661 | $ | 870,433 |
F-16
Amortization expense for the years ended December 31, 2011 and 2010 amounted to $188,286 and $94,531, respectively. Estimated amortization expense for each of the next five succeeding years is expected to be as follows:
Year Ending December 31, | |||
2012 | $ | 188,212 | |
2013 | 180,345 | ||
2014 | 180,345 | ||
2015 | 174,355 | ||
2016 | 140,103 | ||
Total | $ | 863,360 |
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
December 31, | December 31, | |||||
2011 | 2010 | |||||
Legal and accounting fees | $ | 2,199,317 | $ | 1,851,832 | ||
Accounts payable and accruals from Favrille Merger | 315,791 | 315,791 | ||||
Trade payables | 326,284 | 317,550 | ||||
Consulting services | 158,106 | 61,618 | ||||
Accrued vacation | 72,855 | 46,185 | ||||
Interest payable | 38,963 | 17,545 | ||||
Total accounts payable and accrued expenses | $ | 3,111,316 | $ | 2,610,521 |
8. INCOME TAXES
The items accounting for the difference between income taxes computed at the federal statutory rate and the provision for income taxes were as follows:
Years Ended December 31, | ||||||
2011 | 2010 | |||||
Federal statutory rate | -34.00% | -34.00% | ||||
State tax, net of federal benefit | -5.73% | -3.91% | ||||
Non-deductible items | 0.58% | 11.24% | ||||
Valuation allowance | 39.15% | 26.67% | ||||
Effective income tax rate | 0.00% | 0.00% |
F-17
Significant components of deferred tax assets and (liabilities) are as follows:
Years Ended December 31, | ||||
2011 | 2010 | |||
Net operating loss carryforwards | $ | 15,276,124 | $ | 12,119,206 |
Depreciation and amortization | (186,279) | (40,461) | ||
Share based compensation | 2,325,608 | 1,598,009 | ||
State tax and other | (1,223,509) | (962,546) | ||
Deferred tax assets, net | 16,191,944 | 12,714,208 | ||
Less: valuation allowance | (16,191,944) | (12,714,208) | ||
$ | - | $ | - |
At December 31, 2011, the Company had Federal and State net operating loss carry forwards available to offset future taxable income of $35,683,293 and $35,563,398, respectively. These carry forwards will begin to expire in the years ending December 31, 2026 and December 31, 2016, respectively. These net operating losses may be subject to various limitations on utilization based on ownership changes under Internal Revenue Code Section 382 as a result of the Merger, and the Company is in the process of evaluating the impact of this before any losses are used to offset future taxable income.
The Company periodically evaluates the likelihood of the realization of deferred tax assets, and adjusts the carrying amount of the deferred tax assets by a valuation allowance to the extent the future realization of the deferred tax assets is not judged to be more likely than not. The Company considers many factors when assessing the likelihood of future realization of our deferred tax assets, including recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income or loss, the carry-forward periods available to us for tax reporting purposes, and other relevant factors.
At December 31, 2011, based on available evidence, including cumulative losses in recent years and expectations of future taxable income, the Company determined that it was more likely than not that its deferred tax assets would not be realized. According, the Company has recorded a $16,191,944 valuation allowance, or 100% of its cumulative deferred tax assets.
As a result of the implementation of certain provisions of ASC 740, Income Taxes, (formerly FIN 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109), the Company performed an analysis of its previous tax filings and determined that there were no positions taken that it considered uncertain. Therefore, there were no unrecognized tax benefits as of December 31, 2011.
Future changes in the unrecognized tax benefit are not expected to have an impact on the effective tax rate due to the existence of the valuation allowance. The Company estimates that the unrecognized tax benefit will not change within the next twelve months. The Company will continue to classify income tax penalties and interest, if any, as part of interest and other expenses in its consolidated statements of operations. The Company incurred $0 of interest and penalties during the years ended December 31, 2011 and 2010.
The Company files income tax returns in the United States ("Federal") and California ("State") jurisdictions. The Company is subject to Federal and State income tax examinations by the tax authorities.
The following table summarizes the open tax years for each major jurisdiction:
Jurisdiction Open Tax Years
Federal 2008 - 2011
California State 2007 - 2011
As the Company has significant net operating loss carryforwards, even if certain of the Company's tax positions were disallowed, it is not foreseen that the Company would have to pay any taxes in the near future. Consequently, the Company does not calculate the impact of interest or penalties on amounts that might be disallowed. The Company's net operating loss carryforwards are subject to examination until they are fully utilized and such tax years are closed.
F-18
9. COMMITMENTS AND CONTIGENCIES
Leases
We lease certain facilities and equipment under non-cancelable capital and operating leases, which expire at various dates through 2013. Effective September 1, 2010, we entered into a lease agreement to lease office space in Los Angeles, California. The lease requires a monthly payment of $5,500 commencing in September 2010. Effective November 1, 2010, the Company entered into a lease agreement to lease additional space adjacent to the current office space in Los Angeles, California. The lease requires an additional monthly payment of $3,193 commencing in November 2010. Both leases expire on August 31, 2013 unless renewed. Total rent expense for the year ended December 31, 2011 and 2010 was $116,142 and $90,670 respectively. Future minimum lease payments as of December 31, 2011, under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments are as follows:
Year Ending | Operating | Capital | ||||
December 31, | Leases | Leases | ||||
2012 | $ | 110,916 | $ | 2,635 | ||
2013 | 73,944 | - | ||||
- | - | |||||
Total minimum lease payments | $ | 184,860 | $ | 2,635 |
Guarantee provided by The RHL Group
Under the terms of an agreement with an investor who purchased $500,000 of MMR's Series B Preferred stock in 2006, we entered into an agreement to invest $250,000 in a joint venture with this investor to establish an entity to market and sell our services in the countries of Japan, China, Korea, Taiwan and Thailand. We have paid $100,000 to date of this amount which we have expensed during the year ended December 31, 2009 as we have terminated our relationship with this investor. To date, we have not formed a joint venture nor have we commenced operations. In September 2007, The RHL Group provided this investor with a guarantee that we would meet our obligations under this agreement in exchange for 300,000 shares of MMR's restricted common stock valued at the time at $39,000. As consideration for renewing the guarantee when it expired in September 2008, in January 2009, MMR issued The RHL Group 100,000 shares of MMR's common stock, which became 328,174 shares of our common stock upon the closing of the Merger, valued at approximately $5,000. On January 6, 2010, we entered into a settlement agreement with this investor to provide for full and final settlement of any and all claims pertaining to any license rights for MMR-Asia to market, sell and sublicense MMRGlobal and MMR products and services. As part of this settlement agreement, we granted 1,388,889 shares of our common stock to this investor in January 2010. The value of these shares amounted to $138,889, and we have recorded this expense in the accompanying consolidated statement of operations during the year ended December 31, 2010.
On May 6, 2011, the RHL Group agreed to guarantee up to $250,000 in payments to a vendor for future services to be rendered. In consideration of this guarantee, the RHL Group is entitled to (i) a warrant to purchase 625,000 shares of our common stock, at an exercise price of $0.046 per share, which was the closing price of our common stock on the date of the transaction, and (ii) 125,000 shares of our common stock priced as of the same date. In the event that the RHL Group has to perform on this guarantee, interest on any outstanding balance paid to the vendor by the RHL Group will be added to the balance of the Line of Credit. Additionally, any balances due to this vendor at any given time will reduce the amount available under the Line of Credit. The warrants and shares were issued on November 11, 2011 to the RHL Group.
Concentrations
For the year ended December 31, 2011, our three largest customers (Celgene $500,000, E-mail Frequency $140,000, and Chartis $100,000) accounted for approximately 55% of our total revenue.
For the year ended December 31, 2010, our three largest customers (Celgene $250,000, Chartis $150,000 and DDS Coverdell $105,693) accounted for approximately 52% of our total revenue.
Guarantee provided by Robert H. Lorsch
On August 17, 2009, Robert H. Lorsch, our Chief Executive Officer and President, agreed to guarantee $282,641 in payments due to a vendor for services rendered to us. On August 17, 2009, in consideration of a personal guaranty given by Mr. Lorsch, we granted Mr. Lorsch (i) a warrant to purchase up to 706,605 shares of our common stock, at an exercise price of $0.13 per share, which was the closing price of our common stock on the date immediately preceding the date of grant, and (ii) 141,321 shares of our common stock. On June 11, 2010, we settled our liability with this vendor in exchange for 1,680,677 shares of our common stock, which resulted in a cancellation of the aforementioned guarantee. The balance owed by MMR was settled in 2010, and the guarantee was cancelled at that time.
F-19
Employment Agreements
The Company has employment agreements with its Chairman, President and Chief Executive Officer, Robert H. Lorsch, its Vice President of Finance and Chief Financial Officer, Ingrid Safranek, and its Executive Vice President of Technology and Product Development, Sunil Singhal, Vice President Telecommunications & Carrier Relations, Rafael "Ralph" Salazar, and Executive Vice President, Richard Lagani. Under each employment agreement, the executive officers receive a base salary, subject to annual increases as determined by the board of directors, certain benefits as set forth in the employment agreements, and an annual bonus at the discretion of the board of directors.
On January 29, 2009 we entered into an employment agreement with our Chairman, President and Chief Executive Officer, Robert H. Lorsch, with an initial term ending on December 31, 2011, subject to successive automatic extension unless we or Mr. Lorsch elect not to extend. Under the terms of his agreement, Mr. Lorsch shall serve as both our President and Chief Executive Officer and President and Chief Executive Officer of our wholly-owned subsidiary, MMR. The agreement provides for a base salary of $15,000 per month, subject to an upward increase and with an annual bonus and stock option grants in such amounts, if any, as the Board of Directors may determine in its sole discretion. Mr. Lorsch receives a monthly auto allowance, reimbursement of certain life insurance premiums, and reimbursement for certain other insurance coverage, and is entitled to participate in benefits generally made to our senior executives.
On December 28, 2011, the Board of Directors agreed to renew Mr. Lorsch's employment agreement effective January 1, 2012 for an additional three year term ending on December 31, 2014. The employment agreement called for annual bonus and stock option grants as determined by the Board in its sole discretion. In negotiating the renewal, it was pointed out that such bonuses and grants had never been issued under the employment agreement. Therefore, the Board approved an annual bonus of $150,000 for each of the last three years payable under the following conditions: (a) in the event of a change of control; or (b) any portion of the bonus could be paid in any quarter in which the Company would achieve profitability excluding non-cash expenses after payment of such portion of the bonus; or (c) any portion of the bonus amount may be used to convert options or warrants at $0.125 per share or above. With regard to the obligation to award options, the Board agreed to visit that obligation after the resolution of numerous pending transactions that had kept the Company in a trading blackout period. Accordingly, on January 9, 2012, the Company, its subsidiary and Mr. Lorsch entered into an amendment to the Lorsch Employment Agreement (the "Renewal") with an effective date of January 1, 2012. The term of the Renewal expires on December 31, 2014, but may be extended automatically for successive additional one-year periods at the expiration of the then-current term unless written notice of non-extension is provided to Mr. Lorsch with at least 90 days prior notice to the expiration of such term. Mr. Lorsch's current annual base salary will remain unchanged under the Renewal with the understanding that, as in the past, portions of the payments could be deferred into future periods. Mr. Lorsch may terminate the agreement upon 30 days written notice without reason or for good reason (as defined in the agreements) if we fail to cure acts or omissions constituting good reason within 30 days. If Mr. Lorsch's employment is terminated by us for cause or voluntarily by Mr. Lorsch without good reason, he will not be entitled to receive any severance payments or benefits under the employment agreement. If Mr. Lorsch's employment is terminated by us without cause or voluntarily by Mr. Lorsch for good reason, Mr. Lorsch will be entitled to year of salary at his then current rate of pay, including all monthly benefits, and the pro rata portion of the annual bonus otherwise due Mr. Lorsch. In the event of his disability, Mr. Lorsch would be entitled to receive compensation equal to 60% of his base salary as then in effect. Mr. Lorsch's employment agreement includes provisions that prohibit Mr. Lorsch from disclosing our confidential information and trade secrets and competing with us during the term of his employment agreement or soliciting our employees for 12 months following termination of employment.
We also have entered into a consulting agreement with The RHL Group, Inc., which is wholly-owned by Mr. Lorsch that provides for a monthly fee of $25,000 plus reimbursement of expenses including medical insurance. The RHL Group provides consulting, operational and technical services to the Company, which we refer to as the RHL Services. As part of the RHL Services, the RHL Group provides the Company with unrestricted access to its internal business and relationship contact database of more than 10,000 persons and entities, which includes clients of the RHL Group and other individuals which may hold value to the Company. The RHL Group also provides infrastructure support to the Company, including allowing the Company unlimited access to its facilities, equipment, and data, information management and server systems. In addition to allowing the Company the use of its office support personnel, the RHL Group has also consented to allow the Company to utilize the full-time services of Mr. Lorsch as the Company's President, Chairman and Chief Executive Officer, which requires substantial time and energy away from his required duties as The RHL Group's Chairman and Chief Executive Officer. In addition, The RHL Group has made its President, Kira Reed, available as the Company's spokesperson. Ms. Reed, who is Mr. Lorsch's spouse, also manages the Company's social networking activities.
We also had an employment agreement with our former Chief Financial Officer and Senior Vice President and former Executive Vice President of Technology and Product Development, Naj Allana, which was terminated on November 1, 2010 after Mr. Allana's resignation.
F-20
On January 26, 2010, we entered into an employment agreement with Ingrid Safranek as our Vice President, Chief Financial Officer and Secretary. Under the employment agreement, Ms. Safranek receives a base salary, subject to annual increases as determined by the board of directors, certain benefits as set forth in the employment agreement, and an annual bonus at the discretion of the board of directors. Ms. Safranek's employment agreement which was effective until June 15, 2010, which was extended until June 15, 2011. However, on December 10, 2010, the Board approved Ms. Safranek's employment agreement to be amended to extend the term for an additional term commencing on January 1, 2011. On December 28, 2011, the Board extended the current employment agreement for an additional two year term and approved an increase in her base salary with the understanding that, from time to time, it could be necessary to defer certain payments or benefits into future periods.
The current term of Ms. Safranek's employment agreement is effective until December 31, 2013 and will automatically renew for successive 12 month periods unless terminated at least 30 days prior to the end of the term. The employment agreement may be terminated by the Company without cause (as defined in the agreement) upon 90 days written notice or for cause if Ms. Safranek fails to cure the acts or omissions constituting cause within 30 days. If Ms. Safranek's employment is terminated by the Company for cause or voluntarily by Ms. Safranek without good reason, she will not be entitled to receive any severance payments or benefits under the employment agreement. If Ms. Safranek's employment is terminated by the Company without cause or voluntarily by Ms. Safranek for good reason, Ms. Safranek will be entitled to one year of salary at her then current rate of pay, including all monthly benefits, and the pro rata portion of the annual bonus otherwise due Ms. Safranek. In the event of her disability, Ms. Safranek would be entitled to receive compensation equal to 60% of her base salary as then in effect. Ms. Safranek's employment agreement includes provisions that prohibit her from disclosing our confidential information and trade secrets and competing with us during the term of his employment agreement or soliciting our employees for 12 months following termination of employment.
On December 13, 2010, we entered into an employment agreement with Sunil Singhal as our Executive Vice President of Technology and Development. Under the employment agreement, Mr. Singhal received a base salary, subject to annual increase as determined by the board of directors, certain benefits as set forth in the employment agreement, and an annual bonus at the discretion of the board of directors.
The current term of Mr. Singhal's employment agreement is effective until December 13, 2012 and will automatically renew for successive 12 month periods unless terminated at least 60 days prior to the end of the term. The employment agreement may be terminated by the Company with cause (as defined in the agreement) upon 30 days written notice or for cause if Mr. Singhal fails to cure the acts or omissions constituting cause within 30 days. If Mr. Singhal's employment is terminated by the Company for cause or voluntarily by Mr. Singhal without good reason, he will not be entitled to receive any severance payments or benefits under the employment agreement. If Mr. Singhal's employment is terminated by the Company without cause or voluntarily by Mr. Singhal for good reason, Mr. Singhal will be entitled to one year of salary at his then current rate of pay, including all monthly benefits, and the pro rata portion of the annual bonus otherwise due Mr. Singhal.
On June 15, 2010, we entered into an employment agreement with Rafael "Ralph" Salazar as our Vice President Telecommunications & Carrier Relations. Under the employment agreement, Mr. Salazar received a base salary, subject to annual increase as determined by the board of directors, certain benefits as set forth in the employment agreement, and an annual bonus at the discretion of the board of directors. Mr. Salazar's employment agreement was effective until June 15, 2012. On December 28, 2011, the Board extended the current employment agreement for an additional two year term and approved an increase in his base salary with the understanding that, from time to time, it could be necessary to defer certain payments or benefits into future periods.
The current term of Mr. Salazar's employment agreement is effective until December 31, 2013 and will automatically renew for successive 12 month periods unless terminated at least 60 days prior to the end of the term. The employment agreement may be terminated by the Company without cause (as defined in the agreement) upon 30 days written notice or for cause if Mr. Salazar fails to cure the acts or omissions constituting cause within 30 days. If Mr. Salazar's employment is terminated by the Company for cause or voluntarily by Mr. Salazar without good reason, he will not be entitled to receive any severance payments or benefits under the employment agreement. If Mr. Salazar's employment is terminated by the Company without cause or voluntarily by Mr. Salazar for good reason, Mr. Salazar will be entitled to three months of salary at his then current rate of pay, including all monthly benefits, and the pro rata portion of the annual bonus otherwise due Mr. Salazar.
F-21
On April 1, 2011, we entered into an employment agreement with Richard Lagani as our Executive Vice President. Under the employment agreement, Mr. Lagani received a base salary, subject to annual increase as determined by the board of directors, certain benefits as set forth in the employment agreement and an annual bonus at the discretion of the board of directors. The current term of Mr. Lagani's employment agreement is effective until April 30, 2013 and will automatically renew for successive 12 month periods unless terminated at least 30 days prior to the end of the term. The employment agreement may be terminated by the Company without cause upon 30 days written notice or for cause (as defined in the agreement) immediately. If Mr. Lagani's employment is terminated by the Company for cause or voluntarily by Mr. Lagani without good reason, he will not be entitled to receive any severance payments or benefits under the employment agreement. If Mr. Lagani's employment is terminated by the Company without cause or voluntarily by Mr. Lagani for good reason, Mr. Lagani will be entitled to two months' severance (if during the first year of the agreement), four months' severance (if during the second year of the agreement) and six months' severance (after two years of service), including all monthly benefits, and the pro rata portion of the annual bonus otherwise due Mr. Lagani.
Litigation Matters
From time to time, we are involved in various legal proceedings generally incidental to our business. While the result of any litigation contains an element of uncertainty, our management presently believes that the outcome of any known, pending or threatened legal proceeding or claim, individually or combined, will not have a material adverse effect on our financial statements. However, we believe that the following matters, if resolved in our favor, may ultimately be materially beneficial to the Company.
On April 30, 2010, we filed a petition in the New York Supreme Court against the Lymphoma Research Foundation, or LRF, a California nonprofit corporation, to enforce our rights to certain intellectual property and biotechnology assets acquired as a part of the reverse Merger with Favrille. LRF has claimed ownership of some of these assets, including samples and data which were transferred to LRF in the summer of 2008. Also on April 30, 2010, LRF filed a declaratory relief action in the New York Supreme Court asserting its rights over the aforementioned samples and data. We answered LRF's action and filed counterclaims on July 6, 2010. Since then, LRF filed a motion for summary judgment with the New York Court, seeking a determination that it was the sole owner of the assets, and MMR filed papers in opposition of the motion. On September 21, 2010, the New York Court denied LRF's motion on the ground that the parties had not yet had an opportunity to conduct discovery and that LRF's motion was premature. In November 2010, LRF and MMR settled the litigation over the biotech assets, which gave the Company exclusive control of certain data and tissue samples created during trials of Favrille, Inc.'s FavId™ vaccine.
On January 26, 2012, we filed a complaint against certain a former officer of pre-merger Favrille, Inc., and other potential defendants that the Company believes may have committed wrongful acts relating to the misappropriation of Favrille's intellectual and personal property. Information leading to the decision to file the lawsuit was discovered as a result of the filing of a lawsuit by The RHL Group, Inc., a creditor of MMRGlobal. The RHL Group lawsuit was filed against Dan Gold, a former officer and director of Favrille, and other defendants for wrongful acts relating to the misappropriation of Favrille's intellectual and personal property. The RHL Group case is currently pending in San Diego. MMR's board of directors has consented to having the same law firm represent both the RHL Group, Inc. and MMR Global, Inc.
At this time the potential recovery for damages is unknown, however we believe damages could be significant. There is no attorneys' fees provision, so if the lawsuit ends unfavorably, the only damages will be for attorneys' fees incurred by the Company for its representation. The matter is currently in the initial pleading stages and counsel does not have enough facts at this time to predict the changes of either a favorable or unfavorable outcome.
As part of a settlement with the RHL Group, Inc., in a prior lawsuit, Sanford-Burnham Medical Research Institute returned certain samples to MMR. During the course of inventorying those samples, MMR discovered Favrille master and working cell lines ("Cells") were stored, unbeknownst to MMR, at Charles River Laboratories, Inc. These Cells are relevant to various MMR patents and MMR contends that they are of significant value to the Company. Counsel does not have enough facts at this time to predict the chances of either a favorable or unfavorable outcome.
Expression Systems, a vendor for Favrille prior to the reverse merger has attempted to assert ownership interest over the Cells. At this point no lawsuits have been filed by MMR against Expression Systems, but if a settlement is not reached, it may lead to litigation to determine the ownership of the Cells.
On December 9, 2011, MyMedicalRecords, Inc. entered into a Non-Exclusive Settlement and Patent Agreement ("Agreement) with Surgery Center Management LLC ("SCM"). In consideration for the rights granted under the Agreement and inconsideration of a release agreement, SCM contracted to pay MyMedicalRecords, Inc. the sum of $30 million over time with a minimum of $5 million payable on December 23, 2011.
After numerous attempts to collect the past due amount of $5 million, on January 19, 2012, MyMedicalRecords, Inc. filed a lawsuit for breach of contract. The contract contains an arbitration clause and the Company will be demanding arbitration for the $30 million allegedly due.
F-22
This matter is currently in the initial pleading stages and counsel does not have enough facts at this time to predict the changes of either a favorable or unfavorable outcome. Nor does counsel have any facts upon which to base any information regarding collectability.
On July 31, 2011, Ropers, Majeski, Kohn and Bentley ("Ropers"), a national firm with offices in San Francisco, Redwood City, San Jose, Los Angeles, New York and Boston, filed a civil complaint on behalf of MyMedicalRecords.com ("MMR-US") in the Superior Court For the State of California, County of Los Angeles. Named as defendants in that case are Taylor Armstrong, Russell Armstrong and a corporation known as NuWay Digital Systems. Among other things, the Complaint alleges that Taylor Armstrong and her husband Russell Armstrong breached a 2007 settlement agreement between themselves and MMR-US. The settlement agreement entitles MMR-US to liquidated damages of $1,000,000 for the first such breach and $250,000 for each ensuing breach. To date, three breaches have been alleged. Ropers continues to investigate and will amend the Complaint in the event that additional breaches are uncovered. The complaint has been served on Ms. Armstrong individually, and she has answered. The pre-trial discovery process has commenced. Trial is set in July 2012. The parties have engaged in an extensive mediation; however, it would be premature to conclude that the matter will be fully settled prior to trial.
MMR has recently asked Ropers to become counsel of record in a recently filed lawsuit that is pending in San Diego County, California against defendants Daniel Gold, Tamara Seymour and John Longenecker. In the complaint, MMR seeks damages for unauthorized removal and conversion of MMR computer assets as well as tissue and other samples that were wrongfully converted by the defendants. Damages may be as high as $5,000,000. Some of MMR's damage may be covered by first party insurance. MMR is in the process of serving the complaint on the defendants and making a claim to its insurance carrier. No trial date is set and discovery has yet to commence.
MMR is facing one claim from Sunil Singhal, a former employee. Mr. Singhal was employed as Executive Vice President of Technology and Product Development at MMR. He was placed on a 30-day administrative leave on February 13, 2012 and on February 29, 2012 was given a 30-day notice of termination for cause as approved by the Board of Directors. He has (presumably) retained counsel and is making a claim for discrimination and bad faith termination of his position. MMR replied to Mr. Singhal's counsel in mid-March 2012 and has heard no response. No lawsuit has been filed. Defense of the claim has been tendered to MMR's carrier.
10. STOCKHOLDERS' DEFICIT
Preferred Stock
The Company has 5,000,000 shares of preferred stock authorized. As of December 31, 2011, and 2010, there were no shares of preferred stock issued and outstanding.
Common Stock
During the year ended December 31, 2008, MMR issued 4,713,940 shares of common stock (which became 15,469,969 shares of MMRIS, Pursuant to the Merger Agreement, MMRIS agreed to issue (or reserve for issuance) an aggregate 92,599,196 shares of MMRIS common stock to the stockholders of MMR and the holders of options and warrants to acquire MMR common stock at the time of the Merger. Immediately prior to the Merger on January 27, 2009, and including the conversion of 6,176,526 shares of MMR preferred stock into MMR common stock, the issuance of 100,000 shares of MMR common stock to The RHL Group for renewal of a guarantee (see Note 12), MMR had 24,320,100 shares of common stock issued and outstanding. At the effective time of the Merger, and in accordance with the terms of the Merger Agreement, these shares of outstanding MMR common stock automatically converted into 79,812,087 shares of MMRIS common stock. Immediately prior to the Merger, there were 41,254,550 shares of MMRIS common stock issued and outstanding. On July 10, 2009, the stockholders of the Company approved an increase to the authorized shares of common stock. As of December 31, 2011, we are authorized to issue 650,000,000 shares of common stock. On August 5, 2010, the Company filed a Form S-1 related to the offer and resale of up to 60,000,000 shares of our common stock, by the selling stockholder, Dutchess Opportunity Fund, II, LP, or Dutchess. Dutchess has agreed to purchase all 60,000,000 shares pursuant to the investment agreement dated September 15, 2009, as amended on May 7, 2010, or the Investment Agreement, between Dutchess and the Company, and an additional 230,800 shares were issued to Dutchess in partial consideration for the preparation of the documents for its investment. Subject to the terms and conditions of the Investment Agreement, the Company had the right to put up to $10 million in shares of our common stock to Dutchess. As of December 31, 2011 the amount available under the equity line facility was $8.5 million, however that amount could be reduced based on the market price of our stock at the time any shares are sold.
As of December 31, 2011, the total shares of our common stock issued and outstanding amounted to 359,162,894.
Warrants for Purchase of Preferred B shares
On April 1, 2007, MMR granted a warrant to purchase up to 200,000 shares of its Series B Preferred Stock at an exercise price of $2.00 per share. MMR issued this warrant to the largest distributor of employee assistance services in the U.S. as an incentive to market and sell MMR's services into their customer base. The related services agreement was for five years, and the customer never bought any services from MMR. Upon closing of the Merger on January 27, 2009, this warrant converted into a warrant to purchase up to 656,346 shares of our common stock at an exercise price of $0.61 per share.
F-23
11. EQUITY TRANSACTIONS
Stock Option Activity
On January 21, 2010, our Board of Directors approved an increase to the number of shares authorized for issuance under our 2001 Equity Incentive Plan, or the Plan, from 12,000,000 to 27,000,000 shares as we determined that the number of shares remaining under the Plan was not adequate to retain our key directors, executives and managers. Our stockholders approved the increase to the Plan on June 15, 2010.
The plan expired on June 5, 2011 and no options were issued under that plan since that date. On September 1, 2011, our Board of Directors approved the adoption of a new plan to replace the one that just expired under the same general terms. The Company plans to file an S-8 to register the new plan which will be put out for shareholder approval in the next Annual Shareholder Meeting.
A summary of option activity for the years ended December 31, 2010 and 2011 is presented below. Options granted by MMR prior to the date of the Merger of January 27, 2009 have been retroactively restated to reflect the conversion ratio of MMR to MMRIS shares.
Weighted- | ||||||||||
Average | ||||||||||
Weighted- | Remaining | |||||||||
Average | Contractual | Aggregate | ||||||||
Exercise | Life | Intrinsic | ||||||||
Options | Price | (Years) | Value | |||||||
Outstanding at December 31, 2009 | 17,461,642 | $ | 0.12 | 4.00 | $ | 54,582 | ||||
Granted | 27,427,891 | 0.11 | ||||||||
Exercised | (2,441,282) | 0.11 | ||||||||
Cancelled | (696,130) | 0.10 | ||||||||
Outstanding at December 31, 2010 | 41,752,121 | $ | 0.12 | 6.72 | $ | 30,071 | ||||
Granted | 3,550,000 | 0.08 | ||||||||
Exercised | (12,250,628) | 0.12 | ||||||||
Cancelled | (1,791,951) | 0.12 | ||||||||
Outstanding at December 31, 2011 | 31,259,542 | 0.12 | 4.75 | $ | 1,498,793.82 | |||||
Vested and expected to vest | ||||||||||
at December 31, 2011 | 31,259,542 | $ | 0.12 | 4.75 | $ | 1,498,793.82 | ||||
Exercisable at December 31, 2011 | 23,708,938 | $ | - | 0.17 | $ | 17,064,585 |
The aggregate intrinsic value in the table above is before applicable income taxes and is calculated based on the difference between the exercise price of the options and the quoted price of the common stock as of the reporting date.
As of December 31, 2011, total unrecognized stock-based compensation expense related to non-vested stock options was $1,498,794, which is expected to be recognized through December 31, 2013. Total stock option expenses recorded during the years ended December 31, 2011 and 2010 were $1,111,937 and $1,689,141, respectively, and is reflected in operating expenses in the accompanying consolidated statements of operations.
F-24
The following table summarizes information about stock options outstanding and exercisable at December 31, 2011.
Options Outstanding | Options Exercisable | |||||||||||||
Weighted | Weighted | Weighted | Weighted | |||||||||||
Average | Average | Average | Average | |||||||||||
Exercise | Number | Remaining | Exercise | Number | Remaining | Exercise | ||||||||
Price | of Shares | Life (Years) | Price | of Shares | Life (Years) | Price | ||||||||
$ | 0.05 - 0.09 | 3,700,000 | 9.12 | $ 0.08 | 727,083 | 6.32 | $ 0.08 | |||||||
0.1 - 0.15 | 34,052,944 | 5.97 | 0.11 | 20,311,275 | 4.52 | 0.12 | ||||||||
> 0.15 | 3,020,579 | 6.38 | 0.19 | 2,670,580 | 6.43 | 0.19 | ||||||||
40,773,523 | 23,708,938 |
Warrants
On November 7, 2007, in conjunction with the registered direct offering of an aggregate of 7.4 million shares, the Company issued warrants to purchase up to 4.4 million shares of the Company's common stock at an exercise price of $2.77 per share. The warrants are exercisable as of the date of grant through November 7, 2012. The Company valued the warrants using a Black-Scholes pricing model. ASC 815-40 (formerly EITF 00-19, "Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company's Own Stock") requires freestanding contracts that are settled in a Company's own stock, including common stock warrants to be designated as an equity instrument, asset or liability. A contract designated as an asset or a liability must be carried at fair value until exercised or expired, with any changes in fair value recorded in the results of operations. ASC 815-40 (formerly SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities") was applied to determine that the liability is accounted for as a derivative. The valuation of these warrants amounted to $0 and $88,997 as of December 31, 2011 and 2010. The decrease in fair value of $88,997 is included in change in valuation of derivative liabilities in the accompanying consolidated statements of operations for the year ended December 31, 2011.
Immediately prior to the Merger, MMRIS issued warrants to acquire 9,999,992 shares of MMRIS's common stock at an exercise price of $0.12 per share, which expire on January 26, 2014, to certain former officers, former directors and their affiliates who were willing to take such equity as partial or full payment for outstanding liabilities. These warrants vested immediately and were valued on the date of grant using the Black-Scholes option pricing model.
During 2010, the Company granted to one employee, two different related parties and eighteen different unrelated third-parties, which we refer to collectively as the Holders, various warrants providing for the purchase of up to 16,298,202 shares of our common stock in connection with the issuance and sale of 6%, 8% and 12% Convertible Promissory Notes, or the Convertible Notes. See Note 13 below for a complete description of the warrants' exercise price, valuation and method of accounting.
On January 26, 2010, we issued two warrants to the Alexian Brothers Foundation's building and capital fund consisting of the following: (a) an immediate grant of a warrant to acquire up to 500,000 shares of our common stock, exercisable at any time on or before December 31, 2011, with an exercise price of $0.25 per share payable in cash or through a cashless exercise at the option of the holder and (b) an immediate grant of a warrant to acquire up to 500,000 shares of our common stock, exercisable at any time on or before December 31, 2013, with an exercise price of $0.35 per share payable in cash or through a cashless exercise at the option of the holder. These warrants had an aggregate value of $62,251, and we recorded them as sales and marketing expenses during the year ended December 31, 2010.
In March 2010, we granted warrants to purchase an aggregate total of 650,000 shares of our common stock as payment for services rendered to us. These warrants had exercise prices of $0.12 per share, with contractual lives through March 1, 2015. The warrants vested the right to purchase up to 150,000 shares of our common stock immediately, and the right to purchase up to 500,000 shares of our common stock began vesting in September 2010. From the vesting commencement date, these warrants vest in eight quarterly installments through September 30, 2012. The warrants had an aggregate value of $48,729 and $26,702 of which was recorded as operating expenses during the year ended December 31, 2010.
On April 14, 2010, we granted a warrant to purchase up to 250,000 shares of our common stock to a third-party as payment for services. This warrant has an exercise price of $0.16 per share, with a contractual live through April 14, 2015. From the vesting commencement date, this warrant vests in 24 monthly installments. This warrant had a fair value of $18,073 and $7,689 of which was recorded as operating expenses during the year ended December 31, 2010.
On April 29, 2010, we granted a warrant to purchase up to 2,614,684 shares of our common stock to The RHL Group in connection with the Fourth Amended Note (see Note 3). This warrant had an exercise price of $0.21 per share, with a contractual life through April 28, 2014.
F-25
This warrant vested immediately and had a fair value of $456,480, which we recorded as interest expense during the year ended December 31, 2010.
On May 11, 2010, we granted a warrant to purchase up to 500,000 shares of our common stock to a third-party as payment for services. This warrant had an exercise price of $0.25 per share, with a contractual life through May 11, 2015. From the vesting commencement date, this warrant vests quarterly over twelve months. This warrant had a fair value of $34,462 and $30,862 of which was recorded as operating expenses during the year ended December 31, 2010.
On June 21, 2010, we granted a warrant to purchase up to 1,000,000 shares of our common stock to a third-party. This warrant had an exercise price of $0.20 per share, with a contractual life through June 30, 2012. Half of the right to purchase shares under the warrant shall vest and become exercisable upon our receipt of an aggregate of 500 customer agreements and the remaining half vests upon our receipt of an additional 300 customer agreements. This warrant had a fair value of $159,056, of which $0 was recorded as operating expenses during the year ended December 31, 2010.
On July 1, 2010, we granted a warrant to purchase up to 500,000 shares of our common stock to a third-party as payment for services. This warrant has an exercise price of $0.08 per share, with a contractual life through July 1, 2015. This warrant vested immediately and had a fair value of $67,767, which we recorded as operating expenses during the year ended December 31, 2010.
On October 1, 2010, we granted a warrant to purchase up to 1,000,000 shares of our common stock to an employee. This warrant had an exercise price of $0.10 per share, with a contractual life through October 1, 2015. 500,000 shares under this warrant vested on January 1, 2011 with the remaining half vesting on October 1, 2012. This warrant had a fair value of $68,202, and $34,101 of which was recorded as operating expenses during the year ended December 31, 2010.
On November 17, 2010, we granted a warrant to purchase up to 750,000 shares of our common stock to a third-party as payment for services. This warrant had an exercise price of $0.12 per share, with a contractual life through November 17, 2015. One-third of the warrant vested at commencement date. Another third of the warrant would vest 180 days after the commencement date. The remaining third will vest on November 17, 2011. This warrant had a fair value of $44,256, and $14,752 of which was recorded as operating expenses during the year ended December 31, 2010.
On December 10, 2010, we granted a warrant to purchase up to 500,000 shares of our common stock to a third-party as payment for services. This warrant had an exercise price of $0.08 per share, with a contractual life through December 10, 2015. This warrant shall vest quarterly over twelve months. This warrant had a fair value of $35,159, and $8,790 of which was recorded as operating expenses during the year ended December 31, 2010.
On December 10, 2010, we granted a warrant to purchase up to 600,000 shares of our common stock to a third-party as payment for services. This warrant had an exercise price of $0.10 per share, with a contractual life through May 10, 2011. This warrant shall vest monthly over the life of the contract. This warrant had a fair value of $41,514, and $6,919 of which was recorded as operating expenses during the year ended December 31, 2010.
On December 13, 2010, we granted a warrant to purchase up to 1,000,000 shares of our common stock to a third-party as payment for services. This warrant had an exercise price of $0.10 per share, with a contractual life through December 10, 2015. The right to purchase 500,000 shares under this warrant shall vest March 31, 2011. The remaining half will vest at eight equal quarterly installments starting on June 30, 2011. This warrant had a fair value of $69,189, and $0 was recorded as operating expenses during the year ended December 31, 2010.
On December 15, 2010, we granted a warrant to purchase up to 500,000 shares of our common stock to a third-party as payment for services. This warrant had an exercise price of $0.18 per share, with a contractual life through December 15, 2015. This warrant shall vest annually over two years. This warrant had a fair value of $32,892, and $0 was recorded as operating expenses during the year ended December 31, 2010.
On December 17, 2010, we granted a warrant to purchase up to 250,000 shares of our common stock to a former Director as payment for services. This warrant had an exercise price of $0.11 per share, with a contractual life through December 17, 2015. This warrant shall vest at the end of the contract. This warrant had a fair value of $19,493, and $0 was recorded as operating expenses during the year ended December 31, 2010.
On December 17, 2010, we granted a warrant to purchase up to 250,000 shares of our common stock to a former Director as payment for services. This warrant had an exercise price of $0.18 per share, with a contractual life through December 17, 2015. This warrant shall vest six months from the commencement date. This warrant had a fair value of $18,717, and $0 was recorded as operating expenses during the year ended December 31, 2010.
On December 21, 2010, we granted a warrant to purchase up to 50,000 shares of our common stock to a third-party as payment for services.
F-26
This warrant had an exercise price of $0.10 per share, with a contractual life through December 15, 2015. This warrant shall vest annually over the life of the contract. This warrant had a fair value of $3,926, and $0 was recorded as operating expenses during the year ended December 31, 2010.
On December 21, 2010, we granted a warrant to purchase up to 150,000 shares of our common stock to a third-party as payment for services. This warrant had an exercise price of $0.10 per share, with a contractual life through December 15, 2015. This warrant shall vest annually over two years. This warrant had a fair value of $11,778, and $0 was recorded as operating expenses during the year ended December 31, 2010.
On December 21, 2010, we granted a warrant to purchase up to 50,000 shares of our common stock to a third-party as payment for services. This warrant had an exercise price of $0.10 per share, with a contractual life through December 15, 2015. This warrant shall vest annually over two years. This warrant had a fair value of $3,926, and $0 was recorded as operating expenses during the year ended December 31, 2010.
On December 21, 2010, we granted a warrant to purchase up to 100,000 shares of our common stock to a third-party as payment for services. This warrant had an exercise price of $0.10 per share, with a contractual life through December 15, 2015. This warrant shall vest annually over two year. This warrant had a fair value of $7,852, and $0 was recorded as operating expenses during the year ended December 31, 2010.
On January 4, 2011, we granted a warrant to purchase up to 180,000 shares of our common stock to a third-party as payment for services. This warrant has an exercise price of $0.10 per share, with a contractual life through January 4, 2016. From the vesting commencement date, this warrant vests in 6 monthly installments. This warrant had an aggregate value of $14,604, of which $14,604 were recorded as operating expenses during the year ended December 31, 2011.
On February 15, 2011, we granted a warrant to purchase up to 250,000 shares of our common stock to a third-party as payment for services. This warrant had an exercise price of $0.10 per share, with a contractual life through February 15, 2013. This warrant vests annually over two years and has an aggregate value of $13,464 of which $5,049 were recorded as operating expenses during the year ended December 31, 2011.
On March 3, 2011, we granted a warrant to purchase up to 500,000 shares of our common stock to a third-party. This warrant had an exercise price of $0.10 per share, with a contractual life through March 3, 2013. 35% of the right to purchase shares under the warrant vested after 30 days from the vesting commencement date. Additional 35% of the right to purchase shares under the warrant vested after 60 days from the vesting commencement date. The remaining 30% will vest after 90 days from the vesting commencement date. This warrant had an aggregate value of $22,821, which was recorded as operating expenses during the year ended December 31, 2011.
On April 15, 2011, the Company issued warrants to purchase 938,616 shares of common stock in connection to the issuance of 6% Convertible Promissory Notes with an unrelated third-party for a principal amount of $156,436. The term of the warrants is five years and the exercise price is equal to the product of fifty percent (50%) multiplied by the arithmetic average of the volume-weighted average trading price of the Common Stock for the ten (10) consecutive trading days ending on the day that is three (3) trading days prior to the applicable exercise date. This warrant had a bifurcated value of $29,612 and accounted for as a discount on debt. Such discount will be amortized and recorded as interest expense over the life of the notes or at conversion.
On May 20, 2011, the Company issued warrants to purchase an aggregate of 2,710,000 shares of common stock in connection to the issuance of Convertible Promissory Notes with five unrelated third-parties for a principal amount totaling $540,000. The term of the warrants is three years and the exercise price is the product of fifty percent (50%) multiplied by the arithmetic average of the volume- weighted average trading price of the common stock for the ten (10) consecutive trading days ending on the day that is three (3) trading days prior to the investment date. The aggregated value of these warrants amounted to $39,668. On the date of investment, all the aforementioned parties converted their promissory notes and exercised the attached warrants. As a result of the warrant exercise, the $39,668 discount was recorded as interest expense during the nine months ended December 31, 2011 with an offset to additional paid in capital.
On May 24, 2011, the Company issued warrants to purchase 500,000 shares of common stock in connection to the issuance of 8% Convertible Promissory Notes with an unrelated third-party for a principal amount totaling $100,000. The term of the warrants is three years and the exercise price is equal to the product of fifty percent (50%) multiplied by the arithmetic average of the volume-weighted average trading price of the Common Stock for the ten (10) consecutive trading days ending on the day that is three (3) trading days prior to the applicable investment date. This warrant had a bifurcated value of $6,667 and accounted for as a discount on debt. Such discount will be amortized and recorded as interest expense over the life of the notes or at conversion.
On May 24, 2011, the Company granted 2,796,566 warrants to purchase shares of our common stock to The RHL Group in connection with the Fifth Amended Note (see Note 3). This warrant had an exercise price of $0.051 per share, with a contractual life through May 24, 2016. This warrant vested upon commencement and has an aggregate value of $105,442, which was recorded as interest expenses during the year ended December 31, 2011.
F-27
On May 26, 2011, we granted a warrant to purchase 1,000,000 shares of our common stock to a third-party as payment for services. This warrant had an exercise price of $0.051 per share, with a contractual life through May 26, 2012. This warrant will vest upon the closing of a transaction between the Company and a third-party introduced to the Company by such third-party service provider and has an aggregate value of $20,907, which was recorded as interest expenses during the year ended December 31, 2011.
On June 1, 2011, we granted a warrant to purchase 75,000 shares of our common stock to a third-party as payment for services. This warrant had an exercise price of $0.06 per share, with a contractual life through June 1, 2012. This warrant vested at commencement and had an aggregate value of $1,048, which was recorded as operating expenses during the year ended December 31, 2011.
On June 1, 2011, we granted a warrant to purchase 1,000,000 shares of our common stock to a third-party as payment for services. This warrant had an exercise price of $0.06 per share, with a contractual life through June 1, 2012. This warrant vested when certain conditions are met and had an aggregate value of $13,975, of which $8,268 was recorded as operating expenses during the year ended December 31, 2011.
On June 10, 2011, we granted a warrant to purchase 1,000,000 shares of our common stock to a third-party as payment for services. This warrant had an exercise price of $0.055 per share, with a contractual life through June 10, 2013. This warrant will vest upon the holder generating at least $100,000 in gross revenue from the licensing agreement using the technology of the Company and had an aggregate value of $31,294.
On June 10, 2011, we granted a warrant to purchase 500,000 shares of our common stock to a third-party as payment for services. The first tranche of 250,000 shares had an exercise price of $0.055 per share, and will vest when a licensee generates at least $100,000 in gross revenue from the licensing agreement using the technology of the Company, or in one year, whichever occurs first. The second tranche of 250,000 shares had an exercise price of $0.125 per share, and will vest in one year after the vesting of the first tranche. This warrant had a contractual life through June 10, 2016 and had an aggregate value of $20,102, of which $3,888 and $4,733 was recorded as operating expenses during the three and nine months ended September 30, 2011, respectively.
On June 16, 2011, the Company issued a warrant to purchase 140,000 shares of common stock in connection to the issuance of Convertible Promissory Notes with an unrelated third-party for a principal amount of $35,000. The term of the warrant was three years and the exercise price was the lesser of (i) the product of fifty percent (50%) multiplied by the arithmetic average of the volume-weighted average trading price of the Common Stock for the ten (10) consecutive trading days ending on the day that is three (3) trading days prior to the applicable investment date, or (ii) $0.022. This warrant had a bifurcated value of $2,197. On the date of investment, the holder converted the promissory notes and exercised the attached warrants. As a result of the warrant exercise, the $2,197 discount was recorded to interest expense during the nine months ended September 30, 2011 with an offset to additional paid in capital.
On July 7, 2011, we granted a warrant to purchase 1,000,000 shares of our common stock to UNIS in conjunction with the formation of a joint venture. This warrant had an exercise price of $0.08 per share, with a contractual life through July 7, 2013. This warrant vested at commencement and had an aggregate value of $23,064, of which $2,947 was recorded as operating expenses during the three and nine months ended September 30, 2011.
On July 7, 2011, we granted a warrant to purchase 1,000,000 shares of our common stock to UNIS in conjunction with the formation of a joint venture. This warrant had an exercise price of $0.12 per share, with a contractual life through July 7, 2013. This warrant vested at commencement and had an aggregate value of $20,187, of which $2,579 was recorded as operating expenses during the three and nine months ended September 30, 2011.
On July 7, 2011, we granted a warrant to purchase 1,000,000 shares of our common stock to UNIS in conjunction with the formation of a joint venture. This warrant had an exercise price of $0.16 per share, with a contractual life through July 7, 2013. This warrant vested at commencement and had an aggregate value of $18,122, of which $2,316 was recorded as operating expenses during the three and nine months ended September 30, 2011.
On July 7, 2011, we granted a warrant to purchase 1,000,000 shares of our common stock to UNIS in conjunction with the formation of a joint venture. This warrant had an exercise price of $0.20 per share, with a contractual life through July 7, 2013. This warrant vested at commencement and had an aggregate value of $16,537, of which $2,113 was recorded as operating expenses during the three and nine months ended September 30, 2011.
On July 19, 2011, the Company issued a warrant to purchase 944,532 shares of common stock in connection to the issuance of Convertible Promissory Notes with a related-party for a principal amount of $157,422. The term of the warrant is five years and the exercise price is equal to the product of fifty percent (50%) multiplied by the arithmetic average of the volume-weighted average trading price of the Common Stock for the ten (10) consecutive trading days ending on the day that is three (3) trading days prior to the applicable investment date. This warrant vested at commencement and had an aggregate value of $34,813.
F-28
On July 30, 2011, we granted a warrant to purchase 200,000 shares of our common stock to an employee. This warrant had an exercise price of $0.06 per share, with a contractual life through July 30, 2016. This warrant vests annually over two years and has an aggregate value of $6,954, of which $586 was recorded as operating expenses during the three and nine months ended September 30, 2011.
On August 8, 2011, the Company issued a warrant to purchase 300,000 shares of common stock in connection to the issuance of a Convertible Promissory Note to an unrelated third-party for a principal amount of $100,000. The term of the warrant is three years and the exercise price is equal to the product of fifty percent (50%) multiplied by the arithmetic average of the volume-weighted average trading price of the Common Stock for the ten (10) consecutive trading days ending on the day that is three (3) trading days prior to the applicable investment date. This warrant vested at commencement and had an aggregate value of $10,241. On the date of investment, the holder converted the promissory notes and exercised the attached warrants.
On August 12, 2011, the Company issued a warrant to purchase 900,000 shares of common stock in connection to the issuance of a Convertible Promissory Note to an unrelated third-party for a principal amount of $150,000. The term of the warrant is three years and the exercise price is equal to the product of fifty percent (50%) multiplied by the arithmetic average of the volume-weighted average trading price of the Common Stock for the ten (10) consecutive trading days ending on the day that is three (3) trading days prior to the applicable investment date. This warrant vested at commencement and had an aggregate value of $30,723. On the date of investment, the holder converted the promissory notes and exercised the attached warrants.
On September 12, 2011, we granted a warrant to purchase 200,000 shares of our common stock to an employee. This warrant has an exercise price of $0.06 per share, with a contractual life through July 30, 2016. This warrant vests annually over two years and has an aggregate value of $6,954, of which $889 was recorded as operating expenses during the three and nine months ended September 30, 2011.
On September 12, 2011, we granted a warrant to purchase 2,000,000 shares of our common stock to an unrelated third-party for legal services. This warrant has an exercise price of $0.06 per share, with a contractual life through September 12, 2012. This warrant vests when certain conditions are met and has an aggregate value of $34,571, of which $4,417 was recorded as operating expenses during the three and nine months ended September 30, 2011.
On September 27, 2011, the Company issued a warrant to purchase 400,000 shares of common stock in connection to the issuance of a Convertible Promissory Note to an unrelated third-party for a principal amount of $100,000. The term of the warrant is three years and the exercise price is equal to the product of fifty percent (50%) multiplied by the arithmetic average of the volume-weighted average trading price of the Common Stock for the ten (10) consecutive trading days ending on the day that is three (3) trading days prior to the applicable investment date. This warrant vested at commencement and had an aggregate value of $10,549. On the date of investment, the holder converted the promissory notes and exercised the attached warrants.
On October 11, 2011, we granted a warrant to purchase 166,667 shares of our common stock to an unrelated third-party for legal services. This warrant has an exercise price of $0.06 per share, with a contractual life through October 11, 2016. This warrant vests annually over two years and has an aggregate value of $5,752, of which $735 was recorded as operating expenses during the year ended December 31, 2011.
On October 19, 2011, we granted a warrant to purchase 1,050,000 shares of our common stock to a Director. This warrant has an exercise price of $0.06 per share, with a contractual life through October 19, 2016. This warrant vests annually over three years and has an aggregate value of $26,561, of which $2,263 was recorded as operating expenses during the year ended December 31, 2011.
On October 17, 2011, the Company issued a warrant to purchase 876,000 shares of common stock in connection to the issuance of Convertible Promissory Notes with an unrelated third-party for a principal amount of $292,000. The exercise price was the lesser of (i) the product of fifty percent (50%) multiplied by the arithmetic average of the volume-weighted average trading price of the Common Stock for the ten (10) consecutive trading days ending on the day that is three (3) trading days prior to the applicable investment date, or (ii) $0.014. This warrant had a bifurcated value of $17,520. On the date of investment, the holder converted the promissory notes and exercised the attached warrants. As a result of the warrant exercise, the $9,955 discount was recorded to interest expense during the year ended December 31, 2011 with an offset to additional paid in capital.
On November 11, 2011, we granted a warrant to purchase 625,000 shares of our common stock to a related-party. This warrant has an exercise price of $0.046 per share, with a contractual life through November 11, 2016. This warrant vests immediately and has an aggregate value of $17,893, which was recorded as operating expenses during the year ended December 31, 2011.
F-29
On November 16, 2011, the Company issued a warrant to purchase 60,000 shares of common stock in connection to the issuance of Convertible Promissory Notes with an unrelated third-party for a principal amount of $20,000. The exercise price was the lesser of (i) the product of fifty percent (50%) multiplied by the arithmetic average of the volume-weighted average trading price of the Common Stock for the ten (10) consecutive trading days ending on the day that is three (3) trading days prior to the applicable investment date, or (ii) $0.016. This warrant had a bifurcated value of $960. On the date of investment, the holder converted the promissory notes and exercised the attached warrants. As a result of the warrant exercise, the $751 discount was recorded to interest expense during the year ended December 31, 2011 with an offset to additional paid in capital.
On November 16, 2011, we granted a warrant to purchase 500,000 shares of our common stock to an unrelated third-party for services. This warrant has an exercise price of $0.016 per share, with a contractual life through November 11, 2016. This warrant vests annually over two years and has an aggregate value of $14,748, of which $1,884 was recorded as operating expenses during the year ended December 31, 2011.
On November 30, 2011, we granted a warrant to purchase 100,000 shares of our common stock to an employee. This warrant has an exercise price of $0.06 per share, with a contractual life through November 30, 2016. This warrant vests immediately and has an aggregate value of $3,359, which was recorded as operating expenses during the year ended December 31, 2011.
On December 2, 2011, we granted a warrant to purchase 4,000,000 shares of our common stock to an unrelated third-party. This warrant has an exercise price of $0.08 per share, with a contractual life through December 2, 2013. This warrant vests immediately and has an aggregate value of $78,924, which was recorded as operating expenses during the year ended December 31, 2011.
On December 7, 2011, the Company issued a warrant to purchase 450,000 shares of common stock in connection to the issuance of Convertible Promissory Notes with an unrelated third-party for a principal amount of $150,000. The exercise price was the lesser of (i) the product of fifty percent (50%) multiplied by the arithmetic average of the volume-weighted average trading price of the Common Stock for the ten (10) consecutive trading days ending on the day that is three (3) trading days prior to the applicable investment date, or (ii) $0.018. This warrant had a bifurcated value of $18,000. On the date of investment, the holder converted the promissory notes and exercised the attached warrants. As a result of the warrant exercise, the $7,414 discount was recorded to interest expense during the year ended December 31, 2011 with an offset to additional paid in capital.
On December 28, 2011, we granted a warrant to purchase 100,000 shares of our common stock to an unrelated third-party for services. This warrant has an exercise price of $0.08 per share, with a contractual life through December 28, 2016. This warrant vests immediately and has an aggregate value of $3,924, which was recorded as operating expenses during the year ended December 31, 2011.
A summary of the activity of the Company's warrants for the years ended December 31, 2011 is presented below.
Weighted Avg | |||
Shares | Exercise Price | ||
Outstanding at December 31, 2009 | 34,613,844 | $ | 0.96 |
Granted | 27,712,886 | 0.11 | |
Exercised | (15,259,633) | 0.08 | |
Cancelled | (177,499) | 3.37 | |
Outstanding at December 31, 2010 | 46,889,598 | 0.35 | |
Granted | 29,462,381 | 0.06 | |
Exercised | (7,071,000) | 0.05 | |
Cancelled | (4,094,288) | 3.88 | |
Outstanding at December 31, 2011 | 65,186,691 | $ | 0.31 |
The following summarizes the total warrants outstanding and exercisable as of December 31, 2011.
Warrants Outstanding | Warrants Exercisable | ||||||||||
Warrants | Weighted Avg | Weighted Avg | Warrants | Weighted Avg | Weighted Avg | ||||||
Ranges | Outstanding | Remaining Life | Exercise Price | Exercisable | Remaining Life | Exercise Price | |||||
$0.05 - $0.25 | 58,320,435 | 2.50 | $ 0.10 | 49,730,554 | 2.45 | $ 0.10 | |||||
$0.25 - $2.50 | 2,166,346 | 1.33 | 0.39 | 2,166,346 | 1.33 | 0.39 | |||||
> $2.50 | 4,699,910 | 0.83 | 2.83 | 4,699,910 | 0.83 | 2.83 | |||||
65,186,691 | 56,596,810 |
F-30
Shares Issued for Services or Reduction to Liabilities
During the year ended December 31, 2011, we issued 21,026,180 shares of common stock with a value of $1,295,959 to non-employees and charged to the appropriate accounts for the following reasons:
Year Ended December 31, 2011 | ||||
Purpose | Shares | Value | ||
Services Provided | 2,792,858 | $ | 160,640 | |
Reduction of payables | 17,483,322 | 1,060,319 | ||
Capital contribution fund | - | - | ||
Prepaids and other assets | 750,000 | 75,000 | ||
Totals | 21,026,180 | $ | 1,295,959 |
The 21,026,180 shares were not contractually restricted, however as they were unregistered they were restricted from sale until the requirements of Rule 144 under the Securities Act, as amended, permit such sale. All such shares were issued at the trading closing price on the date of issuance and such value was calculated therefrom.
Under the Restricted Stock Program, a restricted stock award is an offer by the Company to sell to an eligible person shares that are subject to restrictions relating to the sale or transfer of the shares. A committee appointed by the Board to administer the program or the Board itself shall determine to whom an offer will be made, the number of shares the person may purchase, the price to be paid and the restriction to which the shares shall be subject. The offer must be accepted by the eligible person within thirty days from the date of the offer evidenced by the Restricted Stock Purchase Agreement. The purchase price of shares shall not be less than 85% of the fair market value of such shares on the issue date, with the provision that the purchase price for a 10% stockholder shall not be less than 110% of such fair market value. Shares are either fully and immediately vested upon issuance, or may vest in installments upon attainment of specified performance objectives.
During the year ended December 31, 2011 and 2010, the Company issued 21,026,180 and 13,057,078, respectively, shares of common stock in consideration for goods and services from both employees and non-employees valued at $1,295,959 and $1,590,844, respectively.
Stock Bonus Program
Under the Stock Bonus Program, shares are issued as a bonus for past services rendered pursuant to the Stock Bonus Agreement. Stock bonuses may be awarded upon satisfaction of specified performance goals pursuant to the Performance Stock Bonus Agreement. No shares were issued under the Stock Bonus Program during the years ended December 31, 2011 or 2010.
Derivative Liabilities
On July 16, 2009, we entered into a 12% Convertible Promissory Note with an unrelated third-party for a principal amount totaling $30,000. Subsequently, we entered into identical 12% Convertible Promissory Notes with four other unrelated third-parties for an additional $530,000, each at the same terms as described above under "Warrants." In addition, we granted a total of 3,110,000 warrants to purchase shares of our common stock in connection with these convertible notes at an exercise price equal to the lesser of (i) the product of 50% multiplied by the arithmetic VWAP of the common stock for the 10 consecutive trading days ending on the day that is 3 Trading Days prior to the applicable exercise date or (ii) $0.15. At the time, this resulted in the possibility that we may not have had enough authorized shares to settle these obligations using common stock. Instead, there was the possibility, although remote, that we may have needed to settle one or more of these contracts with cash. Consequently certain non-employee options and warrants were accounted for as derivative liabilities as of July 16, 2009 in accordance with the provisions of ASC 815- 40.
The event giving rise to this condition was the first convertible note the Company entered into on July 16, 2009. The condition was remedied on May 5, 2010 when all convertible notes were converted into common stock and all warrants granted in connection with the convertible notes were exercised. On May 5, 2010, we valued these contracts again using the Black-Scholes option valuation model and we recorded the difference between the value at December 31, 2009 of $1,534,824 and the value at May 5, 2010 of $7,448,516, as a loss on change in value of derivatives for the year ended December 31, 2010 of $5,843,735. On May 5, 2010, we reclassified the value of the derivative liabilities back into equity.
F-31
On April 15, 2011, the Company issued a Restated Convertible Promissory Note to an unrelated third-party with a principal amount of $167,387 which included a 7% closing discount in the amount of $10,951. This Note replaced and terminated a promissory note originally issued to a related third-party on July 26, 2010 for $150,000 plus accrued interest of $6,436. The Restated Note was convertible at the option of the holder into common stock at a variable conversion price of seventy percent (70%) multiplied by the lower of the arithmetic average of the volume-weighted average trading price (VWAP) of the Common Stock for the ten (10) consecutive trading days ending on the date of the applicable conversion date, or the closing bid on the applicable conversion date. As of June 30, 2011, the conversion price was to be permanently fixed based on the calculation stated above with June 30, 2011 being the 10th day. The whole note was ratably converted on April 15, May 16, and June 22, 2011. The Company recognized $147,057 as interest expense related to these conversions. In addition, the Note was treated as derivative due to the variable nature of the conversion price for the period from April 15 through June 30. As a result, the Company also recognized a loss of $37,798 as a change in derivative liability as of June 30, 2011.
On July 19, 2011, the Company issued a Restated Convertible Promissory Note to an unrelated third-party with a principal amount of $168,442 which included a 7% closing discount in the amount of $11,020. This Note replaced and terminated a portion of a promissory note originally issued to a related third-party on September 21, 2010 for $150,000 plus accrued interest of $7,422. The Restated Note is convertible at the option of the holder into common stock at a variable conversion price of seventy percent (70%) multiplied by the lower of the arithmetic average of the volume-weighted average trading price (VWAP) of the Common Stock for the ten (10) consecutive trading days ending on the date of the applicable conversion date, or the closing bid on the applicable conversion date. As of September 30, 2011, the conversion price was to be permanently fixed based on the calculation stated above with September 30, 2011 being the 10th day. In addition, the Note was treated as derivative due to the variable nature of the conversion price for the period from July 19, 2011 through September 30, 2011. The derivative liability related to this conversion feature was calculated at $108,481. On August 12, 2011, $50,000 or 30% of the note was converted into common stock; the Company valued the contract again using the Black-Scholes option valuation model and recorded the difference between the value at July 19, 2011 of $108,481 and the value at August 12, 2011 of $115,167, as a loss on change in value of derivatives of $6,686. The Company also relieved $34,186 or 30% of the derivative value upon the 30% of the note conversion. On September 30, 2011, the Company re- valued the derivative with the assumptions used and calculated an increase in value of the derivative of $17,210. Per the contract, the note conversion price became fixed at September 30, 2011; therefore, the Company reclassified the entire remaining derivative value of $98,192 to equity on September 30, 2011. There is no derivative liability at December 31, 2011.
We did not designate any of the derivatives liabilities as hedging instruments.
The following is a reconciliation of the derivative liability:
Value at December 31, 2009 | $ | 1,715,650 | |
Change in value of derivative liability | 5,862,568 | ||
Establishment of derivative liability for non-employee options and warrants granted in 2010 | 3,650,334 | ||
Reclassification back to equity for non-employee options and warrants on conversion of convertible notes | (11,139,555) | ||
Value at December 31, 2010 | 88,997 | ||
Change in value of derivative liability | (36,745) | ||
Establishment of derivative liability for change in value of derivative liability | 255,538 | ||
Reclassification back to equity | (307,790) | ||
Value at December 31, 2011 | $ | - |
The inputs used for the Black-Scholes option valuation model were as follows:
Years Ended | ||||
December 31, 2011 | December 31, 2010 | |||
Expected life in years | 0 - 5 Years | 5 - 10 Years | ||
Stock price volatility | 144.34% - 148.34% | 111.85% - 128.94% | ||
Risk free interest rate | 0.03% - 2.14% | 2.38% - 3.87% | ||
Expected dividends | None | None | ||
Forfeiture rate | 0% | 0% |
F-32
12. NOTES PAYABLE
The Notes payable consisted of the following:
December 31, | December 31, | |||||
2011 | 2010 | |||||
Promissory notes payable due to the former officers of MMRGlobal as part of severance packages, due in full on August 31, 2009 with no stated interest |
$ | 76,783 | $ | 76,783 | ||
Promissory notes payable due to the two remaining officers of MMRGlobal pursuant to the Resignation and Post-Merger Employment Arrangement, due in full on August 31, 2009 with no stated interest |
25,444 | 25,444 | ||||
Promissory notes payable due to vendors relating to settlement of certain outstanding accounts payable, payable in 18 equal monthly installments commencing on July 27, 2009 and ending on January 27, 2011, with no stated interest |
223,116 | 223,116 | ||||
325,343 | 325,343 | |||||
Less: current portion | 325,343 | 325,343 | ||||
Notes payable, less current portion | $ | - | $ | - |
On March 16, 2010, we converted the $125,000 principal and unpaid interest on the PM Creative Corporation Promissory Note into a 12% Convertible Promissory Note. See Note 13.
13. CONVERTIBLE PROMISSORY NOTES
In January, March, April, May and June 2010, the Company entered into 12% Convertible Promissory Notes with one employee, two related parties and seventeen unrelated third-parties for a principal amount totaling $2,008,152. Under the terms of the agreements, principal amounts owed under the Notes become due and payable on June 30, 2010, August 31, 2010, September 30, 2010, November 30, 2010 and October 31, 2010 provided that, upon ten (10) days' prior written notice to the Holder, the Company may, in its sole discretion, extend the maturity date to December 31, 2010, January 31, 2011 and June 30, 2011.These Convertible Promissory Notes bear an interest of 12% per annum payable in cash or shares of common stock, or a combination of cash and shares of common stock, at the election of the Company.
In connection with the Notes, the Company also issued warrants to purchase an aggregate of 11,698,202 shares of common stock. The term of the warrants is three years and the exercise price is the product of fifty percent (50%) multiplied by the arithmetic average of the volume-weighted average trading price of the Common Stock for the ten (10) consecutive trading days ending on the day that is three (3) trading days prior to the applicable exercise date, subject to other customary adjustments.
By virtue of the Notes' variable conversion ratio, a possibility existed, although remote, that the Notes may have been convertible into shares of Common Stock that exceed the currently authorized limit. Consequently, a possibility existed that the Company might be placed in a position of net settling the Notes for an amount that exceeded their face value. This resulted in the conversion feature being a derivative under ASC 815-10. As of May 5, 2010, all the Notes had been converted and the possibility of net settlement was no longer existent.
F-33
Additionally, as a result of the above, all outstanding options and warrants issued to non-employees, including the warrants issued in connection with the Notes, were also derivatives as they too could require net settlement in the absence of adequate authorized shares. See Note 11 Derivative Liabilities. As of May 5, 2010, all the Notes had been converted and the possibility of net settlement was no longer existent.
The fair value of the conversion feature of the Notes and related warrants was derived using the Black-Scholes option valuation model, resulting in an aggregate fair value of $3,560,564. For seventeen of the Notes issued during the six months ended June 30, 2010, the fair value of the conversion feature of the Notes and related warrants exceeded the face value of the Notes by $1,554,380 and such amount was recorded as interest expense. The fair value of the conversion feature of the Notes and related warrants, net of the deferred financing cost, was deducted from the Notes, resulting in an initial value ascribed to the Notes of $1,968. The initial value of the Notes is being accreted to their face value over the initial term of the Notes using the interest method. Upon conversion, the entire unamortized discount from the face value of the Notes is recognized as interest expense.
On the same day the $2,008,152 in principal amount of Notes entered into between January and June 2010 were issued, all of the Note holders converted their Notes into 21,866,500 shares of common stock and exercised the 11,698,202 warrants. On these dates the entire conversion feature and warrant discounts on these Notes was recognized as interest expense.
In addition, on February 24, 2010, February 26, 2010 and May 5, 2010, four Note holders with principal amounts of $180,000 outstanding at December 31, 2009, converted their Notes into 1,663,103 shares of common stock. One of these note holders also exercised 350,000 warrants issued in connection with the Notes. On these dates the unamortized values of the conversion feature and warrant discounts on these Notes of $13,063 was recognized as interest expense for the six months ended June 30, 2010.
In the second half of 2010, we entered into Convertible Promissory Notes (the "Notes") with two related parties and three unrelated third-parties for a principal amount totaling $988,250. Under the terms of the agreements, principal amounts owed under the Notes become due and payable six months 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 months. Some of the Notes bear an interest rate of 6%, 8% and others bear an interest rate of 12% per annum payable in cash or shares of common stock, or a combination of cash and shares of common stock, at the election of the Company.
The Notes issued in the second half of 2010 for a principal amount totaling $988,250 are convertible at the option of the holders into common stock at a fixed conversion price ("Fixed Conversion Price") of seventy percent (70 %) multiplied by the arithmetic average of the volume-weighted average trading price of the common stock for the ten (10) consecutive trading days ending on the day that is three (3) trading days prior to the applicable investment date, subject to anti-dilution and other customary adjustments
In connection with the Notes, the Company also issued warrants to purchase an aggregate of 5,803,000 shares of common stock. The term of the warrants is three years and the exercise price is the product of fifty percent (50%) multiplied by the arithmetic average of the volume-weighted average trading price of the common stock for the ten (10) consecutive trading days ending on the day that is three (3) trading days prior to the applicable grant date, subject to anti-dilution and other customary adjustments.
We derived the fair value of the warrants issued with Notes in the second half of 2010 using the Black-Scholes option valuation model, resulting in a fair value of $286,236. The $988,250 note proceeds were allocated to the relative fair values of the note without the warrants and of the warrants themselves on the investment date. The remainder of the proceeds is allocated to the note portion of the transaction, resulting in a discount. We then calculated the intrinsic value of the conversion feature on the investment date and allocated the portion of the proceeds equal to the intrinsic value of this feature of $630,334 to paid-in capital. We deducted the fair value of the warrants and intrinsic value of the conversion feature from the Notes, resulting in an initial value ascribed to the Notes of $71,681. The initial value of the Notes is being accreted to their face value over the initial term of the Notes using the interest method. Upon conversion, the entire unamortized discount from the face value of the Notes is recognized as interest expense due to the beneficial nature of the conversion feature.
During 2011, we entered into Convertible Promissory Notes ("Notes") with accredited investors for an aggregate amount of $1,800,858. Each of the notes carry an annual interest rate of 6%, 8% or 12%, and are convertible at the option of the Purchaser into a number of shares of our common stock equal to a discounted variable weighted average calculated as of the date of subscription. As of December 31, 2011, $974,893, net of discounts of $7,306, remained outstanding and the individuals had not chosen to convert their Note balances into shares of our common stock.
On various date between April 15, 2011 and December 7, 2011, we entered into Convertible Promissory Notes (the "Notes") with one related party and twelve unrelated third-parties for principal amounts totaling $1,800,858. Under the terms of the agreements, principal amounts owed under the Notes become due and payable six months 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 months. Some of the Notes bear an interest rate of 6%, 8% and others bear an interest rate of 12% per annum payable in cash or shares of common stock, or a combination of cash and shares of common stock, at the election of the Company.
F-34
The Notes issued during 2011 for principal amounts totaling $1,800,858 are convertible at the option of the holders into common stock at a fixed conversion price ("Fixed Conversion Price") of eighty percent (80%) or seventy percent (70 %) multiplied by the arithmetic average of the volume-weighted average trading price of the common stock for the ten (10) consecutive trading days ending on the day that is three (3) trading days prior to the applicable investment date, subject to anti-dilution and other customary adjustments
In connection with the Notes, the Company also issued warrants to purchase an aggregate of 8,219,148 shares of common stock. The term of the warrants is three years and the exercise price is the product of fifty percent (50%) multiplied by the arithmetic average of the volume-weighted average trading price of the common stock for the ten (10) consecutive trading days ending on the day that is three (3) trading days prior to the applicable grant date, subject to anti-dilution and other customary adjustments.
We derived the fair value of the warrants issued with Notes during 2011 using the Black-Scholes option valuation model, resulting in a fair value of $385,455. The $1,800,858 note proceeds were allocated to the relative fair values of the note without the warrants and of the warrants themselves on the investment date. The remainder of the proceeds is allocated to the note portion of the transaction, resulting in a discount. We then calculated the intrinsic value of the conversion feature on the investment date and allocated the portion of the proceeds equal to the intrinsic value of this feature of $1,454,287 to paid-in capital. The initial value ascribed to the Notes of $232,249 is being accreted to their face value over the initial term of the Notes using the interest method. Upon conversion, the entire unamortized discount from the face value of the Notes is recognized as interest expense due to the beneficial nature of the conversion feature. The total interest expense attributed to all Notes and related warrants for the years ended December 31, 2011 and 2010 was $2,030,409 and $4,873,269, respectively.
14. RESTRUCTURING ACTIVITIES
From May 29, 2008 to November 7, 2008, Favrille, Inc. had provided notices under the federal Worker Adjustment and Retraining Notification Act to 142 employees, including six members of senior management, that it planned to conduct a workforce reduction at its facility in San Diego, California and that their employment was expected to end on various dates between June 6, 2008 to November 7, 2008. Immediately prior to the date of the Merger on January 27, 2009, the total severance liability relating to former Favrille employees amounted to $1,682,416. On January 27, 2009, immediately prior to the Merger, as part of the 9,999,992 warrants issued to creditors (see Note 12), the Company issued warrants as settlement of $985,020 of these amounts. In addition, the Company signed promissory notes with certain former executives totaling $76,783, which notes are payable in full on August 31, 2009 (see Note 13).
As of December 31, 2011, the total remaining severance liabilities amounted to $620,613, which is reflected as severance liability on the accompanying consolidated balance sheets. This consists of $571,362 payable to former non-executive employees in 18 monthly installments starting on July 27, 2009, as well as $49,251 in estimated payroll tax. No payments were made during the years ended December 31, 2011 or 2010 on these severance liabilities.
During the period from January 27, 2009 through June 30, 2009, the Company entered into a series of settlement agreements with certain vendors of Favrille pursuant to the Creditor Plan, in which the Company settled $302,982 of its outstanding accounts payable for an aggregate settlement amount of $214,402, including promissory notes of $139,355 payable in 18 monthly installments starting on July 27, 2009 (see Note 12).
15. RELATED PARTY TRANSACTIONS
Our President, Chairman and Chief Executive Officer, Robert H. Lorsch, is also the Chief Executive Officer of The RHL Group, Inc. and owns all of the capital stock of The RHL Group, Inc. Mr. Lorsch directly, and indirectly through The RHL Group, Inc., beneficially owns approximately 31.8% our total outstanding voting stock. The RHL Group, Inc. has loaned money to MMR pursuant to a secured note. See Note 3 - Related Party Note Payable above.
The RHL Group is an investment holding company which provides consulting, operational and technical services to the Company, which we refer to as the RHL Services. As part of the RHL Services, the RHL Group provides the Company with unrestricted access to its internal business and relationship contact database of more than 10,000 persons and entities, which includes clients of the RHL Group and other individuals which may hold value to the Company. The RHL Group also provides infrastructure support to the Company, including allowing the Company unlimited access to its facilities, equipment, and data, information management and server systems. In addition to allowing the Company the use of its office support personnel, the RHL Group has also consented to allow the Company to utilize the full-time services of Mr. Lorsch as the Company's President, Chairman and Chief Executive Officer, which requires substantial time and energy away from his required duties as The RHL Group's Chairman and Chief Executive Officer. In addition, The RHL Group has made its President, Kira Reed, available as the Company's spokesperson. Ms. Reed, who is Mr. Lorsch's spouse, also manages the Company's social networking activities.
F-35
In consideration for the above, The RHL Group, Inc. has a consulting arrangement with MMR. A copy of the consulting agreement is filed as an Exhibit in our current report on Form 8-K filed with the SEC on May 4, 2009 and is hereby incorporated by reference.
We incurred $50,000 each year during the years ended December 31, 2011 and 2010, toward marketing consulting services from Bernard Stolar, a director. We included $122,695 and $54,359 in related party payables as of December 31, 2011, and 2010, respectively, in connection with these services.
We also incurred $37,500 and $50,000 during the years ended December 31, 2011 and 2010, respectively, toward marketing consulting services from Hector Barreto, a former director and member of our Advisory Board. We included in related party payables as of December 31, 2011 and 2010 of $8,667 and $31,075, respectively, in connection with these services. Additionally, on January 21, 2010, we granted to Mr. Barreto 50,000 shares of common stock, valued at $5,500 in consideration for sales and marketing services. In the first quarter of 2009, we entered into an agreement with The Latino Coalition, a non-profit organization in which Mr. Barreto is also the Chairman, to market our product to its members. On May 4, 2010, we granted to Latino Coalition 92,593 shares of common stock, valued at $24,908 in consideration for marketing services. We did not pay any amounts to the Latino Coalition in both 2011 and 2010. Mr. Barreto ceased to be a related party upon his departure from the Board of Directors on September 30, 2011.
MMR also had a consulting agreement, as amended, with The Rebensdorf Group, Inc., or TRGI, whose owner and Chief Executive Officer is our former director George Rebensdorf. Pursuant to the agreement, TRGI provided financial advisory services and assisted in negotiations in connection with our efforts to raise funds through private placement transactions. In addition to the initial retainer fee of $30,000 we paid upon execution of the original letter agreement, we agreed to pay TRGI (a) a $4,167 monthly retainer (commencing May 1, 2009), (b) for transactions with parties introduced by TRGI, a success fee equal to 8% of the value (payable 4% in cash, 4% in warrants), (c) for material assistance in closing transactions with parties not introduced by TRGI, an advisory fee equal to 2% of the value (payable in cash), and (d) an annual grant of 100,000 options, vesting monthly over two-years from the grant date, with an exercise price equal to fair market value on the grant date. Payment of the monthly retainer may be deferred, in which case it would be payable to TRGI pro rata upon payment of any other deferred management or consulting fees. The letter agreement, as amended, was terminated effective July 31, 2011.
We also incurred $25,000 and $178,552 during the years ended December 31, 2011 and 2010, respectively, for finder's fees and consulting services from George Rebensdorf of The Rebensdorf Group and a former director. We included in related party payables as of December 31, 2011 and 2010 of $0 and $40,703, respectively, in connection with these services. Any Agreement for these services has been terminated.
We also have an agreement with our current director Jack Zwissig to provide individual executive coaching services to our management team on an as needed basis. Mr. Zwissig receives compensation in the form of stock as determined by our Board of Directors commensurate with the services performed. The agreement with Mr. Zwissig is on a month-to-month basis and continues until terminated by either party.
We also incurred $6,983 and $0 during the years ended December 31, 2011 and 2010, respectively, for consulting services from Jack Zwissig, a director. We included in related party payables as of December 31, 2011 and 2010 of $41,885 and $30,950, respectively, in connection with these services.
We contract with a significant vendor for the development and maintenance of the software applications necessary to run our MyMedicalRecords PHR, MyEsafeDepositBox and MyMedicalRecords Pro products. Our outside developer supports our software development needs through a team of software engineers, programmers, quality control personnel and testers, who work with our internal product development team on all aspects of application development, design, integration and support of our products. This vendor is also a stockholder. For the year ended December 31, 2011 and 2010, the total expenses relating to this stockholder amounted to $476,112 and $291,027, respectively. In addition, we capitalized $282,960 of software development costs for the year ended December 31, 2011. As of December 31, 2011 and 2010, the total amounts due to the stockholder and included in related party payables amounted to $306,312 and $784,278, respectively.
F-36
On September 15, 2009, we entered into a five year agreement with E-Mail Frequency, LLC and David Loftus, Managing Partner of E-Mail Frequency, LLC, a significant stockholder of the Company. We will license an existing 80 million person direct marketing database (the "Database") of street addresses, cellular phone numbers, e-mail addresses and other comprehensive data with E-Mail Frequency. The agreement allows us to market, through the use of the Database, our MyMedicalRecords Personal Health Record, MyEsafeDepositBox virtual vault, and MMRPro document management system to physicians and their patients. Under the terms of the Agreement, we paid $250,000 to David Loftus as a one-time consulting fee in the form of 2,777,778 shares of our common stock. We recorded the $250,000 one-time licensee fee as a prepaid consulting fee and included in the prepaid expenses and other current assets as of December 31, 2009, less amortization of $12,500 included in operating expensed for the year ended December 31, 2009. Amortization expense for the year ended December 31, 2010 was $50,000. In addition, we incurred a total of $76,181 during the year ended December 31, 2010, toward business development services from E-Mail Frequency and Mr. Loftus. We did not incur any such expenses during the same periods in 2009. Furthermore, Mr. Loftus is a value-added-reseller of MMRPro systems and during the second quarter of 2010, Mr. Loftus purchased four MMRPro systems. We recognized revenues of $63,655 for the year ended December 31, 2010 from this sale. We included in related party payables at December 31, 2010, and 2009 of $19,103 and $50,577, respectively, in respect to these services. Furthermore, on January 6, 2010, we entered into 12% Convertible Promissory Notes with Mr. Loftus for a principal amount totaling $400,000 and warrants to purchase our common stock, which Mr. Loftus immediately converted both into shares of our common stock, for a total 8,860,606 shares of our common stock. On July 26, 2010 and September 21, 2010, we entered into 6% Convertible Promissory Notes with Mr. Loftus for a total principal amount of $450,000 and warrants to purchase the our common stock. On April 15, 2011, we entered into a 6% Convertible Promissory Note with Mr. Loftus for a principal amount of $156,436 and warrants to purchase our common stock. On July 19, 2011, we entered into a 6% Convertible Promissory Note with Mr. Loftus for a principal amount of $157,422 and warrants to purchase our common stock. Effective September 1, 2011, we signed and Amendment to the Agreement dated September 15, 2009 to provide licensor a non-exclusive right to target, market and exploit the Employee Benefits market.
16. SUBSEQUENT EVENTS
Following are the subsequent events the Company has evaluated through March 28, 2012:
Pursuant to the terms of his Employment Agreement On February 29, 2011 our Board of Directors passed a resolution to terminate our Executive Vice President of Technology and Development. Per the terms of the agreement, Mr. Singhal has 30 days to cure any breach. If not cured, his employment agreement will be terminated effective March 30, 2012.
On March 5, 2012 we entered into a Line of Credit agreement with Granite State Capital, LLC. ("Granite"), whereby Granite agreed to extend an interim bridge credit line of $235,000 plus interest and other consideration while in the process of negotiating a credit facility to replace the Company's existing equity line with Dutchess. In connection with this agreement, Robert Lorsch agreed to personally guarantee the note. In return for the guarantee, the Board approved a grant of warrants and shares consistent with prior guarantees. As of this date the warrants and shares have not been issued.
On March 28, 2012 the Company granted each of the four Board of Directors members as well as the Company's Chief Executive Officer and Chief Financial Officer in consideration for services and performance during 2011 and the first quarter of 2012 an option to purchase 1,250,000 shares of Common Stock at a price of $0.06 per share. No other options has been granted in nearly two years because the Company has been in an extended lock up due to various ongoing transactions regarding a potential sale of the Company throughout 2011 and 2012. Although the underlying transaction Agreements have not been cancelled the Board believes the price is reasonable given the status of the transaction. The options vest annually over two years and expire ten years from the date of issuance.
F-37
MMRGLOBAL, INC. The accompanying notes are an integral part of these condensed consolidated financial statements F-38
MMRGLOBAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31,
December 31,
2012
2011
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents
$
74,461
$
311,103
Accounts receivable, less allowances of $80,000 in 2012 and $80,000 in 2011
197,508
312,196
Inventory
50,614
50,614
Prepaid expenses and other current assets
198,390
254,634
Total current assets
520,973
928,547
Long-term investments
Investment in equity securities, at cost
56,000
56,000
Total long-term investments
56,000
56,000
Property and equipment, net
23,682
27,683
Deposits
3,370
3,370
Intangible assets, net
1,303,594
1,212,661
Total assets
$
1,907,619
$
2,228,261
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Line of credit, related party, net of discounts of $16,667 in 2012 and $66,667 in 2011
$
1,095,395
$
1,435,056
Related party payables
1,435,369
785,636
Compensation payable
132,993
109,287
Severance liability
620,613
620,613
Accounts payable and accrued expenses
3,223,981
3,111,316
Deferred revenue
18,422
21,551
Convertible notes payable, net of discounts of $0 in 2012 and $7,306 in 2011
872,708
974,893
Notes payable, current portion
560,343
325,343
Notes payable, related party
-
125,000
Capital leases payable, current portion
2,635
2,635
Total current liabilities
7,962,459
7,511,330
Notes payable, less current portion
-
-
Total liabilities
7,962,459
7,511,330
Commitments and contingencies (See Note 9)
Stockholders' deficit:
Preferred stock - $0.001 per value, 5,000,000 shares authorized, 0 issued and outstanding.
-
-
Common stock, $0.001 par value, 650,000,000 shares authorized, 374,096,882
and 359,162,894 shares issued and outstanding as of March 31, 2012 and
December 31, 2011, respectively
374,090
359,155
Additional paid-in capital
43,388,048
42,590,551
Accumulated deficit
(49,816,978)
(48,232,775)
Total stockholders' deficit
(6,054,840)
(5,283,069)
Total liabilities and stockholders' deficit
$
1,907,619
$
2,228,261
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended | |||||||
March 31, | |||||||
2012 | 2011 | ||||||
(Unaudited) | (Unaudited) | ||||||
Revenues | |||||||
Subscriber | $ | 44,846 | $ | 61,659 | |||
MMR Pro | 21,580 | 10,322 | |||||
License fees | 100,000 | 500,000 | |||||
Other revenues | 6,372 | - | |||||
Total revenues | 172,798 | 571,981 | |||||
Cost of revenues | 174,849 | 159,433 | |||||
Gross profit (loss) | (2,051) | 412,548 | |||||
General and administrative expenses | 933,766 | 1,007,861 | |||||
Sales and marketing expenses | 452,644 | 588,996 | |||||
Technology development | 69,977 | 84,814 | |||||
Loss from operations | (1,458,438) | (1,269,123) | |||||
Interest and other finance charges, net | (125,763) | (461,269) | |||||
Net loss | $ | (1,584,201) | $ | (1,730,392) | |||
Net loss per share: | |||||||
Basic and diluted | $ | (0.00) | $ | (0.01) | |||
Weighted average common shares outstanding: | |||||||
Basic and diluted | 366,241,123 | 241,541,304 |
The accompanying notes are an integral part of these condensed consolidated financial statements
F-39
MMRGLOBAL, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, | |||||||||||
2012 | 2011 | ||||||||||
(Unaudited) | (Unaudited) | ||||||||||
Operating activities: | |||||||||||
Net loss | $ | (1,584,201) | $ | (1,730,392) | |||||||
Adjustments to reconcile net loss to net cash | |||||||||||
used in operating activities: | |||||||||||
Depreciation and amortization | 60,312 | 48,876 | |||||||||
Warrants issued for services | - | 48,275 | |||||||||
Stock-based compensation | 194,450 | 416,795 | |||||||||
Common stock issued for services | 53,499 | 85,752 | |||||||||
Amortization of loan discount | 73,798 | 305,862 | |||||||||
Loan commitment fee amortization | 918 | - | |||||||||
Subtotal - Non-cash adjustments | 382,977 | 905,560 | |||||||||
Effect of changes in: | |||||||||||
Accounts receivable | 114,688 | 168,771 | |||||||||
Prepaid expenses and other current assets | 56,244 | 50,784 | |||||||||
Deposits | - | 500 | |||||||||
Accounts payable and accrued expenses | 112,665 | 4,411 | |||||||||
Related party payables | 260,072 | 243,677 | |||||||||
Compensation & severance payable | 23,706 | 24,318 | |||||||||
Deferred revenue | (3,129) | (25,233) | |||||||||
Subtotal - net change in operating assets & liabilities | 564,246 | 467,228 | |||||||||
Net cash used in operating activities | (636,978) | (357,604) | |||||||||
Investing activities: | |||||||||||
Purchase of property and equipment | (555) | (4,539) | |||||||||
Filing of patents (including Biotech) | (94,695) | (39,920) | |||||||||
Costs of continuing MMRPro and website development | (51,993) | (73,032) | |||||||||
Net cash used in investing activities | (147,243) | (117,491) | |||||||||
Financing activities: | |||||||||||
Net proceeds from convertible notes | 36,995 | - | |||||||||
Net proceeds from warrant exercises | 50,458 | 30,000 | |||||||||
Proceeds from equity line of credit | 350,126 | 240,982 | |||||||||
Proceeds from note payable | 235,000 | - | |||||||||
Payment of related party note payable | (125,000) | - | |||||||||
Payments of capital lease | - | (2,041) | |||||||||
Net cash provided by financing activities | 547,579 | 268,941 | |||||||||
Net decrease in cash | (236,642) | (206,154) | |||||||||
Cash, beginning of period | 311,103 | 363,689 | |||||||||
Cash, end of period | $ | 74,461 | $ | 157,535 | |||||||
Supplemental disclosures of cash flow information: | |||||||||||
Cash paid for interest | $ | 368 | $ | 10,172 | |||||||
Cash paid for income taxes | $ | 4,844 | $ | 1,600 | |||||||
Supplemental disclosure of non-cash investing and financing activities: | |||||||||||
Conversion of convertible notes into common stocks | $ | 147,561 | $ | - | |||||||
Reclassification of derivative liabilities and creation of note discounts | $ | 16,492 | $ | - | |||||||
Payment of accounts payable and related party payables through issuance of common stock | $ | 53,499 | $ | 68,992 |
The accompanying notes are an integral part of these condensed consolidated financial statements
F-40
MMRGLOBAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
March 31, 2012
NOTE 1 - NATURE OF OPERATIONS AND BASIS OF PRESENTATION
MMRGlobal Inc. (referred to herein, unless otherwise indicated, as "MMR", "MMRIS," the "Company," "we," "us," and "our") was originally incorporated as Favrille, Inc. ("Favrille") in Delaware in 2000, and since its inception and before the Merger (as defined below), operated under a different management team as a biopharmaceutical company focused on the development and commercialization of targeted immunotherapies for the treatment of cancer and other diseases of the immune system. In May 2008, our Favrille ongoing Phase 3 registration trial for our lead product candidate failed to show a statistically significant improvement in the treatment of patients with follicular B-cell non-Hodgkin's lymphoma, and accordingly, we determined to sell all of our equipment related to manufacturing of this product, as well as other personal property in an auction. On September 9, 2008, this auction was consummated and we received $3.2 million in net proceeds from the sale of the assets. With the disposition of all of our equipment and other personal property, we ceased to engage in any operations and became a "shell company" as such term is defined in Rule 12b-2 of the Exchange Act.
On January 27, 2009, Favrille conducted a reverse merger with what is now our wholly-owned operating subsidiary, MyMedicalRecords, Inc. ("MMR"). We refer to this transaction as the "Merger". Pursuant to the terms of the Merger, all of the outstanding common and preferred stock of MMR was cancelled and the former stockholders of MMR received an aggregate of 79,812,116 shares of Favrille common stock. On February 9, 2009, following the completion of the Merger, we changed our corporate name to MMR Information Systems, Inc. ("MMRIS"). In addition, we assumed the obligations of MMR under its outstanding stock options and warrants, which, pursuant to the terms of the Merger, represented the right to receive an aggregate of 12,787,080 shares of our common stock at the effective time of the Merger. In connection with the Merger, MMR became our wholly-owned subsidiary, with the former stockholders of MMR collectively owning shares of our common and preferred stock representing approximately 60.3% of the voting power of our outstanding capital stock. Effective June 15, 2010, we changed our corporate name to MMRGlobal, Inc., which we believe more accurately reflects our global imprint.
MMRGlobal, through its wholly-owned operating subsidiary MMR provides secure and easy-to-use online Personal Health Records and MyEsafeDepositBox storage solutions, serving consumers, healthcare professionals, employers, insurance companies, financial institutions, and professional organizations and affinity groups. Our PHR, marketed both directly via our website at www.mymedicalrecords.com and as a private-label service, 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 an Internet- connected device. The MyMedicalRecords Personal Health Record is built on proprietary, patented and patent-pending 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 an end-to-end electronic document management and imaging system designed to give physicians' offices, community hospitals and surgery centers an easy and cost-effective solution to digitizing paper-based medical records and sharing them with patients in a timely manner through an integrated patient portal, MMRPatientView. The MMR Stimulus Program is offered with the MMRPro product offerings to help healthcare professionals recoup some or all of the cost of digital conversion of patient charts when they upgrade patients from the free MMRPatientView portal to a full-featured MyMedicalRecords PHR. MMR is an Independent Software Vendor Partner with Kodak to deliver an integrated turnkey EMR solution for healthcare professionals. In addition, in January 2009, as a result of the Merger, we acquired biotech assets and other intellectual property that include anti-CD20 antibodies and data and samples from its FavId™/Specifid™ vaccine clinical trials for the treatment of B-cell Non-Hodgkin's lymphoma.
On March 8, 2011 we formed a subsidiary, which we named MMR Life Sciences Group, Inc., exclusively to maximize the value of our biotech assets including the company's anti-CD 20 antibodies and related FavID™ vaccine technologies acquired by MyMedicalRecords, Inc. through the merger with Favrille. As of this date the assets have not been transferred to the subsidiary but we are in the process of doing so.MMRGlobal was incorporated in Delaware in 2000, MMR was incorporated in Delaware in 2005, and both are headquartered in Los Angeles, CA.
Principles of Consolidation
The consolidated financial statements include the accounts of MMRGlobal, and its wholly-owned subsidiaries MMR and MMR Life Sciences Group, Inc. We eliminated all intercompany transactions upon consolidation.
F-41
Basis of Presentation
We have prepared MMRGlobal's accompanying consolidated unaudited financial statements in accordance with accounting principles generally accepted in the United States of America, or GAAP, for interim financial statements and with instructions to Form 10-Q pursuant to the rules and regulations of Securities and Exchange Act of 1934, as amended, or the Exchange Act and Article 8-03 of Regulation S-X promulgated under the Exchange Act. Accordingly, these financial statements do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of our management, we have included all adjustments considered necessary (consisting of normal recurring adjustments) for a fair presentation. Operating results for the three months ended March 31, 2012 are not indicative of the results that may be expected for the fiscal year ending December 31, 2012. You should read these unaudited condensed consolidated financial statements in conjunction with the audited financial statements and the notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2011.
Management's Plan
As of March 31, 2012, our current liabilities exceeded our current assets by $7.44 million. Furthermore, during the three months ended March 31, 2012, we incurred losses of $1.58 million.
At March 31, 2012 and December 31, 2011, we had $74,461 and $311,103, respectively, in cash and cash equivalents. Historically, we issued capital stock, sold debt and equity securities and received funds from The RHL Group, Inc. (a significant stockholder that is wholly-owned by our Chairman and Chief Executive Officer) to operate our business. Although we received additional funding from The RHL Group pursuant to the Fifth Amended and Restated Note dated April 29, 2011, we will still be required to obtain additional financing in order to meet installment payment obligations resulting from settlement payments with various creditors, which we refer to as the Creditor Plan and the previously existing obligations under the subordinated secured indebtedness to The RHL Group, which had a balance of $1,648,472 at March 31, 2012. As a result of the above, we express uncertainty about our ability to continue as a going concern. The components of the RHL Group Note payable and the related balance sheet presentation as of March 31, 2012 are as follows: $1,119,207, which are included in the line of credit, related party; and $279,265, which is related to deferred salary and other expenses and $250,000, which is related to consulting fees, are included in related party payables. We recorded the loan origination fees mentioned above as a note discount and we are amortizing them over the Fourth Amended Note maturity period. As of March 31, 2012, the remaining unamortized origination fee was $16,667.
Management's plan regarding this matter is to continue to utilize its available line of credit with The RHL Group (see Note 3). At March 31, 2012, there was approximately $866,500 available under The RHL Group line of credit. We also plan to continue to utilize portions of our standby equity line facility with Dutchess as needed. Furthermore, on April 16, 2012, we signed a Continuous Investment Agreement ("CIA") with Granite State Capital LLC ("Granite") whereby Granite agreed to purchase up to 100 million shares of our common stock and provide us with up to $15 million based on the terms of the CIA as filed with the Securities and Exchange Commission ("SEC") as Exhibit 10-1 on our Current Report on Form 8-K on April 16, 2012. On May 8, 2012, we filed a registration statement with the SEC to register the 100 million shares of common stock related to the CIAwhich has not yet been declared effective. In addition, the Company plans to continue to sell additional debt and equity securities, continue to settle its existing liabilities through the issuance of equity securities, explore other debt financing arrangements, continue to increase its existing subscriber and affiliate customer base and sell MMRPro products to obtain additional cash flow over the next twelve months. There can be no assurance that funds from these sources will be available when needed or, if available, will be on terms favorable to us or to our stockholders. If additional funds are raised by issuing equity securities, the percentage ownership of our stockholders will be reduced, stockholders may experience additional dilution or such equity securities may provide for rights, preferences or privileges senior to those of the holders of our common stock.
If we are unable to utilize our available line of credit with The RHL Group, or our equity line of credit with Dutchess, or draw on our CIA with Granite, or obtain suitable alternative debt or equity financing, or increase sales of our products, our ability to execute our business plan and continue as a going concern may be adversely affected.
F-42
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) MANAGEMENT'S USE OF ESTIMATES
The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of net revenue and expenses during each reporting period. On an ongoing basis, management evaluates its estimates, including those related to revenue recognition, allowances for doubtful accounts, the valuation of deferred income taxes, tax contingencies, long-lived and intangible assets, valuation of derivative liabilities and stock-based compensation. These estimates are based on historical experience and on various other factors that management believes to be reasonable under the circumstances, although actual results could differ from those estimates.
(b) CASH AND CASH EQUIVALENTS
We consider cash equivalents to be only those investments that are highly liquid, readily convertible to cash and with maturities of 90 days or less at the purchase date. We maintain our cash in bank deposit accounts that, at times, may exceed federally insured limits. We have not experienced any losses in such accounts and believe that we are not exposed to any significant credit or deposit risk on our cash. We had cash and cash equivalents of $74,461 and $311,103 as of March 31, 2012 and December 31, 2011, respectively.
(c) TRADE AND OTHER RECEIVABLES
Receivables represent claims against third parties that will be settled in cash. The carrying value of receivables, net of an allowance for doubtful accounts, if any, represents their estimated net realizable value. We estimate the allowance for doubtful accounts, if any, based on historical collection trends, type of customer, the age of outstanding receivables and existing economic conditions. If events or changes in circumstances indicate that specific receivable balances may be impaired, we give further consideration to the collectability of those balances and the allowance is adjusted accordingly. We write off past due receivable balances when collection efforts have been unsuccessful in collecting the amount due.
(d) FAIR VALUE OF FINANCIAL INSTRUMENTSASC 820-10, Fair Value Measurements and Disclosures, requires entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value. ASC 820-10 defines the fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of March 31, 2012 and December 31, 2011, the carrying value of accounts receivable, deposits, related party payables, compensation payable, severance liabilities, and accounts payable and accrued expenses approximates fair value due to the short-term nature of such instruments. The carrying value of short-term debt approximates fair value as the related interest rates approximate rates currently available to us.
We utilize ASC 820-10 for valuing financial assets and liabilities measured on a recurring basis. ASC 820-10 defines fair value, establishes a framework for measuring fair value and generally accepted accounting principles, and expands disclosures about fair value measurements. This standard applies in situations where other accounting pronouncements either permit or require fair value measurements. ASC 820-10 does not require any new fair value measurements.
Accounting guidance also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
The standard describes three levels of inputs that may be used to measure fair value:
|
Level 1: |
Quoted prices in active markets for identical or similar assets and liabilities. |
|
Level 2: |
Quoted prices for identical or similar assets and liabilities in markets that are not active or observable inputs other than quoted prices in active markets for identical or similar assets and liabilities. |
|
Level 3: |
Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
In determining the appropriate fair value of warrant liabilities, we used Level 3 inputs for our valuation methodology. We applied the Black-Scholes model to value such warrant liabilities. See Note 7 for the inputs used in the Black-Scholes option valuation model.
F-43
(e) PROPERTY AND EQUIPMENT
We state property and equipment at cost. We state equipment under capital leases at the present value of the minimum lease payments. We calculate depreciation using the straight-line method, based upon the following estimated useful lives:
Furniture and Fixtures: 5 Years
Computer Equipment: 5 Years
When we retire or dispose of items, we charge or credit income for the difference between the net book value of the asset and the proceeds realized thereon.
We charge expenditures for maintenance and repairs to operations as incurred while we capitalize renewals and betterments.
We have pledged as collateral all property and equipment, along with all other of our assets, for a line of credit from The RHL Group, a related party (see Note 3 - Related Party Note Payable).
(f) INTANGIBLE ASSETS
Intangible assets are comprised of website and software development costs, domain names and patents. We account for website and software development costs in accordance with ASC 350-50, Website Development Costs, and ASC 985-20, Costs of Software to Be Sold, Leased or Marketed. Pursuant to ASC 350-50 and 985-20, we capitalize internally developed website and software costs when the website or software under development has reached technological feasibility. We amortize these costs, typically over an estimated life of five years, using the larger of the amount calculated using the straight-line method or the amount calculated using the ratio between current period gross revenues and the total of current period gross revenues and estimated future gross revenues. At each balance sheet date, we evaluate the unamortized capitalized website and software costs compared to the net realizable value. We then write off the amount by which the unamortized capitalized website costs exceed its net realizable value. During the three months ended March 31, 2012 and 2011, there were no impairment charges recorded.
We account for domain names and patents in accordance with ASC 350-30, General Intangibles Other than Goodwill. We capitalize patent costs representing legal fees associated with filing patent applications and amortize them on a straight-line basis. We are in the process of evaluating our patents' estimated useful lives and will begin amortizing the patents when they are brought to the market or otherwise commercialized. We amortize identifiable intangible assets over their estimated useful lives as follows:
Website and Software Development Costs: 5 Years
Domain Names: 5 Years
Patents: 20 Years
(g) IMPAIRMENT OF LONG-LIVED ASSETS AND INTANGIBLES
We account for long-lived assets, which include property and equipment, and identifiable intangible assets with finite useful lives (subject to amortization), in accordance with ASC 350-30. ASC 350-30 requires that we review long-lived assets for impairment whenever events or changes in circumstances indicate that we may not recover the carrying amount of an asset. We measure recoverability by comparing the carrying amount of an asset to the expected future undiscounted net cash flows generated by the asset. If we determine that the asset may not be recoverable, or if the carrying amount of an asset exceeds its estimated future undiscounted cash flows, we recognize an impairment charge to the extent of the difference between the fair value and the asset's carrying amount. We had no impairment charges during the three months ended March 31, 2012 and 2011.
(h) REVENUE RECOGNITION
We generate our revenues from services, which are comprised of providing electronic access to consumer medical records and other vital documents, and from the licensing of our intellectual property and services. We recognize revenue only when the price is fixed or determinable, persuasive evidence of an arrangement exists, the service is performed, and we are reasonably assured of collectability of the resulting receivable.
Our subscriber revenues consist of annual and monthly recurring retail subscriptions and usage-based fees, which are primarily paid in advance by credit card, and corporate accounts that are based on either an access-fee or actual number of users, and in each case billed in advance at the beginning of each month of service. We defer the portions of annual recurring subscription fees collected in advance and recognize them on a straight line basis over the subscription period.
F-44
We grant exclusive licenses for the sale and marketing of our services in international territories in consideration of an up-front license fee and an ongoing royalty. The royalty fee is usually a percentage of revenue earned by the licensee and there are usually certain minimum guarantees. We defer the recognition of license fee revenues received in advance from international licensees for the grant of the license and recognized them over the period covered by the agreement. We defer the recognition of minimum guaranteed royalty payments received in advance and recognize them over the period to which the royalty relates. We include all such revenues under "License Fees." In those cases where a license agreement contains multiple deliverables, we account for the agreement in accordance with ASC 605-25, Revenue Recognition - Multiple-Element Arrangements.
We recognize revenue on sales of our MMRPro system in accordance with ASC 605-25, Revenue Recognition, Multiple- Element Arrangements. We have also adopted Accounting Standards Update ("ASU") 2009-13, "Revenue Recognition (Topic 605): Multiple-Deliverable Revenue Arrangements, a consensus of the FASB Emerging Issues Task Force" effective January 1, 2010.
Our multiple-deliverable arrangements consist solely of our MMRPro product. Significant deliverables within these arrangements include sophisticated scanning equipment, various licenses to use third party software, a license to use our proprietary MMRPro application software, installation and training, dedicated telephone lines, secure online storage and warranties.
We determined all elements to be separate units of accounting as they have standalone value to the customers and/or they are sold by other vendors on a standalone basis. Delivery of the hardware and certain software elements of these arrangements occur at the inception of the agreement. We deliver installation and training at the inception of the agreement. We provide other software licenses, telephone lines and online secure storage over the three year term of the agreement. We include warranties in the arrangements, however the third party product manufacturer, and not us, is obligated to fulfill such warranties. The third-party warranty contracts are paid in advance and are not refundable.
We allocate the revenue derived from these arrangements among all the deliverables. We base such allocation on the relative selling price of each deliverable. With the exception of our proprietary MMRPro application software, we use third party evidence to set the selling prices used for this allocation. In all such cases, third parties sell the same or very similar products. For the MMRPro application software, we estimate the selling price based on recent discussions regarding licensure of that particular application on a standalone basis. To date, we have not licensed this software on a standalone basis.
We recognize the allocated revenue for each deliverable in accordance with SEC Staff Accounting Bulletin ("SAB") No. 104, Topic 13: Revenue Recognition. Under this guidance, we recognize revenue when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed and determinable and collectability is reasonably assured. This results in us recognizing revenue for the hardware, certain software and the warranties upon delivery to the customer, for the installation and training upon completion of these services, and ratably over the contract period for the software licenses, telephone lines and online secure storage.
Revenue from the licensing of our biotech assets 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. For agreements that provide for milestone payments, such as our agreement with Celgene, we adopted ASC 605-28-25, Revenue Recognition, Milestone Method.
(i) INCOME TAXES AND UNCERTAIN TAX POSITIONS
We account for income taxes in accordance with ASC 740-10, Income Taxes. We recognize deferred tax assets and liabilities to reflect the estimated future tax effects, calculated at the tax rate expected to be in effect at the time of realization. We record a valuation allowance related to a deferred tax asset when it is more likely than not that some portion of the deferred tax asset will not be realized. Deferred tax assets and liabilities are adjusted for the effects of the changes in tax laws and rates of the date of enactment.
ASC 740-10 prescribes a recognition threshold that a tax position is required to meet before being recognized in the financial statements and provides guidance on recognition, measurement, classification, interest and penalties, accounting in interim periods, disclosure and transition issues. We classify interest and penalties as a component of interest and other expenses. To date, we have not been assessed, nor have we paid, any interest or penalties.
We measure and record uncertain tax positions by establishing a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized.
(j) ADVERTISING
We expense advertising costs as we incur them. Advertising expense for the three months ended March 31, 2012 and March 31, 2011 amounted to $0 and $27,468, respectively.
F-45
(k) SHARE-BASED COMPENSATION
We account for share-based compensation in accordance with ASC 718-20, Awards Classified as Equity. We apply ASC 718-20 in accounting for stock-based awards issued to employees under the recognition of compensation expense related to the fair value of employee share-based awards, including stock options and restricted stock. Determining the fair value of options at the grant date requires judgment, including estimating the expected term that stock options will be outstanding prior to exercise, the associated volatility and the expected dividends. Judgment is required in estimating the amount of share-based awards expected to be forfeited prior to vesting. If actual forfeitures differ significantly from these estimates, share-based compensation expense could be materially impacted.
We account for options and warrants issued to non-employees in accordance with ASC 505-50, Equity-Based Payments to Non-Employees. We treat options and warrants issued to non-employees the same as those issued to employees with the exception of determination of the measurement date. The measurement date is the earlier of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty's performance is complete. Options and warrants granted to consultants are valued at their respective measurement dates, and recognized as an expense based on the portion of the total consulting services provided during the applicable period. As further consulting services are provided in future periods, we will revalue the associated options and warrants and recognize additional expense based on their then current values.
We estimate the fair value of each stock option on the date of grant using the Black-Scholes option pricing model. We determine assumptions relative to volatility and anticipated forfeitures at the time of grant. We valued grants of stock options and warrants during the three months ended March 31, 2012 and 2011 using the following assumptions.
March 31, 2012 | March 31, 2011 | |||
(Unaudited) | (Unaudited) | |||
Expected life in years | 0 - 5 Years | 5 - 10 Years | ||
Stock price volatility | 144.34% - 148.34% | 147.89% | ||
Risk free interest rate | 0.35% - 0.35% | 3.36% | ||
Expected dividends | None | None | ||
Forfeiture rate | 0% | 0% |
We base the assumptions used in the Black-Scholes models upon the following data: (1) our use of the contractual life of the underlying non-employee warrants as the expected life; the expected life of the employee options used in this calculation is the period of time the options are expected to be outstanding and has been determined based on historical exercise experience; (2) in the absence of an extensive public market for our shares, the expected stock price volatility of the underlying shares over the expected term of the option or warrant was taken at approximately the mid-point of the range for similar companies at the various grant dates; (3) we base the risk free interest rate on published U.S. Treasury Department interest rates for the expected terms of the underlying options or warrants; (4) we base expected dividends on historical dividend data and expected future dividend activity; and (5) we base the expected forfeiture rate on historical forfeiture activity and assumptions regarding future forfeitures based on the composition of current grantees.
(l) NET INCOME/LOSS PER SHARE
We apply the guidance of ASC 260-10, Earnings Per Share for calculating the basic and diluted loss per share. We calculate basic loss per share by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding. We compute diluted loss per share similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential shares had been issued and if the additional shares were dilutive. We exclude common equivalent shares from the computation of net loss per share if their effect is anti-dilutive.
We excluded all potential common shares from the computation of diluted net loss per common share for the three months ended March 31, 2012 and 2011 because they were anti-dilutive due to our net loss position. Stock options and warrants excluded from the computation totaled 107,834,242 shares for the three months ended March 31, 2012 and 86,487,431 shares for the three months ended March 31, 2011.
(m) RESEARCH, DEVELOPMENT AND ENGINEERING
We expense research, development and engineering costs as incurred and presented as technology development in the accompanying consolidated statements of operations. We capitalize and amortize costs for software development relating to our website incurred subsequent to establishing technological feasibility, in the form of a working model, over their estimated useful lives.
F-46
(n) RECENT ACCOUNTING PRONOUNCEMENTS
In January 2010, the FASB issued ASU No. 2010-6, "Improving Disclosures About Fair Value Measurements," that amends existing disclosure requirements under ASC 820 by adding required disclosures about items transferring into and out of levels 1 and 2 in the fair value hierarchy; adding separate disclosures about purchases, sales, issuances, and settlements relative to level 3 measurements; and clarifying, among other things, the existing fair value disclosures about the level of disaggregation. This ASU became effective during the first quarter of 2010, except for the requirement to provide level 3 activities of purchases, sales, issuances, and settlements on a gross basis, which becomes effective beginning the first quarter of 2011. The adoption of this standard didn't have a material impact on our financial statements.
NOTE 3 - RELATED PARTY NOTE PAYABLE
On April 29, 2011, we, The RHL Group and Robert H. Lorsch entered into a Fifth Amended and Restated Secured Promissory Note, or the Fifth Amended Note, and we agreed to guaranty MMR's obligations under the Fifth Amended Note (the "Guaranty"). The Fifth Amended Note amends and restates the April 29, 2010 Fourth Amended and Restated Secured Promissory Note Agreement. The Fifth Amended Note matured April 29, 2012, and bears interest at the lesser of 10% or the highest rate then permitted by law, and is secured by the Security Agreement. The reserve credit line of the Fifth Amended Note remains at $3,000,000. In connection with the Fifth Amended Note, The RHL Group received a $200,000 loan origination fee ("Fee") that was due and payable immediately. The RHL Group exercised warrants to purchase 1,600,000 shares of our common stock with an exercise price of $0.125 in consideration for the loan origination fee. In addition, the RHL Group received a warrant to purchase up to 2,796,566 shares of our common stock at an exercise price of $0.051 per share. This warrant is fully vested and is exercisable either in cash or on a cashless basis at any time prior to the fourth anniversary of the warrant's issuance.
The Fifth Amended Note had a balance of $1,648,472 at March 31, 2012. The components of the Fifth Amended Note and the related balance sheet presentation as of March 31, 2012 are as follows: $1,119,207, which are included in the line of credit, related party; and $279,265, which is related to deferred salary and other expenses and $250,000, which is related to consulting fees, are included in related party payables. We recorded the loan origination fees mentioned above as a note discount and we are amortizing them over the Fifth Amended Note maturity period. As of March 31, 2012, the remaining unamortized origination fee was $16,667.
Total interest expense on this note for the three months ended March 2012 and 2011 amounted to $38,304 and $28,628 respectively. The unpaid interest balances as of March 31, 2012 and December 31, 2011 were $7,145 and $24,145, respectively.
In conjunction with the Fifth Amended Note, we were required to maintain certain financial covenants, including the requirement that we have at least $200,000 in cash in our bank accounts or such other amount as necessary to maintain operations through the subsequent thirty (30) days and timely pay any obligations due respecting payroll and all associated payroll taxes on and after March 31, 2012. As of March 31, 2012, we were in the process of renewing the Fifth Amended Note, which was due to mature on April 29, 2012. As part of that process we received a waiver from the RHL Group for the covenants until May 31, 2012, at which time we expect to have the renewal completed.
Additional information regarding the Fifth Amended and Restated Note is contained in our Quarterly Report on Form 10-Q filed with the SEC on May 26, 2011.
NOTE 4 - INCOME TAXES
Under ASC 740-270, Income Taxes - Interim Reporting, we are required to adjust our effective tax rate each quarter to be consistent with the estimated annual effective tax rate. We are also required to record the tax impact of certain discrete items, unusual or infrequently occurring, including changes in judgment about valuation allowances and effects of changes in tax laws or rates, in the interim period in which they occur. In addition, we exclude jurisdictions with a projected loss for the year or a year-to-date loss where we cannot recognize a tax benefit from our estimated annual effective tax rate. The impact of such an exclusion could result in a higher or lower effective tax rate during a particular quarter, based upon the mix and timing of actual earnings versus annual projections.
As a result of the implementation of certain provisions of ASC 740, Income Taxes, (formerly FIN 48, Accounting for Uncertainty in Income Taxes - An Interpretation of FASB Statement No. 109), the Company performed an analysis of its previous tax filings and determined that there were no positions taken that it considered uncertain. Therefore, there were no unrecognized tax benefits as of March 31, 2012.
MMR, in its capacity as the operating company taking over our income tax positions in addition to its own positions after January 27, 2009 (see Note 1), has estimated its annual effective tax rate to be zero. MMR has based this on an expectation that the combined entity will generate net operating losses in 2012, and it is not likely that those losses will be recovered using future taxable income. Therefore, no provision for income tax has been recorded as of and for the three months ended March 31, 2012.
F-47
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Leases
We lease certain facilities and equipment under non-cancelable capital and operating leases, which expire at various dates through 2013. Effective September 1, 2010, we entered into a lease agreement to lease office space in Los Angeles, California. The lease requires a monthly payment of $5,500 commencing in September 2010. Effective November 1, 2010, the Company entered into a lease agreement to lease additional space adjacent to the current office space in Los Angeles, California. The lease requires an additional monthly payment of $3,193 commencing in November 2010. Both leases expire on August 31, 2013 unless renewed. Total rent expense for the three months ended March 31, 2012 and 2011 was $27,729 and $17,386, respectively. Future minimum lease payments as of March 31, 2012, under non-cancelable operating leases (with initial or remaining lease terms in excess of one year) and future minimum capital lease payments are as follows:
Year Ending | Operating | Capital | ||||
December 31, | Leases | Leases | ||||
2012 (Remainder of) | $ | 83,187 | $ | 2,635 | ||
2013 | 73,944 | - | ||||
Total minimum lease payments | $ | 157,131 | $ | 2,635 |
Guarantee provided by The RHL Group
On May 6, 2011, the RHL Group agreed to guarantee up to $250,000 in payments to a vendor for future services to be rendered. In consideration of this guarantee, the RHL Group received (i) a warrant to purchase 625,000 shares of our common stock, at an exercise price of $0.046 per share, which was the closing price of our common stock on the date of the transaction, and (ii) 125,000 shares of our common stock priced as of the same date. In the event that the RHL Group has to perform on this guarantee, interest on any outstanding balance paid to the vendor by the RHL Group will be added to the balance of the Fifth Amended Note or any subsequent renewals. Additionally, any balances due to this vendor at any given time will reduce the amount available under the Fifth Amended Note or any subsequent renewals. The warrants and shares were issued on November 11, 2011 to the RHL Group.
Guarantee provided by Robert H. Lorsch
On March 5, 2012, Robert Lorsch agreed to guarantee a note with a principal amount of $235,000 plus interest and expenses to a lender who provided a bridge loan to the Company. In consideration of this guarantee, Mr. Lorsch received (i) a warrant to purchase 470,000 shares of our common stock, and (ii) 470,000 shares of our common stock, both with a price of $0.0319 per share.
Concentrations
For the three months ended March 31, 2012, our largest customer (Celgene $100,000) accounted for approximately 58% of our total revenue.
For the three months ended March 31, 2011, our largest customer (Celgene $500,000) accounted for approximately 87.4% of our total revenue.
Litigation Matters
From time to time, we are involved in various legal proceedings generally incidental to our business. While the result of any litigation contains an element of uncertainty, our management presently believes that the outcome of any known, pending or threatened legal proceeding or claim, individually or combined, will not have a material adverse effect on our financial statements.
On July 31, 2011, Ropers, Majeski, Kohn and Bentley ("Ropers"), a national firm with offices in San Francisco, Redwood City, San Jose, Los Angeles, New York and Boston, filed a civil complaint on behalf of MyMedicalRecords.com ("MMR- US") in the Superior Court For the State of California, County of Los Angeles. Named as defendants in that case are Taylor Armstrong, Russell Armstrong and a corporation known as NuWay Digital Systems. Among other things, the Complaint alleges that Taylor Armstrong and her husband Russell Armstrong breached a 2007 settlement agreement between themselves and MMR-US. The settlement agreement entitles MMR-US to liquidated damages of $1,000,000 for the first such breach and $250,000 for each ensuing breach. To date, three breaches have been alleged. Ropers continues to investigate and will amend the Complaint in the event that additional breaches are uncovered. The complaint has been served on Ms. Armstrong individually, and she has answered. The pre- trial discovery process has commenced. Trial is set in July 2012. The parties have engaged in an extensive mediation; however, it would be premature to conclude that the matter will be fully settled prior to trial.
F-48
On January 26, 2012, we filed a complaint against certain a former officer of pre-merger Favrille, Inc., and other potential defendants (the "Favrille Defendants") that the Company believes may have committed wrongful acts relating to the misappropriation of Favrille's intellectual and personal property. Information leading to the decision to file the lawsuit was discovered as a result of the filing of a lawsuit by The RHL Group, Inc., a creditor of MMRGlobal. MMRGlobal's board of directors consented to having the law firm that represented The RHL Group, Inc. represent MMRGlobal in this matter.
MMR has recently asked Ropers to substitute in as counsel of record in the lawsuit that is now pending in San Diego County, California against the Favrille Defendants. In the complaint, MMR seeks damages for unauthorized removal and conversion of MMR assets including tissue and other samples that were wrongfully converted by the defendants. Damages may be as high as $5,000,000. Some of MMR's damage may be covered by first party insurance. The matter is in the initial stages of the litigation process. No trial date is set and discovery has yet to commence.
At this time the potential recovery for damages is unknown. There is no attorneys' fees provision, so if the lawsuit ends unfavorably for us, we will be responsible for the payment of attorneys' fees, costs and expenses incurred by us for its representation and could be required to indemnify the Favrille Defendants pursuant to certain provisions in the Agreement and Plan of Merger and Reorganization between Favrille and MMR. The matter is currently in the early stages of litigation and counsel does not have enough facts at this time to predict the possibilities of either a favorable or unfavorable outcome.
On December 9, 2011, MyMedicalRecords, Inc. entered into a Non-Exclusive Settlement and Patent License Agreement (the "Agreement") with Surgery Center Management LLC ("SCM"). In consideration for the rights granted under the Agreement and in consideration of a settlement and release agreement, SCM contracted to pay MMR an initial payment of $5 million, payable on December 23, 2011, and additional payments of $5 million per year for five consecutive years. After numerous attempts to collect the past due amount of $5 million, on January 19, 2012, MMR filed a lawsuit in the Superior Court of the State of California for the County of Los Angeles for breach of contract. The contract contains an arbitration clause. The Company has demanded arbitration for the total $30 million allegedly due under the Agreement and is awaiting response. This matter is currently in the initial pleading stages and counsel does not have enough facts at this time to predict the chances of either a favorable or unfavorable outcome, nor does counsel have any facts upon which to base any information regarding collectability.
MMR is facing one claim from Sunil Singhal, a former employee. Mr. Singhal was employed as Executive Vice President of Technology and Product Development at MMR. He was placed on a 30-day administrative leave on February 13, 2012, and was given a 30-day notice of termination as approved by the Board of Directors of MMRGlobal on February 29, 2012. On March 30, 2012, Mr. Singhal was officially terminated. No lawsuit has been filed and defense of the claim has been tendered to MMR's insurance carrier.
NOTE 6 - STOCKHOLDERS' DEFICIT
Preferred Stock
The Company has 5,000,000 shares of preferred stock authorized. As of March 31, 2012, and December 31, 2011, there were no shares of preferred stock issued and outstanding.
Common Stock
As of March 31, 2012, we are authorized to issue 650,000,000 shares of common stock.
On August 5, 2010, the Company filed a Form S-1 related to the offer and resale of up to 60,000,000 shares of our common stock, by the selling stockholder, Dutchess Opportunity Fund, II, LP ("Dutchess"). Dutchess has agreed to purchase all 60,000,000 shares pursuant to the investment agreement dated September 15, 2009, as amended on May 7, 2010, or the Investment Agreement, between Dutchess and the Company, and an additional 230,800 shares were issued to Dutchess in partial consideration for the preparation of the documents for its investment. Subject to the terms and conditions of the Investment Agreement, the Company had the right to put up to $10 million in shares of our common stock to Dutchess. As of March 31, 2012, the amount available under the equity line facility was $7.9 million, however that amount could be reduced based on the market price of our stock at the time any shares are sold.
As of March 31, 2012, the total shares of our common stock issued and outstanding amounted to 374,096,882.
NOTE 7 - EQUITY ISSUANCES
Stock Option Activity
On January 21, 2010, our Board of Directors approved an increase to the number of shares authorized for issuance under our 2001 Equity Incentive Plan (the "Plan") from 12,000,000 to 27,000,000 shares as we determined that the number of shares remaining under the Plan was inadequate to retain our key directors, executives and managers. Our stockholders approved the increase to the Plan on June 15, 2010.
F-49
The Plan expired on June 5, 2011 and no options were issued under that plan since that date. On September 1, 2011, our Board of Directors approved the adoption of a new plan to replace the Plan under the same general terms. The Company plans to file an S-8 to register the new plan which will be put out for shareholder approval in the next Annual Shareholder Meeting to be held on June 20, 2012.
A summary of option activity for the three months ended March 31, 2012 is presented below. Options granted by MMR prior to the date of the Merger have been retroactively restated to reflect the conversion ratio of MMR to MMRIS shares.
Weighted- | ||||||||||
Average | ||||||||||
Weighted- | Remaining | |||||||||
Average | Contractual | Aggregate | ||||||||
Exercise | Life | Intrinsic | ||||||||
Options | Price | (Years) | Value | |||||||
Outstanding at December 31, 2011 | 40,773,523 | $ | 0.11 | 6.29 | $ | - | ||||
Granted | 7,750,000 | 0.08 | ||||||||
Exercised | - | - | ||||||||
Cancelled | (4,875,972) | 0.11 | ||||||||
Outstanding at March 31, 2012 (Unaudited) | 43,647,551 | $ | 0.10 | 6.75 | $ | - | ||||
Vested and expected to vest | ||||||||||
at March 31, 2012 (Unaudited) | 43,647,551 | $ | 0.10 | 6.75 | $ | - | ||||
Exercisable at March 31, 2012 (Unaudited) | 27,122,549 | $ | 0.12 | 5.32 | $ | - |
The aggregate intrinsic value in the table above is before applicable income taxes and is calculated based on the difference between the exercise price of the options and the quoted price of the common stock as of the reporting date.
Total stock option expenses recorded during the years ended December 31, 2011 and 2010 were $1,111,937 and $1,689,141, respectively, and is reflected in operating expenses in the accompanying consolidated statements of operations.
Total stock option expense recorded for the three months ended March 31, 2012 and 2011 amounted to $194,450 and $416,795, respectively. The following table summarizes information about stock options outstanding and exercisable at March 31, 2012.
Options Outstanding | Options Exercisable | |||||||||||||
Weighted | Weighted | Weighted | Weighted | |||||||||||
Average | Average | Average | Average | |||||||||||
Exercise | Number | Remaining | Exercise | Number | Remaining | Exercise | ||||||||
Price | of Shares | Life (Years) | Price | of Shares | Life (Years) | Price | ||||||||
$ | 0.05 - 0.09 | 11,450,000 | 9.65 | $ 0.07 | 802,083 | 6.24 | $ 0.08 | |||||||
0.1 - 0.15 | 29,312,290 | 5.66 | 0.11 | 23,560,205 | 5.11 | 0.11 | ||||||||
> 0.15 | 2,885,261 | 6.31 | 0.19 | 2,760,261 | 6.23 | 0.19 | ||||||||
43,647,551 | 27,122,549 |
Warrants
On February 17, 2012, the Company issued a warrant to purchase 105,000 shares of common stock in connection to the issuance of a Convertible Promissory Note to an unrelated third-party for a principal amount of $35,000. The term of the warrant was one day and the exercise price was equal to the product of fifty percent (50%) multiplied by the arithmetic average of the volume- weighted average trading price of the Common Stock for the ten (10) consecutive trading days ending on the day that was three (3) trading days prior to the applicable investment date. This warrant vested at commencement and had an aggregate value of $1,785. On the date of investment, the holder converted the promissory notes and exercised the attached warrants.
F-50
On March 21, 2012, we granted a third-party two warrants to purchase up to 175,000 shares of our common stock to as payment for serving on our advisory board. These warrants had an exercise price of $0.06 and $0.08 per share, respectively, with a contractual life through March 21, 2017. These warrants vest annually over two years and have an aggregate value of $10,500 and $14,000, of which $513 and $493 were recorded as operating expenses during the three months ended March 31, 2012, respectively.
A summary of the activity of the Company's warrants for the three months ended March 31, 2012 is presented below:
Weighted Avg | ||||
Shares | Exercise Price | |||
Outstanding at December 31, 2011 | 64,336,691 | $ | 0.31 | |
Granted | 455,000 | 0.06 | ||
Exercised | (105,000) | 0.02 | ||
Cancelled | (500,000) | 0.25 | ||
Outstanding at March 31, 2012 (Unaudited) | 64,186,691 | $ | 0.31 |
The following summarizes the total warrants outstanding and exercisable as of March 31, 2012.
Warrants Outstanding | Warrants Exercisable | |||||||||||||
Warrants | Weighted Avg | Weighted Avg | Warrants | Weighted Avg | Weighted Avg | |||||||||
Ranges | Outstanding | Remaining Life | Exercise Price | Exercisable | Remaining Life | Exercise Price | ||||||||
$0.05 - $0.25 | 57,820,435 | 2.29 | $ | 0.10 | 43,718,411 | 2.45 | $ | 0.11 | ||||||
$0.25 - $2.50 | 1,666,346 | 1.48 | 0.43 | 2,166,346 | 1.08 | 0.39 | ||||||||
> $2.50 | 4,699,910 | 0.58 | 2.83 | 4,699,910 | 0.58 | 2.83 | ||||||||
64,186,691 | 50,584,667 |
Shares Issued for Services or Reduction to Liabilities
During the three months ended March 31, 2012, we issued 591,250 shares of common stock with a value of $53,499 to non- employees and charged to the appropriate accounts for the following reasons:
Three-Months Ended March 31, 2012 | |||||
(Unaudited) | |||||
Purpose | Shares | Value | |||
Reduction of payables | 591,250 | $ | 53,499 | ||
Totals | 591,250 | $ | 53,499 |
The 591,250 shares were not contractually restricted, however as they have not been registered under the Act, they are restricted from sale until the requirements of Rule 144 under the Securities Act, as amended, permit such sale. All such shares were issued at the trading closing price on the date of issuance and such value was calculated therefrom.
F-51
Restricted Stock Program
Under the Restricted Stock Program, a restricted stock award is an offer by the Company to sell to an eligible person shares that are subject to restrictions relating to the sale or transfer of the shares. A committee appointed by the Board to administer the program or the Board itself shall determine to whom an offer will be made, the number of shares the person may purchase, the price to be paid and the restriction to which the shares shall be subject. The offer must be accepted by the eligible person within thirty days from the date of the offer evidenced by the Restricted Stock Purchase Agreement. The purchase price of shares shall not be less than 85% of the fair market value of such shares on the issue date, with the provision that the purchase price for a 10% stockholder shall not be less than 110% of such fair market value. Shares are either fully and immediately vested upon issuance, or may vest in installments upon attainment of specified performance objectives.
Stock Bonus Program
Under the Stock Bonus Program, shares are issued as a bonus for past services rendered pursuant to the Stock Bonus Agreement. Stock bonuses may be awarded upon satisfaction of specified performance goals pursuant to the Performance Stock Bonus Agreement. No shares were issued under the Stock Bonus Program during the three months ended March 31, 2012.
Derivative Liabilities
On April 15, 2011, the Company issued a Restated Convertible Promissory Note to an unrelated third-party with a principal amount of $167,387 which included a 7% closing discount in the amount of $10,951. This Note replaced and terminated a promissory note originally issued to a related third-party on July 26, 2010 for $150,000 plus accrued interest of $6,436. The Restated Note was convertible at the option of the holder into common stock at a variable conversion price of seventy percent (70%) multiplied by the lower of the arithmetic average of the volume-weighted average trading price (VWAP) of the Common Stock for the ten (10) consecutive trading days ending on the date of the applicable conversion date, or the closing bid on the applicable conversion date. As of June 30, 2011, the conversion price was to be permanently fixed based on the calculation stated above with June 30, 2011 being the 10th day. The whole note was ratably converted on April 15, May 16, and June 22, 2011. The Company recognized $147,057 as interest expense related to these conversions. In addition, the Note was treated as derivative due to the variable nature of the conversion price for the period from April 15 through June 30. As a result, the Company also recognized a loss of $37,798 as a change in derivative liability as of June 30, 2011.
On July 19, 2011, the Company issued a Restated Convertible Promissory Note to an unrelated third-party with a principal amount of $168,442 which included a 7% closing discount in the amount of $11,020. This Note replaced and terminated a portion of a promissory note originally issued to a related third-party on September 21, 2010 for $150,000 plus accrued interest of $7,422. The Restated Note is convertible at the option of the holder into common stock at a variable conversion price of seventy percent (70%) multiplied by the lower of the arithmetic average of the volume-weighted average trading price (VWAP) of the Common Stock for the ten (10) consecutive trading days ending on the date of the applicable conversion date, or the closing bid on the applicable conversion date. As of September 30, 2011, the conversion price was to be permanently fixed based on the calculation stated above with September 30, 2011 being the 10th day. In addition, the Note was treated as derivative due to the variable nature of the conversion price for the period from July 19, 2011 through September 30, 2011. The derivative liability related to this conversion feature was calculated at $108,481. On August 12, 2011, $50,000 or 30% of the note was converted into common stock; the Company valued the contract again using the Black-Scholes option valuation model and recorded the difference between the value at July 19, 2011 of $108,481 and the value at August 12, 2011 of $115,167, as a loss on change in value of derivatives of $6,686. The Company also relieved $34,186 or 30% of the derivative value upon the 30% of the note conversion. On September 30, 2011, the Company re-valued the derivative with the assumptions used and calculated an increase in value of the derivative of $17,210. Per the contract, the note conversion price became fixed at September 30, 2011; therefore, the Company reclassified the entire remaining derivative value of $98,192 to equity on September 30, 2011. There is no derivative liability at March 31, 2012.
We did not designate any of the derivatives liabilities as hedging instruments.
The inputs used for the Black-Scholes option and warrant valuation model were as follows.
March 31, 2012 | March 31, 2011 | |||
(Unaudited) | (Unaudited) | |||
Expected life in years | 0 - 5 Years | 5 - 10 Years | ||
Stock price volatility | 144.34% - 148.34% | 147.89% | ||
Risk free interest rate | 0.35% - 0.35% | 3.36% | ||
Expected dividends | None | None | ||
Forfeiture rate | 0% | 0% |
F-52
NOTE 8 - NOTES PAYABLE
Notes payable consisted of the following.
March 31, | December 31, | |||||
2012 | 2011 | |||||
(Unaudited) | ||||||
Promissory notes payable due to the former officers of MMRGlobal as part of severance packages, due in full on August 31, 2009 with no stated interest |
$ | 76,783 | $ | 76,783 | ||
Promissory notes payable due to the two remaining officers of MMRGlobal pursuant to the Resignation and Post-Merger Employment Arrangement, due in full on August 31, 2009 with no stated interest |
25,444 | 25,444 | ||||
Promissory notes payable due to vendors relating to settlement of certain outstanding accounts payable, payable in 18 equal monthly installments commencing on July 27, 2009 and ending on January 27, 2011, with no stated interest |
223,116 | 223,116 | ||||
Short term loan due to a third-party, payable in full on July 3, 2012 with 12.5% interest | 235,000 | - | ||||
560,343 | 325,343 | |||||
Less: current portion | 560,343 | 325,343 | ||||
Notes payable, less current portion | $ | - | $ | - |
NOTE 9 - CONVERTIBLE PROMISSORY NOTES
From time to time we enter into Convertible Promissory Notes ("Note(s)"). As of March 31, 2012, a total of $872,708 in Notes remained outstanding and the investors had not chosen to convert their Note balances into shares of our common stock.
On February 17, 2012, we entered into a Convertible Promissory Note (the "Note") with one unrelated third-party for a principal amount totaling $35,000. Under the terms of the agreement, the principal amount owed under the Note became due and payable six months 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 Note had a stated interest rate of 12% per annum payable in cash or shares of common stock, or a combination of cash and shares of common stock, at the election of the Company. The Note was convertible at the option of the holder into common stock at a fixed conversion price ("Fixed Conversion Price") of seventy-five percent (75 %) multiplied by the arithmetic average of the volume-weighted average trading price of the common stock for the ten (10) consecutive trading days ending on the day that was three (3) trading days prior to the applicable investment date, subject to anti-dilution and other customary adjustments. In connection with the Note, the Company also issued a warrant to purchase an aggregate of 105,000 shares of common stock. The term of the warrant was one day and the exercise price was the product of fifty percent (50%) multiplied by the arithmetic average of the volume-weighted average trading price of the common stock for the ten (10) consecutive trading days ending on the day that was three (3) trading days prior to the applicable grant date, subject to anti-dilution and other customary adjustments.
We derived the fair value of the warrant issued with the Note(s) during the first quarter of 2012 using the Black-Scholes option valuation model, resulting in a fair value of $45,000. The $35,000 note proceed was allocated to the relative fair value of the note without the warrant and of the warrants itself on the investment date. The remainder of the proceeds is allocated to the note portion of the transaction, resulting in a discount. We then calculated the intrinsic value of the conversion feature on the investment date and allocated the portion of the proceeds equal to the intrinsic value of this feature of $12,712 to paid-in capital. The initial value ascribed to the Note of $32,288 is being accreted to their face value over the initial term of the Notes using the interest method. Upon conversion, the entire unamortized discount from the face value of the Note was recognized as interest expense due to the beneficial nature of the conversion feature.
The total interest expense attributed to the Notes and related warrants (see above) for the three months ended March 31, 2012 and 2011 was $65,256 and $305,862 respectively.
F-53
NOTE 10 - RESTRUCTURING ACTIVITIES
From May 29, 2008 to November 7, 2008, Favrille, Inc. had provided notices under the federal Worker Adjustment and Retraining Notification Act to 142 employees, including six members of senior management, that it planned to conduct a workforce reduction at its facility in San Diego, California and that their employment was expected to end on various dates between June 6, 2008 to November 7, 2008. Immediately prior to the date of the Merger on January 27, 2009, the total severance liability relating to former Favrille employees amounted to $1,682,416. On January 27, 2009, immediately prior to the Merger, as part of the 9,999,992 warrants issued to creditors (see Note 9), the Company issued warrants as settlement of $985,020 of these amounts. In addition, the Company signed promissory notes with certain former executives totaling $76,783, which notes are payable in full on August 31, 2009 (see Note 10).
As of March 31, 2012, the total remaining severance liabilities amounted to $620,613, which is reflected as severance liability on the accompanying consolidated balance sheets. This consists of $571,362 payable to former non-executive employees in 18 monthly installments starting on July 27, 2009, as well as $49,251 in estimated payroll tax. No payments were made during the three months ended March 31, 2012 on these severance liabilities.
During the period from January 27, 2009 through June 30, 2009, the Company entered into a series of settlement agreements with certain vendors of Favrille pursuant to the Creditor Plan, pursuant to which the Company settled $302,982 of its outstanding accounts payable for an aggregate settlement amount of $214,402, including promissory notes of $139,355 payable in 18 monthly installments starting on July 27, 2009 (see Note 8).
NOTE 11 - RELATED PARTY TRANSACTIONS
Our Chairman and Chief Executive Officer, Robert H. Lorsch, is also the Chief Executive Officer of The RHL Group, Inc. and has full voting power over all of the capital stock of The RHL Group, Inc. Mr. Lorsch directly, and indirectly through The RHL Group, Inc., beneficially owns approximately 17.3% our total outstanding voting stock. The RHL Group, Inc. has loaned us money pursuant to the Fifth Amended Note and any predecessor notes. See Note 3 - Related Party Note Payable above.
The RHL Group is an investment holding company which provides consulting, operational and technical services to the Company, which we refer to as the RHL Services. As part of the RHL Services, The RHL Group provides the Company with unrestricted access to its internal business and relationship contact database of more than 10,000 persons and entities, which includes clients of The RHL Group and other individuals which may hold value to the Company. The RHL Group also provides infrastructure support to the Company, including allowing the Company unlimited access to its facilities, equipment, and data, information management and server systems. In addition to allowing the Company the use of its office support personnel, The RHL Group has also consented to allow the Company to utilize the full-time services of Mr. Lorsch as the Company's President, Chairman and Chief Executive Officer, which requires substantial time and energy away from his required duties as The RHL Group's Chairman and Chief Executive Officer. In addition, The RHL Group has made its President, Kira Reed, available as the Company's spokesperson. Ms. Reed, who is Mr. Lorsch's spouse, also manages the Company's social networking activities.
In consideration for the above, The RHL Group, Inc. has a consulting arrangement with MMR. A copy of the consulting agreement is filed as an Exhibit in our current report on Form 8-K filed with the SEC on May 4, 2009 and is hereby incorporated by reference.
We incurred $12,500 during the three months ended March 31, 2012 and 2011, respectively, toward marketing consulting services from Bernard Stolar, a director. We included $140,945 and $122,695 in related party payables as of March 31, 2012 and December 31, 2011, respectively, in connection with these services.
We also incurred $12,500 during the three months ended March 31, 2012 and 2011, respectively, toward marketing consulting services from Hector Barreto, a former director and member of our Advisory Board. We included in related party payables as of March 31, 2012 and December 31, 2011 of $21,167 and $8,667, respectively, in connection with these services. In the first quarter of 2009, we entered into an agreement with The Latino Coalition, a non-profit organization in which Mr. Barreto is also the Chairman, to market our product to its members. On May 4, 2010, we granted to Latino Coalition 92,593 shares of common stock, valued at $24,908 in consideration for marketing services. We did not pay any amounts to the Latino Coalition in both 2012 and 2011. Mr. Barreto ceased to be a related party upon his departure from the Board of Directors on September 30, 2011.
MMR also had a consulting agreement, as amended, with The Rebensdorf Group, Inc., or TRGI, whose owner and Chief Executive Officer is our former director George Rebensdorf. Pursuant to the agreement, TRGI provided financial advisory services and assisted in negotiations in connection with our efforts to raise funds through private placement transactions. In addition to the initial retainer fee of $30,000 we paid upon execution of the original letter agreement, we agreed to pay TRGI (a) a $4,167 monthly retainer (commencing May 1, 2009), (b) for transactions with parties introduced by TRGI, a success fee equal to 8% of the value (payable 4% in cash, 4% in warrants), (c) for material assistance in closing transactions with parties not introduced by TRGI, an advisory fee equal to 2% of the value (payable in cash), and (d) an annual grant of 100,000 options, vesting monthly over two-years from the grant date, with an exercise price equal to fair market value on the grant date. Payment of the monthly retainer may be deferred, in which case it would be payable to TRGI pro rata upon payment of any other deferred management or consulting fees. The letter agreement, as amended, was terminated effective July 31, 2011.
F-54
We also incurred $0 and $12,500 during the three months ended March 31, 2012 and 2011, respectively, for finder's fees and consulting services from George Rebensdorf of The Rebensdorf Group and a former director. We included in related party payables as of March 31, 2012 and December 31, 2011 of $0, in connection with these services. Any Agreement for these services has been terminated.
We also have an agreement with our current director Jack Zwissig to provide individual executive coaching services to our management team on an as needed basis. Mr. Zwissig receives compensation in the form of stock as determined by our Board of Directors commensurate with the services performed. The agreement with Mr. Zwissig is on a month-to-month basis and continues until terminated by either party.
We also incurred $394 and $6,000 during the three months ended March 31, 2012 and 2011, respectively, for consulting services from Jack Zwissig, a director. We included in related party payables as of March 31, 2012 and December 31, 2011 of $46,278 and $41,885, respectively, in connection with these services.
We contract with a significant vendor for the development and maintenance of the software applications necessary to run our MyMedicalRecords PHR, MyEsafeDepositBox and MyMedicalRecords Pro products. Our outside developer supports our software development needs through a team of software engineers, programmers, quality control personnel and testers, who work with our internal product development team on all aspects of application development, design, integration and support of our products. This vendor is also a stockholder. For the three months ended March 31, 2012 and 2011, the total expenses relating to this stockholder amounted to $126,117 and $103,257, respectively. In addition, we capitalized $36,346 of software development costs for the three months ended March 31, 2012. As of March 31, 2012 and December 31, 2011, the total amounts due to the stockholder and included in related party payables amounted to $432,429 and $306,312, respectively.
On September 15, 2009, we entered into a five year agreement with E-Mail Frequency, LLC and David Loftus, Managing Partner of E-Mail Frequency, LLC, a significant stockholder of the Company. We licensed an existing 80 million person direct-marketing database of street addresses, cellular phone numbers, e-mail addresses and other comprehensive data with E-Mail Frequency. The agreement allows us to market, through the use of the Database, our MyMedicalRecords Personal Health Record, MyEsafeDepositBox virtual vault, and MMRPro document management system to physicians and their patients. Under the terms of the Agreement, we paid $250,000 to David Loftus as a one-time consulting fee in the form of 2,777,778 shares of our common stock. We recorded the $250,000 one-time licensee fee as a prepaid consulting fee and included in the prepaid expenses and other current assets as of December 31, 2009, less amortization of $12,500 included in operating expensed for the year ended December 31, 2009. Amortization expense for the three months ended March 31, 2012 and 2011 was $12,500 each. In addition, we incurred a total of $6,939 and $1,997 during the three months ended March 31, 2012 and 2011, toward business development services from E-Mail Frequency and Mr. Loftus. We included in related party payables at March 31, 2012 and December 31, 2011 of $28,626 and $21,687, respectively, in respect to these services. Furthermore, Mr. Loftus is a value-added-reseller of MMRPro systems. During 2011, we recognized $140,000 in revenue from E-Mail Frequency for the development and integration of our MyMedicalRecords.com product with their customer's website.
F-55
NOTE 12 - SUBSEQUENT EVENTS
On April 5, 2012, we learned of an inadvertent omission, due to a formatting error, of the Item 9A information required in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, timely filed with the Securities and Exchange Commission ("SEC") on March 30, 2012 (the "10-K"). Due to the omission, an "E" symbol was placed on our ticker symbol by the OTC Bulletin Board (the "OTCBB"). In addition, the OTCBB informed us in a letter dated April 5, 2012, which we received on April 9, 2012, that we had 30 days to correct the omission. On April 6, 2012, we amended the Form 10-K to include the omitted information, placing us back in compliance with all periodic reporting requirements of the SEC. After extensive discussions with the OTCBB and representatives of the SEC, we were informed by the OTCBB that the Amendment properly corrected the omission, we were in compliance with respect to our periodic reporting requirements and the "E" symbol was removed from the Company's ticker symbol, effective at the open of markets on April 12, 2011.
Investment Agreement
On April 16, 2012, we entered into a Continuous Investment Agreement (the "Investment Agreement") with Granite State Capital, LLC (the "Investor"). Pursuant to the Investment Agreement, the Investor committed to purchase up to $15,000,000 of our common stock (the "Common Stock"), over the course of thirty-six months (the "Facility"). We may draw on the Facility from time to time, as and when we determine appropriate, by providing the Investor a draw notice in accordance with the terms and conditions of the Investment Agreement (a "Draw Notice"). A maximum of 100 million shares may be issued under the Facility, at per share prices set at ninety-five percent (95%) of the lowest daily volume weighted average price of our common stock during the five (5) consecutive trading day period beginning on the trading day immediately following the date of delivery of the applicable draw notice (such five-day period, the "Pricing Period").
We may draw in any Draw Notice an amount up to either (i) two hundred percent (200%) of the average daily volume (U.S. market only) of the Common Stock for the three (3) trading days prior to the applicable Draw Notice, multiplied by the average of the three (3) daily closing prices immediately preceding the date of the Draw Notice or (ii) five hundred thousand dollars ($500,000) (each a "Draw"). The purchase price shall be set at ninety-five percent (95%) of the lowest daily volume weighted average price of our common stock during the Pricing Period. However, we have the option to specify a floor ("Suspension Price") for each Draw Notice. If, on any trading day during a Pricing Period, the price of the Common Stock falls below the Suspension Price specified by us in the applicable Draw Notice, the Draw shall be temporarily suspended and shall resume at such time as the Common Stock is above the Suspension Price, provided the Pricing Period is still valid. Any shares above the Suspension Price will be settled at the Suspension Price (with no discount). We shall not be entitled to deliver a new Draw Notice to the Investor until the prior Pricing Period has closed.
The Investor will not be obligated to purchase shares if the Investor's total number of shares beneficially held would exceed 4.99% of the number of shares of the Company's common stock as determined in accordance with Rule 13d-1 of the Securities Exchange Act of 1934, as amended. In addition, we are not permitted to draw on the facility unless there is an effective registration statement (as further explained below) to cover the resale of the shares.
The Investment Agreement further provides that the Investor and the Company are each entitled to indemnification from the other for any losses or liabilities suffered as a result of any breach by the other of any provisions of the Investment Agreement or Registration Rights Agreement (as defined below), as well as certain other potential losses and liabilities customarily included in similar types of agreements.
The Investment Agreement also contains representations and warranties of each of the Company and the Investor. The assertions embodied in those representations and warranties were made for purposes of the Investment Agreement and are subject to qualifications and limitations agreed to by the respective parties in connection with negotiating the terms of the Investment Agreement. In addition, certain representations and warranties were made as of a specific date, may be subject to a contractual standard of materiality different from what a stockholder or investor might view as material, or may have been used for purposes of allocating risk between the respective parties rather than establishing matters as facts. Investors should read the Investment Agreement together with the other information concerning the Company that the Company publicly files in reports and statements with the Securities and Exchange Commission (the "SEC").
Registration Rights Agreement
Pursuant to the terms of a Registration Rights Agreement ("Registration Rights Agreement") dated April 16, 2012, between the Company and the Investor, we are obligated to file one or more registration statements with the SEC to register the resale by the Investor of shares of common stock issued or issuable under the Investment Agreement. In addition, we are obligated to use all commercially reasonable efforts to have the initial registration statement declared effective by the SEC within ninety (90) days after the closing date. The registration statement was filed with the SEC on May 8, 2012 and we are awaiting approval by the SEC.
The foregoing description of each of the Investment Agreement and the Registration Rights Agreement is qualified in its entirety by reference to the full text of the Investment Agreement and the Registration Rights Agreement, which were filed with the SEC on April 18, 2012 as Exhibits 10.1 and 10.2, respectively, on Form 8-K and incorporated herein by reference.
F-56
Unis JV Application Approval
On April 20, 2012 we were notified that the Administration of Industry and Commerce ("AIC") approved our application for the establishment of the Unis Tonghe MMR International Health Management Service Co., Ltd. Joint Venture and we are planning on filing the application for the registration of the Unis JV by May 18, 2012.
F-57
100,000,000 SHARES
COMMON STOCK PROSPECTUS Through and including June 25, 2012 (the 25th day after the date of this prospectus), all
dealers effecting transaction in these securities, whether or not
participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments or subscriptions.