Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
¨
Yes
x
No
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act.
¨
Yes
x
No
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
¨
Yes
x
No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that
the registrant was required to submit and post such files).
¨
Yes
x
No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
x
Yes
¨
No
Indicate by check mark whether the Registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definitions of “large accelerated
filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Exchange Act).
o
Yes
x
No
The aggregate market value of voting and non-voting common stock
held by non-affiliates of the registrant, based upon the closing bid quotation for the registrant’s common stock, as reported
on the OTC Bulletin Board quotation service, as of December 31, 2010, the last business day of the registrant’s most recently
completed second fiscal quarter, was approximately $2,612,219.
The number of shares of registrant’s common stock outstanding
as of June 30, 2011 was 373,174,121.
As of August 15, 2013, the
registrant had 1,357,450,073 shares of common stock issued and outstanding, respectively.
Part I
Special Note Regarding Forward-Looking
Statements
On one or more occasions, we may make forward-looking statements
in this Annual Report on Form 10-K regarding our assumptions, projections, expectations, targets, intentions or beliefs about future
events. Words or phrases such as “anticipates,” “may,” “will,” “should,”
“believes,” “estimates,” “expects,” “intends,” “plans,” “predicts,”
“projects,” “targets,” “will likely result,” “will continue” or similar expressions
identify forward-looking statements. These forward-looking statements are only our predictions and involve numerous
assumptions, risks and uncertainties, including, but not limited to those listed below and those business risks and factors described
elsewhere in this report and our other Securities and Exchange Commission filings.
We undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future events or otherwise. However, your attention is directed
to any further disclosures made on related subjects in our subsequent annual and periodic reports filed with the Securities and
Exchange Commission on Forms 10-K, 10-Q and 8-K and Proxy Statements on Schedule 14A.
References herein to “we,” “us,” “our”
or “the Company” refer to Medical Alarm Concepts Holding, Inc. and its subsidiaries.
ITEM 1. Business
General
Medical Alarm Concepts Holding, Inc. (the “Company”
or “Medical Alarm”) was formed in June 2008 and, on June 24, 2008, we acquired 100% of the membership interests in
Medical Alarm Concepts, LLC, a Delaware limited liability corporation.
The Company's product is called the MediPendant®, which
is a medical alarm, often referred to in the industry as a Personal Emergency Response System (PERS). Such systems are most often
purchased by middle-age adults for their aging parents. While it is primarily a device for older people, there is also a market
for those who are physically disabled, as well as anyone living alone. The MediPendant® device has significant feature and
function advantages over other personal medical alarms in the marketplace today. Approximately 80% of all medical alarms currently
being sold in the United States are first-generation technologies that require the user to speak and listen through a central base
station unit. If the user of one of these older generation products is not within speaking or listening distance to the base station,
the operator in the centralized emergency monitoring center might not hear the user.
The MediPendant® enables the wearer to simply speak and
listen directly through the pendant in the event of an emergency. The MediPendant® is designed to be worn in the bath or shower
and offers a 600-foot range so that the wearer can operate the unit from virtually anywhere within their home or on their property.
The product is extremely durable, very reliable and offers an extremely long battery life.
The company's business model focuses on both sales of the
MediPendant® and on the production of revenue via monthly charges paid by the customer for monitoring services.
Market Background
Living arrangements have changed greatly in the United States
among older people and other potentially vulnerable segments of the population, including those with physical disabilities and/or
medical conditions. During the 20th century, one of the most dramatic changes in the lives of the aging in the United States, was
the rise of the number of elderly widows and widowers living at home alone. In 1910, for example, only 12% of widows age 65 or
older lived alone. In 1970, this figure was 70% and today it is estimated to be impressively higher.
In the 21st century, this trend has gained momentum and become
stronger than ever, with more of the elderly and medically at risk population living alone at present than at any other time in
the past, especially with the rise of the aging Baby Boomer population. The Baby Boomers, those born between 1946 and 1964, started
turning 65 years old in 2011, with the number of older people set to increase dramatically during the 2010 to 2030 time period.
According to a 2009 analysis of U.S. Current Population Survey data, “between 2010 and 2030, the number of people age 65
and older is projected to grow by 31.7 million or 79.2%.” Thus, the older population in 2030 is projected to be twice as
large as in 2000, growing from 35 million to 71.5 million, representing nearly 20% of the total U.S. population around the year
2030.
This social dynamic of a rising older population is true in
both the United States as well as in many developed nations worldwide. Likewise, social change, technological advancements, and
general lifestyle choices have promoted increased independence and the ability to live alone among other potentially vulnerable
segments of the population such as those with physical disabilities or medical conditions. These groups can be especially susceptible
to heath problems and concerns for their physical well being. Experts and even common sense agree that in order to help facilitate
independence and safety, more help is needed to provide aging people and the medically at risk living alone, with a point of contact
in case of emergency, or the benefit of support in a time of need. It was in response to this situation that the personal emergency
response systems (“PERS”) industry emerged in the United States and developed the first personal medical alarm. The
most obvious and common use for personal medical alarms is as a safeguard for the elderly and persons with certain medical conditions,
in case of an age or health related incident that requires immediate attention, but in which the victim is unable to reach out
for assistance via traditional means, including the ability to make a telephone call.
Effective personal emergency response systems with their emergency
alert capabilities, are a key technology solution that can greatly help the vulnerable segment of the population live a more free
and active life while maintaining the security of being able to access immediate assistance as needed. In fact, there has been
a boom in the PERS market in recent years because of the growing aging population worldwide. According to Forrester Research, Inc.,
the PERS market in the United States was estimated to grow at double digit rates, from approximately $350 million in 2004 to $2
billion in 2012.
Today, however, while the PERS industry has been around for
a long time, much of the technology within the industry has unfortunately remained stagnant. Many of the original PERS solutions
are still designed today to provide alerts whereby a push of a button simply triggers a call center operator to respond by calling
the device user at home, with two-way voice communication done through a centralized speaker box and not the actual device itself.
Thus, traditional PERS solutions currently on the market offer communication between user and a call center only through a speaker
box. This greatly inhibits the user’s freedom and limits their mobility to an area near the speaker box.
Medical Alarm Concepts™ has built upon traditional PERS
technology to develop a revolutionary patented solution for direct two-way voice communication through its MediPendant® alarm
device. In particular, the Company’s wearable alarm pendant enables users to manage the spontaneity of an emergency by responding
anytime, anywhere through a two-way voice speakerphone pendant that connects to a monitored call center for direct communication,
leaving users free to move in and around their home within an extended mobility range that exceeds that of other personal alarm
offerings. Additionally, MediPendant®’s advanced technology allows for three-way calling between the operator, the user
and the dispatched first responders and/or a friend and family member. No other available PERS system on the marketplace today
offers the benefit of three-way voice conferencing directly through the pendant.
These attributes of the MediPendant® mark an important distinction
relative to the competition and make the Company’s solution unique in the industry and highly desirable to end users who
want to be able to move more broadly about their living quarters with increased freedom and comfort.
Market Opportunity
The healthcare industry is the largest industry in the world,
with the home healthcare market in developed countries in particular growing rapidly, driven in part by aging baby boomers and
a growing shift toward moving some types of healthcare away from the hospital and into the home.
These trends help make the home healthcare sector an increasingly
attractive market for successful companies that offer effective solutions in the PERS industry space.
The most obvious and common use for personal medical alarms
is as a safeguard for the elderly and persons with certain medical conditions, in case of an age or health related incident that
requires immediate attention, but in which the victim is unable to reach out for assistance via traditional means, including the
placement of a telephone call. While very few things can prevent falls by elderly persons or other unforeseen medical emergencies,
medical alarms mitigate the potential harm done by initiating a timely response to such an incident.
In fact, there has been a boom in the PERS market in recent
years because of the growing aging population worldwide and in the United States in particular. According to the U.S. Census Bureau,
the number of people over 65 in the United States is set to jump from approximately 34 million today to approximately 74 million
in 2025. By 2050, this number is projected to reach 86.7 million, with many of them living at home or in an alternative home-type
environment. Worldwide, this figure number is expected to double from some 550 million people currently at age 65 years old to
over 1.2 billion seniors by the time period around the year 2025.
Not surprisingly, experts in the health care industry expect
many of these seniors will want to continue living independently at home for as long as possible. Likewise, more than any elderly
generation of the past, this population is expected to be more technology-savvy as consumers of healthcare are very interested
in playing an active role in personally managing their health and well-being. Importantly, they will likely look to technologies
that help them gain access to medical care while being able to remain independent and outside a hospital environment.
Effective personal emergency response systems (PERS), with their
emergency alert capabilities, are a key technology solution that can greatly help the vulnerable segment of the population live
a more free and active life while maintaining the security of being able to access immediate assistance as needed. According to
Forrester Research, Inc., the PERS market in the United States was estimated to grow at double digit rates, from approximately
$350 million in 2004 to $2 billion in 2012.
According to statistics from some of the industry’s largest
providers of traditional PERS solutions, customers of these emergency alert systems are typically individuals over the age of 75
years old who are predominantly female and live alone, with the actual buyers of PERS systems often being the end user’s
children who purchase the medical alarms for their parents.
Regarding purchases of PERS
solutions worldwide, the large majority of customers currently pay for their PERS products out-of-pocket, with government reimbursement
for PERS items varying from country to country. In the United States, for example, 25% of PERS sales were government reimbursed
in 2004, compared to 35% in Germany, just over 50% in France and nearly 100% in the United Kingdom. Furthermore, it is estimated
government reimbursement for PERS will ramp up in a number of countries, further fuelling demand for these products after the year
2010.
Interestingly, as an approximation
of the potential PERS market size in the United States, Lifeline Systems, Inc., the founder of the PERS industry in the U.S. almost
20 years ago, served 250,000 users in the United States and Canada around the time frame of 1992. Today, Philips Medical Systems’
recent acquisition of Lifeline Medical Alarm has positioned it as the largest provider of traditional PERS systems with over 700,000
monitored accounts, implying that the total market size of users is likely much larger.
Sales and Marketing
The company’s marketing efforts are focused in four main
areas, 1) online marketing, 2) retail distribution, 3) wholesale distribution and 4) international markets.
Online Marketing - the Company markets the MediPendant®
through its website at www.MediPendant.com. Due to the complex sales process for medical alarms, which often require several phone
calls among the end user customer’s family members before a decision is reached, the MediPendant
®
website is mainly for informational purposes with the actual sale typically taking place over the phone with one of our customer
service representatives. The company uses a variety of techniques, such as Internet paid ad campaigns and social media, in order
to drive web traffic to the website.
Retail Distribution - During December of 2012, the company announced
its plans to promote the MediPendant® product utilizing an e-commerce marketing strategy program designed specifically for
Costco Wholesale Corporation and its members. Costco began offering the MediPendant® to its customers via its website during
the spring of 2012. Since that time, sales have met the company's expectations and several special marketing programs, including
email, postal mail and in-store print distribution campaigns have been instituted in conjunction with this retailing partner. The
company is currently in discussions with several other retail organizations for distribution of the MediPendant® product.
Wholesale Distribution - The Company currently has several relationships
with wholesalers who resell the MediPendant® product in conjunction with their own monitoring services. The company believes
its relationships with these strategic partners is good. The company is currently in discussions with several other wholesale distributors
looking to sell the MediPendant
®
through their own independent
channels.
International Markets – The Company also distributes its
products in a wholesale manner to selected international markets. To date, the company has signed marketing relationships with
partners in Denmark and Ireland, and is in the process of researching various avenues to distribute product in the People's Republic
of China
Competition
The market for Personal Emergency Response Systems (PERS) is
highly fragmented. Because the vast majority of the market participants are private corporations, only limited information about
competitors is available.
The vast majority of competitors market first generation PERS
systems that rely on a centralized base station for communication between the user and the monitoring center. The second largest
of these market participants is believed to be Life Alert, which was founded in 1987. The largest participant is thought to be
Philips Medical Systems, which several years ago purchased Lifeline Medical Alarms. Additionally, there are dozens of smaller organizations
marketing PERS devices and monitoring services.
There is also a growing trend in the industry toward the sale
of non-monitored PERS devices. Such products, upon activation by the user, connect the user NOT to a centralized private monitoring
function, but to either an E-911 operator or to a family member or other person. These non-monitored PERS devices are typically
for the consumer to purchase as a one-time purchase and do not require the payment of monthly monitoring fees.
ITEM 1
A.
Risk
Factors
We operate in a market environment that is difficult to predict
and involves significant risks and uncertainties, many of which are beyond our control. The following risk factors and other information
included in this annual report should be carefully considered. The risks and uncertainties described below are not the only ones
we face. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair our
business operations. If any of the following risks occur, our business, financial condition, operating results, and cash flows
could be materially adversely affected.
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(1)
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Risks Related to Our Business
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The report of the independent registered public accounting
firm on our 2011 and 2010 financial statements contains a going concern qualification.
The report of the independent registered public accounting firm
covering our financial statements for the years ended June 30, 2011 and 2010 stated that certain factors, including that we have
a working capital and shareholder deficit, raise substantial doubt as to our ability to continue as a going concern. Because
our revenue production history is limited, we are dependent upon raising capital to continue our business. If we are
unable to raise capital, we may not be able to continue as a going concern.
Weakness in the economy has adversely affected and may continue
to adversely affect our customers, which has resulted and may continue to result in decreased usage and advertising levels, customer
acquisitions and customer retention rates and, in turn, could lead to a decrease in our revenues or rate of revenue growth.
Certain segments of our customers have been and may continue
to be adversely affected by the current weakness in the general economy. To the extent these customers have been adversely affected
by the economic downturn and their usage of our services and/or our customer retention rates could fluctuate. This may result in
decreased recurring revenues, which may adversely impact our revenues and profitability.
Our level of indebtedness could adversely affect our financial
flexibility and our competitive position.
Our total indebtedness as of June 30, 2011 was $3,403,524. Our
level of indebtedness could have significant effects on our business. For example, it could:
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·
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Make it more difficult for us to satisfy our obligations with respect to current notes outstanding and any other indebtedness
we may occur in the future;
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·
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increase our vulnerability to adverse changes in general economic, industry and competitive conditions;
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require us to dedicate a substantial portion of our cash flow to make payments on our indebtedness, thereby reducing the availability
of our cash flow to fund working capital;
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limit our flexibility in planning for, or reacting to, changes in our business and industry in which we compete;
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restrict us from exploiting good business opportunities;
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make it more difficult to satisfy our financial obligations;
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place us at a competitive disadvantage compared to our competitors that have less indebtedness; and
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limit our ability to borrow additional funds for working capital, capital expenditures, acquisitions, debt service requirements,
execution of our business strategy or other general corporate purposes.
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To service our debt and fund our other capital requirements,
including the acquisition of inventory, we will require a significant amount of cash, and our ability to generate cash will depend
on many factors beyond our control.
Our ability to meet our debt service obligations and to fund
working capital, capital expenditures, acquisitions and other elements of our business strategy and other general corporate purposes,
will depend upon our future performance, which will be subject to financial, business and other factors affecting our operations,
many of which are beyond our control. To some extent, this is subject to general and regional economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. We cannot ensure that we will generate cash flow from operations,
or that future borrowings will be available, in an amount sufficient to enable us to pay our debt, or to fund our other liquidity
needs.
If our cash flows and capital resources are insufficient to
fund our debt service obligations, we could face substantial liquidity problems and could be forced to reduce or delay investments
and capital expenditures or to dispose of material assets or operations, seek additional indebtedness or equity capital or restructure
or refinance our indebtedness. We may not be able to affect any such alternative measures on commercially reasonable terms or at
all and, even if successful, those alternative actions may not allow us to meet our obligations.
Our inability to generate sufficient cash flows to satisfy our
obligations, or to refinance our indebtedness on commercially reasonable terms, or at all, would materially and adversely affect
our financial position and results of operations and our ability to satisfy our debt obligations.
Our growth will depend on our ability to develop our brand,
market our current MediPendant® product brands, and launch new products in the future, and these efforts may be costly.
We believe that continuing to strengthen our current brand and
effectively launch a new version of the MediPendant® will be critical to achieving widespread acceptance of our services, and
will require continued focus on active marketing efforts. The demand for and cost of online and traditional advertising have been
increasing and may continue to increase. Accordingly, we may need to spend increasing amounts of money on, and devote greater resources
to, advertising, marketing and other efforts to create and maintain loyalty among users. Product promotion activities may not yield
increased revenues, and even if they do, any increased revenues may not offset the expenses incurred in building our brands. If
we fail to promote and maintain our brands, or if we incur substantial expense in an unsuccessful attempt to promote and maintain
our brands, our business could be harmed.
If the security of our customers’ confidential information
is breached or otherwise subjected to unauthorized access, our reputation may be harmed, we may be exposed to liability and we
may lose the ability to offer our customers a credit card payment option.
We have agreements with third-parties related to certain functions
of our business operation. These third-parties must protect our customers’ confidential information including credit card
information where applicable. Any accidental or willful security breaches or other unauthorized access could expose
us to liability for the loss of such information, time-consuming and expensive litigation and other possible liabilities as well
as negative publicity. If security measures are breached because of third-party employee error or malfeasance, or if
design flaws in its software are exposed and exploited, and, as a result, a hacker obtains unauthorized access to any of our customers’
data, our relationships with our customers will be severely damaged, and we could incur significant liability. Because
techniques used to obtain unauthorized access or to sabotage systems change frequently and generally are not recognized until they
are launched against a target, our third-party support company may be unable to anticipate these techniques or to implement adequate
preventative measures. In addition, nearly every state has enacted laws requiring companies to notify individuals of
data security breaches involving their personal data. These mandatory disclosures regarding a security breach often
lead to widespread negative publicity, which may cause our customers to lose confidence in the effectiveness of our data security
measures. Any security breach, whether actual or perceived, would harm our reputation, and we could lose customers.
We rely heavily on the revenue generated for monitoring services
and this dependence is expected to continue.
A substantial portion of our revenues are generated via monthly
monitoring services. This segment's success is therefore dependent on our ability to maintain a robust group of customers willing
to pay for such services and is further dependent on our ability to procure contract monitoring center services at a price that
will allow us to produce positive gross margins. If the demand for monitoring services decreases, and we are unable to replace
lost revenues from decreasing usage or cancellation of monitoring services, our results and cash flow could be materially and adversely
affected.
A system failure or security breach could delay or interrupt
service to our customers or harm our reputation or subject us to significant liability.
Our operations are dependent on third-party monitoring centers
being free from interruption by damage from fire, earthquake, power loss, telecommunications failure, unauthorized entry, computer
viruses, cyber attacks or other events beyond our control. There can be no assurance that our existing and planned precautions
will be adequate to prevent significant damage, system failure or loss of customers. Despite the implementation of security measures
by our 3rd party vendors, our infrastructure may be vulnerable to system failures, computer viruses, cyber attacks, or other issues
beyond our control. Currently a significant number of our customers authorize us to build their credit or debit cards directly
for the purchase of MediPendant® and monthly monitoring services. Any system failure or security breaches that causes interruption
to our ability to utilize credit or debit card systems, could adversely affect our results and our financial condition. Any of
these events could have a material adverse effect on our business, prospects, financial condition, operating results and cash flows.
Our services are dependent on a small number of monitoring
centers and our inability to maintain agreements at attractive rates with such monitoring centers may negatively impact our business.
Our services substantially depend on the capacity, affordability,
reliability and security of the monitoring centers in which we contract for services. There are a limited number of such monitoring
centers. Any or all of our current monitoring centers could discontinue providing us with services at rates acceptable to us, or
at all, and we may not be able to obtain adequate replacement, which would materially and adversely affect our business, prospects,
financial condition, operating results and cash flows.
The successful operation of our business depends on the supply
of critical elements and marketing relationships from other companies.
We depend on 3rd parties for several critical elements of our
business including equipment procurement, infrastructure, customer service, and selected marketing components. We rely on 3rd party
providers for our Internet and other connections. Any disruption in the services provided by any of these suppliers, or any failure
by them to handle current or higher volumes of activity could have a material adverse effect on our business, prospects, financial
condition, operating results and cash flows. To obtain customers, we rely on operators of leading search engines and websites.
Failure to continue these relationships on terms that are acceptable to us or to continue to create additional relationships could
have a material adverse effect on our business, prospects, financial condition, operating results and cash flows.
Inadequate intellectual property protections could prevent
us from enforcing or defending our proprietary technology and could be costly.
Our success depends in part upon our proprietary technology.
We rely on a combination of patents, trademarks, trade secrets, and copyrights to protect our proprietary technology. However,
these measures provide only limited protection, and we may not be able to detect unauthorized use or take appropriate steps to
enforce our intellectual property rights. We have licensed patents and there can be no assurance that any of these patents will
not be challenged, invalidated or circumvented, or that any rights granted under these patents will in fact provide competitive
advantages to us.
In addition, effective protection of patents, copyrights, trademarks,
trade secrets and other intellectual property may be unavailable or limited in some foreign countries. As a result, we may not
be able to effectively prevent competitors in these regions from infringing our intellectual property rights, which could reduce
our competitive advantage and ability to compete in those regions and negatively impact our business.
Companies in our segments have experienced litigation regarding
intellectual property. Litigation to enforce or defend our intellectual property rights may be expensive and time-consuming,
could divert management resources and may not be adequate to protect our business. We may be found to have infringed the intellectual
property rights of others, which could expose us to substantial damages or restrict our operations.
We may be subject to claims and legal proceedings that we have
infringed the intellectual property rights of others. The ready availability of damages and royalties and the potential for injunctive
relief has increased the costs associated with litigation and settlement of patent infringement claims. In addition, we may be
required to indemnify our resellers and users for similar claims made against them. Any claims against us, whether or not meritorious,
could require us to spend significant time and money in litigation, pay damages, develop new intellectual property or acquire licenses
to intellectual property that is the subject of the infringement claims. These licenses, if required, may not be available at all
or have acceptable terms. As a result, intellectual property claims against us could have a material adverse effect on our business,
prospects, financial condition, operating results and cash flows.
We may be engaged in legal proceedings that could cause us
to incur unforeseen expenses and could occupy a significant amount of our management's time and attention.
From time to time we may be subject to litigation or claims,
including in the areas of patent infringement that could negatively affect our business operations and financial condition. Such
disputes could cause us to incur unforeseen expenses, occupy a significant amount of our management's time and attention and negatively
affect our business operations and financial condition.
The markets in which we operate are highly competitive and
our competitors may have greater resources to commit to growth, superior technologies, cheaper pricing or more effective marketing
strategies.
For information regarding our competition, see the section entitled
Competition contained in this Annual Report on Form 10-K. In addition, some of our competitors include major companies with much
greater resources and significantly larger subscriber bases than we have. Some of these competitors may offer their services at
lower prices than we do. These companies may be able to develop and expand their network infrastructures and capabilities more
quickly, adapt more swiftly to new or emerging technologies and changes in customer requirements, take advantage of acquisition
and other opportunities more readily and devote greater resources to the marketing and sale of their products and services than
we can. There can be no assurance that additional competitors will not enter markets that we are currently serving and plan to
serve or that we will be able to compete effectively. Competitive pressures may reduce our revenue, operating profits or both.
If our competitors are more successful than we are in developing and deploying compelling products or in attracting and retaining
users, our revenue and growth rates could decline.
If we cannot manage our growth effectively and expand our
technology, we may not become profitable.
Businesses which grow rapidly often have difficulty managing
their growth. If Medical Alarm Concepts is successful, we may incur rapid and substantial growth. Because of this rapid growth,
we will need to expand our technology, add management by recruiting and employing experienced executives and key employees capable
of providing the necessary support. We cannot assure you that our management will be able to manage our growth effectively
or successfully and expand our technology and capacity as needed. Our failure to meet these challenges could cause us to lose money.
Our business is highly dependent on our billing systems.
A significant part of our revenues depends on prompt and accurate
billing processes. Customer billing is a highly complex process, and our billing systems must efficiently interface with third-party
systems, such as those of credit card processing companies. Our ability to accurately and efficiently bill our customers is dependent
on the successful operation of our billing systems and the third-party systems upon which we rely, such as our credit card processor,
and our ability to provide these third parties the information required to process transactions. Any failures or errors in our
billing systems or procedures could impair our ability to properly bill our current customers or attract and service new customers,
and thereby could materially and adversely affect our business and financial results.
Future acquisitions could result in dilution, operating difficulties
and other harmful consequences, and may require us to incur additional indebtedness.
We may acquire or invest in additional businesses, products,
services and technologies that complement or augment our service offerings and customer base. We cannot assure that we will successfully
identify suitable acquisition candidates, integrate or manage disparate technologies, lines of business, personnel and corporate
cultures, realize our business strategy or the expected return on our investment, or manage a geographically dispersed company.
Acquisitions could divert attention from management and from other business concerns and could expose us to unforeseen liabilities
or unfavorable accounting treatment. In addition, we may lose key employees while integrating any new companies, and we may have
difficulties entering new markets where we have no or limited prior experience.
We may pay for some acquisitions by issuing additional common
stock, which would dilute current stockholders, or incur debt, which may cause us to incur additional interest expense, leverage
and debt service requirements. We may also use cash to make acquisitions, which may limit our availability of cash for other uses,
such as interest payments, stock repurchases or dividends. We will be required to review goodwill and other intangible assets for
impairment in connection with past and future acquisitions, which may materially increase operating expenses if an impairment issue
is identified.
Our success depends on our retention of our executive officers,
senior management and our ability to hire and retain key personnel.
Our success depends on the skills,
experience and performance of executive officers, senior management and other key personnel. The loss of the services of one or
more of our executive officers, senior managers or other key employees could have a material adverse effect on our business, prospects,
financial condition, operating results and cash flows. Our future success also depends on
our continuing ability to attract, integrate and retain highly qualified technical, sales and managerial personnel. Competition
for these people is intense, and there can be no assurance that we can retain our key employees or that we can attract, assimilate
or retain other highly qualified technical, sales and managerial personnel in the future.
We are exposed to risk if we cannot maintain or adhere to
our internal controls and procedures.
We have established and continue to maintain, assess and update
our internal controls and procedures regarding our business operations and financial reporting. Our internal controls and procedures
are designed to provide reasonable assurances regarding our business operations and financial reporting. However, because
of the inherent limitations in this process, internal controls and procedures may not prevent or detect all errors as or misstatements.
To the extent our internal controls are inadequate or not adhered to by our employees, our business, financial condition and operating
results could be materially adversely affected.
If we are not able to maintain internal controls and procedures
in a timely manner, or without adequate compliance, we may be unable to accurately report our financial results or prevent fraud
and may be subject to sanctions or investigations by regulatory authorities such as the SEC. Any such action or restatement of
prior-period financial results could harm our business or investors' confidence in the company, and could cause our stock price
to fall.
We may be subject to legal liability associated with providing
monitoring services.
We host and provide a variety of services and technology products
in support of our MediPendant® product. As a result, we may be subject to certain associated liabilities. Defense of any such
actions could be costly and involve significant time and attention of our management and other resources, may result in monetary
liabilities or penalties, and may require us to change our business in an adverse manner.
(2) Risks Related to our Industry
The industry in which we operate is undergoing rapid technological
changes and we may not be able to keep up.
The industry in which we operate is subject to rapid and significant
technological change. We cannot predict the effect of technological changes on our business. We expect that new services and technologies
will emerge in the markets in which we compete. These new services and technologies may be superior to the services and technologies
that we use or these new services may render our services and technologies obsolete. Our future success will depend, in part, on
our ability to anticipate and adapt to technological changes and evolving industry standards. We may be unable to obtain access
to new technologies on acceptable terms or at all, and may therefore be unable to offer services in a competitive manner. Any of
the foregoing risks could have a material adverse effect on our business, prospects, financial condition, operating results and
cash flows.
We are subject to a variety of new and existing laws and
regulations, which could subject us to claims, judgments, monetary liabilities and other remedies, and to limitations on our business
practices.
The application of existing domestic and international laws
and regulations to us relating to issues such as user privacy and data protection, security, defamation, pricing, advertising,
taxation, promotions, billing, consumer protection, accessibility, and intellectual property ownership and infringement in many
instances is unclear or unsettled. In addition, we will also be subject to any new laws and regulations directly applicable to
our domestic and international activities. Internationally, we may also be subject to laws regulating our activities in foreign
countries and to foreign laws and regulations that are inconsistent from country to country. We may incur substantial liabilities
for expenses necessary to defend such litigation or to comply with these laws and regulations, as well as potential substantial
penalties for any failure to comply. Compliance with these laws and regulations may also cause us to change or limit our business
practices in a manner adverse to our business.
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(3)
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Risk Related to Our Common Stock
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Our stock price may be volatile or may decline.
Our stock price and trading volumes have been volatile and we
expect that this volatility will continue in the future due to factors, such as:
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Assessments of the size of our subscriber base and our average revenue per subscriber, and comparisons of our results areas versus prior performance and that of our competitors;
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Variations between our actual results and investor expectations;
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Regulatory or competitive developments affecting our markets;
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Investor perceptions of us and comparable public companies;
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Conditions and trends in the communications, messaging and Internet-related industries;
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Announcements of technological innovations and acquisitions;
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Introduction of new services by us or our competitors;
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Developments with respect to intellectual property rights;
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Conditions and trends in the Internet and other technology industries;
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Rumors, gossip or speculation published on public chat or bulletin boards;
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General market conditions; and
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Geopolitical events such as war, threat of war or terrorist actions.
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In addition, the stock market has from time to time experienced
significant price and volume fluctuations that have affected the market prices for the common stocks of technology and other companies,
particularly communications and Internet companies. These broad market fluctuations have previously resulted in a material decline
in the market price of our common stock. In the past, following periods of volatility in the market price of a particular company's
securities, securities class action litigation has often been brought against that company. We may become involved in this type
of litigation in the future. Litigation is often expensive and diverts management's attention and resources, which could have a
material adverse effect on our business, prospects, financial condition, operating results and cash flows.
Future sales of our common stock may negatively affect our
stock price.
Sales of a substantial number of shares of common stock in the
public market or the perception of such sales could cause the market price of our common stock to decline. These sales also might
make it more difficult for us to sell equity securities in the future at a price that we think is appropriate, or at all.
Anti-takeover provisions could negatively impact our stockholders.
Provisions of Nevada law and of our certificate of incorporation
and bylaws could make it more difficult for a third-party to acquire control of us. These provisions could make it more difficult
for a third-party to acquire us even if an acquisition might be in the best interest of our stockholders.
Because the market for our common stock is limited,
persons who purchase our common stock may not be able to resell their shares at or above the purchase price paid by them.
Our common stock trades on the OTC Markets, which is not a liquid
market. There is currently only a limited public market for our common stock. We cannot assure you that an
active public market for our common stock will develop or be sustained in the future. If an active market for our common
stock does not develop or is not sustained, the price may continue to decline.
Because we are subject to the “penny stock” rules,
brokers cannot generally solicit the purchase of our common stock which adversely affects its liquidity and market price.
The SEC has adopted regulations which generally define “penny
stock” to be an equity security that has a mark willet price of less than $5.00 per share, subject to specific exemptions. The
market price of our common stock on the Bulletin Board has been substantially less than $5.00 per share and therefore we are currently
considered a “penny stock” according to SEC rules. This designation requires any broker-dealer selling these
securities to disclose certain information concerning the transaction, obtain a written agreement from the purchaser and determine
that the purchaser is reasonably suitable to purchase the securities. These rules limit the ability of broker-dealers
to solicit purchases of our common stock and therefore reduce the liquidity of the public market for our shares.
ITEM 1B. Unresolved Staff Comments
None.
Our business office is located at 200 West Church Road Suite
B, King of Prussia, PA 19406. This office is leased. We believe the facilities we are now using are adequate and suitable for business
requirements.
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ITEM 3.
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Legal Proceedings
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(a) There are no legal claims currently
pending or threatened against us that in the opinion of our management would be likely to have a material adverse effect on our
financial position, results of operations or cash flows.
(b) On or about November 24, 2009, LogicMark
LLC, a Virginia corporation (“LogicMark”), filed a lawsuit in U.S. Federal Court for the Eastern District of
Virginia against the Company, Medical Alarm Concepts LLC, and Mr. Nevin Jenkins, an individual residing in Florida. The complaint
essentially alleges that (a) the Company’s MediPendant® product infringes on several claims of a patent which LogicMark
recently purchased from a bankrupt British company; (b) Mr. Jenkins, the inventor of the patents which the Company has acquired
failed to include certain inventorship information in his patent application with the U.S. Patent and Trademark Office; and (c) the
Company misrepresented in its advertising and marketing of the MediPendant® product that the Company was the first company
to market a monitored Personal Emergency Response System product. The Company has denied the claims asserted in the lawsuit
and filed its own infringement claims against LogicMark. The Company will vigorously defend against the LogicMark claims
and believes the lawsuit will be successfully resolved. The lawsuit has had no adverse impact on the Company’s business
operations as it continues to manufacture and market its product and is distributing the MediPendant® to dealers and customers.
On April 16, 2010, the Company and LogicMark
reached a settlement agreement resolving the litigation. As a result of the settlement, all outstanding causes of action
between the parties have been dismissed, without acknowledgement of liability by either party, and the parties retain their rights
in their respective intellectual property. The parties agreed to file a joint motion to dismiss with prejudice and both parties
covenant not to bring any further suits against the parties for a period of twenty-four (24) months following the settlement. The
terms of the settlement agreement are confidential.
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ITEM 4.
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Mine Safety Disclosures
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Not applicable.
NOTES TO CONCOLIDATED FINANCIAL STATEMENTS
NOTE 1 NATURE OF OPERATIONS
On June 4, 2008, Medical Alarm Concepts Holding, Inc. (the “Company”)
was incorporated under the laws of the State of Nevada. The Company was formed for the sole purpose of acquiring all of the membership
units of Medical Alarm Concepts LLC, a Pennsylvania limited liability company (“Medical LLC”).
On June 24, 2008, the Company merged with Medical LLC. The members
of Medical LLC received 30,000,000 shares of the Company’s common stock, or 100% of the outstanding shares in the merger.
As of the date of the merger, Medical LLC was inactive.
The Company utilizes new technology in the medical alarm industry
to provide 24-hour personal response monitoring services and related products to subscribers with medical or age-related conditions.
NOTE 2 SUMMARY OF ACCOUNTING POLICIES
Basis of Presentation and Consolidation
The Company’s consolidated financial statements have been
prepared in accordance with accounting principles generally accepted in the United States (“GAAP”).
The consolidated financial statements include
the accounts of the Company and its wholly owned subsidiary. All significant inter-company transactions and balances among the
Company and its subsidiary are eliminated upon consolidation.
Certain amounts included in June 30, 2010
financial statements have been reclassified to conform to the June 30, 2011 financial statements presentation.
Use of Estimates
The preparation of the financial statements
in conformity with Generally Accepted Accounting Principles (“GAAP”) requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of
the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ
from those estimates. These estimates and assumptions include the collectability of accounts receivable and deferred taxes and
related valuation allowances. Certain of our estimates, including evaluating the collectability of accounts receivable, could be
affected by external conditions, including those unique to our industry, and general economic conditions. It is possible that these
external factors could have an effect on our estimates that could cause actual results to differ from our estimates. We re-evaluate
all of our accounting estimates at least quarterly based on these conditions and record adjustments when necessary.
Cash
The Company considers all highly liquid investments with maturities
of three months or less at the time of purchase to be cash and cash equivalents.
Accounts receivable and allowance for doubtful accounts receivable
We have a policy of reserving for uncollectible
accounts based on our best estimate of the amount of probable credit losses in our existing accounts receivable. We extend credit
to our customers based on an evaluation of their financial condition and other factors. We generally do not require collateral
or other security to support accounts receivable. We perform ongoing credit evaluations of our customers and maintain an allowance
for potential bad debts if required. We determine whether an allowance for doubtful accounts is required by evaluating
specific accounts where information indicates the customers may have an inability to meet financial obligations. In these cases,
we use assumptions and judgment, based on the best available facts and circumstances, to record a specific allowance for those
customers against amounts due to reduce the receivable to the amount expected to be collected. These specific allowances are re-evaluated
and adjusted as additional information is received. The amounts calculated are analyzed to determine the total amount of the allowance.
We may also record a general allowance as necessary. Direct write-offs are taken in the period when we have exhausted
our efforts to collect overdue and unpaid receivables or otherwise evaluate other circumstances that indicate that we should abandon
such efforts.
Inventory
The Company values inventory, consisting of purchased products,
at the lower of cost or market. Cost is determined on the first-in and first-out (“FIFO”) method. The Company regularly
reviews its inventories on hand and, when necessary, records a provision for excess or obsolete inventories based primarily on
current selling price and spot market prices. The Company determined that there was no inventory obsolescence as of June 30, 2011
and 2010.
Property and equipment
Property and equipment includes furniture and fixtures and office
equipment which are recorded at cost. Expenditures for major additions and betterments are capitalized. Maintenance and repairs
are charged to operations as incurred. Depreciation of furniture and fixtures and office equipment is computed by the straight-line
method (after taking into account their respective estimated residual values) over their estimated useful life of seven (7) and
five (5) years, respectively. Upon sale or retirement of office equipment, the related cost and accumulated depreciation are removed
from the accounts and any gain or loss is reflected in statements of operations.
Patent
The Company has adopted the guidelines as set out in section
330-30-35-6 of the FASB Accounting Standards Codification for patent costs. Under the requirements as set out, the Company capitalizes
and amortizes patent costs associated with the licensed product the Company intends to sell pursuant to the Purchase Agreement
and the Patent Assignment Agreements, entered into on July 10, 2008 and effective July 30, 2008, over their estimated useful life.
From July 30, 2008 to March 31, 2011, the patent costs was amortized over the period of six years. The company changed the estimated
useful life of patent from six years to twenty years. From April 1, 2011, the unamortized balance of patent costs will be amortized
over the remaining period of useful life. The costs of defending and maintaining patents are expensed as incurred. Upon becoming
fully amortized, the related cost and accumulated amortization are removed from the accounts.
Impairment of long-lived assets
The Company follows section 360-10-05-4
of the FASB Accounting Standards Codification for its long-lived assets. The Company’s reviews it long-lived assets, which
include property and equipment, and patent, for impairment whenever events or changes in circumstances indicate that the carrying
amount of an asset may not be recoverable.
The Company assesses the recoverability
of its long-lived assets by comparing the projected undiscounted net cash flows associated with the related long-lived asset or
group of long-lived assets over their remaining estimated useful lives against their respective carrying amounts. Impairment, if
any, is based on the excess of the carrying amount over the fair value of those assets. Fair value is generally determined using
the asset’s expected future undiscounted cash flows or market value, if readily determinable. If long-lived assets are determined
to be recoverable, but the newly determined remaining estimated useful lives are shorter than originally estimated, the net book
values of the long-lived assets are depreciated or amortized over the newly determined remaining estimated useful lives. The Company
determined that there were no impairments of long-lived assets as of June 30, 2011 and 2010.
Derivative warrant liability
The Company evaluates its convertible debt, options, warrants
or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately
accounted for in accordance with paragraph 810-10-05-4 of the FASB Accounting Standards Codification and paragraph 815-40-25 of
the FASB Accounting Standards Codification. The result of this accounting treatment is that the fair value of the embedded derivative
is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability,
the change in fair value is recorded in the Statement of Operations as other income or expense. Upon conversion, exercise or cancellation
of a derivative instrument, the instrument is marked to fair value at the conversion date and then the related fair value is reclassified
to equity.
In circumstances where the embedded conversion option in a convertible
instrument is required to be bifurcated and there are also other embedded derivative instruments in the convertible instrument
that are required to be bifurcated, the bifurcated derivative instruments are accounted for as a single, compound derivative instrument.
The classification of derivative instruments, including whether
such instruments should be recorded as liabilities or as equity, is re-assessed at the end of each reporting period. Equity instruments
that are initially classified as equity that become subject to reclassification are reclassified to liability at the fair value
of the instrument on the reclassification date. Derivative instrument liabilities will be classified in the balance sheet as current
or non-current based on whether or not net-cash settlement of the derivative instrument is expected within 12 months of the balance
sheet date.
On January 1, 2009, the Company adopted Section 815-40-15 of
the FASB Accounting Standards Codification (“Section 815-40-15”) to determine whether an instrument (or an embedded
feature) is indexed to the Company’s own stock. Section 815-40-15 provides that an entity should use a two-step approach
to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating
the instrument’s contingent exercise and settlement provisions. The adoption of Section 815-40-15 has affected the accounting
for (i) certain freestanding warrants that contain exercise price adjustment features and (ii) convertible bonds issued by foreign
subsidiaries with a strike price denominated in a foreign currency.
The Company classified warrants to purchase 65,545,000 shares
of its common stock issued in connection with its offering of common stock as additional paid-in capital upon issuance of the warrants.
Upon the adoption of Section 815-40-15 on January 1, 2009, these warrants are no longer deemed to be indexed to the Company’s
own stock and were reclassified from equity to a derivative liability with a fair value of $556,545 effective as of January 1,
2009. The reclassification entry included a cumulative adjustment to retained earnings of $138,745 and a reduction of additional
paid-in capital of $417,800, the amount originally classified as additional paid-in capital upon issuance of the warrants.
Fair Value of Financial Instruments
The Company follows paragraph 825-10-50-10 of the FASB Accounting
Standards Codification for disclosures about fair value of its financial instruments and paragraph 820-10-35-37 of the FASB Accounting
Standards Codification (“Paragraph 820-10-35-37”) to measure the fair value of its financial instruments. Paragraph
820-10-35-37 establishes a framework for measuring fair value pursuant to GAAP and expands disclosures about fair value measurements.
To increase consistency and comparability in fair value measurements and related disclosures, Paragraph 820-10-35-37 establishes
a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure fair value into three (3) broad levels.
The fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities
and the lowest priority to unobservable inputs. The three (3) levels of fair value hierarchy defined by Paragraph 820-10-35-37
are described below:
Level 1 Quoted market prices available in active markets
for identical assets or liabilities as of the reporting date.
Level 2 Pricing inputs other than quoted prices in active
markets included in Level 1, which are either directly or indirectly observable as of the reporting date.
Level 3 Pricing inputs that are generally observable inputs
and not corroborated by market data.
The carrying amounts of the Company’s financial assets
and liabilities, such as cash, accounts receivable, stock subscription receivable, prepaid expenses, accounts payable, bank overdraft,
deferred revenues and accrued liabilities, approximate their fair values because of the short maturity of these instruments. The
Company’s convertible notes payable approximate the fair value of such instruments based upon management’s best estimate
of interest rates that would be available to the Company for similar financial arrangements at June 30, 2011 and 2010.
The derivative liability which consists
of embedded conversion feature and warrants issued in connection with our convertible debt, classified as a level 3 liability,
are the only financial liability measured at fair value on a recurring basis
Income Taxes
The Company accounts for income taxes under the provisions of
FASB ASC Topic 740, “Income Tax,” which requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the consolidated financial statements or tax returns. Deferred tax
assets and liabilities are recognized for the future tax consequence attributable to the difference between the tax bases of assets
and liabilities and their reported amounts in the financial statements. Deferred tax assets and liabilities are measured using
the enacted tax rate expected to apply to taxable income in the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that
includes the enactment date. The Company establishes a valuation when it is more likely than not that the assets will not be recovered.
ASC Topic 740.10.30 clarifies the accounting for uncertainty
in income taxes recognized in an enterprise’s financial statements and prescribes a recognition threshold and measurement
attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return.
ASC Topic 740.10.40 provides guidance on derecognition, classification, interest and penalties, accounting in interim periods,
disclosure, and transition. We have no material uncertain tax positions for any of the reporting periods presented.
Revenue Recognition
The Company’s revenues are derived principally from utilizing
new technology in the medical alarm industry to provide 24-hour personal response monitoring services and related products to subscribers
with medical or age-related conditions. The Company applies paragraph 605-10-S99-1 of the FASB Accounting Standards Codification
for revenue recognition. The Company will recognize revenue when it is realized or realizable and earned. The Company considers
revenue realized or realizable and earned when it has persuasive evidence of an arrangement that the services have been rendered
to the customer, the sales price is fixed or determinable, and collectability is reasonably assured.
All revenues from subscription arrangements are recognized ratably
over the term of such arrangements. The excess of amounts received over the income recognized is recorded as deferred revenue on
the consolidated balance sheet.
Shipping and handling costs
The Company accounts for shipping and handling fees in accordance
with paragraph 605-45-45-19 of the FASB Accounting Standards Codification. While amounts charged to customers for shipping products
are included in revenues, the related costs are classified in cost of goods sold as incurred.
Stock-based compensation
We recognize compensation expense for stock-based compensation
in accordance with ASC Topic 718. For employee stock-based awards, we calculate the fair value of the award on the date of grant
using the Black-Scholes method for stock options and the quoted price of our common stock for unrestricted shares; the expense
is recognized over the service period for awards expected to vest. For non-employee stock-based awards, we calculate the fair value
of the award on the date of grant in the same manner as employee awards. However, the awards are revalued at the end of each reporting
period and the pro rata compensation expense is adjusted accordingly until such time the nonemployee award is fully vested, at
which time the total compensation recognized to date equals the fair value of the stock-based award as calculated on the measurement
date, which is the date at which the award recipient’s performance is complete. The estimation of stock-based awards that
will ultimately vest requires judgment, and to the extent actual results or updated estimates differ from original estimates, such
amounts are recorded as a cumulative adjustment in the period estimates are revised. We consider many factors when estimating expected
forfeitures, including types of awards, employee class, and historical experience.
Net loss per common share
Net loss per common share is computed pursuant to section 260-10-45
of the FASB Accounting Standards Codification. Basic net loss per common share is computed by taking net loss divided by the weighted
average number of common shares outstanding for the period. Diluted net loss per common share is computed by dividing net loss
by the weighted average number of shares of common stock and potentially outstanding shares of common stock during the period to
reflect the potential dilution that could occur from common shares issuable through stock options, warrants, and convertible debt.
These potential shares of common stock were not included as they were anti-dilutive.
Commitments and contingencies
The Company follows subtopic 450-20 of the FASB Accounting Standards
Codification to report accounting for contingencies. Liabilities for loss contingencies arising from claims, assessments, litigation,
fines and penalties and other sources are recorded when it is probable that a liability has been incurred and the amount of the
assessment can be reasonably estimated.
Cash flows reporting
The Company adopted paragraph 230-10-45-24 of the FASB Accounting
Standards Codification for cash flows reporting, classifies cash receipts and payments according to whether they stem from operating,
investing, or financing activities and provides definitions of each category, and uses the indirect or reconciliation method (“Indirect
method”) as defined by paragraph 230-10-45-25 of the FASB Accounting Standards Codification to report net cash flow from
operating activities by adjusting net income to reconcile it to net cash flow from operating activities by removing the effects
of (a) all deferrals of past operating cash receipts and payments and all accruals of expected future operating cash receipts and
payments and (b) all items that are included in net income that do not affect operating cash receipts and payments. The Company
reports the reporting currency equivalent of foreign currency cash flows, using the current exchange rate at the time of the cash
flows and the effect of exchange rate changes on cash held in foreign currencies is reported as a separate item in the reconciliation
of beginning and ending balances of cash and cash equivalents and separately provides information about investing and financing
activities not resulting in cash receipts or payments in the period pursuant to paragraph 830-230-45-1 of the FASB Accounting Standards
Codification.
Subsequent events
The Company follows the guidance in Section 855-10-50 of the
FASB Accounting Standards Codification for the disclosure of subsequent events. The Company will evaluate subsequent events through
the date when the financial statements are issued. Pursuant to ASU 2010-09 of the FASB Accounting Standards Codification, the Company
as an SEC filer considers its financial statements issued when they are widely distributed to users, such as through filing them
on EDGAR.
Recently Accounting Pronouncements
In April 2011, the FASB issued ASU No. 2011-02, Receivables
(Topic 310), A Creditor’s Determination of Whether a Restructuring Is a Trouble Debt Restructuring. Under the amendments
of this ASU, in evaluating whether a restructuring constitutes a troubled debt restructuring, a creditor must separately conclude
that both of the following exist: 1) the restructuring constitutes a concession; 2) the debtor is experiencing financial difficulties.
The amendments also clarify the guidance on a creditor’s evaluation of whether it has granted a concession and on a creditor’s
evaluation of whether a debtor is experiencing financial difficulties. This ASU is effective for interim and annual periods beginning
on or after June 15, 2011. The adoption of this standard did not have a material impact on the Company’s consolidated financial
statements.
In May 2011, the FASB issued ASU No. 2011-04, Fair Value Measurement
(Topic 820), Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. Under the
amendments of this ASU will result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. Consequently,
the amendments change the wording used to describe many of the requirements in U.S. GAAP for measuring fair value and for disclosing
information about fair value measurements. This ASU is effective during interim and annual periods beginning after December 15,
2011. The Company is evaluating the impact of the adoption of this ASU.
In June 2011, the FASB issued ASU No. 2011-05, Comprehensive
Income (Topic 220), Presentation of Comprehensive Income. Under the amendments of this ASU, an entity has the option to present
the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single
continuous statement of comprehensive income or in two separate but consecutive statements. In both choices, an entity is required
to present each component of net income along with total net income, each component of other comprehensive income along with a
total for other comprehensive income, and a total amount for comprehensive income. In a single continuous statement, the entity
is required to present the components of net income and total net income, the components of other comprehensive income and a total
for other comprehensive income, along with the total of comprehensive income in that statement. In the two-statement approach,
an entity is required to present components of net income and total net income in the statement of net income. The statement of
other comprehensive income should immediately follow the statement of net income and include the components of other comprehensive
income and a total for other comprehensive income, along with a total for comprehensive income. This ASU is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2011. The Company is evaluating the impact of the adoption
of this ASU.
In September 2011, the FASB issued ASU No. 2011-08, Intangible
– Goodwill and Other (Topic 350), Testing Goodwill for Impairment. Under the amendments of this ASU, an entity has the option
to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that
it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality
of events or circumstances, an entity determines it is not more likely than not that the fair value of a reporting unit is less
than its carrying amount, then performing the two-step impairment test is unnecessary. However, if an entity concludes otherwise,
then it is required to perform the first step of the two-step impairment test by calculating the fair value of the reporting unit
and comparing the fair value with the carrying amount of the reporting unit, as described in paragraph 350-20-35-4. If the carrying
amount of a reporting unit exceeds its fair value, then the entity is required to perform the second step of the goodwill impairment
test to measure the amount of the impairment loss, if any, as described in paragraph 350-20-35-9. Under the amendments in this
Update, an entity has the option to bypass the qualitative assessment for any reporting unit in any period and proceed directly
to performing the first step of the two-step goodwill impairment test. An entity may resume performing the qualitative assessment
in any subsequent period. This ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning
after December 15, 2011. The Company is evaluating the impact of the adoption of this ASU.
In July 2012, the FASB issued Accounting Standards Update No.
2012-02 Intangibles — Goodwill and Other (Topic 350): The amendments in this update will allow an entity to first assess
qualitative factors to determine whether it is necessary to perform a quantitative impairment test. Under these amendments, an
entity would not be required to calculate the fair value of an indefinite-lived intangible asset unless the entity determines,
based on a qualitative assessment, that it is not more likely than not, the indefinite-lived intangible asset is impaired. The
amendments include a number of events and circumstances for an entity to consider in conducting the qualitative assessment. The
amendments are effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012.
Early adoption is permitted, including for annual and interim impairment tests performed as of a date before July 27, 2012, if
a public entity’s financial statements for the most recent annual or interim period have not yet been issued. The Company
does not expect the adoption of the provisions in this update will have a significant impact on its consolidated financial statements.
In February 2013, the FASB issued Accounting Standards Update
No. 2013-02 Comprehensive Income (Topic 220): The objective of this update is to improve the reporting of reclassifications out
of accumulated other comprehensive income. The amendments in this update seek to attain that objective by requiring an entity to
report the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items in
net income if the amount being reclassified is required under U.S. generally accepted accounting principles (GAAP) to be reclassified
in its entirety to net income. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to
net income in the same reporting period, an entity is required to cross-reference other disclosures required under U.S. GAAP that
provide additional detail about those amounts. This would be the case when a portion of the amount reclassified out of accumulated
other comprehensive income is reclassified to a balance sheet account (for example, inventory) instead of directly to income or
expense in the same reporting period. For public entities, the amendments are effective prospectively for reporting periods beginning
after December 15, 2012. The Company does not expect the adoption of the provisions in this update will have a significant impact
on its consolidated financial statements.
Other accounting standards that have been issued or proposed
by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material
impact on the Company’s consolidated financial statements upon adoption.
NOTE 3 GOING CONCERN
These consolidated financial statements are presented on the
basis that we will continue as a going concern. The going concern concept contemplates the realization of assets and satisfaction
of liabilities in the normal course of business
As reflected in the accompanying consolidated financial statements,
the Company has negative working capital of $666,222, did not generate cash from its operations, had stockholders’ deficit
of $2,025,041 and had operating loss for past two years. These circumstances raise substantial doubt about the Company’s
ability to continue as a going concern.
While the Company is attempting to generate sufficient revenues,
the Company’s cash position may not be enough to support the Company’s daily operations. Management intends to raise
additional funds by way of a public or private offering. Management believes that the actions presently being taken to further
implement its business plan and generate sufficient revenues provide the opportunity for the Company to continue as a going concern.
While the Company believes in the viability of its strategy to increase revenues and in its ability to raise additional funds,
there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s
ability to further implement its business plan and generate sufficient revenues.
The consolidated financial statements do not include any adjustments
that might be necessary if the Company is unable to continue as a going concern.
NOTE 4 PROPERTY AND EQUIPMENT
Property and equipment, stated at cost, less accumulated depreciation
at June 30, 2011 and 2010 consisted of the following:
|
|
June 30,2011
|
|
|
June 30, 2010
|
|
Furniture and fixtures
|
|
$
|
20,000
|
|
|
$
|
20,000
|
|
Office equipment
|
|
|
11,965
|
|
|
|
11,964
|
|
Less: accumulated depreciation
|
|
|
(15,750
|
)
|
|
|
(10,500
|
)
|
|
|
$
|
16,215
|
|
|
$
|
21,464
|
|
NOTE 5 PATENT
On July 10, 2008, the Company entered into a Purchase Agreement
and Patent Assignment Agreement (the “Agreement”) to be effective July 31, 2008. The Company is obligated to pay the
seller $2,500,000 on June 30, 2012. The Agreement specifies interest of 6% to be payable monthly, commencing on July 31, 2008.
The seller will reacquire all patents and applications if payment is not made on June 30, 2012. On June 25, 2013, this due date
was extended to September 30, 2013.
The patent is being amortized over its estimated useful life.
During the year ended June 30, 2011, estimated useful life of the patent was changed from six years to twenty years due to change
of accounting estimates. Amortization of patent aggregated $332,125 and $416,666 for the year ended June 30, 2011 and 2010 respectively.
Patent, stated at cost, less accumulated amortization at June
30, 2011 and 2010, consisted of the following:
|
|
June 30,2011
|
|
|
June 30, 2010
|
|
Patent
|
|
$
|
2,500,000
|
|
|
$
|
2,500,000
|
|
Less: accumulated amortization
|
|
|
(1,165,456
|
)
|
|
|
(833,331
|
)
|
|
|
$
|
1,334,544
|
|
|
$
|
1,666,669
|
|
NOTE 6 - CONVERTIBLE NOTES PAYABLE
On July 15, 2009, the Company sold convertible promissory notes
in the aggregate principal amount of $53,350. The aggregate gross proceeds of the sales were $48,500. The notes do not bear interest,
but instead were issued at an original issue discount of $4,850. The notes are due and payable August 15, 2010. The notes can convert
into shares of the Company’s common stock, par value $0.0001, at $0.02 per share. On June 21, 2010, the notes were converted
into 2,667,500 shares of common stock at $0.01 per share.
On December 21, 2010, the Company sold a convertible promissory
note to Emerging Growth in the aggregate principal amount of $15,000. The aggregate gross proceeds of the notes were $15,000. The
notes bear interest of 8% per annum. The notes mature on December 21, 2014. The notes can be converted into shares of the Company’s
common stock, par value $0.0001, at the conversion price of the less of (1) $0.0041 per share or (2) 25% discount of the average
three lowest daily trades in the previous five trading days. The Company also issued 3,658,537 warrants to purchase the Company’s
common stock at the exercise price of $0.0041 per share.
On May 9, 2011, the Company sold a convertible promissory note
to an individual investor in the aggregate principal amount of $5,000. The aggregate gross proceeds of the notes were $5,000. The
notes bear interest of 8% per annum. The notes mature on May 9, 2013. The notes can be converted into shares of the Company’s
common stock, par value $0.0001, at the conversion price of the less of (1) $0.0041 per share or (2) 25% discount of the average
three lowest daily trades in the previous five trading days. The Company also issued 1,219,512 warrants to purchase the Company’s
common stock at the exercise price of $0.0041 per share.
On June 1, 2011 and June 20, 2011, the Company sold two convertible
promissory notes to Sonoma Winton in the aggregate principal amount of $8,828. The notes bear interest at 8% per annum. The notes
mature on the second anniversary of the issuance date. The notes can be converted into shares of the Company’s common stock,
par value $0.0001, at the conversion price of the less of (1) $0.0041 per share or (2) 25% discount of the average three lowest
daily trades in the previous five trading days. The Company also issued 2,153,096 shares of warrants to purchase the Company’s
common stock at the exercise price of $0.0041 per share.
On June 8, 2011, the Company sold a convertible promissory note
to Bio-tech Development in the aggregate principal amount of $15,000. The notes bear interest of 8% per annum. The note matures
on June 8, 2013. The note can be converted into shares of the Company’s common stock, par value $0.0001, at the conversion
price of the less of (1) $0.0041 per share or (2) 25% discount of the average three lowest daily trades in the previous five trading
days. The Company also issued 3,658,536 warrants to purchase the Company’s common stock at the exercise price of $0.0041
per share.
On June 8, 2011, the Company sold a convertible promissory note
to Emerging Growth in the aggregate principal amount of $845. The aggregate gross proceeds of the note were $845. The note bears
interest of 8% per annum. The note matures on June 8, 2013. The note can be converted into shares of the Company’s common
stock, par value $0.0001, at the conversion price of the less of (1) $0.0041 per share or (2) 25% discount of the average three
lowest daily trades in the previous five trading days. The Company also issued 206,097 warrants to purchase the Company’s
common stock at the exercise price of $0.0041 per share.
The following table summarizes the convertible promissory notes
movement:
Balance at June 30, 2010
|
|
$
|
398,750
|
|
Convertible notes issued
|
|
|
44,673
|
|
Convertible notes converted
|
|
|
(195,825
|
)
|
Total
|
|
|
247,598
|
|
Less: debt discount
|
|
|
(38,020
|
)
|
Balance at June 30, 2011
|
|
$
|
209,578
|
|
NOTE 7 – PREFERRED STOCK
Series A Convertible Preferred Stock
The Series A Convertible Preferred Stock has no voting rights,
bears no dividends and is convertible at the option of the holder after the date of issuance at a rate of 1 share of common stock
for every preferred share issued however, the preferred shares cannot be converted if conversion would cause the holder to own
more than 5% of the issued and outstanding common stock.
During the fiscal year ended June 30, 2010, certain shareholders’
converted 29,450,000 shares of the Series A Convertible Preferred Stock for 29,450,000 shares of common stock. As of June 30, 2011
and 2010, the Company has Series A preferred stock of 550,000 shares issued and outstanding respectively.
Series B Convertible Preferred Stock
The Series B Convertible Preferred Stock has no voting rights,
bears no dividends and is convertible at the option of the holder after the date of issuance at a rate of 1 share of common stock
for every preferred share issued however, the preferred shares cannot be converted if conversion would cause the holder to own
more than 5% of the issued and outstanding common stock.
For the year ended June 30, 2010, the Company issued 38,450,000
shares of the Series B Convertible Preferred Stock for $769,000 in cash and 3,750,000 was converted to common stock subsequently.
During the year ended June 30, 2011, 38,375,000 shares of Series
B preferred stock has been converted into 38,375,000 shares of common stock. The Company also issued 11,625,000 shares of Series
B preferred stock as ratchet shares.
NOTE 8 - COMMON STOCK
On January 1, 2010, the Company issued 3,000,000 shares of its
common stock at its fair market value of $0.02 per share or $60,000 for services.
On January 1, 2010, the Company issued 100,000 shares of its
common stock at its fair market value of $0.02 per share or $2,000 in cash.
On February 1, 2010, the Company issued 600,000 shares of its
common stock at its fair market value of $0.02 per share or $12,000 in cash.
On February 18, 2010, the Company issued 1,250,000 shares of
its common stock at its fair market value of $0.02 per share or $25,000 in cash.
On March 8, 2010, the Company issued 7,015,625 shares of its
common stock in exchange for 7,734,375 warrants issued in connection with the issuance of Series B convertible preferred stock
in a cashless exercise.
On March 29, 2010, a note holder converted $68,750 of the convertible
note for 3,437,500 shares of common stock at a conversion price of $0.02 per share.
During the quarter ended March 31, 2010, individual shareholders’
converted 28,150,000 shares of the Series A Convertible Preferred Stock for 28,150,000 shares of common stock.
On April 7, 2010, a preferred stockholder converted 1,300,000
shares of Series A Convertible Preferred Stock for 1,300,000 shares of common stock.
On May 19, 2010, the Company issued 9,000,000 shares of its
common stock at its fair market value of $0.01 per share or $90,000 for settlement of lawsuit with LogicMark LLC.
On June 3, 2010, a preferred stockholder converted 1,250,000
shares of Series B Convertible Preferred Stock for 1,250,000 shares of common stock.
On June 3, 2010, a preferred stockholder converted 2,500,000
shares of Series A Convertible Preferred Stock for 2,500,000 shares of common stock.
On June 21, 2010, note holders converted $315,150 of convertible
notes for 33,484,686 shares of common stock at a conversion price of $0.01 per share.
On June 22, 2010, the Company issued 2,493,533 shares of its
common stock in exchange for 5,900,000 Class B Warrants in a cashless exercise.
On June 25, 2010, the Company issued 17,500,000 shares of its
common stock at its fair market value of $0.01 per share or $160,000 in cash, net of expenses.
During fiscal 2011, the 38,375,000 shares of Series B preferred
stock were converted into 38,375,000 shares of common stock.
During the year ended June 30, 2011, 42,656,292 shares of common
stocks were issued resulting from conversion of $195,826 of convertible notes, which includes the effect of the derivative liability
of the embedded conversion features.
During the year ended June 30 2011, the Company issued 26,265,500
shares of common stocks with warrants and raised $222,655. $35,771 of the proceeds was allocated to the warrants and recorded as
a derivative liability.
During the year ended June 30, 2011, the Company issued 61,536,585
shares of common stocks to three service providers as compensation of $488,300 to their services of consulting campaign, research
and development and marking. The 40,000,000 shares issued in October 2010 were valued at $0.01 per share. 21,536,535 shares issued
in April 2011 were valued at $0.0041 per share.
NOTE – 9 Warrants
On March 30, 2009, together with the sale of convertible promissory
notes discussed in Note 6, the Company issued warrants to purchase 2,337,500 shares of the Company’s common stock. The warrants
are exercisable over five (5) years at an exercise price of $0.45 per share. The fair value of these warrants granted, estimated
on the date of grant, was $302,940, which has been recorded as a discount to the convertible notes payable, using the Black-Scholes
option-pricing model.
Because of the issuance on December 2, 2009, the Company issued
additional warrants to purchase 50,256,250 shares of the Company’s common stock. The warrants are now exercisable over five
(5) years at an exercise price of $0.02 per share.
On June 15, 2009, together with the sale of convertible promissory
notes discussed in Note 4, the Company issued warrants to purchase 1,309,000 shares of the Company’s common stock. The warrants
are exercisable over five years at an exercise price of $0.45 per share. The fair value of these warrants granted, estimated on
the date of grant, was $155,345, which has been recorded as a discount to the convertible notes payable, using the Black-Scholes
option-pricing model.
Because of the issuance on December 2, 2009, the Company issued
additional warrants to purchase 28,143,500 shares of the Company’s common stock. The warrants are now exercisable over five
years at an exercise price of $0.02 per share.
On July 15, 2009, together with the sale of convertible promissory
notes discussed in Note 4, the Company issued warrants to purchase 294,250 shares of the Company’s common stock. The warrants
are exercisable over five years at an exercise price of $0.45 per share. The fair value of these warrants granted, estimated on
the date of grant, was $22,983, which has been recorded as a discount to the convertible notes payable, using the Black-Scholes
option-pricing model.
Because of the issuance on December 2, 2009, the Company issued
additional warrants to purchase 5,735,125 shares of the Company’s common stock The warrants are now exercisable over five
years at an exercise price of $0.02 per share.
On December 2, 2009 the Company issued 26,869,000 warrants of
common stock with an exercise price of $0.02 per share. The 5 year warrants vest over 4 quarters with a 6 month lockup. The fair
value of these warrants granted, estimated on the date of grant, was $321,904, which has been recorded as deferred compensation
that has been fully amortized over a period of six-months, using the Black-Scholes option-pricing model.
On March 8, 2010, the Company issued 7,015,625 shares of its
common stock pursuant to the cashless exercise of 7,734,375 Warrants.
During 2011, the Company issued warrants to purchase total
amount of 60,855,152 shares of our common stock together with convertible notes sold to various investors and additional
warrants issued due to price adjustment. The weighted average exercise price of warrants issued during 2011 was $0.0083 per share.
Stock warrant activities for the fiscal year ended June 30,
2011 and 2010 is summarized as follows:
|
|
Number
of shares
|
|
|
Weighted average
exercise price
|
|
Outstanding at June 30, 2009
|
|
|
68,411,875
|
|
|
$
|
0.02
|
|
Granted
|
|
|
18,501,875
|
|
|
|
0.01
|
|
Exercised
|
|
|
(35,454,375
|
)
|
|
|
0.02
|
|
Outstanding at June 30, 2010
|
|
|
51,459,375
|
|
|
|
0.02
|
|
Granted
|
|
|
60,855,152
|
|
|
|
0.0083
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2011
|
|
|
112,314,527
|
|
|
$
|
0.0091
|
|
NOTE 10 - DERIVATIVE WARRANT LIABILITY AND FAIR VALUE
The Company has evaluated the application of ASC 815 Derivatives
and Hedging (formerly SFAS No. 133) and ASC 815-40-25 to the Warrants to purchase common stock issued with the the Convertible
Notes and service agreements. Based on the guidance in ASC 815 and ASC 815-40-25, the Company concluded these instruments were
required to be accounted for as derivatives due to the down round protection feature on the conversion price and the exercise price.
The Company records the fair value of these derivatives on its balance sheet at fair value with changes in the values of these
derivatives reflected in the statements of operations as “Gain (loss) on derivative liabilities.” These derivative
instruments are not designated as hedging instruments under ASC 815 and are disclosed on the balance sheet under Derivative Liabilities.
The Company accounted for the issuance
of the convertible debentures in accordance with ASC 815” Derivatives and Hedging.” The debentures are convertible
into an indeterminate number of shares for which the Company cannot determine if it has sufficient authorized shares to settle
the transaction with. Accordingly, the embedded conversion option is a derivative liability and is marked to market
through earnings at the end of each reporting period.
The gross proceed from the sale of the
debentures are recorded net of a discount of related to the conversion feature of the embedded conversion option. When
the fair value of conversion options is in excess of the debt discount the amount has been included as a component of interest
expense in the statement of operations. During the year ended June 30, 2011 and 2010, the Company recorded $783,021 and $692,368,
respectively of interest expense relating to the excess fair value of the conversion option over the face value of the debentures.
NOTE 11 – INCOME TAX
The reconciliation of income tax benefit at the U.S. statutory
rate of 34% for the years ended June 30, 2011 and 2010 to the Company’s effective tax rate is as follows:
|
|
Year ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
U.S. federal statutory rate
|
|
|
(34.0)
|
%
|
|
|
(34.0)
|
%
|
State income tax, net of federal benefit
|
|
|
(9.99)
|
%
|
|
|
(9.99)
|
%
|
Change in valuation allowance
|
|
|
43.99
|
%
|
|
|
43.99
|
%
|
Income tax provision (benefit)
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
The benefit for income tax is summarized as follows:
|
|
Year ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
(138,562
|
)
|
|
|
(1,585,209
|
)
|
State and local:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
(40,713
|
)
|
|
|
(465,772
|
)
|
Change in valuation allowance
|
|
|
179,275
|
|
|
|
2,050,981
|
|
Income tax provision (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
The tax effects of temporary differences that give rise to the
Company’s net deferred tax liability as of June 30, 2011 and 2010 are as follows:
|
|
Year ended June 30,
|
|
|
|
2011
|
|
|
2010
|
|
Net operating losses carried forward
|
|
$
|
3,089,089
|
|
|
$
|
2,909,814
|
|
Less: valuation allowance
|
|
|
(3,089,089
|
)
|
|
|
(2,909,814
|
)
|
Deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
As of June 30, 2011 and 2010, the Company had approximately
$7,022,253 and $6,614,717 of federal and state net operating loss carryovers (“NOLs”) which begin to expire in 2028. Utilization
of the NOLs may be subject to limitation under the Internal Revenue Code Section 382 should there be a greater than 50% ownership
change as determined under regulations.
In assessing the realization of deferred tax assets, management
considers whether it is more likely than not that some portion or all of the deferred tax assets will be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies in making this assessment. Based on the assessment, management
has established a full valuation allowance against the entire deferred tax asset relating to NOLs for every period because it is
more likely than not that all of the deferred tax asset will not be realized.
The Company files U.S. federal and states of Pennsylvania tax
returns that are subject to audit by tax authorities beginning with the year ended June 30, 2008.The Company’s policy is
to classify assessments, if any, for tax and related interest and penalties as tax expense.
NOTE 12 - RELATED PARTY TRANSACTIONS
The Company subleases its office space from an affiliate owned
by its officers. Total rent expense for the fiscal year ended June 30, 2010 was $14,000 and the related party paid an additional
$16,000 in rent for the fiscal year ended June 30, 2010. The related party also paid $5,800 for telephone and utilities for the
fiscal year ended June 30, 2010.
NOTE 13 - CONCENTRATION AND CREDIT RISK
During the fiscal year ended June 30, 2011, one customer accounted
for approximately $163,000 of the total sales or approximately 34% of the Company’s revenue.
During the fiscal year ended June 30, 2010, one customer accounted
for $425,000 of the total sales or approximately 68% of the Company’s revenue.
A reduction in sales from or loss of such customer would have
a material adverse effect on the Company’s results of operations and financial condition.
NOTE 14 – SUBSEQUENT EVENT
July 15, 2011 - The Company issued promissory notes to an accredited
investor totaling a cash investment of $4,000 for the Company, a form which is convertible into shares of the Company’s common
stock at a fixed conversion price equal to the lesser of the fixed conversion price of $0.0014, or seventy five percent (75%) of
the average of the closing bid price of the common stock as reported by Bloomberg LP for the principal market for the 5 trading
days preceding the conversion date. As part of this transaction the Company also issued to the subscriber a warrant to purchase
an additional 2,857,143 shares of common stock at $0.0014.
July 21, 2011 - The Company issued promissory notes to an accredited
investor totaling a cash investment of $4,000 for the Company, a form which is convertible into shares of the Company’s common
stock at a fixed conversion price equal to the lesser of the fixed conversion price of $0.0041, or seventy five percent (75%) of
the average of the closing bid price of the common stock as reported by Bloomberg LP for the principal market for the 5 trading
days preceding the conversion date. As part of this transaction the Company also issued to the subscriber a warrant to purchase
an additional 975,609 shares of common stock at $0.0041.
July 27, 2011 - The Company issued promissory notes to an accredited
investor totaling a cash investment of $5,000 for the Company, a form which is convertible into shares of the Company’s common
stock at a fixed conversion price equal to the lesser of the fixed conversion price of $0.0041, or seventy five percent (75%) of
the average of the closing bid price of the common stock as reported by Bloomberg LP for the principal market for the 5 trading
days preceding the conversion date. As part of this transaction the Company also issued to the subscriber a warrant to purchase
an additional 1,219,512 shares of common stock at $0.0041.
July 27, 2011 - The Company issued promissory notes to an accredited
investor totaling a cash investment of $3,000 for the Company, a form which is convertible into shares of the Company’s common
stock at a fixed conversion price equal to the lesser of the fixed conversion price of $0.0041, or seventy five percent (75%) of
the average of the closing bid price of the common stock as reported by Bloomberg LP for the principal market for the 5 trading
days preceding the conversion date. As part of this transaction the Company also issued to the subscriber a warrant to purchase
an additional 731,707 shares of common stock at $0.0041.
August 1, 2011 - The Company issued promissory notes to an accredited
investor totaling a cash investment of $73,500 for the Company, a form which is convertible into shares of the Company’s
common stock at a fixed conversion price equal to the lesser of the fixed conversion price of $0.0041, or seventy five percent
(75%) of the average of the closing bid price of the common stock as reported by Bloomberg LP for the principal market for the
5 trading days preceding the conversion date. As part of this transaction the Company also issued to the subscriber a warrant to
purchase an additional 17,926,829 shares of common stock at $0.0041.
August 2, 2011 - The Company issued promissory notes to an accredited
investor totaling a cash investment of $2,958 for the Company, a form which is convertible into shares of the Company’s common
stock at a fixed conversion price equal to the lesser of the fixed conversion price of $0.0041, or seventy five percent (75%) of
the average of the closing bid price of the common stock as reported by Bloomberg LP for the principal market for the 5 trading
days preceding the conversion date. As part of this transaction the Company also issued to the subscriber a warrant to purchase
an additional 619,024 shares of common stock at $0.0041.
August 16, 2011 the Company issued promissory notes to an accredited
investor totaling a cash investment of $5,000 for the Company, a form which is convertible into shares of the Company’s common
stock at a fixed conversion price equal to the lesser of the fixed conversion price of $0.0041, or seventy five percent (75%) of
the average of the closing bid price of the common stock as reported by Bloomberg LP for the principal market for the 5 trading
days preceding the conversion date. As part of this transaction the Company also issued to the subscriber a warrant to purchase
an additional 1,219,512 shares of common stock at $0.0041.
August 29, 2011 - The Company issued promissory notes to an
accredited investor totaling a cash investment of $3,000 for the Company, a form which is convertible into shares of the Company’s
common stock at a fixed conversion price equal to the lesser of the fixed conversion price of $0.0041, or seventy five percent
(75%) of the average of the closing bid price of the common stock as reported by Bloomberg LP for the principal market for the
5 trading days preceding the conversion date. As part of this transaction the Company also issued to the subscriber a warrant to
purchase an additional 731,707 shares of common stock at $0.0041.
September 2, 2011 - The Company issued promissory notes to an
accredited investor totaling a cash investment of $5,000 for the Company, a form which is convertible into shares of the Company’s
common stock at a fixed conversion price equal to the lesser of the fixed conversion price of $0.0041, or seventy five percent
(75%) of the average of the closing bid price of the common stock as reported by Bloomberg LP for the principal market for the
5 trading days preceding the conversion date. As part of this transaction the Company also issued to the subscriber a warrant to
purchase an additional 1,219,512 shares of common stock at $0.0041.
September 7, 2011 - The Company issued promissory notes to an
accredited investor totaling a cash investment of $12,500 for the Company, a form which is convertible into shares of the Company’s
common stock at a fixed conversion price equal to the lesser of the fixed conversion price of $0.0041, or seventy five percent
(75%) of the average of the closing bid price of the common stock as reported by Bloomberg LP for the principal market for the
5 trading days preceding the conversion date. As part of this transaction the Company also issued to the subscriber a warrant to
purchase an additional 3,048,780 shares of common stock at $0.0041.
September 16, 2011 - The Company issued promissory notes to
an accredited investor totaling a cash investment of $85,000 for the Company, a form which is convertible into shares of the Company’s
common stock at a fixed conversion price equal to the lesser of the fixed conversion price of $0.0002, or seventy five percent
(75%) of the average of the closing bid price of the common stock as reported by Bloomberg LP for the principal market for the
5 trading days preceding the conversion date. As part of this transaction the Company also issued to the subscriber a warrant to
purchase an additional 20,731,707 shares of common stock at $0.0041. As additional consideration for the investment, on September
16, 2011 the Company entered into an agreement with the holders (“Noteholders”) of the Secured Convertible Promissory
Notes (“Notes”) and the associated Class A Common Stock Purchase Warrants (“Warrants”) dated approximately
March 2009, June 2011, July 2011 and August 2011 to modify certain terms of these Notes and Warrants. The Noteholder and the Company
have each separately determined that it is in the parties’ collective best interests to amend the Subscription Agreement
and the Warrants pursuant to the terms of amendment document. The noteholders have agreed to invest additional funds into the Company
to be used for general working capital purposes, inventory procurement, media purchasing, research and development, and other corporate
purposes. Noteholder has agreed to invest additional funds into MDHI in the form of additional convertible promissory notes and/or
common shares in order to prevent the Company from moving into insolvency and to fund working capital requirements, purchase inventory,
and to fund general corporate functions. Under the terms of the agreement the maturity date of the warrants is extended to five
years from the date hereof and the maturity date of the notes extended for two years from the date hereof. As further consideration
of the substantial investment, the Fixed Conversion Price of the Notes and the Exercise Price of the Warrants shall adjust to two
one hundredths of one cent ($0.0002). Additionally, The Noteholder agrees to waive any provision that would prohibit the Company
from filing a registration statement with respect to any shares issued to accredited investors subsequent to the date hereof.
On September 19, 2011 the Company entered into an agreement
with its management team. The agreement outlines the management team’s position and duties, compensation and methodology
for calculation, procedures for termination of the agreement for “Cause”, and noncompetition agreement. Under the terms
of the agreement, The Management Team will be issued restricted common shares equal to 27% of Employers outstanding common stock,
and which includes stock previously issued by the Company. The Company's Board of Directors will vote at a later date regarding
the allocation of these shares amongst the management team members. The Management Team’s 27% common stock ownership shall
be protected through anti-dilution provisions. If the Company issues additional shares through financings or for any other reasons,
additional common stock will be issued to the Management Team to maintain their original 27% common stock ownership, less any shares
previously sold.
September 21, 2011 - The Company issued promissory notes to
an accredited investor a cash investment of $8,000 for the Company, a form which is convertible into shares of the Company’s
common stock at a fixed conversion price equal to the him lesser of the fixed conversion price of $0.0018, or seventy five percent
(75%) of the average of the closing bid price of the common stock as reported by Bloomberg LP for the principal market for the
5 trading days preceding the conversion date. As part of this transaction the Company also issued to the subscriber a warrant to
purchase an additional 4,444,444 shares of common stock at $0.0018.
September 26, 2011 - The Company issued promissory notes to
an accredited investor for a cash investment of $11,250 into the Company, a form which is convertible into shares of the Company’s
common stock at a fixed conversion price equal to the lesser of the fixed conversion price of $0.0018, or seventy five percent
(75%) of the average of the closing bid price of the common stock as reported by Bloomberg LP for the principal market for the
5 trading days preceding the conversion date. As part of this transaction the Company also issued to the subscriber a warrant to
purchase an additional 6,250,000 shares of common stock at $0.0018.
October 6, 2011 – 18,600,000 common shares issued for
conversion of $3,720 of convertible debt. The shares have not been registered under the Securities Act and were not registered
or qualified in any jurisdiction.
October 6, 2011 - 13,600,000 shares of restricted common stock
were issued to a consultant, Paul Hepler, for services rendered. The shares have not been registered under the Securities Act and
were not registered or qualified in any jurisdiction and are restricted from sale for a period of one year from the date of issue.
The shares were valued at fair market value. The cost will be amortized over the service period of one year.
October 6, 2011 - 2,600,000 shares of restricted common stock
were issued to a consultant, Thomas Shea, for services rendered. The shares have not been registered under the Securities Act and
were not registered or qualified in any jurisdiction and are restricted from sale for a period of one year from the date of issue.
The shares were valued at fair market value. The cost will be amortized over the service period of one year.
November 10, 2011 - the Company began a series of withdrawals
against its credit line provided by an accredited investor. Monies drawn against the $750,000 balance carry an 8% annualized simple
interest and are due December 31, 2014. A total of $632,793.78 has been drawn against this credit line.
January 12, 2012 – 20,000,000 common shares issued for
conversion of $4,000 of convertible debt. The shares have not been registered under the Securities Act and were not registered
or qualified in any jurisdiction.
February 13, 2012 – 20,000,000 common shares issued for
conversion of $4,000 of convertible debt. The shares have not been registered under the Securities Act and were not registered
or qualified in any jurisdiction.
On March 9, 2012 - The Company determined that it would not
be in the best interest of common shareholders to complete its proposed merger with Texas-based, First Fitness Nutrition. This
decision was based mainly to the excessive amount of common shareholder dilution that would occur if the merger closed. Under the
terms of the non-binding memorandum of understanding signed between the Companies on November 9, 2011, the Company supplied FirstFitness
Nutrition with a $140,000 capital infusion in the form of a 12-month 10% interest-bearing note due on January 4, 2013. In the event
of default, the loan shall bear interest on each day at the rate of 20% per annum. Borrower agrees that all property of Borrower
which may hereafter be deposited with or come into the possession of Lender shall be applicable to secure the payment of the Loan,
and for this purpose Lender is hereby given a lien on and a security interest in all property of Borrower which may hereafter be
deposited with or come into the possession of Lender, and for such purpose this Agreement shall constitute a security agreement
under the Uniform Commercial Code.
March 12, 2012 – 12,000,000 common shares issued for conversion
of $2,400 of convertible debt. The shares have not been registered under the Securities Act and were not registered or qualified
in any jurisdiction.
March 14, 2012 – 4,000,000 shares of restricted common
stock were issued to a consultant, Paul Hepler, for services rendered. The shares have not been registered under the Securities
Act and were not registered or qualified in any jurisdiction and are restricted from sale for a period of one year from the date
of issue. The shares were valued at fair market value of $0.004. The cost will be amortized over the service period of one year.
March 14, 2012 – 6,000,000 shares of restricted common
stock were issued to a consultant, Thomas Shea, for services rendered. The shares have not been registered under the Securities
Act and were not registered or qualified in any jurisdiction and are restricted from sale for a period of one year from the date
of issue. The shares were valued at fair market value of $0.004. The cost will be amortized over the service period of one year.
April 9, 2012 – 31,500,000 common shares issued for conversion
of $6,300 of convertible debt. The shares have not been registered under the Securities Act and were not registered or qualified
in any jurisdiction.
April 27, 2012 – 15,000,000 common shares issued for conversion
of $3,000 of convertible debt. The shares have not been registered under the Securities Act and were not registered or qualified
in any jurisdiction.
April 27, 2012 – 4,000,000 shares of restricted common
stock were issued to a consultant, Paul Hepler, for services rendered. The shares have not been registered under the Securities
Act and were not registered or qualified in any jurisdiction and are restricted from sale for a period of one year from the date
of issue. The shares were valued at fair market value of $0.0028. The cost will be amortized over the service period of one year.
May 1, 2012, the Company reached an agreement with holders of
its convertible debt. Under the terms of the agreement, $56,251 of convertible debt and 34,606,250 warrants were canceled. The
debt holders received no common share, preferred share, warrant, option, or cash consideration for these cancellations. The cancellation
of this debt and the associated warrants may allow the Company to reverse a significant portion of its derivative liability charges
during the current quarter, and will likely result in significant reductions in shareholder dilution.
May 21, 2012 – 28,208,284 common shares issued for conversion
of $37,525 of convertible debt. The shares have not been registered under the Securities Act and were not registered or qualified
in any jurisdiction.
June 6, 2012 – 25,000,000 common shares issued for conversion
of $5,000 of convertible debt. The shares have not been registered under the Securities Act and were not registered or qualified
in any jurisdiction.
July 13, 2012 - 28,430,000 common shares issued for conversion
of $9,350 of convertible debt. The shares have not been registered under the Securities Act and were not registered or qualified
in any jurisdiction.
July 13, 2012 – 17,100,000 common shares issued for a
new equity investment in the Company. The securities described above were issued to “accredited” investors, as such
term is promulgated by the SEC. In reliance upon such accredited investor’s representation as an “accredited investor,”
among other representations, the offer and issuance of the securities described above are exempt from the registration requirements
under the Securities Act of 1933, as amended (the “Securities Act”), pursuant to Section 4(2) thereof and in reliance
upon Rule 506 of Regulation D promulgated by the SEC. No natural person beneficially or entity owns, directly or indirectly, more
than 10% of any class of equity securities.
August 3, 2012, the Company reached an agreement with various
investors in the Corporation who held certain rights to buy common stock in the Corporation (Warrant Holders). The Warrant Holders
and the Company agreed that it is in the best interests of the Warrant Holders, the Corporation and common stockholders to cancel
a total of 60.825 million warrants.
All of these warrants had strike prices that were above the
closing bid price on the day before the agreement was reached, thus were considered “in the money” warrants. No compensation
of any type was given to Warrant Holders who canceled their warrant positions. These warrants were granted on the following dates
in the following amounts:
June 8, 2011
|
|
|
3,658,536
|
|
June 21, 2011
|
|
|
619,024
|
|
June 21, 2011
|
|
|
975,609
|
|
July 27, 2011
|
|
|
1,219,512
|
|
August 1, 2011
|
|
|
17,926,829
|
|
August 16, 2011
|
|
|
1,219,512
|
|
August 29, 2011
|
|
|
731,707
|
|
September 7, 2011
|
|
|
3,048,780
|
|
September 16, 2011
|
|
|
20,731,707
|
|
September 21, 2011
|
|
|
4,444,444
|
|
September 26, 2011
|
|
|
6,250,000
|
|
August 21, 2012 – 21,000,000 common shares issued for
conversion of $4,200 of convertible debt. The shares have not been registered under the Securities Act and were not registered
or qualified in any jurisdiction.
September 17, 2012 – 30,000,000 common shares issued for
conversion of $6,000 of convertible debt. The shares have not been registered under the Securities Act and were not registered
or qualified in any jurisdiction.
October 2, 2012 – 14,250,000 common shares issued for
conversion of $2,850 of convertible debt. The shares have not been registered under the Securities Act and were not registered
or qualified in any jurisdiction.
November 16, 2012 - The Company issued promissory notes to an
accredited investor for a cash investment of $58,000 into the Company, a form which is convertible into shares of the Company’s
common stock at a fixed conversion price equal to the lesser of the fixed conversion price of $0.0014, or seventy five percent
(75%) of the average of the closing bid price of the common stock as reported by Bloomberg LP for the principal market for the
5 trading days preceding the conversion date. As part of this transaction the Company also issued to the subscriber a warrant to
purchase an additional 41,000,000 shares of common stock at $0.0014.
November 29, 2012 - 49,192,308 common shares issued for conversion
of $9,838 of convertible debt. The shares have not been registered under the Securities Act and were not registered or qualified
in any jurisdiction.
In February 19, 2013 - The Company reached agreements with holders
of notes dated September 2, 2011 and November 15, 2012. The terms of the agreements call for cancellation of 1,219,512 warns relative
to the September 2, 2011 Note and the cancellation of 27,619,048 warrant associated with the November 15, 2012 Note.
On February 19, 2013 – The Company reached an agreement
with the holder of the May 9, 2011 convertible note. Under the terms of the agreement the note holder and the Company agreed to
cancel 1,219,512 warrants associated with this Note.
On February 20, 2013 - The Company issued 20 million common
shares for conversion of $4,000 of convertible debt relating to notes dated March 31, 2009. The shares have not been registered
under the Securities Act and were not registered or qualified in any jurisdiction.
On March 4, 2013 - The Company issued 890,774 shares for the
exercise of warrants. The shares have not been registered under the Securities Act and were not registered or qualified in any
jurisdiction.
On March 4, 2013 - The Company issued 4,225,000 common shares
for conversion $845 convertible note dated June 8, 2011. The shares have not been registered under the Securities Act and were
not registered or qualified in any jurisdiction.
On March 4, 2013 - The Company issued 188,175 shares for the
exercise of warrants relating to a warrant agreement entered into on June 8, 2011. The shares have not been registered under the
Securities Act and were not registered or qualified in any jurisdiction.
On March 4, 2013 - The Company issued 20,000,000 common shares
for conversion of $4,000 of convertible debt. The shares have not been registered under the Securities Act and were not registered
or qualified in any jurisdiction.
On March 4, 2013 - The Company issued 2,816,901 common shares
for conversion of debt relating to notes dated May 9, 2011. The shares have not been registered under the Securities Act and were
not registered or qualified in any jurisdiction.
On March 6, 2013 – The Company announced it has received
an investment led by a strategic partner. Under the terms of the agreement the three investor groups purchased 550,674,510 restricted
common shares for a price $307,500. The company received gross proceeds of $307,500 upon closing as there were no sales commissions
or brokerage fees paid to any party. The Company plans to offer up to an additional 39,059,490 common stock at similar terms and
may from time to time complete additional investor common stock purchase agreements. Securities purchased in this Offering may
not be transferred or resold except as permitted under The Securities Act of 1933, as amended, and applicable state securities
laws, pursuant to registration or exemption therefrom. Securities purchased in this Offering will be legended to reflect the foregoing
rights and obligations. The Company reserves the right to accept or reject any subscription in its sole discretion for any reason
whatsoever and to withdraw this Offering at any time prior to the acceptance of the subscriptions received. Subscription funds
paid by a Subscriber whose subscription is rejected will be returned promptly without interest or deduction. The Securities Purchase
Agreement contains customary representations and warranties and covenants of the Company and the Buyers. Pursuant to the terms
of the Securities Purchase Agreement, the Company has agreed to provide customary indemnification to the Buyers, their affiliates
and agents against certain liabilities.
On April 3, 2013, the Company reached an agreement with the
holder of its revolving credit line. The parties agreed it was in the best interest of both parties to cancel repayment of $236,397
of the balance of the revolving credit line carrying a percent simple annualized interest, due and payable on December 31, 2014.
On May 17, 2013, as also disclosed in the Medical Alarm Concepts
Holdings, Inc. (the “Company”) definitive Schedule 14C Information Statement dated May 17, 2013, a majority in interest
of the Common Stock holders approved an amendment to its Articles of Incorporation. The amendment is effective upon the filing
of the Amended and Restated Articles of Incorporation with the Nevada Secretary of State. On June 7, 2013, the Company filed an
Amendment to its Articles of Incorporation (the "Amendment") with the Nevada Secretary of State, affecting the increase
of its authorized number of shares of Common Stock (the “Authorized Share Increase). This amendment to the Company’s
Articles of Incorporation increased the number of the Company’s authorized shares of common stock, par value $0.001 per share,
from 800,000,000 to 1,400,000,000.
On May 28, 2013, the Company entered into an agreement with
holders of its convertible debentures canceling all remanding warrants outstanding related to convertible notes dated March 2009
and all convertible notes dated at any time during 2011, 2012, or 2013. As of this date, all warrants outstanding have been cancelled.
On June 6, 2013 and June 18, 2013 - The Company issued a total
of 25,000,000 common shares for conversion of $5,000 of debt relating to notes dated July 27, 2011. The shares have not been registered
under the Securities Act and were not registered or qualified in any jurisdiction.