U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended: September 30, 2004
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission File No. 0-11808
MB SOFTWARE CORPORATION
Texas 59-2220004
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
2225 E. Randol Mill Road - Suite 305
Arlington, Texas 76011-6306
(817) 633-9400
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for 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 [ ]
As of September 30, 2004, 14,395,113 of the Issuer's $.001 par value common
stock were outstanding.
Transitional Small Business Disclosure Format Yes [ ] No [X]
MB SOFTWARE CORPORATION AND SUBSIDIARIES
Form 10-QSB
Quarter Ended September 30, 2004
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements .................................................3
Consolidated Balance Sheet (Unaudited).........................................3
Consolidated Statements of Operations (Unaudited)..............................4
Consolidated Statements of Cash Flows (Unaudited)..............................5
Notes to Condensed Consolidated Financial Statements...........................6
Item 2 - Management Discussion and Analysis or Plan of Operation ..............9
Item 3 - Controls and Procedures .............................................12
PART II - OTHER INFORMATION
ITEM 1. Legal Proceedings.....................................................12
ITEM 2. Changes in Securities and Use of Proceeds.............................12
ITEM 3. Defaults Upon Senior Securities.......................................12
ITEM 4. Submission of Matters to a Vote of Security Holders...................12
ITEM 5. Other Information.....................................................12
ITEM 6. Exhibits and Reports on Form 8-K......................................12
SIGNATURES ...................................................................13
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
In the opinion of management, the accompanying unaudited financial statements
included in this Form 10-QSB reflect all adjustments (consisting only of normal
recurring accruals) necessary for a fair presentation of the results of
operations for the periods presented. The results of operations for the periods
presented are not necessarily indicative of the results to be expected for the
full year.
MB SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
SEPTEMBER 30, 2004 (Unaudited)
ASSETS
Current Assets
Accounts receivable $ 30,376
Inventory 104,746
Prepaid expenses 69,200
Due from related parties 291,270
------------
Total current assets 495,592
Property and equipment, net 40,653
Software license, net 103,333
------------
Total Assets $ 639,578
============
LIABILITIES AND STOCKHOLDERS DEFICIENCY
Current Liabilities
Cash overdraft $ 11,141
Notes payable - unrelated party 527,500
Accounts payable and accrued liabilities 156,702
Accrued interest 61,704
------------
Total current liabilities 757,047
------------
Shareholders' Deficiency
Preferred stock, $10 par value, 5,000,000 shares authorized
Issued and outstanding - none --
Common stock, $0.001 par value, 20,000,000 shares authorized
Issued and outstanding - 14,395,113 14,395
Additional paid-in capital 15,024,425
Accumulated deficit (15,144,250)
------------
(105,430)
Less, treasury stock, at cost - 4,089 shares (12,039)
------------
Total shareholders' deficiency (117,469)
------------
Total Liabilities and Shareholders' Deficiency $ 639,578
============
See notes to condensed consolidated financial statements.
3
MB SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
2004 2003 2004 2003
----------- ----------- ----------- -----------
Revenues $ 32,233 $ -- $ 71,458 $ --
Cost of revenues 23,350 -- 23,350 --
----------- ----------- ----------- -----------
Gross margin 8,883 -- 48,108 --
Operating Expenses
Selling, general and administrative 130,022 119,807 338,199 296,267
Depreciation and amortization 6,528 5,000 16,528 15,000
Impairment loss 5,758,561 -- 5,758,561 --
----------- ----------- ----------- -----------
Total operating expenses 5,895,111 124,807 6,113,288 311,267
----------- ----------- ----------- -----------
Operating loss (5,886,228) (124,807) (6,065,180) (311,267)
----------- ----------- ----------- -----------
Other Expense
Interest expense 5,207 -- 30,000 --
----------- ----------- ----------- -----------
Net loss before income taxes (5,891,435) (124,807) (6,095,180) (311,267)
----------- ----------- ----------- -----------
Provision for income taxes -- -- -- --
----------- ----------- ----------- -----------
Net loss $(5,891,435) $ (124,807) $(6,095,180) $ (311,267)
=========== =========== =========== ===========
Basic and diluted per common share $ (0.61) $ (0.15) $ (0.85) $ (0.38)
=========== =========== =========== ===========
Weighted average common shares outstanding 9,736,253 822,810 7,136,813 822,810
=========== =========== =========== ===========
See notes to condensed consolidated financial statements.
4
MB SOFTWARE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
September 30,
2004 2003
----------- -----------
Cash flows from operating activities
Net loss $(6,095,180) $ (311,267)
Adjustments to reconcile net loss to net cash used in operating activities
Depreciation and amortization 16,528 15,000
Impairment loss 5,758,561 --
Changes in assets and liabilities
(Increase) decrease in accounts receivable (21,153)
(Increase) decrease in inventory (61,790) --
(Increase) decrease in prepaid expenses 33,906 --
Increase (decrease) in accounts payable and accrued liabilities 56,878 5,846
Increase (decrease) in accrued interest 16,550 --
----------- -----------
Net cash flows used in operating activities (295,700) (290,421)
Cash flows from investing activities
Cash acquired in WCI acquisition 16,048
Capital expenditures (34,054) --
Payment for software license (50,000) --
----------- -----------
Net cash flows used in investing activities (68,006) --
Cash flows from financing activities
Cash overdraft 11,141 9,418
Proceeds from unrelated party notes payable 70,000 652,500
Net change in due from related parties 282,180 (371,648)
----------- -----------
Net cash flows provided by financing activities 363,321 290,270
----------- -----------
Increase (decrease) in cash and cash equivalents (385) (151)
Cash and cash equivalents, beginning of period 385 151
----------- -----------
Cash and cash equivalents, end of period $ -- $ --
=========== ===========
Cash paid for interest: $ 13,354 --
=========== ===========
Cash paid for income taxes: -- --
Supplemental noncash investing and financing activities:
Common stock issued for acquisition of WCI $ 4,200,000 --
=========== ===========
Common stock issued in exchange for WCI debt $ 1,800,612 --
=========== ===========
See notes to condensed consolidated financial statements.
5
MB SOFTWARE CORPORATION AND SUBSIDIARIES
QUARTER ENDED - SEPTEMBER 30, 2004
NOTES TO FINANCIAL STATEMENTS
NOTE 1: BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles in the United States
of America for interim financial information and with the instructions to Form
10-QSB and Rule 10-01 of Regulation S-X. They do not include all information and
notes required by generally accepted accounting principles in the United States
of America for complete financial statements. However, except as disclosed,
there has been no material change in the information disclosed in the notes to
consolidated financial statements included in the Annual Report on Form 10-KSB
of MB Software Corporation (the Company) for the year ended December 31, 2003,
as amended. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included in the operating results for the three and nine month period ended
September 30, 2004, and are not necessarily indicative of the results that may
be expected for the year ending December 31, 2004.
The Company's financial statements include the combined statements of financial
position, results of operations and cash flows for the entities merged as a
result of certain merger agreements completed during 2003. The Company remains
as the reporting entity and its balance sheet and other financial information
have been updated as of the beginning of the period as though the assets and
liabilities had been transferred at that date. Financial statements and
financial information presented for the prior period have been restated to
furnish comparative information. All restated financial statements reflect the
combined results of operations and cash flows of the previously separate
entities.
NOTE 2: GOING CONCERN
The financial statements have been prepared on a going concern basis, which
contemplates realization of assets and liquidation of liabilities in the
ordinary course of business. The Company has continuously incurred losses from
operations and has a significant accumulated deficit. The appropriateness of
using the going concern basis is dependent upon the Company's ability to obtain
additional financing or equity capital and, ultimately, to achieve profitable
operations. These conditions raise substantial doubt about its ability to
continue as a going concern. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
It is the Company's belief that it will continue to incur losses for at least
the next twelve months, and as a result will require additional funds from debt
or equity investments to meet such needs. To meet these objectives, management's
plans are to (i) raise capital by obtaining financing from debt financing and /
or equity financing through private placement efforts, (ii) issue common stock
for services rendered in lieu of cash payments, (iii) convert substantially all
of its notes payable to equity, and (iv) obtain loans from shareholders as
necessary. Without realization of additional capital, it would be unlikely for
the Company to continue as a going concern. The Company anticipates that its
shareholders will contribute sufficient funds to satisfy the cash needs of the
Company for the next twelve months. However, there can be no assurances to that
effect, as the Company has no revenues and the Company's need for capital may
change dramatically if it is successful in expanding its current business or
acquiring a new business. If the Company cannot obtain needed funds, it may be
forced to curtail or cease its activities.
Management believes that actions presently taken to revise the Company's
operating and financial requirements provide the opportunity for the Company to
continue as a going concern. The Company's future ability to achieve these
objectives cannot be determined at this time. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
NOTE 3: SIGNIFICANT ACCOUNTING POLICIES
Revenue recognition - Revenue is recognized when all of the following criteria
are met: (i) persuasive evidence of an arrangement exists, (ii) delivery has
occurred or services have been rendered, (iii) the price is fixed or
determinable and (iv) collectibility is reasonably assured. Delivery occurs when
the customer has taken title and assumed the risks and rewards of ownership of
products and revenue is recognized when the customer accepts the delivery of a
product or performance of a service.
Accounts receivable and allowance for doubtful accounts - The Company presents
accounts receivable, net of allowances for doubtful accounts. The allowances are
calculated based on detailed review of certain individual customer accounts,
historical rates and an estimation of the overall economic conditions affecting
the Company's customer base. If the financial condition of its customers were to
deteriorate, resulting in an impairment of their ability to make payments,
additional allowances may be required. There is no allowance for doubtful
accounts at September 30, 2004.
Inventories - Inventories representing powders and gels are stated at the lower
of cost and net realizable value, on a first-in first-out basis. Cost comprises
all costs of purchases and other costs incurred in bringing the inventories to
their present location and condition. Net realizable value represents the
estimated selling price in the ordinary course of business less the estimated
costs necessary to make the sale.
6
NOTE 4: NOTES PAYABLE
Notes payable consists of the following:
Convertible promissory note payable [1] $200,000
Convertible promissory note payable [2] 100,000
Convertible promissory notes payable [3] 157,500
Convertible promissory notes payable [4] 70,000
--------
$527,500
========
[1] Convertible promissory note payable represents one note with outstanding
principal convertible (in denominations of $10,000 or integral multiples
thereof) into shares of the Company's common stock at the conversion price of
$1.00 per share; maturity date is December 26, 2003; interest rate is 10% per
annum or in the event of default 15% per annum; personally guaranteed by the
Company's president.
[2] Convertible promissory note payable represents one note with outstanding
principal convertible into shares of the Company's common stock at the
conversion price of $0.50 per share equal to the total value of the note after
the first quarterly interest payment, which is due on February 28, 2004;
maturity date is also February 28, 2004; interest rate is 10% per annum.
[3] Convertible promissory notes payable represents five different notes bearing
interest at 10% per annum and originally convertible into shares of the
Company's common stock at the conversion price of $0.50 to $1.00 per share; the
notes mature at various dates through August 28, 2003.
[4] Convertible promissory notes payable represents seven different notes
bearing interest at 10% per annum and convertible into shares of the Company's
common stock at the conversion price of $1.00 per share; the notes mature at
various dates through September 30, 2004.
Accrued interest on the above notes at September 30, 2004 was $61,704. The
entire balance of notes payable outstanding is currently in default, including
accrued interest.
NOTE 5: RELATED PARTY TRANSACTIONS
Amounts due from related parties at September 30, 2004 totaling $291,270
consists of:
(1) $195,870 of funds advanced, as necessary, from various other entities
controlled by the president of this Company and (2) $95,400 representing the
balance due from an entity controlled by the Company's President for the
purchase of certain assets pursuant to an Asset Purchase Agreement dated July
24, 2003 between Envoii Healthcare, L.L.C. and Envoii Technologies, L.L.C., both
related parties. The amounts due are interest-free, unsecured and repayable on
demand.
NOTE 6: EARNINGS PER SHARE
Basic earnings per share ("EPS") are calculated using net earnings (numerator)
divided by the weighted-average number of shares outstanding (denominator)
during the reporting period. All per share amounts in these financial statements
are basic earnings or loss per share. Convertible securities that could
potentially dilute basic earnings or loss per share in the future are not
included in the computation of diluted earnings or loss per share because to do
so would be antidilutive. All per share and per share information are adjusted
retroactively to reflect stock splits and changes in par value.
NOTE 7: MERGER AGREEMENT
On August 20, 2004, the Company consummated the acquisition of Wound Care
Innovations, LLC, ("WCI"), a Nevada limited liability company, through a merger
of WCI with the Company's wholly-owned subsidiary, Wcare Acquisition, LLC, a
Nevada limited liability company. WCI owns certain exclusive and nonexclusive
distribution rights to CellerateRxTM products, advanced collagen-based wound
care products based upon a patented molecular form of collagen. WCI's
distribution rights for these products are exclusive in the domestic medical,
retail, government and first aid human use wound care markets, as well as in
several international markets.
The details of the agreement are as follows:
WCI had entered into a Distribution Agreement dated July 28, 2004 ("effective
date of agreement"), with Applied Nutritionals, LLC, ("AN") for the exclusive
rights to market, sell and distribute wound products that contan a certain
tissue adhesive that AN had obtained the rights to via U.S. Patent No.
6,136,341. The patent is for a tissue adhesive hydrolysate which promotes wound
healing containing hydrolyzed Type I collagen. To maintain the exclusive rights,
7
WCI agreed to pay AN the following royalty: contract year 1-$90,000; contract
year 2-$291,000, and contract year 3-$522,000. Additionally, WCI agreed to
purchase from AN a minimum dollar amount of products as follows: contract year
1-$350,000; contract year 2-$727,500; and contract year 3-$1,305,000. Within 45
days prior to expiration of the first 3 years following the effective date of
the agreement, and prior to the expiration of each year during the term
thereafter, WCI and AN agreed to negotiate in good faith a minimum annual
royalty and minimum annual purchases for the ensuing year, which shall be 115%
of the prior year's royalty and purchases, respectively. If WCI fails to pay the
royalties or make the purchases, AN may terminate the agreement by written
notice to WCI and the WCI's rights convert to a non-exclusive basis.
All royalties are due and payable on a calendar quarterly basis on or before the
30th day of the month immediately following the calendar quarter in which gross
receipts are received. The first royalty report is due on or before January 30,
2005 for the period beginning on the effective date of the agreement and ending
on December 31, 2004. As of September 30, 2004, WCI has paid $69,200 as an
advance against the royalties to be paid. AN also granted WCI an option to
acquire all of AN's rights, title and interest in and to the patent, and all
processes and other know-how related to the products and their manufacture,
solely with respect to the patent, exercisable at any time during the first five
years of the term of the agreement.
The consideration paid by the Company for WCI consisted of an aggregate of
6,000,000 restricted shares of the Company's common stock. The shares were
issued to H.E.B., L.L.C. ("HEB") and Mr. Araldo Cossutta, the sole owners of
WCI. The Company's Chairman of the Board, Chief Executive Officer and President
is the majority owner and managing member of HEB. Mr. Cossutta is also a member
of the Company's Board of Directors. In connection with the acquisition, HEB and
Mr. Cossutta agreed to convert an aggregate of $1,800,612 of WCI debt and other
WCI obligations owed to HEB and Mr. Cossutta into an aggregate of 2,572,303
additional restricted shares of the Company's common stock.
WCI's financial information is incorporated into the consolidation of the
Company from the effective date of the merger, which was August 20, 2004. The
value assigned to assets and liabilities acquired can be summarized as follows:
Cash $ 16,048
Accounts receivable 9,223
Prepaid expenses 103,106
Inventory 42,956
Due from related parties 105,690
Fixed assets 8,128
Goodwill 5,758,561
Accounts payable (43,100)
Loans payable converted (1,800,612)
-----------
Fair value of net assets acquired $ 4,200,000
===========
The following unaudited pro forma information is based on the assumption that
the acquisition took place as of the beginning of the period (January 1, 2004),
with comparative information for the immediately preceding period as though the
acquisition had been completed at the beginning of that period (January 1,
2003). WCI was not formed until August 21, 2003 and therefore, its operations
are for a short period in 2003:
2004 2003
---------- ----------
Net sales $ 160,529 $ 21,642
Net loss $7,480,675 $ 461,084
Basic and diluted loss per share $ 1.05 $ 0.56
8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Caution Concerning Forward-Looking Statements/Risk Factors
----------------------------------------------------------
The following discussion should be read in conjunction with the Company's
financial statements and the notes thereto and the other financial information
appearing elsewhere in this document. In addition to historical information, the
following discussion and other parts of this document contain certain
forward-looking information. When used in this discussion, the words "believes,"
"anticipates," "expects," and similar expressions are intended to identify
forward-lookinZg statements. Such statements are subject to certain risks and
uncertainties, which could cause actual results to differ materially from those
projected due to a number of factors beyond our control. The Company does not
undertake to publicly update or revise any of its forward-looking statements
even if experience or future changes show that the indicated results or events
will not be realized. You are cautioned not to place undue reliance on these
forward-looking statements, which speak only as of the date hereof. You are also
urged to carefully review and consider our discussions regarding the various
factors, which affect our business, included in this section and elsewhere in
this report.
Factors that might cause actual results, performance or achievements to differ
materially from those projected or implied in such forward-looking statements
include, among other things: (i) the impact of competitive products; (ii)
changes in law and regulations; (iii) adequacy and availability of insurance
coverage; (iv) limitations on future financing; (v) increases in the cost of
borrowings and unavailability of debt or equity capital; (vi) the effect of
adverse publicity regarding our products; (vii) the inability of the Company to
gain and/or hold market share; (viii) exposure to and expense of resolving and
defending product liability claims and other litigation; (ix) consumer
acceptance of the Company's products; (x) managing and maintaining growth; (xi)
customer demands; (xii) market and industry conditions including pricing and
demand for products, (xiii) the success of product development and new product
introductions into the marketplace; (xiv) the departure of key members of
management; (xv) the ability of the Company to efficiently market its products;
as well as other risks and uncertainties that are described from time to time in
the Company's filings with the Securities and Exchange Commission.
Plan of Operation
-----------------
The Company currently has two primary lines of business, operated through two of
its wholly owned subsidiaries, Veriscrip and Wound Care Innovations, LLC
("WCI"). Wound Care Innovations, was acquired in August of 2004, and is the
exclusive distributor for two advanced, collagen-based wound care products for
the United States and many international markets. WCI's products, like Veriscrip
provide solutions to meet emerging market needs, and deliver high quality
solutions that can provide the healthcare and insurance industries with strong
savings.
Veriscrip currently operates the pilot project for real time prescription drug
monitoring in the Commonwealth of Kentucky, and anticipates completion by the
end of January 2005. The pilot has involved multiple physician/clinic locations
and pharmacies, and has demonstrated Veriscrip's real time prescribing and
prescription tracking capabilities, implemented per the terms of the pilot.
Management expects that the University of Louisville, sanctioned to provide an
evaluation of the pilot, to complete their report during January 2005. In the
meantime, the Company continues to operate the pilot and pursue business
development activities in several other states. Because of the capital required
for expanding business development activities, and the development and
implementation of additional pilot programs, Management has been pursuing a
number of capitalization strategies for Veriscrip. Veriscrip will require
significant outside funding to complete its business plan.
Wound Care Innovations, LLC, based in Fort Lauderdale, secured exclusive rights
to CellerateRX Gel and Powder, and the rights to purchase the patent and
intellectual product related to the activated collagen found in these products.
Since July of 2004, WCI has focused on preparing, packaging, and pre-marketing
CellerateRX gel and powder, since these products had formerly been sold in
limited quantities in the market. WCI has secured an extensive base of customers
in the South Florida market in its pre-market activities.
The patented, FDA cleared CellerateRX products are highly effective in the
treatment of a variety of wound types, and have been well received in the
market. Collagen has long been considered a favorable tool in the art of wound
care, but has always been regarded as a relatively "inert" substance because of
the time interval required for the body to breakdown or degrade native intact
collagen molecules. CellerateRX, however, utilizes a patented form of activated
collagen, which averages 1/100th of the collagen molecules found in other
products. This activated collagen is sized for immediate use by the body.
WCI maintains its primary business office in Fort Lauderdale, with its inventory
storage and fulfillment activities being carried out by Diamond Packaging, of
NY. By outsourcing these activities, WCI anticipates the ability to smoothly
scale to meet larger customers in 2005. Although WCI sells to customers
throughout the United States, its direct sales activities have focused primarily
on the Florida market. The fourth quarter of 2004 will be key for the finalizing
new packaging, new product configurations, and materials required for aggressive
2005 sales and marketing activities.
9
OVERVIEW
--------
The Company currently business activities currently focus on the following:
(i) Veriscrip offerings, which include sales and marketing activities to state
organizations, and the implementation and management of the Kentucky pilot
program. Veriscrip's services include electronic prescription writing services
for physicians and other authorized prescribers, delivery and management
services of electronic prescriptions for pharmacies, and real time electronic
tracking of prescription writing and fulfillment for regulatory agencies. This
set of services combines e-prescribing with the concept of now widely adopted
prescription drug monitoring programs (PDMP's). These services are marketed to
state agencies.
During the first and second quarter of 2004, the Company conducted marketing
activities within multiple states in an effort to generate awareness of the
Veriscrip system's features and capabilities, and begin the sales process. The
Company has closely monitored local and national media sources covering
prescription drug related issues in several states. Management feels that market
demand is significantly increasing with government initiatives such as President
Bush's appointment of a subcabinet level position of National Health Information
Technology Coordinator (within the Department of Health and Human Services), the
introduction of "The Prescription Drug Elimination Act of 2004" (H.R. 3870) to
the House of Representatives, and President Bush's immediate earmarking of $100
million for improving healthcare information systems as a first step to
committing that every American have an electronic medical records within 10
years. Veriscrip's electronic prescription services and computerized physician
order entry (CPOE) capabilities have the capability to satisfy a number of the
outlined initiatives both at the Federal and State levels.
A number of system enhancements were made to the service offering, resulting in
more comprehensive features being offered to Veriscrip users, and more rapid
entry of electronic prescriptions. In addition, through its informal
pre-marketing and marketing activities, and its pilot program, the Company
continues to refine its strategy to secure a strong position in the online
healthcare transactions market. Management has drafted its strategy into a
formal business plan and has approached a number of funding sources with the
intention of raising external funds to support its strategy. Pursuant to its
strategy and existing contractual obligations, the Company completed phases I
and II of its pilot project with the Commonwealth of Kentucky, and expects to
complete phase III in the third quarter of 2004. The Company has also begun
working with the University of Louisville to evaluate the overall project, as
stipulated by the terms of its contract. The defined pilot phases require
assessment, design, and implementation of electronic prescription writing and
tracking services within several locations in Eastern Kentucky. These locations
include physician clinics, where physicians and authorized staff utilize
Veriscrip to electronically prescribe and transmit prescription orders to
pharmacies participating in the pilot. The Company expects Phase III to be
complete by the end of August 2004.
(ii) Distribution of wound care gel and powder products in the healthcare
markets, such as hospitals, long-term care facilities, home healthcare provider
organizations, durable medical equipment suppliers, and physicians/clinics. The
Company has contracted with Diamond Packaging of Rochester, New York to house
its inventory and provide fulfillment services. The Company plans to pursue
multiple professional medical provider markets followed by implementation of
marketing efforts in the first aid, government, and retail markets. The retail
effort is expected to take at least twelve months.
RESULTS OF OPERATIONS
---------------------
Revenues - For the three and nine months ended September 30, 2004, the Company
derived revenues from the sale of wound care products of $32,233 and the testing
of Veriscrip offerings of $39,226, respectively, totaling $71,458 for the nine
months then ended.
Selling, general and administrative expenses ("SGA") - For the three and nine
months ended September 30, 2004, SGA expenses totaled $130,022 (2003: $119,807)
and $338,199 (2003: $296,267), respectively. SGA expenses mainly consisted of
(approximations) contract labor ($113,000) legal and professional fees
($62,000), and salaries and related costs ($93,000) for the nine months ended
September 30, 2004. For the nine months ended September 30, 2003, SGA expenses
mainly consisted of contract labor ($128,000), legal and professional fees
($65,000), travel ($29,000) and bankruptcy expense ($40,000).
Impairment loss - The Company recorded an impairment loss to its goodwill
recognized in connection with the acquisition of Wound Care Innovations, LLC
during the quarter ended September 30, 2004. The impairment resulted from the
uncertainty of future revenue streams and thus, management considered the asset
to be impaired.
Net loss - Net loss for the three and nine months ended September 30, 2004 was
$5,891,435 (2003: $124,807) and $6,095,180 (2003: $311,267), respectively.
LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Working capital - We currently have a negative working capital of $261,455 at
September 30, 2004. Our future funding requirements will depend on numerous
factors, some of which are beyond the Company's control. These factors include
our ability to operate profitably, recruit and train management and personnel,
and to compete with other, better-capitalized and more established competitors.
10
Cash flows - Net cash flows used in operating activities for the nine months
ended September 30, 2004 primarily represented costs incurred for the purchase
of inventory. Net cash flows used in investing activities for the nine months
ended September 30, 2004 consisted of cash outlays for the purchase of fixed
assets ($34,054), cash paid for a software license ($50,000), offset by cash
acquired in the WCI acquisition ($16,048). Net cash flows provided by financing
activities for both periods presented represented proceeds from unrelated party
notes payable of $70,000 (2003: $652,500) and advances to and from related
parties to fund operations as necessary for 2004 of $282,180 and 2003:
($371,648).
Concentration credit risk - Historically, we have relied on our major
shareholder for funding operations, as necessary, when other external funds
could not be raised. There is no assurance that the majority shareholder will be
able to continue to fund the company if significant expenditures are incurred.
Future resources - We believe that we can satisfy our cash requirements over the
next twelve months as follows: (i) raise capital by obtaining financing from
debt financing and / or equity financing through private placement efforts, (ii)
issue common stock for services rendered in lieu of cash payments, (iii) convert
substantially all of its notes payable to equity, and (iv) obtain loans from
shareholders as necessary. There is no assurance that such additional funds will
be available for the Company to finance its operations on acceptable terms, if
at all. Furthermore, there is no assurance the net proceeds from any successful
financing arrangement will be sufficient to cover cash requirements during the
initial stages of the Company's operations and once a suitable business
opportunity has been acquired.
Future Commitments - The Company, through its wholly-owned subsidary, WCI, had
entered into a Distribution Agreement dated July 28, 2004 ("effective date of
agreement"), with Applied Nutritionals, LLC, ("AN") for the exclusive rights to
market, sell and distribute wound products that contan a certain tissue adhesive
that AN had obtained the rights to via U.S. Patent No. 6,136,341. The patent is
for a tissue adhesive hydrolysate which promotes wound healing containing
hydrolyzed Type I collagen. To maintain the exclusive rights, WCI agreed to pay
AN the following royalty: contract year 1-$90,000; contract year 2-$291,000, and
contract year 3-$522,000. Additionally, WCI agreed to purchase from AN a minimum
dollar amount of products as follows: contract year 1-$350,000; contract year
2-$727,500; and contract year 3-$1,305,000. Within 45 days prior to expiration
of the first 3 years following the effective date of the agreement, and prior to
the expiration of each year during the term thereafter, WCI and AN agreed to
negotiate in good faith a minimum annual royalty and minimum annual purchases
for the ensuing year, which shall be 115% of the prior year's royalty and
purchases, respectively. If WCI fails to pay the royalties or make the
purchases, AN may terminate the agreement by written notice to WCI and the WCI's
rights convert to a non-exclusive basis.
All royalties are due and payable on a calendar quarterly basis on or before the
30th day of the month immediately following the calendar quarter in which gross
receipts are received. The first royalt report is due on or before January 30,
2005 for the period beginning on the effective date of the agreement and ended
on December 31, 2004. As of September 30, 2004, WCI has paid $69,200 as an
advance against the royalties to be paid. AN also granted WCI an option to
acquire all of AN's rights, title and interest in and to the patent, and all
processes and other know-how related to the products and their manufacture,
solely with respect to the patent, exercisable at any time during the first five
years of the term of the agreement.
The Company does not anticipate incurring significant research and development
costs, the purchase of any major equipment, or any significant changes in the
number of its employees over the next twelve months, depending on the success of
its future operations.
CRITICAL ACCOUNTING POLICIES
----------------------------
Our discussion and analysis or plan of operations are based upon our financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, we evaluate our
estimates, including those related to bad debts, inventories, intangible assets,
income taxes and contingencies. We base our estimates on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. Actual results may differ from these estimates under different
assumptions or conditions.
We believe the following critical accounting policies reflect our more
significant estimates and assumptions used in the preparation of our financial
statements:
Allowance For Doubtful Accounts
We evaluate the collectibility of our trade receivables based on a combination
of factors. We regularly analyze our significant customer accounts, and, when we
become aware of a specific customer's inability to meet its financial
obligations to us, such as in the case of bankruptcy filings or deterioration in
the customer's operating results or financial position, we record a specific
reserve for bad debt to reduce the related receivable to the amount we
reasonably believe is collectible. The allowances are calculated based on
detailed review of certain individual customer accounts and historical rates. If
the financial condition of our customers were to deteriorate, resulting in an
impairment of their ability to make payments, additional allowances may be
required. In the event that our trade receivables became uncollectible after
exhausting all available means of collection, we would be forced to record
additional adjustments to receivables to reflect the amounts at net realizable
value. The effect of this entry would be a charge to income, thereby reducing
our net profit. Although we consider the likelihood of this occurrence to be
remote based on past history and the current status of our accounts, there is a
possibility of this occurrence.
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Inventory
Our inventory purchases and commitments are made in order to build inventory to
meet future shipment schedules based on forecasted demand for our products. We
perform a detailed assessment of inventory for each period, which includes a
review of, among other factors, demand requirements, product life cycle and
development plans, component cost trends, product pricing and quality issues.
Based on this analysis, we record adjustments to inventory for excess,
obsolescence or impairment, when appropriate, to reflect inventory at net
realizable value. Revisions to our inventory adjustments may be required if
actual demand, component costs or product life cycles differ from our estimates.
In the event the demand for our product diminished, other competitors offered
similar or better products, and/or the product life cycles deteriorated causing
quality issues, we would be forced to record an adjustment to inventory for
impairment or obsolescence to reflect inventory at net realizable value. The
effect of this entry would be a charge to income, thereby reducing our net
profit. Although we consider the likelihood of this occurrence to be remote
based on our forecasted demand for our products, there is a possibility of this
occurrence.
RECENT ACCOUNTING PRONOUNCEMENTS
--------------------------------
The Financial Accounting Standards Board ("FASB") issued the following new
accounting pronouncements during 2004:
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs," which
clarifies the accounting for abnormal amounts of idle facility expense, freight,
handling costs, and wasted material (spoilage). This Statement requires that
those items be recognized as current-period charges regardless of whether they
meet the criterion of "so abnormal." In addition, this Statement requires that
allocation of fixed production overheads to the costs of conversion be based on
the normal capacity of the production facilities. This Statement is the result
of a broader effort by the FASB to improve the comparability of cross-border
financial reporting by working with the International Accounting Standards Board
("IASB") toward development of a single set of high-quality accounting
standards. As part of that effort, the FASB and the IASB identified
opportunities to improve financial reporting by eliminating certain narrow
differences between their existing accounting standards. As currently worded in
Accounting Research Bulletin 43, the term "so abnormal" was not defined and its
application could lead to unnecessary non-comparability of financial reporting.
This Statement eliminates that term. This statement does significantly affect
the Company.
ITEM 3. CONTROLS AND PROCEDURES
The President, who is also the chief executive officer and the chief financial
officer of the Company, has concluded based on his evaluation as of a date
within 90 days prior to the date of the filing of this Report, that the
Company's disclosure controls and procedures are effective to ensure that
information required to be disclosed by the Company in the reports filed or
submitted by it under the Securities Act of 1934, as amended, is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and include controls and
procedures designed to ensure that information required to be disclosed by the
Company in such reports is accumulated and communicated to the Registrant's
management, including the president, as appropriate to allow timely decisions
regarding required disclosure.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect these controls subsequent to the date of
such evaluation.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS - NONE
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
The registrant issued an aggregate of 6,000,000 restricted shares of the
Company's common stock pursuant to an Agreement and Plan of Merger dated August
20, 2004 with Wound Care Innovations, LLC ("WCI"). The shares were issued to
H.E.B., L.L.C. ("HEB") and Mr. Araldo Cossutta, the sole owners of WCI. The
Company's Chairman of the Board, Chief Executive Officer and President is the
majority owner and managing member of HEB. Mr. Cossutta is also a member of the
Company's Board of Directors. In connection with the acquisition, HEB and Mr.
Cossutta agreed to convert an aggregate of $1,800,612 of WCI debt and other WCI
obligations owed to HEB and Mr. Cossutta into an aggregate of 2,572,303
additional restricted shares of the Company's common stock.
The shares of common stock were issued pursuant to an exemption (Section 4(2))
from the registration requirements of the Securities Act of 1933, as amended and
are restricted shares.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
All of the Company's promissory notes payable ($527,500) are currently in
default, including accrued interest due of $61,704 as of September 30, 2004.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS - NONE
ITEM 5. OTHER INFORMATION - NONE
ITEM 6. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
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(a) Exhibits
31 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32 Certification of Chief Executive Officer and Chief Financial Officer
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K. The registrant filed an 8-K on 8/25/04 under Items
1.01, 2.01, 3.02, and 9.01.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned thereunto duly
authorized.
MB SOFTWARE CORPORATION
Date: December 22, 2004 /s/ Scott A. Haire
--------------------------------------
Scott A. Haire, Chairman of the Board,
Chief Executive Officer and President
(Principal Financial Officer)
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