INN Blog

More Posts
 

MMRGLOBAL, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations

Edgar Online, Inc.

You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the description of our business appearing in our Annual Report on Form 10-K for the year ended December 31, 2011, filed with the SEC on March 30, 2012 (the "Form 10-K"). This discussion contains forward-looking statements, which inherently involve risks and uncertainties. Please see "Cautionary Note Regarding Forward-Looking Statements" below. Our actual results could differ materially from those anticipated in these forward- looking statements for many reasons, including the risks faced by us described in "Risk Factors" in Item 1A of the Form 10-K.

Cautionary Note Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains certain forward-looking statements. The words "anticipate," "expect," "believe," "plan," "intend," "will" and similar expressions are intended to identify such statements. Although the forward-looking statements in this Quarterly Report on Form 10-Q reflect the good faith judgment of our management, such statements are subject to various risks and uncertainties, including but not limited to the following:

   º Our ability to obtain financing to fund our operations;
   º Our inability to generate sufficient cash flow to service our debt
     obligations;
   º The ability to generate subscribers for our products and services given the
     current competitive landscape;
   º Our ability to adapt our products to conform to any technical
     specifications necessary to benefit from stimulus package funding;
   º Our ability to raise dilutive and non-dilutive capital in order to meet our
     financial obligations and invest in our business to grow revenues,
     including risks related to our trading in the Over the Counter market;
   º Our ability to launch new products or to successfully commercialize our
     existing or planned products;
   º Managing costs while building an effective sales and service delivery
     organization for our products with our small management team;
   º Our ability to maximize our legacy biotechnology assets and otherwise
     protect our intellectual property assets;
   º Our ability to enter into marketing arrangements with large membership and
     affinity organizations for our products and maintain and grow subscribers
     from such arrangements, such as those noted above, particularly after the
     initial introductory period; and
   º The possible invalidity of the underlying assumptions and estimates related
     to our business and market;
   º Conditions and actions taken or omitted to be taken by third parties,
     including customers, suppliers, business partners and competitors and
     legislative, judicial and other governmental authorities and officials; and
   º Possible changes or developments in economic, business, industry, market,
     legal and regulatory circumstances.

Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Any of such assumptions could be inaccurate. You should not place undue reliance on these forward-looking statements, which are based on our current views and assumptions. In evaluating these statements, you should specifically consider various factors, including the foregoing risks and those outlined under "Risk Factors" in Item 1A of the Form10-K. Our forward-looking statements represent estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q.

There are No Baby Steps in Sales.

Overview

Background

We provide secure and easy-to-use online Personal Health Records ("PHRs") and electronic safe deposit box storage solutions, serving consumers, healthcare professionals, employers, insurance companies, professional organizations and affinity groups. MyMedicalRecords enables individuals and families to access their medical records and other important documents, such as birth certificates, passports, insurance policies and wills, anytime from anywhere using the Internet. The MyMedicalRecords Personal Health Record is built on proprietary, patent pending, issued and applied for technologies to allow documents, images and voicemail messages to be transmitted and stored in the system using a variety of methods, including fax, phone, or file upload without relying on any specific electronic medical record platform to populate a user's account. The Company's professional offering, MMRPro, is designed to give physicians' offices an easy and cost-effective solution to digitizing paper-based medical records and sharing them with patients in real time. Since receiving the first notices of allowance in late 2011, the U.S. Patent and Trademark Office has issued the Company a total of four patents and one additional notice of allowance pertaining to the "Method and System for Providing Online Medical Records" and "Method and System for Providing Online Records". Such patents had been applied for as early as 2005 and the Company believes these patents along with the remaining pending and applied for claims represent a competitive barrier to entry and create a competitive advantage for the Company which the Company is looking to leverage through licensing agreements. For a description of our corporate organizational history prior to the date hereof, please see Note 1 to our financial statements.

Source of Revenues

We derive our revenues from the provision of services, which are comprised of facilitating electronic access to consumer medical records and other vital documents, as well as international licensing of our services. We offer our services to subscribers either on a direct subscription basis or an "access" basis through various types of organizations, and in both cases, we record these revenues under "Subscriber" in our income statement. On a direct subscription basis, which we use when we market our products direct to consumers or wholesale through corporations to their employees, or through affinity and membership organizations to their members, the subscriber pays us directly with a credit card or PayPal account either on a monthly or annual plan. On an access basis, which we currently use only with corporations, affinity and membership organizations, hospitals and other business to business customers, we charge a monthly fee to the organization based on the number of users who will have access to our services through such organization, whether or not such users actually enroll. During the three and nine months ended September 30, 2012, the Company received $31,017, and $130,943 from subscriber revenues, respectively, which represents 9.0% and 18.3% of our revenues for such periods, respectively.


                                       16

--------------------------------------------------------------------------------

We also derive our revenues from the sale of our MMRPro system, which includes a high-tech scanner, various licenses to use third party software, a license to use MMR's proprietary MMRPro application software, dedicated telephone lines, secure online storage and warranties. Installation and training are provided as part of the agreement. Software licenses, telephone lines, online secure storage and warranties are provided over the three year term of the agreement. Our customers pay these contracts in advance and are not refundable. We allocate the revenue derived from these arrangements among all the deliverables, based on the relative selling price of each deliverable. With the exception of MMR's proprietary MMRPro application software, we used third party evidence to set the selling prices used for this allocation. During the three and nine months ended September 30, 2012, the Company received $314,804, and $425,083 from MMRPro revenues, respectively, which represents 91.0% and 59.3% of our revenues for such periods, respectively.

There are No Baby Steps in Sales.

On September 27, 2012, the Company signed an agreement with VisiInc PLC, which is incorporated in this filing as Exhibit 10.1, for the sale of a minimum of 1,275 MMR Pro systems through a large reseller of medical products and services to health care professionals. As of September 30, 2012, we had delivered the first 25 MMRPRo systems. In addition, the agreement obligates VisiInc PLC to purchase a minimum of 50 MMRPro by the first quarter of 2013. MMRPro will be bundled with other Visi products and marketed as VISI MMRPro. The VISI MMRPro systems are being sold through the Seagate VAR and OEM channels, which includes a syndicate of Seagate VARs, as well as through the Burkhart Dental channel, as part of a Seagate/Visi/MMR/Via3 product bundle. The entire product bundle will be featured at the Synnex VAR conference "Varnex" in Las Vegas on November 14, 2012 to an estimated 700 VAR partners.

The bundle offering also includes Seagate's Network Attached Storage ("NAS") Boxes (NAS440), which, when connected to VISI MMRPro, will store documents and images created in the VISI MMRPro system in the NAS boxes, as well as in MMRPro.

Initially, the Agreement calls for exclusivity in the dental market through Burkhart Dental ("Burkhart"), which has an estimated 24,000 dental office clients. Burkhart has already begun the process of installing MMRPro systems in several of its dental clients' offices. Although the Agreement is based on selling exclusively to the dental channel, VISI has subsequently requested exclusive rights to include, legal, accounting and other verticals. As a result, the Company believes the number of units may increase.

We are also generating revenues from the licensing of our biotech assets, which may include non-refundable license and up-front fees, non-refundable milestone payments that are triggered upon achievement of a specific event and future royalties or lump-sum payments on sales of related products. We record these licensing revenues under "License Fees - Biotech" in our income statement. We are sometimes paid an upfront license fee and milestone payments and we recognized these fees as revenue as payments were received. During the three and nine months ended September 30, 2012, the Company received $0, and $100,000 from Celgene, respectively, which represents 0% and 13.9% of our revenues for such periods, respectively.

We also have generated revenues from licensing the sale and marketing of our services internationally and, to a lesser extent, from ancillary fee payments including web and marketing development services, amongst others. We record these licensing revenues under "License Fees" and other ancillary revenues under "Other Revenues" in our income statement. When we enter into a licensing arrangement, we are sometimes paid an upfront license fee and typically receive ongoing royalty payments that are often based on a percentage of revenue earned by our licensee. We recognize these fees over the license period. When we receive ancillary one-time payments, we record them when services or products are delivered.

In addition, we plan on generating future revenues from the licensing of our biotech and health IT patents. In the third quarter of 2012, we retained the law firm of Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor LLP (Liner) to lead the effort. With Liner's assistance, we will pursue markets that rely on the Company's patented health IT technologies, including hospitals, healthcare providers and physician group practices using document management, imaging, faxing and/or sharing of paper-based medical records into digital online Personal Health Records. The Liner firm will protect and monetize the Company's intellectual property, including the past, present and future use by third parties of its health IT and Biotech patents. Liner will also work with existing consultants and bankers to identify markets and potential infringers, including healthcare IT service vendors and healthcare providers. We will record those fees as revenue as payments are received. These fees may include non-refundable license and up-front fees, non-refundable milestone payments that are triggered upon achievement of a specific event and or future royalties or lump-sum payments on sales of related products.

There are No Baby Steps in Sales.


                                       17

--------------------------------------------------------------------------------

Cost of Revenue

Our cost of revenue includes the cost of maintaining our voice and fax mailboxes, long-distance call transport costs, fax and voice call processing costs, credit card transaction processing costs, web hosting and management fees, website maintenance and support costs, costs associated with creating and mailing enrollment packages to our subscribers and the cost of Kodak scanners. Cost of revenue also includes customer service costs. We also charge to cost of revenue our direct selling costs, which include commissions paid to sales representatives who sell our wholesale and access based accounts.

Operating Expenses

The largest component of our operating expenses is our general and administrative expenses, which include personnel salaries and benefits, office rent and supplies, insurance costs, fees for legal and professional services, as well as our expenses for corporate telecommunications and internet access not associated with our products. Our operating expenses also include sales and marketing expenses (which include expenses associated with attending trade shows and travel costs, as well as a portion of personnel salaries allocated to sales and marketing activities), as well as technology development expenses (which includes expenses related to research and development as well as a portion of personnel salaries allocated to development activities).

Recent Accounting Pronouncements

For a description of recent accounting pronouncements and how we apply such pronouncements to our financial statements, see the accompanying notes to our consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.

Factors Affecting Future Results

Intellectual Property

Over the past year, we have been focusing on maximizing the value of our intellectual property portfolio, mainly the Health IT patents that have been granted since the end of last year. To that end, the Company announced in August that it had retained the law firm of Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor LLP ("Liner") as patent litigation counsel to assist us in monetizing our extensive patent portfolio of global Health IT patents and biotechnology assets. Due to changes in U.S. healthcare laws, most notably the HITECH Act of 2009, healthcare professionals are being required to provide patients with online access to their personal health information by 2014. We believe that the Company holds significant foundational patents which are relevant to providers who communicate health records in that they limit their ability to communicate without infringement.

In September, the Company began the process of pursuing claims for infringement against hundreds of healthcare providers and other organizations that use document management, imaging and faxing solutions to transmit medical records into digital online Personal Health Records in manners that could infringe on our intellectual property. MMR is also offering a program of annual renewable licenses to healthcare professionals that are not providing MyMedicalRecords.com or using the Company's MMRPro document management and imaging solution.

In the third quarter, the Company was successful in receiving two additional Notices of Allowance ("NOA") granted by the United States Patent and Trademark Office (as detailed below in the "MMRGlobal Health Information Technology Patents" section) with one of the two having become an issued patent in October 2012, which helped to strengthen our health IT portfolio and raised the bar for PHRs. The Company believes that the new patents make it extremely difficult to comply with certain MU requirements under HITECH without a license from MMR for the Company's IP.

The MMR patent portfolio was created in conjunction with the intellectual property law boutique of McKee, Voorhees & Sease, P.L.C. ("MVS"). MVS has worked with MMR from the beginning and continues to assist in building U.S. and international patent portfolios in the health information technology and biotechnology areas.

Exploiting MMRGlobal Biotech Assets and Patents

Although the Company's primary business is the Web-based storage and management of personal and professional health and vital records, we acquired intellectual property rights to certain biotech assets through the Merger with Favrille, Inc. which currently includes 3 U.S. patents, 4 U.S. pending patent applications, 6 patents in foreign countries and 14 pending patent applications in foreign countries. Pre-Merger, the Company spent more than $140 million in development of the biotech assets, which are comprised of patents, patient samples and data from the FavId™/Specifid™ idiotype vaccine trials and our proprietary anti-CD20 antibody panels to treat B-cell lymphoma and additional B-Cell mediated conditions such as rheumatoid arthritis. Subsequent to the Merger, we have recovered additional intellectual property, including certain physical assets used by Favrille, Inc. in the form of over 1,800 patient tissue samples, samples of the B-Cell vaccine, a collection of insect cells used in the manufacture of the vaccine and other materials collected during the Company's pre-Merger FavId™/Specifid™ vaccine trials. The insect cells are of a particular kind believed to be susceptible to a particular baculovirus infection providing unique utility including Trichoplusia ni (Hi-5) and Spodoptera Frugiperda (Sf9) cells which are important to the Company and a material element in its issued patents numbers 6,911,204, 8,114,404 and 8,133,486 as well as pending patent applications.

The Company was granted a Notice of Allowance from the Mexican Industrial Property Institute (the equivalent to the United States Patent and Trademark Office) during the second quarter for the patent entitled "Antibodies and Methods for Making and Using Them" (Patent No. MX302058). After successfully prosecuting the breadth of the allowed Mexican Patent, the patent was granted to cover all of the Company's proprietary antibodies that have particular utility in fighting cancers. The Mexican Patent represents the first of the Company's patents for its anti-CD20 monoclonal antibody assets. Patents for the Company's antibodies are also pending in a number of additional countries including the United States, Australia, Brazil, Canada, China, Hong Kong, India, Europe, Japan and Korea. The anti-CD20 monoclonal antibodies are considered valuable assets of the Company based on the commercial value and benefits demonstrated by Rituxan®, the first monoclonal antibody approved by the FDA with reported sales of $7.1 billion in 2011. Rituxan is due to go off patent in 2015.

MMRGlobal's biotech patents also include the B-Cell vaccine patents and patent applications entitled "Method and Composition for Altering a B Cell Mediated Pathology" which relate to methods of manufacturing compositions for B-cell vaccines used in the fight against lymphoma and potentially other forms of cancer, including U.S. Patents 6,911,204, 8,114,404 and 8,133,486. An additional manufacturing divisional patent application was filed with the Mexican Industrial Property Institute in the third quarter after the awarding of a second Mexican patent No. MX302477 in June to further enhance the protection of the manufacturing patents already issued in various countries, including the U.S. The Company continues its pursuit of robust patent protection around the world in various countries of commercial interest.

In addition to our patent litigation firm, Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor, and our investment banking firm, B. Riley, we continue to work with scientists and experienced venture capitalists to assist us in generating revenue through licensing agreements as would be usual and customary in that industry. Moreover, we plan to continue pursuing license agreements with companies like Celgene that have expertise in the area of biotechnology and specifically in treating lymphomas and other cancers, and which can benefit from the use of our clinical and scientific data.

MMRGlobal Health Information Technology Patents

Currently, the Company's health IT patents have been either issued or are pending in more than 13 countries, and our Personal Health Records patent portfolio has been the subject of worldwide rigorous examination creating a significant licensing opportunity to companies providing EMR or electronic health information services globally. The Personal Health Records patent portfolio is in addition to our portfolio of biotech patents and includes issued patents on our MyMedicalRecords.com, MyEsafeDepositBox.com and MMRPro document imaging and management systems as well as the pending provisional patents and utility applications in the U.S. and numerous other countries around the world.

MMR began applying for its patents in 2005. After more than seven years of effort and the expenditure of millions of dollars in technology on behalf of our shareholders, the Company's bankers and analysts believe the licensing of our health IT patent portfolio could represent substantial ongoing revenue to the Company.


                                       18

--------------------------------------------------------------------------------

Following the approval of three of our patents by the United States Patent and Trademark Office ("USPTO") in the first quarter directed at a "Method and System for Providing Online Medical Records," we were granted a similar patent in April by the Mexican Industrial Property Institute, and most recently going into the fourth quarter, received two additional Notices of Allowance from the USPTO for health information technology patents, including U.S. Serial No. 13/041,809 and 13/352,026, making a total of five U.S. patents with additional patent applications still pending. The latest two issuances are most significant in that they cover aspects of the exchange of protected health information to and from patients, doctors, pharmacies, insurance providers and other healthcare professionals in forms including, but not limited to, email, text, phone, facsimile and web-based portals. The latest issuance, 13/352,026, was filed on January 17, 2012 and received a Notice of Allowance in less than nine months. The patent portfolio is believed to be relevant to providers of online medical records and transmitters of electronic health records in that it will limit their ability to communicate protected health information without potentially infringing. The Company is in the process of negotiating licensing agreements on terms that will allow MMR's Personal Health Record to be sold as an Administrative and General cost under reimbursed managed care plans such as Medicare and Medicaid.

After the latest patent issuances, MMR believes it holds significant foundational patents entitled "Method and System for Providing Online Medical Records" and "Method and System for Providing Online Records" and that the patents are relevant to any provider who transmits Electronic Health Records in that they limit their ability to communicate without infringement. Accordingly, the process of enforcement and licensing of its patent portfolio through the law firm, Liner Grode Stein Yankelevitz Sunshine Regenstreif & Taylor LLP, has continued to build throughout the third quarter including a campaign of sending 250 letters per week to hospitals, medical groups, pharmacies and other healthcare professionals as part of efforts to license the MMR IP.

Starting in 2014, Meaningful Use requirements mandate that patients receive timely online access to their personal health information. The Company believes that the claims in its patent portfolio provide solutions necessary and desirable for healthcare providers to meet those requirements. Because the MMR HIT Patents issued thus far have priority dates in advance of the relevant Meaningful Use requirements, the Company believes that its patent portfolio makes it difficult for eligible healthcare professionals to fully qualify for incentives under the HITECH Act without licensing from MMR. Also, because of government incentives, there will continue to be increased interest and need by hospitals and physician groups to deploy Web-based patient portals that have access to medical records.

The Liner law firm is also representing the Company in the collection of $30 million dollars under the Company's Settlement and Patent License Agreement with SCM as further described in our Litigation Matters section herewith.

The Company also has hundreds of patent claims in pending U.S. applications, including 17 U.S. utility and provisional patent applications related to health information technology. These include applications directed towards a Mobile Platform for Personal Health Records, a Method and System for Managing Personal Health Records with Telemedicine and Personal Health Monitoring Device Features, Prepaid Card Services related to Personal Health Records, a Universal Patient Record Conversion Tool, Aggregation of Data from Third Party Systems into a Personal Health Record Account and Electronic Health Records in Clinical Trials. The Company believes that many of the pending claims will ultimately be allowed including both health IT and non-health IT/medical applications which are pending in the Company's entire patent portfolio. We also have 5 patents in foreign countries and 9 pending patent applications in foreign countries, and one pending Patent Cooperation Treaty ("PCT") application.

Our patent portfolio also includes numerous other issued patents and pending applications in the U.S. and countries of commercial interest including Australia, Singapore, New Zealand, Mexico, Canada, Hong Kong, Japan, South Korea, Israel and European nations.

Competition

Major competitors include NoMoreClipboard.com, WebMD Health Manager, MyMediConnect and Zweena Health, however, MMR believes that it offers the most comprehensive, universal, versatile and easy-to-use service creating a competitive advantage in the marketplace:

   º Universal PHR built on patented telecommunications platform that seamlessly
     integrates Internet, fax, and voicemail technologies to transmit, store and
     share medical records enabling multi-platformed, multi-channeled and more
     connected healthcare.
   º Interfaces/communicates with virtually any EMR platform (easy integration
     capability).
   º More cost-effective and easy-to-use interface relative to other options
     (competitors offer limited document management capabilities).
   º Company's numerous patents and IP act as a barrier to entry.

Moreover, even though we are competing with companies that spend hundreds of millions of dollars in the health IT market, we have managed to spend a fraction of that amount and still enjoy strategic partnerships and sales and licensing agreements designed to generate revenues with companies such as UST Global, 4medica, Alcatel-Lucent and ng Connect, Chartis Insurance, Coverdell, China Joint Venture Partner Unis-Tonghe Technology (Zhengzhou) Co., Ltd., Australian licensee VisiInc PLC, Eastman Kodak, E-mail Frequency, Fujitsu Computer Products of America, Inc., Interbit Data, MedicAlert, REACH Air Medical Services, Mickey Fine Pharmacy, St. Helens Hospital in the United Kingdom, XN Financial, VIDA Senior Resource, Inc., and healthcare providers and surgery centers across the United States. The Company has also entered into agreements to provide its products and services through Mobile Home Park chains, Evolution Fitness (formerly Gold's Gyms), and Datavo Business Data & Voice Solutions, and is planning on launching services under an amendment to its Chartis/AIG Agreement with Travel Guard.

Although we have competition, we believe that our product is the most robust and comprehensive product in the market and we feel confident that the patents surrounding the products will prove to have tremendous potential in the end. This was made clearer by the 2012 National Physicians Survey published in June, which showed that fax remains the predominant form of communication for 63% of healthcare providers. While 33% of physicians use a laptop, 20% use Smartphones and 12% use iPads in their practices, the fax is "still king with physicians" along with the telephone. We believe this survey further highlights the value of our patented products and services since telephone and fax make up the backbone and infrastructure of the Company's SaaS Personal Health Record and professional document management systems.


                                       19

--------------------------------------------------------------------------------

Marketing and Sales

Marketing Update

Demand for both our consumer and professional medical records products is driven primarily by the U.S. healthcare market and the health information technology market. We are expanding our consumer market through strategic partnerships with nurse advocates, local pharmacies, home healthcare specialists, and medical supply companies, all of whom have significant one-on-one relationships with patients who can benefit immediately from the use of our PHR. Likewise, we have created a retail consumer model through the use of prepaid Personal Health Record cards, which will be sold through retail brick and mortar outlets. On the professional side, demand is increasing in the field of ambulatory surgical centers and EMR systems as well as other clinics looking for an elegant and cost-effective scanning and document management solution. We also view specialty practice areas such as pediatrics, chronic care illnesses and geriatrics as fertile grounds for expanding the MMRPro solution with the integrated patient portal MMRPatientView.

With the use of teleconsulting and telemedicine becoming increasingly prevalent in healthcare, our MyMedicalRecords PHR solution provides a well-suited platform to facilitate collaboration between patients and their doctors and other healthcare providers with the ease of use and integration the solution provides. Through the Company's relationship with ngConnect and Alcatel-Lucent, we have launched a telemedicine reporting module inside the MyMedicalRecords PHR and are further working on identifying strategic partners to send medical information through our portal. We are also actively working with ng Connect to assist the Company in taking our Personal Health Record products and services into Alcatel- Lucent's government and telecommunications clients. Additionally, we are continuing to work with major telecommunications companies to bring the MyMedicalRecords.com Personal Health Record to Smartphones. We continue to be actively involved in meetings with Verizon. The Company believes that its patents give us a competitive advantage when negotiating services with the major carriers since many mobile phones receive fax.

As previously reported, we are working with 4medica to integrate our PHR with laboratory reporting services which is used by tens of thousands of doctors nationwide. Once this application is available, information will be put directly into subscribers' accounts and users will be able to view their laboratory report results in binary format, meaning they will also be able to chart and graph this data. The ability for consumers to directly access their lab report results is also a national initiative being driven by the Department of Health and Human Services which under "new rules" seeks to expand the rights of patients to gain access to test results reports directly from labs using health IT solutions. We also are working with 4Medica to create a "fax portal" for their 30,000 doctors to facilitate better handling of the still large number of lab results that are paper-based in their network. That portal, which creates a significant new revenue stream for the Company, was completed in September and is expected to begin to be made available by 4Medica to its client doctors in November.

Under the Health Information Technology for Economic and Clinical Health Act (HITECH), which was part of the 2009 American Recovery and Reinvestment Act (stimulus bill), a core "Meaningful Use" objective requires that for physicians to qualify for government incentive payments, they need to provide more than 50% of their patients with timely electronic copies of their personal health information in Stage 1, transitioning to the same measure of patients being provided the ability to view online, download and transmit their health information in Stage 2, and at least 90% of patients in Stage 3 by 2014. This is believed to be spurring eligible healthcare professionals to seriously focus on how they will offer Personal Health Records to their patients. As a result, the Company entered into such strategic partnerships in the last year as we have with UST Global and Interbit Data, the latter to provide our MMRPatientView portal to users of the MEDITECH EMR system. MEDITECH is being used by more than 650 hospitals nationwide. Although the solution is only deployed for MEDITECH at this time, we believe that it can work with virtually any EMR platform, which opens up a significant new market opportunity for us.

On the professional side, after nearly three years of development, the Company launched the modules that enable physicians to receive and send faxes from inside a fully functional EMR. Partnered with 4medica, we began incorporating our EMR/EHR Fax Communications Gateway in 4medica's Certified Meaningful Use Integrated Electronic Health Record (4medica iEHR®) at the end of June. 4medica provides the industry's leading cloud clinical integration platform and solutions and the program will also use MMR's patented document management and imaging solution to facilitate electronic consultations for both inbound and outbound referral letters. 4medica will pay monthly minimum usage and patent licensing fees based on the size of the Gateway plus a 20% royalty on revenues generated from healthcare providers.

We plan to continue to take advantage of the burgeoning consumer health information market and leverage federal legislation and initiatives. Beyond HITECH, we believe that the healthcare reform legislation passed by Congress and signed by the President into law in March 2010 (Patient Protection and Affordable Care Act, or ACA) also represents a significant behavioral shift in how consumers will manage their healthcare because of the requirement that most everyone have insurance. After the U.S. Supreme Court heard oral arguments challenging the law during the last week of March 2012, the Court announced its ruling on June 28 to uphold most of the healthcare reform law, which includes the individual mandate requiring most U.S. residents to have health insurance. Although the ruling did not touch directly on health IT or affect the federal incentive programs for EMR/EHR adoption, healthcare reform is now able to move forward with greater clarity. The challenges created by the influx of newly insured to better manage the cost of their care along with the administrative efficiencies mandated by the ACA should see greater demand for health IT solutions such as those provided by MMR.

With government mandates and stimulus building both awareness and momentum for personal and electronic health records, others not directly affected by Meaningful Use incentives are driving healthcare technology to control healthcare spending, and we began recalibrating our marketing and sales strategies in 2012 to allocate resources in these areas. These include pharmacies that can offer patients drug interaction tools within a PHR and prescription refill reminders, the patient-centered medical home where caregivers placed PHRs at the top of their list of technologies that can best support their practice issues, retailers who can use this as a tool to create stickiness and build loyalty programs at the point-of-sale, and the world of telemedicine where data from remote patient monitoring devices is transmitted by smartphones into a patient's PHR for sharing by the entire medical team, such as what the Company is doing with Alcatel-Lucent.

It should also be noted that demand is not solely U.S.-centric. As health IT spreads around the globe, and other countries intensify their focus on controlling healthcare costs through the improved use of information technology, we are seeing increased demand internationally. This expansion and increased demand is evidenced by the Company's agreements in China, Australia and other countries in development to offer Personal Health Record and electronic document management and imaging services. Moreover, in a global economy, companies are increasingly sending employees overseas, a practice which is expected to increase demand for our MyMedicalRecords PHR or MyEsafeDepositBox among ex-pats, particularly in Europe and the Middle East. Additionally, the growth of health IT at home and abroad is further impetus for ensuring the protection and enforcement of our patents worldwide.


                                       20

--------------------------------------------------------------------------------

Sales Update

MyMedicalRecords PHR

In Q1 2012, we analyzed our sales and distribution strategy and identified eight vertical business opportunities designed to generate accelerated revenue by putting Personal Health Records directly into the hands of consumers. These verticals are: independent pharmacies, pharmacy chains and other mass merchandisers, visiting nurses, caregivers, patient advocates, in-home sales affiliates, hospitals and medical supply companies. The Company believes that it will be able to efficiently and profitably gain traction in these markets to create revenue that will allow us to focus on many larger strategic, government, international and licensing opportunities such as the MMR's agreements with Chartis Insurance, MedicAlert, Unis-Tonghe in China and VisiInc in Australia, which take long periods of time and significant capital to incubate and develop to their full revenue potential.

As part of the strategy, we are in the process of creating a national sales representative network that will be able to bring us into the larger retail accounts such as chain pharmacies. The Company is completing the agreement process with the first of these representatives and expects to be calling on large retailers by end of Q3. Consumers will be able to purchase a Prepaid Personal Health Record card at retail, which will be manufactured in a high quality credit-card style. The package surrounding it will provide information on the PHR service to encourage both initial purchase and then active use. Because the prepaid card is high quality, emergency personnel will be able to find it in a user's wallet in the event of a medical emergency, which reinforces the special Emergency Login feature of the MMR product. The Company plans to have a magnetic stripe on the back of the card as well, which will allow us to offer the prepaid product in conjunction with pharmacy or store loyalty programs. In September, the Company hired Mike Dietrich, a business executive formerly with Office Depot, School Specialty and Troxell Communications, to assist the Company with leading the effort to sell its MyMedicalRecords Personal Health Record products and services to retailers, with particular focus on the launch of MMR's Prepaid Personal Health Record cards at retail. Dietrich will also manage sales to the education marketplace including schools and universities. A nine-year veteran of the United States Air Force, Dietrich will also assist the Company with programs for Veterans, including connecting to MMRGlobal'sMyBlueButton.com initiative. Additionally, Dietrich will use his experience and expertise to work with CEO Bob Lorsch on the sale of Emergency Services through Personal Health Records to major wireless carriers and cell phone retailers and operators.

In addition, the Company is working to create partnership programs with caregivers who can distribute its product to patients who most need a Personal Health Record. The Company is in the process of launching its program with VIDA Senior Resource, Inc., a family owned and operated community resource organization headquartered in Boise, Idaho, which provides senior home care services nationwide through a network of certified owned and operated agencies. It is estimated that our product will be sold to some 50,000 patients. It is important to note that VIDA will be selling the PHR at a significantly higher price point, $19.95 per month or $199.95 annually, than it is currently being sold direct to consumer on the Company's Website. The Company has conducted several trainings for VIDA personnel in preparation for rolling out the product to VIDA clients. At the same time, the Company announced relationships with patient advocates who are selling the MyMedicalRecords PHR directly to their clients. The Company also attended the Visiting Nurses Association of America trade show in Phoenix in order to begin to create distribution to that channel in which 90,000 nurses work with nearly 4 million patients nationwide. The Company has conducted training for Vida offices in Las Vegas and in San Diego and is now rolling out a telemarketing program with the San Diego office, which deals with private pay rather than Medicare clients. In addition, the Company is beginning to work with Vida's Assisted Transition franchisees to make the Personal Health Record part of their offering to the clients they help to move into assisted living and nursing homes. It is expected that this program will begin to be tested late in the fourth quarter. The programs the Company has created for Vida are requiring significant lead time, training and testing to deploy.

We are actively working with E-mail Frequency and its partners, AmeriDoc™ and National Benefit Builders, Inc., on embedding MyMedicalRecords in benefit programs as part of a suite of healthcare products and services.

The Company recently introduced a new enhanced service called Personal Touch, in which a credentialed health professional collects the medical records on behalf of a MyMedicalRecords.com subscriber, then works with the subscriber to organize the records and put them into the PHR. The Company believes that the new service will help to speed-up adoption of the PHR product because it removes the need for the user to collect his or her own medical records, thus providing a tremendous convenience. The Personal Touch service also is sold at a premium price - $179.95 annually instead of $99.95 annually. Initial test marketing of the product has shown very promising metrics and we believe that the Personal Touch concierge service can make a significant contribution to our subscriber revenues beginning in Q3 as the marketing program expands after successful testing of the concept. The above is in addition to our ongoing main sales channels focused on healthcare professionals, direct to consumer, corporate sales, insurance companies, affinity group and membership organizations.

In the second quarter, the Company increased utilization of social media (YouTube, Facebook, Twitter) to enhance brand loyalty for our MyMedicalRecords PHR and connect with a greater number of potential users. The Facebook advertising campaign that we have been running delivered 20.7 million impressions in the month of June. The campaign uses targeted messages which drive people to both disease-specific and family wellness pages such as www.mymedicalrecords.com/diabetes and www.mymedicalrecords.com/family. In the fourth quarter, the Company also is expected to roll out an affiliate marketing program, in which marketing partners such as list publishers and health-related websites will be offered the ability to bring the Personal Health Record to their customers on a "Per Acquisition" basis, which means MMR only pays them if the Company received a paid subscription. This program will give MMR the ability to put its marketing message in front of millions of new eyeballs, in a targeted way, without having to pay cost of advertising upfront.

MMRPro

Sales of MMRPro are being directed at physicians, particularly small group and sole practitioners who still do not have any way to digitize the paper in their offices and who do not want to invest the hundreds of thousands of dollars necessary to implement an EMR system, community hospitals and other clinics which do not have the funds or technology resources to invest in a fully functional EMR system, surgery centers and specialty clinics, and EMR and EHR vendors who are looking for a way to bring a patient portal into their systems without having to build their own import modules. We also work with document imaging sales and distribution channels, and the Company is utilizing distribution networks of companies who already sell other products into doctor offices. These distribution partners also help increase our integration and support network.

We are also continuing to build relationships with companies managing Ambulatory Surgical Centers (ASCs), and in the second quarter we signed two additional agreements with, Regent Surgical Health to install MMRPro systems. The MMRPro systems were installed at facilities managed by Regent in Fort Myers, Florida and New Brunswick, New Jersey. The Company expects additional agreements in Chicago, Illinois this quarter. These sales are in addition to previous sales of MMRPro systems for Regent, a leading surgery center management and development company that currently manages more than 20 facilities nationwide. Additionally, through our partnership with Interbit Data, we created a joint software solution that allows hospitals and other clinical facilities to use a Meaningful Use certified solution to instantly make health information available to patients securely over the Internet using MMRPatientView from any EMR system without first having to scan, fax or print any documents. The Interbit Data-MMR module, which the Company presented at the International MUSE Conference in May-June, is already being installed in hospitals and is certified for Meaningful Use with MEDITECH systems.


                                       21

--------------------------------------------------------------------------------

In June, we announced a new business arrangement with Fujitsu Computer Products of America, Inc., one of the world leaders in scanning solutions, which incorporates MMRPro with their new ScanSnap N1800 Network Scanner. Utilizing a proprietary interface created by DocuFi™, the document imaging solution offers smaller physician offices, community hospitals and surgery centers the MMRPro system as a lower cost service alternative to digitize medical records.

In September, the Company signed an Agreement with VisiInc, which has committed to selling an initial 75 units, of which the first 25 have been delivered, the next 25 are scheduled to be delivered by the end of the fourth quarter, and the remaining 25 in the first quarter of 2013. Starting in the second quarter of 2013, the agreement calls for the reseller to purchase or license a guaranteed minimum of 100 additional MMRPro systems per quarter over the life of the three-year contract, which represents a minimum of $5 million to $16.8 million in revenues in addition to $1,050,000 for the first 75 units. VisiInc's primary focus is distributing the MMRPRo product into the dental channel, which represents a new opportunity for the Company.

China

In June 2012, the Company received its official business license from the Chinese Government to operate the Unis Tonghe MMR International Health Management Service Co., Ltd. Joint Venture (the "JV"). The license enables the JV to develop medical information management software, medical information technology software, health records management systems, and provision of related services, including the Company's Personal Health Record systems. The JV will offer its products and services to the Chinese government, hospitals, healthcare facilities and to the public, and is valid through 2042. The completion of the definitive Joint Venture agreement between MMR and Unis-Tonghe Technology (Zhengzhou) Co., Ltd., or Unis, was first announced in January 2010, with the cooperation to build a customized version of MMR's proprietary PHR services and professional document imaging and management solutions in China. During the application and registration process of responding to requests from the Chinese Government, the JV has already been installing early stage EMR systems in three hospitals in Henan Province, with a population of over 100 million. The JV, under a 30-year operating agreement, has also begun participating in formal government bids to commence numerous medical records projects in China, which include continuing to offer MMR's Personal Health Record services and other related products.

Since 2010, Alcatel Lucent has provided support to MMR in China, and MMR also became a member of Alcatel Lucent's ng Connect program. The Unis-Tonghe/MMR JV is working with Alcatel-Lucent to also assist the launch of MMR's Personal Health Record products and services in China. More recently MMR has begun conversations with ng Connect to expand that support throughout the Asia Pacific region. As part of this relationship Alcatel-Lucent is also supporting the JV's first installations of MMR Personal Health Records in a 10-hospital network operating in Qinyang City and Xiuwu County in the prefecture-level city of Jiaozuo in northern Henan Province. The 10 hospitals serve approximately one million patients.

We also continue to leverage our resources in China with other U.S. partners on the ground while our JV partner continues to actively support Chinese Local Government projects utilizing our patented and patent-pending technologies, platforms and features. Furthermore, since Alcatel-Lucent owns 50% plus one share of Shanghai Bell Co. Ltd., and MMR's platform uses a telecommunications infrastructure, the relationship is expected to speed-up the launch of the Company's Personal Health Record products and services throughout China.

Australia

There is a very active market for Personal Health Records in Australia where MMR holds dominant patents in the market. Through its Australian strategic partner, VisiInc PLC, this includes integrating telemedicine applications, document management solutions and sales to affinity programs. Just three weeks following the launch of the Australian Government's Personally Controlled eHealth Record (PCEHR) on July 1, 2012, the Department of Health and Ageing announced it was putting the records system out to bid after two years of planning and reportedly hundreds of billions of dollars' worth of investment. MMR and VisiInc plan to offer a combined product that represents a solution within the PCEHR standard as defined by the Government's National E-Health Transition Authority (NEHTA). The Company believes this represents an enormous opportunity for both companies to consolidate their technologies and enable VisiInc to leverage the MyMedicalRecords Australian patent portfolio to implement a secure NEHTA-compliant service that delivers unified integration of electronic Personal Health Records to work with the take-up of any system, from digitizing plain paper files to transmitting, storing and sharing digital files.

Value Added Reseller ("VAR") Networks

On September 27, 2012, the Company signed an agreement with VisiInc PLC, which is incorporated in this filing as Exhibit 10.1, for the sale of a minimum of 1,275 MMR Pro systems through a large reseller of medical products and services to health care professionals. As of September 30, 2012, we had delivered the first 25 MMRPRo systems. In addition, the agreement obligates VisiInc PLC to purchase a minimum of 50 MMRPro by the first quarter of 2013. MMRPro will be bundled with other Visi products and marketed as VISI MMRPro. The VISI MMRPro systems are being sold through the Seagate VAR and OEM channels, which includes a syndicate of Seagate VARs, as well as through the Burkhart Dental channel, as part of a Seagate/Visi/MMR/Via3 product bundle. The entire product bundle will be featured at the Synnex VAR conference "Varnex" in Las Vegas on November 14, 2012 to an estimated 700 VAR partners.

The bundle offering also includes Seagate's Network Attached Storage ("NAS") Boxes (NAS440), which, when connected to VISI MMRPro, will store documents and images created in the VISI MMRPro system in the NAS boxes, as well as in MMRPro.

Initially, the Agreement calls for exclusivity in the dental market through Burkhart Dental ("Burkhart"), which has an estimated 24,000 dental office clients. Burkhart has already begun the process of installing MMRPro systems in several of its dental clients' offices. Although the Agreement is based on selling exclusively to the dental channel, VISI has subsequently requested exclusive rights to include, legal, accounting and other verticals. As a result, the Company believes the number of units may increase.

Results of Operations for the three and nine months ended September 30, 2012 as Compared to the three and nine months ended September 30, 2011

Revenues.

Revenues for the third quarter of 2012 were $345,821, a decrease of $6,237 or 1.8% compared to $352,058 in 2011. Revenues for the nine months ended September 30, 2012 were $717,398, a decrease of $372,278 or 34.2% compared to $1,089,676 in 2011. The year-to-date decrease was primarily due to lower biotech license fees, which varied based on the milestones reached in the same period as compared to prior year.


                                       22

--------------------------------------------------------------------------------

Cost of revenue.

Cost of revenue decreased by $108,747, or 51.7%, from $210,474 for the third quarter of 2011 to $101,727 in 2012. Cost of revenue decreased by $27,789, or 6.2%, from $448,238 for the nine months ended September 30, 2011 to $420,449 in 2012. The decrease was primarily due to decreased website hosting fees and license fees. Gross profit as a percentage of revenues was $244,094, or 70.6% for the third quarter of 2012, as compared to $141,584, or 40.2% in 2011. Gross profit as a percentage of revenues was $296,949, or 41.4% for the nine months ended September 30, 2012, as compared to $641,438, or 58.9% in 2011. Gross profit decreased for the nine months ended September 30, 2012 primarily due to lower biotech licensing fees received as compared to prior year.

Operating expenses.

Total operating expenses increased by $76,793, or 4.9%, from $1,580,885 in the third quarter of 2011 to $1,657,678 in 2012. Total operating expenses decreased by $612,532, or 12.1%, from $5,053,797 in the nine months ended September 30, 2011 to $4,441,265 in 2012. General and administrative expenses increased by $42,753, or 4.7%, from $917,525 in the third quarter of 2011 to $960,278 in 2012. General and administrative expenses decreased by $297,300, or 10.0%, from $2,979,372 in the nine months ended September 30, 2011 to $2,682,072 in 2012. The year-to-date decrease in 2012 as compared to 2011 was driven primarily by a reduction in stock-based compensation expenses of approximately $68,000 and lower consulting fees of $248,000, offset by higher office rent and office expenses of approximately $17,000.

Sales and marketing expenses increased by $50,381, or 8.5%, from $592,910 in the third quarter of 2011 to $643,291 in 2012. Sales and marketing expenses decreased by $298,955, or 16.2%, from $1,840,559 in the nine months ended September 30, 2011 to $1,541,604 in 2012. The year-to-date decrease in 2012 as compared to 2011 was primarily due to lower investor relations costs of approximately $229,000 and a reduction in stock-based compensation expenses of $140,000, offset by higher marketing expenses of approximately $70,000.

Technology development expenses decreased by $16,341, or 23.2%, from $70,450 in the third quarter of 2011 to $54,109 in 2012. Technology development expenses decreased by $16,277, or 7.0%, from $233,866 in the nine months ended September 30, 2011 to $217,589 in 2012. The year-to-date decrease in 2012 as compared to 2011 was primarily due to an overall decrease in product management expenses.

Change in valuation of derivative liabilities.

In November 2007, Favrille issued warrants to purchase 4.4 million shares of common stock in conjunction with a registered direct offering of common stock and warrants. We assumed these outstanding warrants as a result of the Merger on January 27, 2009. The value associated with these warrants was recorded as a liability utilizing the Black-Scholes valuation model, and revalued at the end of each quarter. The change in valuation of the warrants from the beginning to the end of the period is recorded as change in valuation of derivative liabilities. There was no change in valuation for the third quarter of 2012.

We also had certain non-employee options and warrants outstanding which were accounted for as derivatives as there was a possibility, although remote, that the Company may not have enough authorized shares to settle its 12% Convertible Promissory Note obligations using common stock. The event giving rise to this condition was the first Convertible Note the Company entered into on July 16, 2009. We remedied this condition on May 5, 2010 when all convertible notes were converted into common stock and warrants granted in connection with the convertible notes were exercised. On May 5, 2010, we again valued these contracts using the Black- Scholes option valuation model and we recorded the difference between the value at December 31, 2009 of $1,534,824 and the value at May 5, 2010 of $7,397,392, as a loss on change in value of derivatives for the year ended December 31, 2010 of $5,862,568. On May 5, 2010, we reclassified the value of the derivative liabilities back into equity. Since then, no additional valuation was recorded.

There was no change in the valuation of derivative liabilities for the nine months ended September 30, 2012.

Interest and Other Finance Charges, Net.

We had interest and other finance charges, net of $113,131 for the third quarter of 2012, a decrease of $500,113 from $613,244 in 2011. Interest and other finance charges totaled $341,215 for the nine months ended September 30, 2012, a decrease of $1,457,708 from $1,798,923 for the same period of 2011. The decrease was primarily due to lower non-cash interest expense attributed to the conversion feature and warrant issued with Convertible Promissory Notes of approximately $1.3M and lower line of credit interest expense of approximately $129,000.

Net loss.

As a result of the foregoing, we had a net loss of $1,526,715 for the third quarter of 2012 compared to a net loss of $2,140,489 for the third quarter of 2011. We had a net loss of $4,485,531 for the nine months ended September 30, 2012 compared to a net loss of $6,248,027 for the same period of 2011.

Going Concern

As more fully described in Note 1 to the consolidated financial statements appearing above in this Quarterly Report on Form 10-Q, our independent registered public accounting firm included an explanatory paragraph in their report on our 2011 financial statements for the year ended December 31, 2011 related to the uncertainty of our ability to continue as a going concern. As of September 30, 2012, our current liabilities of $8,481,841 exceeded our current assets of $625,114.

For a description of our management's plan regarding our ability to continue as a going concern, please see Note 1 to the financial statements included above.

Liquidity and Capital Resources

As of September 30, 2012, the Company's current liabilities exceeded its current assets by $7.86 million. We have incurred net losses of $1,526,715 and $2,140,489 for the three months ended September 30, 2012 and 2011, respectively, and $4,485,531 and $6,248,027 for the nine months ended September 30, 2012 and 2011, respectively. At the current level of borrowing, we require cash of $275,000 per year to service our debt. Furthermore, not including debt service, in order to continue operating our business, we use an average of $278,000 in cash per month, or $3.3 million per year. At this rate of cash burn, over the next twelve months, the Company's existing current assets will sustain our business for approximately one to three months.


                                       23

--------------------------------------------------------------------------------

In addition to the above cash burn from operations, we will be required to obtain additional financing in order to meet the obligations for installment payments of $621,000 under the Creditor Plan and our obligations under the secured indebtedness to The RHL Group under the Seventh Amended Note (which had a balance of $1,640,328 at September 30, 2012), amongst other debt obligations. Such obligations are currently due and payable pursuant to the terms of the notes. The components of the RHL Group Note payable and the related balance sheet presentation as of September 30, 2012 are as follows: $1,005,974, which is included in the line of credit, related party; and $634,353 for other obligations due to The RHL Group, which is included in related party payables.

Traditionally, we have relied on the issuance of stock and debt to the RHL Group to finance our activities. At September 30, 2012, we had a line of credit with The RHL Group in the amount of $4.5 million. As of September 30, 2012, availability under this line of credit was $1.45 million.

Furthermore, we may utilize portions of our standby equity facility with Granite as needed. Additionally, we raised $780,000 and $1,800,858 in convertible debt during 2012 and 2011, respectively. We expect to continue offering a limited amount of convertible debt in 2012. The Company also expects sales from MMRPro, its prepaid Personal Health Record cards, and fees from patent licensing agreements to generate revenue and gross profit that will significantly improve its monthly sales and reduce annual cash burn from operations.

Cash Flows for the three and nine months ended September 30, 2012 compared to three and nine months ended September 30, 2011

Net cash used in operating activities for the nine months ended September 30, 2012 was $1,638,725, compared to $1,958,363 used in the similar period in 2011. In 2012, we had a net loss of $4,485,531, less non-cash adjustments (depreciation, amortization, common stock and warrants issued for services and interest, change in valuation of derivative liabilities, gain or loss of disposition of assets, stock compensation expense and the non-cash write-down of assets) of $1,489,518, less changes in operating assets and liabilities of $1,357,288. In 2011, cash used in operating activities included net loss of $6,248,027, less similar non-cash adjustments of $3,609,716, plus changes in operating assets and liabilities of $679,948. Compared to 2011, non-cash adjustments in 2012 were lower primarily due to a decreased in stock-based compensation expense and lower amortization of loan discount.

Net cash used in investing activities in the nine months ended September 30, 2012 and 2011 totaled $268,936 and $416,078 respectively. Compared to 2011, investing activities in 2012 were lower mainly due to a decrease in MMRPro and website development costs.

Net cash provided by financing activities in the nine months ended September 30, 2012 and 2011 totaled $1,639,270 and $2,191,737, respectively. Financing activities primarily included proceeds generated from the issuance of convertible notes, common shares and net proceeds from draw downs on our line of credit from The RHL Group, Inc., a significant stockholder wholly-owned by Robert H. Lorsch, our Chairman and Chief Executive Officer. Compared to 2011, financing activities in 2012 were lower primarily due to a decreased in convertible notes and warrant activities.

As of September 30, 2012, we had cash and cash equivalents of $42,712, compared to $180,985 at September 30, 2011.

Description of Indebtedness

The RHL Group

For a description of our indebtedness to The RHL Group, please See Note 3 - Related Party Note Payable, included above in this Quarterly Report on Form 10-Q.

The RHL Group's Seventh Amended Note had a balance of $1,640,328 at September 30, 2012. The components of the RHL Group Note payable and the related Balance Sheet presentation as of September 30, 2012 are as follows: $1,005,974, which is included in the Line of Credit, Related Party balance; and $634,353 for other obligations due to The RHL Group, which are included in related party payables. Total interest expense on this note for the three months ended September 30, 2012 and 2011 amounted to $39,201 and $27,930, respectively. Total interest expense on this note for the nine months ended September 30, 2012 and 2011 amounted to $116,155 and $88,530, respectively. The unpaid interest balances as of September 30, 2012 and December 31, 2011 were $29,478 and $24,145, respectively.

Convertible Notes

During the first quarter of 2012, the Company entered into one Convertible Promissory Note ("Note") with an accredited investor for an aggregate amount of $35,000. The note carried an annual interest rate of 12%, and was convertible at the option of the Purchaser into a number of shares of our common stock at $0.028 per share.

During the second quarter of 2012, the Company entered into thirteen different Convertible Promissory Notes (the "Convertible Notes") with twelve different unrelated third-parties for principal amounts totaling $235,000. The Convertible Notes bear interest at a rate of 6% per annum payable in cash or shares of common stock or a combination of cash and shares of common stock. The decision whether to pay in cash, shares of common stock or combination of both shall be at our sole discretion. At any time from and after the earliest to occur of (i) the approval of the stockholders' of the Company of the increase in the authorized shares of the Company's common stock from 650,000,000 to 950,000,000; or (ii) the availability of sufficient unreserved shares, the Company shall be entitled to convert any portion of the outstanding and unpaid conversion amount into fully paid and non-assessable shares of common stock. The Company elected to convert the Notes, issuing a total of 13,250,000 shares.

During the third quarter of 2012, the Company entered into eight different Convertible Promissory Notes (the "Notes") with eight different unrelated third-parties for principal amounts totaling $480,000. The Notes are convertible at the option of the Company into a number of shares of our common stock at $0.02 per share. These Notes bear interest at a rate of 6% per annum payable in cash or shares of common stock or a combination of cash and shares of common stock at the option of the Company. As of September 30, 2012, $130,000 remained unconverted.

As of September 30, 2012, a total of $1,002,808 of Convertible Notes remained outstanding and the Company or the holders had not elected to convert their Note balances into shares of our common stock.

Commitments and Contingencies

For information relating to our commitments and contingent liabilities, please see Note 5 to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q.


                                       24

--------------------------------------------------------------------------------

Off-Balance Sheet Arrangements

On January 4, 2010, we entered into a Cooperation Agreement with UNIS, which we refer to as the "Cooperation Agreement". Under the Cooperation Agreement, UNIS and the Company agreed to form the JV for the purpose of deploying our Personal Health Record services and document imaging and management solutions in China. We will own 40% of the JV and UNIS will own 60% and each party will have the right to designate two members of the JV's board of directors, with the fifth member being a Chinese citizen mutually designated by us and UNIS. Under the Cooperation Agreement, board actions will require the approval of more than three of the five members of the JV's board of directors and no material actions may be taken unless all board members are present and voting at the meeting.

Under the Cooperation Agreement, UNIS and the Company will contribute an aggregate of 50 million RMB to the joint venture, based on each party's respective ownership, in the form of intellectual property rights, equipment, brand value, cash and such other consideration as may be agreed upon by the parties. Each party's obligation to contribute to the joint venture is subject to a number of conditions, including obtaining all necessary approvals of and licenses from the Chinese government, as well as the joint venture meeting its budget, goals and objectives at the time contributions are due. Under the Cooperation Agreement, each party's contributions will be made over a period of sixty months.

For a more complete description of the terms of the Cooperation Agreement, please see Exhibit 10.26 in our annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 31, 2010.

On August 10, 2010, the Company entered into a Supplementary Agreement for the purpose of clarifying certain non-material terms of the original Cooperation Agreement mentioned above.

On July 2, 2012, the Company received its official business license from the Chinese government to operate the JV. The JV is officially licensed with the Chinese government and is approved to operate and generate revenue. The license enables the JV to develop medical information management software, medical information technology software, health records management systems, and provision of related services, including the Company's Personal Health Record systems. The JV will offer its products and services to the Chinese government, hospitals, healthcare facilities, and to the public and is valid through 2042.

The Company's entry into the Cooperation Agreement described above constitutes the creation of a direct financial obligation.

Wordcount: 10689



USER COMMENTS:


  More Newswires

More Newswires >>
  Most Popular Newswires

More Popular Newswires >>
Hot Off the Wires  Hot off the Wires

More Hot News >>

insider icon Denotes premium content. Learn more about becoming an Insider here.
There are No Baby Steps in Sales.