Ocean Thermal Energy Corp - Quarter Report: 2008 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2008

 

Commission File Number 033-19411-C

 

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).

 

 

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. As of November 10, 2008, issuer had 21,381,863 outstanding shares of common stock, par value $0.001.

 

TABLE OF CONTENTS

 

 

 

 

 

PART I – FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

 

 

 

 

 

 

TETRIDYN SOLUTIONS, INC. AND SUBSIDIARIES

Notes to the Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1 – Basis of Presentation

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the rules and regulations of the Securities and Exchange Commission for interim financial information. Accordingly, they do not include all the information necessary for a comprehensive presentation of financial position and results of operations.

 

It is management’s opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made that are necessary for a fair financial statements presentation. The results for the interim period are not necessarily indicative of the results to be expected for the year. The interim consolidated financial statements should be read in conjunction with the Company’s annual report on Form 10-KSB for the year ended December 31, 2007, including the financial statements and notes thereto.

 

Note 2 – Organization and Summary of Significant Accounting Policies

 

Nature of Business – TetriDyn Solutions, Inc. (the “Company”) and its wholly owned and controlled subsidiaries specialize in providing business information technology (IT) solutions to its customers. The Company optimizes business and IT processes by utilizing systems engineering methodologies, strategic planning and guidance, and system integration to add efficiencies and value to its customers’ business processes.

 

Principles of Consolidation – The consolidated financial statements include the accounts of the Company and its wholly owned subsidiary, an Idaho corporation also named TetriDyn Solutions, Inc., and results of operations of its 39.1% owned variable interest entity, Southfork Solutions, Inc. Intercompany accounts and transactions have been eliminated in consolidation (see Notes 4 and 5).

 

Business Segments – The Company’s services can be broadly classified into two principal segments: the business IT solutions segment and the livestock segment. The business IT solutions segment primarily provides business IT solutions within the healthcare industry, although the segment is in the process of expanding the solutions to other industries. The livestock segment is focused on providing business IT solutions specifically within the livestock industry. In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 131,“Disclosures about Segments of an Enterprise and Related Information,” the Company has evaluated the segment reporting requirements and determined that it now has two reportable segments.

 

Use of Estimates – In preparing financial statements in conformity with generally accepted accounting principles, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and revenues and expenses during the reported period. Actual results could differ from these estimates.

 

Cash and Cash Equivalents – For purposes of the cash flow statements, the Company considers all highly liquid investments with original maturities of three months or less at the time of purchase to be cash equivalents.

 

 

Revenue Recognition – The Company’s AeroMD EMR, or electronic medical records, software is provided as turnkey software that has been customized for specific medical specializations. The Company typically installs the software at the customer’s location for a fee and charges the customer a monthly license fee, based on the number of operating workstations, under a one- or two-year usage agreement. The customer is entitled to all systems upgrades during the one- or two-year license. At the end of their contracts, customers may continue using AeroMD by entering into a new license with the Company. The Company also sells installation and post-contract telephone support service contracts on an hourly basis. The Company does not provide any rights of return or warranties on its AeroMD EMR software.

 

Revenue from software licenses and related installation and support services is recognized when earned and realizable. Revenue is earned and realizable when persuasive evidence of an arrangement exists, services, if requested by the customers, have been rendered and are determinable, and collectibility is reasonably assured. Amounts received from customers prior to these criteria being met are deferred. Revenue from the sale of software is recognized when delivered to the customer or upon installation of the software if an installation contract exists. Revenue from post-contract telephone support service contracts is recognized as the services are provided, determined on an hourly basis. Revenue applicable to multiple-element fee arrangements is divided among the software, the installation, and post-contract support service contracts using vendor-specific objective evidence of fair value, as evidenced by the prices charged when the software and the services are sold as separate products or arrangements.

 

The Company also provides IT management consulting services. To date, these services have been primarily in the hospital industry. These services are paid for on a monthly basis and for a flat-fee, which is not cancelable or refundable. Revenue for these services is recognized over the contract period.

 

The Company had one customer that represented 73% of sales for both the three- and nine-month periods ended September 30, 2008. This same customer represented 78% and 76% of sales for the three- and nine-month periods ended September 30, 2007, respectively. This customer is a regional hospital that contracted with the Company for IT consulting and management services.

 

Going Concern – The accompanying financial statements have been prepared on the assumption that the Company will continue as a going concern. As reflected in accompanying financial statements, the Company had a net loss of $59,423 and $333,788 for the three and nine months ended September 30, 2008, respectively. The Company currently has a positive cash flow from operating activities and its current ratio is 1.35. The indicated losses are a function of the following noncash transactions: the Company’s $22,763 and $131,473 stock compensation for the three and nine months ended September 30, 2008, respectively, and Southfork Solutions’ $73,975 and $428,864 noncash stock compensation for the three and nine months ended September 30, 2008, respectively. At September 30, 2008, the Company had $106,708 in working capital and an accumulated deficit of $3,588,264. The ability of the Company to continue as a going concern is dependent on the Company’s ability to maintain or increase its sales. The financial statements do not include any adjustments that may result from the outcome of this uncertainty.

 

Income Taxes – The Company utilizes the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and on the amount of operating loss carry-forwards, and are measured using the enacted tax rates and laws that will be in effect when the temporary differences and carry-forwards are expected to reverse. An allowance against deferred tax assets is recorded when it is more likely than not that such tax benefits will not be realized.

 

 

Fair Value of Financial Instruments – The carrying amounts of the Company’s accounts receivable, restricted cash, accounts payable, notes payable, and deferred compensation approximate fair value due to the relatively short period to maturity for these instruments.

 

Property and Equipment – Property and equipment are recorded at cost. Maintenance, repairs, and renewals that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Gains or losses on dispositions of property and equipment are included in the results of operations when realized.

 

Net Loss Per Common Share – Basic and diluted net loss per common share is computed based upon the weighted-average stock outstanding as defined by SFAS No. 128, “Earnings Per Share.” As of September 30, 2008 and 2007, 3,520,500 and 1,633,000, respectively, of common share equivalents were antidilutive and not used in the calculation of diluted net loss per share.

 

Stock-Based Compensation – The Company’s shareholders approved the 2006 Long-Term Incentive Plan under which up to 4,000,000 shares of common stock may be issued. The 2006 plan is to be administered either by the board of directors or by the appropriate committee to be appointed from time to time by such board of directors. Awards granted under the 2006 plan may be incentive stock options (“ISOs”) (as defined in the Internal Revenue Code), appreciation rights, options that do not qualify as ISOs, or stock bonus awards that are awarded to employees, officers, and directors who, in the opinion of the board or the committee, have contributed or are expected to contribute materially to the Company’s success. In addition, at the discretion of the board of directors or the committee, options or bonus stock may be granted to individuals who are not employees, officers, or directors, but contribute to the Company’s success.

 

Under SFAS No. 123 (revised), "Share-Based Payment," all employee stock-based compensation is measured at the grant date, based on the fair value of the option or award, and is recognized as an expense over the requisite service, which is typically through the date the options or awards vest.

 

Recent Accounting Pronouncements – In December 2007, the Financial Accounting Standards Board, or FASB, issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” This statement improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent and the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently; when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value; and entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 affects those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The adoption of this statement is not expected to have a material effect on the Company’s financial statements.

 

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS No. 161 applies to all derivative instruments within the scope of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as well as related hedged items, bifurcated derivatives, and nonderivative instruments that are designated and qualify as hedging instruments. Entities with instruments subject to SFAS No. 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS No. 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. The Company is currently evaluating the disclosure implications of this statement.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. The board believes the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS No. 162 is effective 60 days following the SEC’s approval of Public Company Oversight Board, or PCAOB, Auditing Standards No. 6, “Evaluating Consistency of Financial Statements (AS/6).” The adoption of SFAS No. 162 is not expected to have a material impact on the Company’s financial position.

 

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60.” Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises.” This results in inconsistencies in the recognition and measurement of claim liabilities. This statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the statement will improve the quality of information provided to users of financial statements. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of SFAS No. 163 is not expected to have a material impact on the Company’s financial position.

 

Reclassifications – Certain amounts in the 2007 information have been reclassified to conform to the 2008 presentation. These reclassifications had no impact on the Company’s net loss or cash flows.

 

Note 3 – Inventory

 

Although the Company does not typically carry inventory, in January 2008, the Company purchased one third-party software package valued at $3,126, which it still has in its inventory.

 

 

Note 4 – Variable Interest Entities

 

In December 2003, the FASB issued a revision to Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN No. 46R”), which was originally issued in January 2003. FIN No. 46R provides guidance on the consolidation of certain entities when control exists through means other than ownership of voting (or similar) interests and was effective for public entities that have interests in variable interest entities commonly referred to as special purpose entities for the first reporting period that ends after March 15, 2004. FIN No. 46R requires consolidation by the majority holder of expected residual gains and losses of the activities of a variable interest entity (“VIE”).

 

As of September 30, 2008, the Company owned 39.1% of the voting interest in Southfork Solutions, Inc., an Idaho corporation. The Company’s ownership in Southfork Solutions was 39.6% as of January 1, 2008. Southfork Solutions’ objective is to provide electronic livestock verification and tracking throughout the entire livestock lifecycle. In July 2007, the Company entered into an agreement with Southfork Solutions. The agreement details the stock compensation that Southfork Solutions will pay to the Company for management services, as well as cash compensation that Southfork Solutions will pay to the Company for technical services, including but not limited to engineering, marketing, bookkeeping, and administration. According to the agreement, Southfork Solutions will compensate the Company with 45,000 common shares per month for management services and with cash based upon hours spent for all other services. In addition, Southfork Solutions has consulting agreements for consulting services to be paid with Southfork Solutions’ common stock in the collective amount of 24,450 shares per month.

 

 

The effect of the VIE’s consolidation on the Company’s consolidated balance sheet at September 30, 2008, was an increase in the Company’s assets and liabilities of $261,313 and $12,637, respectively. The Company also recognized non-controlling interest net loss of $154,648 and $463,850 for the three and nine months ended September 30, 2008, respectively.

 

Note 5 – Segment Reporting

 

The Company operates in two reportable segments based on differences in services provided. The business IT solutions segment primarily provides IT services and products to a variety of industries, whereas the livestock segment is focused on delivering services and products specifically to the livestock industry.

 

The accounting policies of the segments are the same as those described in “Organization and Summary of Significant Accounting Policies” above. Segment data includes intersegment revenues. Assets and costs of the corporate headquarters are allocated to the segments based on usage. The Company’s business is currently conducted in the United States.

 

 

The following table summarizes segment information for the three months ended September 30, 2008:

 

 

The following table summarizes segment information for the nine months ended September 30, 2008:

 

 

The following table summarizes segment information for the three months ended September 30, 2007:

 

 

 

 

The following table summarizes segment information for the nine months ended September 30, 2008:

 

 

Note 6 – Stockholders’ Equity

 

In April 2008, the Company granted 60,000 shares of common stock to each of its two outside directors for their services valued at the fair value on the date of grant of $12,000 total for both directors. The Company also granted 250,000 shares of common stock to a consultant for services rendered valued at the fair value on the date of grant of $25,000.

 

In April 2008, the Company granted 1,887,500 stock options to employees and executives. Stock option compensation expense is the estimated fair value of options granted amortized on a straight-line basis over the requisite service period for the entire portion of the award. The fair value of options at the date of grant is estimated using the Black-Scholes option pricing model. The assumptions made in calculating the fair values of options are as follows:

 

 

A summary of the status of the Company’s stock options as of September 30, 2008, and the changes during the period ended is presented below:

 

 

 

 

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion should be read in conjunction with our unaudited condensed consolidated financial statements and notes to our financial statements included elsewhere in this report. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors discussed elsewhere in this report.

 

Certain information included herein contains statements that may be considered forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, such as statements relating to our anticipated revenues, gross margin and operating results, estimates used in the preparation of our financial statements, future performance and operations, plans for future expansion, capital spending, sources of liquidity, and financing sources. Such forward-looking information involves important risks and uncertainties that could significantly affect anticipated results in the future, and accordingly, such results may differ from those expressed in any forward-looking statements made herein. These risks and uncertainties include those relating to our liquidity requirements, the continued growth of the software and IT services industries, the success of our product-development, marketing and sales activities, vigorous competition in the software industry, dependence on existing management, leverage and debt service (including sensitivity to fluctuations in interest rates), domestic or global economic conditions, the inherent uncertainty and costs of prolonged arbitration or litigation, and changes in federal or state tax laws or the administration of such laws.

 

Overview

 

We optimize business and information technology (IT) processes by utilizing systems engineering methodologies, strategic development, and integration to add efficiencies and value to our customers’ business processes. Our business was founded as an Idaho corporation, TetriDyn Solutions, Inc. On March 22, 2006, we completed a share exchange with Creative Vending Corp., then inactive, that resulted in TetriDyn Solutions, Inc. becoming a wholly owned subsidiary of the Florida corporation, the legal acquirer. For accounting purposes, the Idaho corporation was the accounting acquirer because its management and controlling shareholders continued to manage and control the consolidated enterprise following the exchange. In June 2006, we changed our corporate domicile from Florida to Nevada and changed our name from Creative Vending Corp. to TetriDyn Solutions, Inc.

 

Our business IT solutions segment provides IT solutions to the healthcare industry, but we are expanding our business IT solutions to selected other industries. We provide small-to-midsize businesses with a cost-effective conduit to an array of advanced IT engineering skills from management to engineering to basic technical assistance.

 

 

Our livestock segment capitalizes on our healthcare industry experience in our business IT solutions segment along with the core technology in our AeroMD EMR software to develop, implement, and market products and services that will provide electronic livestock verification and tracking throughout the lifecycle of an animal and its by-products.

 

Description of Expenses

 

General and administrative expenses consist primarily of salaries and related costs for accounting, administration, finance, human resources, and information systems for internal use.

 

Professional fees expenses consist primarily of fees related to legal, outside accounting, auditing, outside advertising, and investor relations services.

 

 

Research and development expenses consist of payroll and related costs for software engineers, management personnel, and the costs of materials and equipment used by these employees in the development of new or enhanced product offerings.

 

In accordance with Financial Accounting Standards Board, or FASB, Statement of Financial Accounting Standards (“SFAS”) No. 86, “Accounting for the Costs of Computer Software to be Sold, Leased or Otherwise Marketed,” development costs incurred in the research and development of new software products to be sold, leased, or otherwise marketed are expensed as incurred until technological feasibility in the form of a working model has been established. Internally generated, capitalizable software development costs have not been material to date. We have charged our software development cost to research and development expense in our statements of operations.

 

Property and equipment are recorded at cost. Maintenance, repairs, and renewals that neither materially add to the value of the property nor appreciably prolong its life are charged to expense as incurred. Property and equipment are depreciated using the straight-line method over the estimated useful lives of the assets. Gains or losses on dispositions of property and equipment are included in the results of operations when realized.

 

Results of Operations

 

Comparison of Three and Nine Months Ended September 30, 2008 and 2007

 

Revenues

 

Our revenue was $335,110 and $998,255 for the three and nine months ended September 30, 2008, respectively, compared to $287,193 and $846,241 for the three and nine months ended September 30, 2007, respectively, representing an increase of $47,917, or 17%, and $152,014, or 18%, for the three- and nine-month periods, respectively. The increase in revenues was due to an expansion in our existing consulting services to a regional hospital beginning in August 2007, the addition of another consulting agreement with a regional surgery center beginning in March 2007, and increased AeroMD, third-party software, and custom software sales throughout the three and nine months ended September 30, 2008.

 

 

Cost of Revenue

 

Our cost of revenue was $119,559 and $365,682 for the three and nine months ended September 30, 2008, respectively, compared to $108,637 and $302,495 for the three and nine months ended September 30, 2007, respectively, representing an increase of $10,922, or 10%, and $63,187, or 21%, for the three- and nine-month periods, respectively. The gross margin percentage on revenue was 64% and 63% for the three and nine months ended September 30, 2008, respectively, and 62% and 64% for the three and nine months ended September 30, 2007, respectively.

 

Although the net changes and percent changes with respect to our revenues and our cost of revenue for the three and nine months ended September 30, 2008 and 2007, are summarized above, the trends contained therein are limited and should not be viewed as a definitive indication of our future results.

 

Operating Expenses

 

General and Administrative — General and administrative expenses, including noncash compensation expense, were $116,080 and $477,074 for the three and nine months ended September 30, 2008, respectively, compared to $53,877 and $180,624 for the three and nine months ended September 30, 2007, respectively, representing an increase of $62,203, or 115%, and $296,450, or 164%, for the three- and nine-month periods, respectively. The increase in our general and administrative expenses for the three- and nine-month periods ended September 30, 2008, as compared to the three and nine months ended September 30, 2007, reflects noncash stock compensation paid to our outside directors and to a consultant for infrastructure configuration in the second quarter of 2008, in addition to compensation expense for stock options granted to our employees and executives and Southfork Solutions’ consultants and advisors over the entire nine-month period. Additionally, we experienced an increase in payroll costs in 2008 due to an additional administrative staff member and an increase in salaries to existing personnel. We also experienced an increase in insurance costs as well as other general expenditures.

 

Professional Fees — Professional fees expenses, including noncash compensation expense, were $37,681 and $99,426 for the three and nine months ended September 30, 2008, respectively, compared to $113,512 and $298,997 for the three and nine months ended September 30, 2007, respectively, representing a decrease of $75,831, or 67%, and $199,571, or 67%, for the three- and nine-month periods, respectively. The decrease in our professional fees expenses for the three- and nine-month periods ended September 30, 2008, as compared to the three and nine months ended September 30, 2007, reflects the decrease in investor relations expenses in 2008.

 

Selling and Marketing — Selling and marketing expenses, including noncash compensation expense, were $30,861 and $128,325 for the three and nine months ended September 30, 2008, respectively, compared to $76,363 and $199,230 for the three and nine months ended September 30, 2007, respectively, representing a decrease of $45,502, or 60%, and $70,905, or 36%, for the three- and nine-month periods, respectively. The decrease in our selling and marketing expenses for the three- and nine-month periods ended September 30, 2008, as compared to the three and nine months ended September 30, 2007, primarily reflects our streamlining of our sales efforts for more efficient operations.

 

 

Research and Development Expenses — Research and development expenses were $236,644 and $701,264 for the three and nine months ended September 30, 2008, respectively, compared to $109,270 and $155,214 for the three and nine months ended September 30, 2007, respectively, representing an increase of $127,374, or 117%, and $546,050, or 352%, for the three- and nine-month periods, respectively. The increase in research and development expenses reflects significant increased research and development activities within and in support of Southfork Solutions, which we expect to continue and possibly increase in coming months. The increased research and development activities required the addition of engineers to our staff. Additionally, the increase includes stock compensation by the issuance of shares of Southfork Solutions’ common stock for services rendered during the three and nine months ended September 30, 2008.

 

In general, our expenses increased substantially due to $22,763 and $131,473 in noncash stock compensation for the three and nine months ended September 30, 2008. Additionally, Southfork Solutions had expenses including $73,975 and $428,864 noncash stock compensation for the three and nine months ended September 30, 2008, respectively.

 

Interest expense was $8,568 and $24,438 for the three and nine months ended September 30, 2008, respectively, as compared to $12,047 and $42,277 for the three and nine months ended September 30, 2007, respectively, representing a decrease of $3,479, or 29%, and $17,839, or 42%, for the three- and nine-month periods, respectively. The decrease in interest expense related primarily to our reduction of debt on which interest was applied.

 

 

At September 30, 2008, our principal source of liquidity consisted of $306,349 of cash, as compared to $148,934 of cash at December 31, 2007. In addition, our stockholders’ deficit was $859,069 at September 30, 2008, compared to stockholders’ deficit of $670,040 at December 31, 2007, an increase in the deficit of $189,029.

 

Our operations provided net cash of $259,759 during the nine months ended September 30, 2008, as compared to $59,816 during the nine months ended September 30, 2007. The $199,943 increase in the net cash provided by our operating activities primarily resulted from the inclusion of the non-controlling interest in our VIE, which was significantly larger in the nine months ended September 30, 2008, due to the increased activities in our subsidiary compared to the nine months ended September 30, 2007.

 

Investing activities for the nine months ended September 30, 2008, used $5,648 of net cash, as compared to $9,045 of net cash used during the nine months ended September 30, 2007. The decrease in net cash used related to slightly smaller purchases of property or equipment in the nine months ended September 30, 2008.

 

Financing activities used $96,696 during the nine months ended September 30, 2008, compared to using net cash of $47,429 during the nine months ended September 30, 2007. The increase of $49,267 of net cash used in financing activities was primarily due to the increase in notes payable repayments in 2008. Additionally, we have further reduced our notes payable since September 30, 2008, by an additional $69,125.

 

We are focusing our efforts on increasing revenue while we explore external funding alternatives for Southfork Solutions. We currently have contracts in place for future deliveries of our consulting services, our AeroMD product, and other solutions that we believe will cover our minimum expenditures for operating costs and minimum installments due on our other indebtedness to nonaffiliates during the next 12 months. We expect that additional sales will enable us to increase our payments on indebtedness and support the development of other products.

 

 

We have no significant contractual obligations or commercial commitments not reflected on our balance sheet as of this date.

 

Critical Accounting Policies

 

We have identified the policies outlined below as critical to our business operations and an understanding of our results of operations. The list is not intended to be a comprehensive list of all of our accounting policies. In many cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States, with no need for management’s judgment in their application. The impact and any associated risks related to these policies on our business operations is discussed throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations where such policies affect our reported and expected financial results. For a detailed discussion on the application of these and other accounting policies, see the notes to the December 31, 2007 consolidated financial statements. Note that our preparation of the financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities, disclosure of contingent assets and liabilities at the date of our financial statements, and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from those estimates.

Revenue Recognition

 

Our AeroMD EMR software is provided as turnkey software that has been customized for specific medical specializations. We typically install the software at the customer’s location for a fee and charge the customer a monthly license fee, based on the number of operating workstations, under a one- or two-year usage agreement. The customer is entitled to all systems upgrades during the one- or two-year license. At the end of their contracts, customers may continue using AeroMD by entering into a new license with us. We also sell installation and post-contract telephone support service contracts on an hourly basis. We do not provide any rights of return or warranties on our AeroMD EMR software.

 

Revenue from software licenses and related installation and support services is recognized when earned and realizable, which is when persuasive evidence of an arrangement exists, services, if requested by the customers, have been rendered and are determinable, and collectibility is reasonably assured. Amounts billed to customers prior to these criteria being met are deferred. Revenue from the sale of software is recognized when delivered to the customer or upon installation of the software if an installation contract exists. Revenue from post-contract telephone support service contracts is recognized as the services are provided, determined on an hourly basis. Revenue applicable to multiple-element fee arrangements is divided among the software, the installation, and post-contract support service contracts using vendor-specific objective evidence of fair value. Fair value is evidenced by the prices charged when the software and the services are sold as separate products or arrangements.

 

We also provide IT management consulting services. To date, these services have been primarily in the hospital industry. These services are paid for on a monthly basis and for a flat-fee, which is not cancelable or refundable. Revenue for these services is recognized over the contract period.

 

 

Income Taxes

 

We utilize the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are determined based on temporary differences between financial reporting and tax bases of assets and liabilities and on the amount of operating loss carry-forwards, and are measured using the enacted tax rates and laws that will be in effect when the temporary differences and carry-forwards are expected to reverse. An allowance against deferred tax assets is recorded when it is more likely than not that such tax benefits will not be realized.

 

Stock Based Compensation

 

Effective January 1, 2006, we adopted the provisions of SFAS No. 123 (revised), “Share-Based Payment,” which replaces SFAS No. 123, “Accounting for Stock-Based Compensation,” and supersedes APB Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. SFAS No. 123R requires compensation costs related to share-based payment transactions, including employee stock options, to be recognized in the financial statements. In addition, we adhere to the guidance set forth within SEC Staff Accounting Bulletin No. 107, which provides the views of the staff of the SEC regarding the interaction between SFAS No. 123R and certain SEC rules and regulations and provides interpretations with respect to the valuation of share-based payments for public companies.

 

Variable Interest Entities

 

In December 2003, the FASB issued a revision to Interpretation No. 46, Consolidation of Variable Interest Entities (“FIN No. 46R”), which was originally issued in January 2003. FIN No. 46R provides guidance on the consolidation of certain entities when control exists through means other than ownership of voting (or similar) interests and was effective for public entities that have interests in variable interest entities commonly referred to as special purpose entities for the first reporting period that ends after March 15, 2004. FIN No. 46R requires consolidation by the majority holder of expected residual gains and losses of the activities of a variable interest entity (“VIE”).

 

We have concluded that Southfork Solutions meets the definition of a VIE because we have an agreement with Southfork Solutions to fully manage and control the financial direction of Southfork Solutions and we are the primary beneficiary of its operations. Therefore, we have accounted for Southfork Solutions’ operations by consolidating them with our financials and recognizing the noncontrolling interest in its operations.

 

 

Recent Accounting Pronouncements

 

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements – an amendment of ARB No. 51.” This statement improves the relevance, comparability, and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards that require the ownership interests in subsidiaries held by parties other than the parent and the amount of consolidated net income attributable to the parent and to the noncontrolling interest be clearly identified and presented on the face of the consolidated statement of income; changes in a parent’s ownership interest while the parent retains its controlling financial interest in its subsidiary be accounted for consistently; when a subsidiary is deconsolidated, any retained noncontrolling equity investment in the former subsidiary be initially measured at fair value; and entities provide sufficient disclosures that clearly identify and distinguish between the interests of the parent and the interests of the noncontrolling owners. SFAS No. 160 affects those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. Early adoption is prohibited. The adoption of this statement is not expected to have a material effect on our financial statements.

 

In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133.” This statement is intended to improve transparency in financial reporting by requiring enhanced disclosures of an entity’s derivative instruments and hedging activities and their effects on the entity’s financial position, financial performance, and cash flows. SFAS No. 161 applies to all derivative instruments within the scope of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” as well as related hedged items, bifurcated derivatives, and nonderivative instruments that are designated and qualify as hedging instruments. Entities with instruments subject to SFAS No. 161 must provide more robust qualitative disclosures and expanded quantitative disclosures. SFAS No. 161 is effective prospectively for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application permitted. We are currently evaluating the disclosure implications of this statement.

 

In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” SFAS No. 162 identifies the sources of accounting principles and provides entities with a framework for selecting the principles used in preparation of financial statements that are presented in conformity with GAAP. The current GAAP hierarchy has been criticized because it is directed to the auditor rather than the entity, it is complex, and it ranks FASB Statements of Financial Accounting Concepts, which are subject to the same level of due process as FASB Statements of Financial Accounting Standards, below industry practices that are widely recognized as generally accepted but that are not subject to due process. We believe the GAAP hierarchy should be directed to entities because it is the entity (not its auditors) that is responsible for selecting accounting principles for financial statements that are presented in conformity with GAAP. SFAS No. 162 is effective 60 days following the SEC’s approval of PCAOB Auditing Standards No. 6, “Evaluating Consistency of Financial Statements (AS/6).” The adoption of SFAS No. 162 is not expected to have a material impact on our financial position.

 

 

In May 2008, the FASB issued SFAS No. 163, “Accounting for Financial Guarantee Insurance Contracts-an interpretation of FASB Statement No. 60.” Diversity exists in practice in accounting for financial guarantee insurance contracts by insurance enterprises under FASB Statement No. 60, “Accounting and Reporting by Insurance Enterprises.” This results in inconsistencies in the recognition and measurement of claim liabilities. This statement requires that an insurance enterprise recognize a claim liability prior to an event of default (insured event) when there is evidence that credit deterioration has occurred in an insured financial obligation. This statement requires expanded disclosures about financial guarantee insurance contracts. The accounting and disclosure requirements of the statement will improve the quality of information provided to users of financial statements. SFAS No. 163 is effective for financial statements issued for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years. The adoption of SFAS No. 163 is not expected to have a material impact on our financial position.

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

Not applicable.

 

ITEM 4T. CONTROLS AND PROCEDURES

 

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized, and reported within the time periods specified by the Securities and Exchange Commission’s rules and forms, and that information is accumulated and communicated to our management, including our principal executive and principal financial officers (whom we refer to in this periodic report as our Certifying Officers), as appropriate to allow timely decisions regarding required disclosure. Our management evaluated, with the participation of our Certifying Officers, the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act) as of September 30, 2008, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of September 30, 2008, our disclosure controls and procedures were effective.

 

There were no changes in our internal control over financial reporting that occurred during our most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS

 

We are not a party to any material legal proceedings and no material legal proceedings have been threatened by us or, to the best of our knowledge, against us.

 

ITEM 1A. RISK FACTORS

 

None.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

None.

 

ITEM 3. DEFAULT UPON SENIOR SECURITIES

 

None.

 

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

ITEM 6. EXHIBITS

 

The following exhibits are filed as a part of this report:

 

_______________

 

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SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.