Ocean Thermal Energy Corp - Quarter Report: 2009 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, 2009

 

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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

 

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, 2009, 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 condensed 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, or SEC, 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 condensed consolidated financial statements should be read in conjunction with the Company’s annual report on Form 10-K for the year ended December 31, 2008, 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 system integration to add efficiencies and value to its customers’ business processes and to help its customers identify critical success factors in their business.

 

Principles of Consolidation – The condensed 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 40.1% owned variable interest entity, Southfork Solutions, Inc. Intercompany accounts and transactions have been eliminated in consolidation (see Notes 3 and 4).

 

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 provides business IT solutions within the healthcare industry, although the segment is in the process of expanding the solutions to other select 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, electronic medical records software, is provided as turnkey software that has been customized for specific medical specializations. The Company 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 term of the agreement. 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 support service contracts on an hourly basis. The Company does not provide any rights of return or warranties on its AeroMD EMR software or on its support service contracts.

 

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 collectability 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 support service contracts is recognized as the services are provided, determined on an hourly basis. The Company recognizes the revenue received for unused support hours under support service contracts that have had no support activity after two years. 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. These services are focused at the healthcare industry and paid on a monthly basis for a contracted monthly fee, which is not cancelable or refundable. Revenue for these services is recognized over the contract period.

 

The Company had three customers that represented more than 10% of sales for either the three- or nine-month period ended September 30, 2009, as follows:

 

 

Going Concern – The accompanying condensed consolidated financial statements have been prepared on the assumption that the Company will continue as a going concern. As reflected in accompanying condensed consolidated financial statements, the Company had a net loss of $250,994 and $376,291 for the three and nine months ended September 30, 2009, respectively. The Company used $346,420 of cash in operating activities for the nine months ended September 30, 2009. The Company had a working capital deficiency of $377,239 and a stockholders’ deficiency of $1,270,335 as of September 30, 2009. The ability of the Company to continue as a going concern is dependent on the Company’s ability to maintain or increase its sales and obtain external funding for its product development. 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 carryforwards, and are measured using the enacted tax rates and laws that will be in effect when the temporary differences and carryforwards 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 current portion of accounts receivable, prepaid expenses, accounts payable, accrued liabilities, unearned revenue, and notes payable 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 life of the asset, which is set at five years for computing equipment and vehicles and seven years for office equipment. 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 both September 30, 2009 and 2008, 3,520,500 of common share equivalents were antidilutive and not used in the calculation of diluted net loss per share.

 

Stock-Based Compensation – On June 17, 2009, at the Company’s annual shareholders’ meeting, the Company’s shareholders approved the 2009 Long-Term Incentive Plan under which up to 4,000,000 shares of common stock may be issued. The 2009 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 2009 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 that, 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 that are not employees, officers, or directors, but contribute to the Company’s success.

 

Equity instruments issued to other than employees are recorded on the basis of the fair value of the instruments, as required by SFAS No. 123 (Revised 2004), “Share-Based Payment.” Emerging Issues Task Force, or EITF, Issue 96-18,“Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services,” defines the measurement date and recognition period for such instruments. In general, the measurement date is when either: (a) a performance commitment, as defined, is reached; or (b) the earlier of (i) the nonemployee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the EITF.

 

Effective January 1, 2006, the Company adopted the provisions of SFAS No. 123R for its stock-based compensation plan. Under SFAS No. 123R, 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. The Company adopted SFAS No. 123R using the modified prospective method. Under this method, for all stock-based options and awards granted prior to January 1, 2006, that remain outstanding as of that date, compensation cost is recognized for the unvested portion over the remaining requisite service period, using the grant-date fair value measured under the original provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” for pro forma and disclosure purposes. Furthermore, compensation costs will also be recognized for any awards issued, modified, repurchased, or cancelled after January 1, 2006.

 

 

 

Recent Accounting Pronouncements – In June 2009, the Financial Accounting Standards Board, or FASB, issued SFAS No. 166 “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.” SFAS No. 166 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS No. 166 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The Company is evaluating the impact the adoption of SFAS No. 166 will have on its financial statements.

 

In June 2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R).” SFAS No. 167 improves financial reporting by enterprises involved with variable interest entities and to address: (1) the effects on certain provisions of FASB Interpretation No. 46 (revised December 2003), “Consolidation of Variable Interest Entities” (“FIN No. 46(R)”), as a result of the elimination of the qualifying special-purpose entity concept in SFAS No. 166; and (2) constituent concerns about the application of certain key provisions of FIN No. 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. SFAS No. 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The adoption of SFAS No. 167 did not have an impact on the Company’s financial statements.

 

In June 2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162.” The FASB Accounting Standards Codification (“Codification”) will be the single source of authoritative nongovernmental U.S. generally accepted accounting principles, or GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009. All existing accounting standards are superseded as described in SFAS No. 168. All other accounting literature not included in the Codification is nonauthoritative. The adoption of SFAS No. 168 did not have an effect on the Company’s financial statements.

 

Reclassifications – Certain amounts in the 2008 information have been reclassified to conform to the 2009 presentation. These reclassifications had no impact on the Company’s net loss or cash flows.

 

Note 3 – Variable Interest Entities

 

In December 2003, the FASB issued FIN No. 46(R), which was originally issued in January 2003. FIN No. 46(R) 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. 46(R) 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, 2009, the Company owned 40.1% of the voting interest in Southfork Solutions, Inc., an Idaho corporation. 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 shares of common stock for management services and with cash based upon hours spent for all other services. The number of shares of common stock issued for management services would be valued at $45,000 per month for the first year of the agreement, $49,500 per month for the second year of the agreement, and $54,450 per month for the third year of the agreement.

 

The Company has concluded that Southfork Solutions meets the definition of a VIE because the Company has an agreement with Southfork Solutions to fully manage and control the financial direction of Southfork Solutions and is the primary beneficiary of its operations.

 

The effect of the VIE’s consolidation on the Company’s condensed consolidated balance sheet at September 30, 2009, was an increase in the Company’s assets of $7,645 and an increase in the Company’s liabilities of $160,845. The Company also recognized a noncontrolling net loss of $92,048 and $364,497 for the three and nine months ended September 30, 2009, respectively. The effect of the VIE’s consolidation on the Company’s consolidated balance sheet at December 31, 2008, was an increase in the Company’s assets of $286,422 and an increase in the Company’s liabilities of $622. The Company recognized a noncontrolling net loss of $154,648 and $463,850 for the three and nine months ended September 30, 2008, respectively.

 

Note 4 – Segment Reporting

 

The Company operates in two reportable segments, based on differences in services provided. The business IT solutions segment 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 principally in the United States.

 

The following table summarizes segment information for the three months ended September 30, 2009:

 

 

 

 

The following table summarizes segment information for the nine months ended September 30, 2009:

 

 

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:

 

 

 

 

Note 5 – Notes Payable

 

In July 2009, the Company’s variable interest subsidiary, Southfork Solutions, Inc., obtained two unsecured short-term loans as follows:

 

 

In September 2009, the Company obtained one unsecured short-term loans as follows:

 

 

Note 6 – Subsequent Events

 

Effective September 2009, the Company no longer provides management and technical services to Southfork, for which it received both Southfork stock and cash reimbursement. The Company’s executives thereafter resigned as officers and directors of Southfork. As a result, Southfork will no longer be classified as a VIE effective fourth quarter 2009.

 

The Company evaluated subsequent events through October 31, 2009, the date the condensed consolidated financial statements were issued, and concluded there were no additional material subsequent events other than those disclosed.

 

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 IT processes by utilizing systems engineering methodologies, strategic development, and integration to add efficiencies and value to our customers’ business processes and to help our customers identify critical success factors in their business. 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.

 

We provide business IT solutions to the healthcare industry. We are expanding our service offerings into selected other professional industries as those markets develop and as we develop new applications for our integrated system of radio frequency identification (RFID) and software solutions for tracking, management, and diagnostic systems. This constitutes our business IT solutions segment.

 

Our variable interest subsidiary, Southfork Solutions, Inc. (“Southfork”), is developing an integrated system of RFID and software solutions specifically targeted to the livestock industry. Our solutions and software development experiences are being used to develop livestock tracking, management, and diagnostic systems to add efficiency and value to the commercial livestock industry. Southfork’s focus along with our management and technical expertise constitutes our livestock segment.

 

Description of Expenses

 

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

 

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

 

Selling and marketing expenses consist of advertising, promotional activities, trade shows, travel, and personnel-related expenses.

 

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 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 costs 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, 2009 and 2008

 

Revenues

 

Our revenue was $107,221 and $721,478 for the three and nine months ended September 30, 2009, respectively, compared to $335,110 and $998,255 for the three and nine months ended September 30, 2008, respectively, representing a decrease of $227,889, or 68%, and $276,777, or 28%, for the three- and nine-month periods, respectively. The decrease in revenues was due to the loss of our service contract with a regional hospital at the end of the second quarter of 2009 following a change in ownership and management at the hospital.

 

Cost of Revenue

 

Our cost of revenue was $51,202 and $265,091 for the three and nine months ended September 30, 2009, respectively, compared to $119,559 and $365,682 for the three and nine months ended September 30, 2008, respectively, representing a decrease of $68,357, or 57%, and $100,591, or 28%, for the three- and nine-month periods, respectively. The gross margin percentage on revenue was 52% and 63% for the three and nine months ended September 30, 2009, respectively, and 64% and 63% for the three and nine months ended September 30, 2008, respectively. The decrease in the gross margin percentage for the three months ended September 30, 2009, from the three months ended September 30, 2008, was due to a higher percentage of revenue from hardware sales rather than from service sales. Hardware sales have a significantly lower profit margin than service sales.

 

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, 2009 and 2008, 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 $73,347 and $264,218 for the three and nine months ended September 30, 2009, respectively, compared to $116,080 and $477,074 for the three and nine months ended September 30, 2008, respectively, representing a decrease of $42,733, or 37%, and $212,856, or 45%, for the three- and nine-month periods, respectively. The decrease in our general and administrative expenses for the three- and nine-month periods ended September 30, 2009, as compared to the three and nine months ended September 30, 2008, reflects reduced stock and stock compensation granted to employees, directors, and executives in 2009.

 

Professional Fees — Professional fees expenses, including noncash compensation expense, were $26,736 and $91,977 for the three and nine months ended September 30, 2009, respectively, compared to $37,681 and $99,426 for the three and nine months ended September 30, 2008, respectively, representing a decrease of $10,945, or 29%, and $7,449, or 7%, 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, 2009, as compared to the three and nine months ended September 30, 2008, reflects the decreased patent legal fees expenses incurred by Southfork in 2009.

 

 

Selling and Marketing — Selling and marketing expenses, including noncash compensation expense, were $30,295 and $95,056 for the three and nine months ended September 30, 2009, respectively, compared to $30,861 and $128,325 for the three and nine months ended September 30, 2008, respectively, representing a decrease of $566, or 2%, and $33,269, or 26%, 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, 2009, as compared to the three and nine months ended September 30, 2008, reflects our focus on optimizing our sales process in the business IT services segment while investing in sales conference attendance in the livestock segment.

 

Research and Development — Research and development expenses were $259,920 and $727,571 for the three and nine months ended September 30, 2009, respectively, compared to $236,644 and $701,264 for the three and nine months ended September 30, 2008, respectively, representing an increase of $23,276, or 10%, and $26,307, or 4%, for the three- and nine-month periods, respectively. The increase in research and development expenses reflects increased expenditures for prototype design and development in the livestock segment, as well as the reassignment of personnel from supporting the lost service contract with a local regional hospital to new development projects.

 

Interest expense was $8,820 and $19,531 for the three and nine months ended September 30, 2009, respectively, as compared to $8,568 and $24,438 for the three and nine months ended September 30, 2008, respectively, representing a decrease of $252, or 3%, and $4,907, or 20%, for the three- and nine-month periods, respectively. The decrease in interest expense is directly related to our reduction of debt on which interest was applied.

 

Liquidity and Capital Resources

 

At September 30, 2009, our principal source of liquidity consisted of $98,537 of cash, as compared to $357,157 of cash at December 31, 2008. In addition, our stockholders’ deficit was $1,270,335 at September 30, 2009, compared to stockholders’ deficit of $894,044 at December 31, 2008, an increase in the deficit of $376,291.

 

Our operations used $346,420 of net cash during the nine months ended September 30, 2009, as compared to the $259,759 of net cash provided during the nine months ended September 30, 2008. The $606,179 increase in the net cash used by our operating activities resulted primarily from the effect of the noncontrolling interest in our VIE and the reduction in revenues due to the lost service contract with a local regional hospital.

 

Investing activities for the nine months ended September 30, 2009, used $11,124 of net cash, as compared to $5,648 net cash used during the nine months ended September 30, 2008. The increase in net cash used related to increased computing equipment purchases in the nine months ended September 30, 2009, in order to update aging equipment.

 

Financing activities provided $98,924 during the nine months ended September 30, 2009, compared to using net cash of $96,696 during the nine months ended September 30, 2008. The increase of $195,620 of net cash provided in financing activities is the result of securing new notes payables while reducing the speed at which we pay down existing notes payables in 2009.

 

 

We are focusing our efforts on increasing revenue within our business IT solutions while we explore external funding alternatives. We expect that additional sales and potential investment will enable us to increase our payments on indebtedness and support the development of other products for the next 12 months. Although our independent auditors have expressed substantial doubt about our ability to continue as a going concern, we feel that our projected IT business solutions revenues along with potential investment would be sufficient for our IT business solutions segment to continue as a going concern.

 

In order for us to expand our business IT solutions customer base and to pursue the development of new applications for our integrated system of RFID and software solutions for tracking, management, and diagnostic systems, we will be required to increase our revenues substantially and to seek additional external capital.

 

Growth within the livestock segment will be severely restricted if Southfork is unable to reorganize its management and technical support and obtain external funding. Effective September 2009, we no longer provide management and technical services to Southfork, for which we received both stock and cash reimbursements, and our executives thereafter resigned as officers and directors of Southfork. The livestock segment is currently being funded by investors within the cattle industry through Southfork. The development of the livestock segment and market introduction of commercial products is dependent upon further investment and the reorganization of management and technical support. Investment made in Southfork directly benefits us since we are a significant stockholder. We do not anticipate that Southfork will generate significant revenues during 2009 due to the continued research and development activities that are required and the management and technical challenges that must be addressed.

 

As we continue development of new products and identify specific commercialization opportunities, we will focus on those product markets and opportunities for which we might be able to get external funding through joint venture agreements, strategic partnerships, or other direct investments.

 

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 when 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, 2008, consolidated financial statements. Note that our preparation of the condensed consolidated 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 condensed consolidated 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 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 usage agreement. The customer is entitled to all systems upgrades during the term of the agreement. 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 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. 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 ability to collect 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 support service contracts is recognized as the services are provided, determined on an hourly basis. We recognize the revenue received for unused support hours under support service contracts that have had no support activity after two years.

 

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.

 

We also provide IT management consulting services. These services have been targeted at the hospital industry. These services are paid for on a monthly basis and for a contracted monthly 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 carryforwards, and are measured using the enacted tax rates and laws that will be in effect when the temporary differences and carryforwards 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.

 

 

In adopting SFAS No. 123R, we applied the modified prospective approach to transition. Under the modified prospective approach, the provisions of SFAS No. 123R are to be applied to new awards and to awards modified, repurchased, or cancelled after the required effective date. Additionally, compensation cost for the portion of awards for which the requisite service has not been rendered that are outstanding as of the required effective date shall be recognized as the requisite service is rendered on or after the required effective date. The compensation costs for that portion of awards shall be based on the grant-date fair value of those awards as calculated for either recognition or pro forma disclosures under SFAS No. 123.

 

Variable Interest Entities

 

In December 2003, the FASB issued a revision to Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN No. 46(R)”), which was originally issued in January 2003. FIN No. 46(R) 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. 46(R) requires consolidation by the majority holder of expected residual gains and losses of the activities of a VIE.

 

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

 

Recent Accounting Pronouncements

 

In June 2009, the FASB issued SFAS No. 166 “Accounting for Transfers of Financial Assets—an amendment of FASB Statement No. 140.” SFAS No. 166 improves the relevance, representational faithfulness, and comparability of the information that a reporting entity provides in its financial statements about a transfer of financial assets; the effects of a transfer on its financial position, financial performance, and cash flows; and a transferor’s continuing involvement, if any, in transferred financial assets. SFAS No. 166 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period and for interim and annual reporting periods thereafter. We are evaluating the impact the adoption of SFAS No. 166 will have on our financial statements.

 

In June 2009, the FASB issued SFAS No. 167 “Amendments to FASB Interpretation No. 46(R).” SFAS No. 167 improves financial reporting by enterprises involved with variable interest entities and to address: (1) the effects on certain provisions of FIN No. 46(R) as a result of the elimination of the qualifying special-purpose entity concept in SFAS No. 166; and (2) constituent concerns about the application of certain key provisions of FIN No. 46(R), including those in which the accounting and disclosures under the Interpretation do not always provide timely and useful information about an enterprise’s involvement in a variable interest entity. SFAS No. 167 is effective as of the beginning of each reporting entity’s first annual reporting period that begins after November 15, 2009, for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. We are evaluating the impact the adoption of SFAS No. 167 will have on our financial statements.

 

 

In June 2009, the FASB issued SFAS No. 168 “The FASB Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162”. The FASB Accounting Standards Codification (“Codification”) will be the single source of authoritative nongovernmental U.S. generally accepted accounting principles, or GAAP. Rules and interpretive releases of the SEC under authority of federal securities laws are also sources of authoritative GAAP for SEC registrants. SFAS No. 168 is effective for interim and annual periods ending after September 15, 2009. All existing accounting standards are superseded as described in SFAS No. 168. All other accounting literature not included in the Codification is nonauthoritative. The adoption of SFAS No. 168 did not have an effect on our financial statements.

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities.”

 

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, 2009, pursuant to Rule 13a-15(b) under the Securities Exchange Act. Based upon that evaluation, our Certifying Officers concluded that, as of September 30, 2009, 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.

 

Our management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of control must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of the control can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

 

 

 

PART II – OTHER INFORMATION

 

ITEM 6. EXHIBITS

 

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

 

_______________

 

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.