Net Operating Expenses
.
Operating expenses for the three months ended March 31, 2009 were $976,916 compared to $746,469 for the three months ended March 31, 2008. This increase of $230,447 was the result of an increase of $132,513 in medical clinic operating expenses related to increased service revenues and staffing costs to improve client service. Increased corporate expenses accounted for an $118,559 increase, due to costs associated with our registration statement filed with the SEC as well as the addition of a chief financial officer in April 2008. These increases were offset by a decrease of $20,625 in operating expenses for the medical spa related to a decrease in administrative staffing.
Medical clinic operating expenses increased to support higher service revenues and improve client service. Medical provider labor costs increased $63,009 as a result of adding a full time physician’s assistant in July 2008, a full time physician in March 2009, and several part time physicians’ assistants and advanced practice nurses throughout the fourth
quarter 2008 and first quarter 2009. Medical staff payroll increased $27,764 for the three months ended March 31, 2009 compared to the three months ended March 31, 2008. Supplies expense ($15,266) and laboratory service expenses ($17,564) also increased in response to our higher medical clinic revenue during the same reporting period.
Medical spa operating expenses decreased as a result of a reduction in administrative staffing as well as the transition of several full-time service provider positions to part-time. Staffing costs for the medical spa decreased $15,773 from $86,291 for the three months ended March 31, 2009 compared to $70,518 for the three months ended March 31, 2008. Expenses related to spa products decreased $12,033 in response to lower sales of several product lines. These expense decreases were offset by increased marketing costs of $10,836.
Increased corporate expense accounted for $118,559 of the total increase in net operating expenses, primarily due to an increase of $105,956 in accounting, legal, and consulting fees associated with our registration statement filed with the SEC. We also incurred $4,148 in compensation expense related to stock options issued during the three months ended March 31, 2009. There was no compensation expense for stock options issued during the three months ended March 31, 2008.
Operating Loss.
Operating loss for the three months ended March 31, 2009 was $46,580 compared to operating income of $105,077 for the three months ended March 31, 2008. This decrease of $151,657 was primarily the result of the combined impact of increased operating expenses discussed above.
Net Interest Expense
.
Our net interest expense for the three months ended March 31, 2009 was $53,924 compared to $69,577 for the three months ended March 31, 2008. This decrease of $15,653 was primarily the result of reduced amortization of the debt discount recorded for the subordinated convertible debentures. The decrease in amortization of debt discount was $14,453, from $8,547 for the three months ended March 31, 2009 compared to $23,000 for the three months ended March 31, 2008. We also saw reduced interest expense due to a decrease in our Small Business Administration loan in April 2008. The bank holding our Small Business Administration loan released the restriction on a $250,000 certificate of deposit, which we used to reduce the principal of the loan. This reduced the monthly debt service of the note,
thereby reducing interest expense. These decreases were partially offset by increased interest expense recognized on a note payable to a related party. The funds were utilized primarily to pay for expenses related to our SEC registration.
Net Loss Applicable to Common Stock.
Our net loss for the three months ended March 31, 2009 was $100,504 compared to net income of $35,500 for the three months ended March 31, 2008. This decrease of $136,004 is primarily the result of the items discussed above.
Liquidity and Capital Resources
As of March 31, 2009, we had a working capital deficit of $1,849,785, resulting from current liabilities of $2,282,302. For the three months ended March 31, 2009, net cash flow used in operating activities totaled $61,627. Cash used in investing activities totaled $2,699. Cash provided by financing activities totaled $60,741, including $32,774 in debt reductions, which were offset by $93,515 in borrowings from a related party.
Our days in medical accounts receivables were 35 days and 39 days as of March 31, 2009 and December 31, 2008, respectively. All medical spa services and product sales are paid at the point of service by credit cards, debit cards, checks or cash. Accounts receivable related to medical spa services are not material and are not included in this analysis. Medical clinic services provided by Northwest Arkansas Primary Care Physicians are generally submitted for billing to third-party insurance companies or Medicare within 48 hours of the time of service. We have engaged a professional medical billing company to submit the claims to insurers. Most claims are submitted electronically to the insurance companies and Medicare. These claims become accounts receivable at the time they are submitted to the insurance company. The aging of accounts receivable begins at the date of the billing
submission. Insurance companies then review the electronic billing and either ask for more/corrected
13
information, deny the particular service or part of a service or pay it (electronically to a bank lock box) or by check mailed. In addition, each insurance company adjusts the billing amount for each specific service to the “insurance allowable rate” as specified in that insurance company’s contract with Northwest Arkansas Primary Care Physicians. The insurance company will also identify any portions of the billing that are to be paid by the insured client (client responsible). These reviews and adjustments are communicated along with payments to us in an Explanation of Benefits.
We calculate days sales outstanding using average daily sales over the previous three months to arrive at an average daily charge amount. Medical clinic accounts receivable as of the end of the period is divided by the average daily charge amount to arrive at days sales outstanding. Below is a calculation of the days sales outstanding as reported above:
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Three Months Ended
March 31, 2009
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Three Months Ended
December 31, 2008
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|
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Gross Medical Clinic Revenue (1)
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$ 1,146,559
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|
$ 1,174,388
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Expense recorded for Contractual adjustment/Bad Debt Allowance
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|
(394,911)
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|
(408,955)
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Net Medical Clinic Revenue
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$ 751,648
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$ 765,433
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|
|
|
|
|
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# of Days in period (2)
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90
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92
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|
|
|
|
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Average Daily Charge (3) = (1) / (2)
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$ 12,739
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$ 12,765
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|
|
|
|
|
|
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Medical Clinic Accounts Receivable (4)
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$ 451,070
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|
$ 497,303
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|
Other Accounts Receivable
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|
$ 17,048
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|
$ 31,408
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|
|
|
$ 468,118
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|
$ 528,711
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|
|
|
|
|
|
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Days in medical accounts receivable = (4) / (3)
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35
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39
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We make every effort to collect any anticipated “client responsible” portions of a service bill (such as a co-pay or deductible) at the time of service. Payments by the insurance companies are posted to each client’s account at the time it is received. Client payments are also posted as received. Accounts receivable are then reduced by the amounts of insurance contractual adjustments, insurance payments and client payments. At the time any amounts are determined to be owed by the client; printed bills are sent to the responsible party of the client. During all of these collection processes from the time of the initial billing date to the insurance companies, the accounts are individually and collectively aged. Due to the complexities of medical insurance policies, employer specific policies, and coverage qualifications, some appeals and interactions with insurance
companies can result in three to six months of claim reconciliation. If the client does not respond after three mailed billings, then the account is turned over to a collection company that pursues collection from the client. When an account is turned over for collection, it is removed from the accounts receivable and maintained in a bad debt recovery account and fully reserved. If the collection company fails in locating the client or in collecting the account due, then the balance of the account is written off against the allowance. Any amounts due under $5.00 are immediately written off due to the cost of collection exceeding the expected collection recovery.
We expect significant capital expenditures during the next 12 months, contingent upon raising capital. These anticipated expenditures are for opening an additional office, property and equipment, overhead and working capital purposes. We have sufficient funds to conduct our operations for a few months, but not for 12 months or more. We anticipate that we will need an additional $1,500,000 to fund our anticipated operations for the next 12 months, depending on revenues from operations. We have no contracts or commitments for additional funds and there can be no assurance that financing will be available in amounts or on terms acceptable to us, if at all.
By adjusting our operations and development to the level of capitalization, we believe we have sufficient capital resources to meet projected cash flow deficits. However, if during that period or thereafter, we are not successful in generating sufficient liquidity from operations or in raising sufficient capital resources, on terms acceptable to us, this could have a material adverse effect on our business, results of operations, liquidity and financial condition.
14
We presently do not have any available credit, bank financing or other external sources of liquidity. Due to our brief history and historical operating losses, our operations have not been a source of liquidity. We will need to obtain additional capital in order to expand operations and become profitable. In order to obtain capital, we may need to sell additional shares of our common stock or borrow funds from private lenders. There can be no assurance that we will be successful in obtaining additional funding.
To the extent that we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities may result in dilution to existing stockholders. If additional funds are raised through the issuance of debt securities, these securities may have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on our operations. Regardless of whether our cash assets prove to be inadequate to meet our operational needs, we may seek to compensate providers of services by issuance of stock in lieu of cash, which may also result in dilution to existing shareholders. Even if we are able to raise the funds required, it is possible that we could incur unexpected costs and expenses, fail to collect significant amounts owed to us, or experience unexpected cash requirements that would force us to seek
alternative financing.
Whereas we have been successful in the past in raising capital, no assurance can be given that these sources of financing will continue to be available to us and/or that demand for our equity/debt instruments will be sufficient to meet our capital needs, or that financing will be available on terms favorable to us. If funding is insufficient at any time in the future, we may not be able to take advantage of business opportunities or respond to competitive pressures, or may be required to reduce the scope of our planned service development and marketing efforts, any of which could have a negative impact on our business and operating results. In addition, insufficient funding may have a material adverse effect on our financial condition, which could require us to:
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•
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curtail operations significantly;
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•
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sell significant assets;
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•
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seek arrangements with strategic partners or other parties that may require us to relinquish significant rights to products, technologies or markets; or
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•
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explore other strategic alternatives including a merger or sale of our company.
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Critical Accounting Policies
Accounts Receivable
Accounts receivable principally represent receivables from customers and third-party payors for medical services provided by clinic physicians, less an allowance for contractual adjustments and doubtful accounts. We utilize a third party billing organization that estimates the collectability of receivables based on industry standards and our collection history. We recorded contractual adjustments and bad debt expense of approximately $395,000 and $368,000 for the three months ended March 31, 2009 and 2008, respectively. We recorded contractual adjustments of approximately $338,000 and $313,000 for three months ended March 31, 2009 and 2008, respectively. We recorded bad debt expense of approximately $57,000 and $55,000 for the three months ended March 31, 2009 and 2008, respectively. Our revenues and receivables are reported at their estimated net realizable
amounts and are subject to audit and adjustment. Provisions for estimated third-party payor settlements are provided in the period the related services are rendered and are adjusted in the period of settlement. Actual settlements could have an adverse material effect on our financial position and operations.
Our accounts receivable include amounts that are pending approval from third party payors. Claims for insured clients are first filed with insurance, at which time the net realizable amount is unknown. The insurance company processes the claim and calculates the payment made to us. The following factors are among those considered by the insurance company: adjustments based on contracted amounts for specific procedures, outstanding deductible for the client, and co-insurance percentages. Our billing system does not separately track claims that are pending approval. Our billing system also does not track claims that are denied by a third party payor and ultimately paid by the client. Thus, the amount of claims classified as insurance receivables that are reclassified to self-pay is not quantifiable. We
calculate allowances for contractual adjustments and bad debts based on total accounts receivable outstanding and our collection experience.
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As of March 31, 2009
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60 days or less
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61 – 120 days
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Greater than 120 days
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Total
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Medicare
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$ 11,967
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$ 3,949
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$ 3,657
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$ 19,573
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15
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Third party insurance (1)
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196,073
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30,308
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41,513
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267,894
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Self pay (2)
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39,073
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18,997
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105,533
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163,603
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Other
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6,782
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57
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10,209
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17,048
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Total Accounts Receivable
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$ 253,895
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$ 53,311
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$ 160,912
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$ 468,118
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|
|
|
|
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|
|
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As of December 31, 2008
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|
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60 days or less
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61 – 120 days
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Greater than 120 days
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Total
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Medicare
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$ 19,173
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$ 1,966
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$ 2,691
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$ 23,830
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Third party insurance (1)
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224,900
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40,113
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48,859
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313,872
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Self pay (2)
|
31,883
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28,891
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98,827
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159,601
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Other
|
15,873
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5,173
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10,362
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31,408
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Total Accounts Receivable
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$ 291,829
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$ 76,143
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$ 160,739
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$ 528,711
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(1)
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Third party insurance represents claims made to insurance companies not classified as Medicare, Medicaid, or other government-backed program.
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(2)
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Self pay receivables are defined as all amounts due from individuals. The amounts can include amounts due from uninsured clients and co-payments or deductibles.
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Revenue Recognition
We recognize revenue in accordance with Securities and Exchange Commission (SEC) Staff Accounting Bulletin No. 104,
Revenue Recognition in Financial Statements
(SAB 104). Under SAB 104, revenue is recognized when the title and risk of loss have passed to the customer, there is persuasive evidence of an arrangement, delivery has occurred or services have been rendered, the sales price is determinable and collectability is reasonably assured.
Our net revenue is comprised of net clinic revenue and revenue derived from the sales of spa services and related products. Net clinic revenue is recorded at established rates reduced by provisions for doubtful accounts and contractual adjustments. Contractual adjustments arise as a result of the terms of certain reimbursement and managed care contracts. Such adjustments represent the difference between charges at established rates and estimated recoverable amounts and are recognized in the period the services are rendered. Any differences between estimated contractual adjustments and actual final settlements under reimbursement contracts are recognized in the year they are determined.
Spa revenues are recognized at the time of sale, as this is when the services have been provided or, in the case of product revenues, delivery has occurred, and the spa receives the customer’s payment. Revenues from pre-paid purchases are also recorded when the customer takes possession of the merchandise or receives the service. Pre-paid purchases are defined as either gift cards or series sales. Series sales are the purchase of a series of services to be received over a period of time. Pre-paid purchases are recorded as a liability (deferred revenue) until they are redeemed. Gift cards expire two years from the date of the customer’s purchase. Series sales do not carry an expiration date.
Earnings Per Share
The Company calculates and discloses earnings per share (EPS) in accordance with Statement of Financial Accounting Standards (SFAS) No. 128,
Earnings Per Share
(SFAS 128). SFAS 128 requires dual presentation of Basic and Diluted EPS on the face of the statements of operations and requires a reconciliation of the numerator and denominator of the Basic EPS computation to the numerator and denominator of the Diluted EPS computation. Basic EPS excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company.
In computing Diluted EPS, only potential common shares that are dilutive — those that reduce earnings per share or increase loss per share — are included. Exercise of options and warrants or conversion of convertible securities is not assumed if the result would be antidilutive, such as when a loss from continuing operations is reported. The “control number” for determining whether including potential common shares in the Diluted EPS computation would be antidilutive is income from continuing operations. As a result, if there is a loss from continuing operations, Diluted EPS would be computed in the same
16
manner as Basic EPS, even if an entity has net income after adjusting for discontinued operations, an extraordinary item or the cumulative effect of an accounting change. The Company incurred a loss from continuing operations for the three month period ended March 31, 2009. Therefore, basic EPS and diluted EPS are computed in the same manner for that period. Anti dilutive and/or non-exercisable warrants and convertible preferred stock and convertible subordinated debentures represent approximately 16,200,000 and 15,400,000 common shares at March 31, 2009 and 2008, respectively which may become dilutive in future calculations of EPS.
Share-Based Payment
In December 2004, the Financial Accounting Standards Board issued SFAS No.. 123R,
Share-Based Payment
(SFAS 123R). SFAS 123R is a revision of SFAS 123,
Accounting for Stock-Based Compensation
, and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees
, and its related implementation guidance. Under paragraph 7 of SFAS 123R, if the fair value of goods or services received in a share-based payment transaction with nonemployees is more reliably measurable than the fair value of the equity instruments issued, the fair value of the goods or services received shall be used to measure the transaction. In contrast, if the fair value of the equity instruments issued in a share-based payment
transaction with nonemployees is more reliably measurable than the fair value of the consideration received, the transaction shall be measured based on the fair value of the equity instruments issued. We utilized the fair value of the equity instruments issued to nonemployees to value the shares issued. We recognize the fair value of stock-based compensation awards in general corporate expense in the consolidated statements of operations on a straight-line basis over the vesting period.
In January 2009, the Company entered into a one year agreement with a consulting company for public and investor relations services. Pursuant to that agreement, the Company will pay the consultant $6,000 per month ($72,000 per year) and issue 348,600 shares of common stock. As of March 31, 2009, the Company has not issued the shares. The shares have been valued at $0.08888 per share and $30,984 has been recorded as an accrued liability on the Company’s balance sheet and as general corporate expense on the Company’s income statement.
Recent Accounting Pronouncements
In March 2008, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 161,
Disclosures about Derivative Instruments and Hedging Activities — an amendment of FASB Statement No.
133
(SFAS 161). SFAS 161 requires enhanced disclosures about an entity’s derivative and hedging activities, including qualitative disclosures about objectives and strategies for using derivatives, quantitative disclosures about fair value amounts of and gains and losses on derivative instruments, and disclosures about credit-risk-related contingent features in derivative agreements. SFAS 161 is effective for fiscal years and interim periods beginning after November 15, 2008. The Company adopted SFAS 161 as of January 1, 2009. The adoption of SFAS 161
did not have a material effect on its financial statements and related disclosures.
In April 2009, the Financial Accounting Standards Board issued FASB Staff Position No. FAS 107-1 and APB 28-1,
Interim Disclosure about Fair Value of Financial Instruments
(FSP 107-1). FSP 107-1 amends FASB Statement No. 107,
Disclosures about Fair Value of Financial Instruments
, to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements. FSP 107-1 also amends APB Opinion No. 28,
Interim Financial Reporting
, to require those disclosures in summarized financial information at interim reporting periods. FSP 107-1 is effective for interim reporting periods ending after June 15, 2009. The Company does not expect the adoption of FSP 107-1 to have a
material effect on its financial statements and related disclosures.
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ITEM 3 – QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not required under Regulation S-K for “smaller reporting companies.”
ITEM 4T - CONTROLS AND PROCEDURES
(a) Evaluation of disclosure controls and procedures.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures pursuant to Rule 13a – 15(e) and 15d – 15(e) under the Securities Exchange Act of 1934 as of March 31, 2009. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.
Based on our evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are designed at a reasonable assurance level and are effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
(b) Changes in internal control over financial reporting.
We regularly review our system of internal control over financial reporting and make changes to our processes and systems to improve controls and increase efficiency, while ensuring that we maintain an effective internal control environment. Changes may include such activities as implementing new, more efficient systems, consolidating activities, and migrating processes.
There were no changes in our internal control over financial reporting that occurred during the period covered by this Quarterly Report on Form 10-Q that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
18
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that we believe will have, individually or in the aggregate, a material adverse affect on our business, financial condition or operating results.
Item 1A. Risk Factors.
Not required under Regulation S-K for “smaller reporting companies.”
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
Item 5. Other Information.
None.
Item 6. Exhibits
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31.01
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Certification of Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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31.02
|
Certification of Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
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32.01
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Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
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19
SIGNATURES
In accordance with requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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WELLQUEST MEDICAL & WELLNESS
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Date: May 12, 2009
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By:
/s/ STEVE SWIFT
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Steve Swift
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Chief Executive Officer (Principal Executive Officer)
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Date: May 12, 2009
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By:
/s/ GREG PRIMM
|
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Greg Primm
|
|
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Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)
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