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MMRGLOBAL, INC. - 10-Q - Management's Discussion and Analysis of Financial Condition and Results of Operations(Edgar Glimpses Via Acquire Media NewsEdge) You should read the following discussion of our financial condition and results of operations in conjunction with our financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the description of our business appearing in our Annual Report on Form 10-K for the year ended December 31, 2013, filed with the SEC on March 31, 2014 (the "Form 10-K"). This discussion contains forward-looking statements, which inherently involve risks and uncertainties. Please see "Cautionary Note Regarding Forward- Looking Statements" below. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us described in "Risk Factors" in Item 1A of the Form 10-K. Cautionary Note Regarding Forward-Looking Statements This Quarterly Report on Form 10-Q contains certain forward-looking statements. The words "anticipate," "expect," "believe," "plan," "intend," "will" and similar expressions are intended to identify such statements. Although the forward-looking statements in this Quarterly Report on Form 10-Q reflects the good faith judgment of our management, such statements are subject to various risks and uncertainties, including but not limited to the following: º Our ability to monetize our Health Information Technology patents and other IP º Our ability to maximize our legacy biotechnology assets and otherwise protect our intellectual property assets; º Our ability to obtain financing to fund our operations; º Our inability to generate sufficient cash flow to service our debt obligations; º The ability to generate subscribers for our products and services given the current competitive landscape; º Our ability to adapt our products to conform to any technical specifications necessary to benefit from stimulus package funding; º Our ability to raise dilutive and non-dilutive capital in order to meet our financial obligations and invest in our business to grow revenues, including risks related to our trading in the Over the Counter market; º Our ability to launch new products or to successfully commercialize our existing or planned products; º Managing costs while building an effective sales and service delivery organization for our products with our small management team; º Our ability to enter into marketing arrangements with large membership and affinity organizations for our products and maintain and grow subscribers from such arrangements, such as those noted above, particularly after the initial introductory period; and º The possible invalidity of the underlying assumptions and estimates related to our business and market; º Conditions and actions taken or omitted to be taken by third parties, including customers, suppliers, business partners and competitors and legislative, judicial and other governmental authorities and officials; and º Possible changes or developments in economic, business, industry, market, legal and regulatory circumstances. Assumptions related to the foregoing involve judgments with respect to, among other things, future economic, competitive and market conditions and future business decisions, all of which are difficult or impossible to predict accurately and many of which are beyond our control. Any of such assumptions could be inaccurate. You should not place undue reliance on these forward-looking statements, which are based on our current views and assumptions. In evaluating these statements, you should specifically consider various factors, including the foregoing risks and those outlined under "Risk Factors" in Item 1A of the Form10-K. Our forward-looking statements represent estimates and assumptions only as of the date of this Quarterly Report on Form 10-Q. Except as required by law, we undertake no obligation to update any forward-looking statement to reflect events or circumstances occurring after the date of this Quarterly Report on Form 10-Q. 19 -------------------------------------------------------------------------------- Overview Background We provide secure and easy-to-use online Personal Health Records ("PHRs") electronic safe deposit box storage solutions, and document management and imaging systems for healthcare professionals. Our MyMedicalRecords PHR, which we sell to consumers, healthcare professionals, retailers, employers, insurance companies, professional organizations and affinity groups, enables individuals and families to safely maintain and access copies of their medical records and other important documents such as birth certificates, passports, insurance policies and wills, anytime from anywhere using the Internet. The MyMedicalRecords Personal Health Record is built on proprietary, patented technologies to allow documents, images and voicemail messages to be transmitted and stored in the system using a variety of methods, including fax, phone, or file upload without relying on any specific electronic medical record platform to populate a user's account. We also offer the MyEsafeDepositBox service which provides secure online storage for vital financial, legal and insurance documents in addition to medical records using the same patented technologies that drive the MyMedicalRecords PHR service. Our professional offering, MMRPro, is designed to give physicians' offices an easy and cost-effective solution to digitizing paper-based medical records and securely sharing them online with patients in a timely manner. We now have numerous Health IT and Biotech patents issued, pending, and applied for in the United States and numerous other countries around the world. As a result, we have evolved from an operating business selling products and services to consumers and healthcare professionals to a company whose value proposition is based on a combination of factors including: º A Personal Health Records company specializing in storing medical records and other important documents for consumers and healthcare professionals; º A document imaging and management company for healthcare professionals; º A licensor of Biotech Intellectual Property based on a portfolio of biotech assets developed at a cost of more than 100 million dollars; and º A licensor of Health Information Technology patents and other Intellectual Property in numerous counties around the world. For a description of our patents, see Intellectual Property section below. Source of Revenues MMR remains focused on its primary Health IT business of selling the MyMedicalRecords PHR and MMRPro document and imaging systems for healthcare professionals. We derive revenues from the provision of services, which are comprised of facilitating electronic access to consumer medical records and other vital documents through subscribers on a direct subscription basis or an "access" basis through various types of organizations including direct sales, affinity and membership groups, healthcare organizations and retailers, and in both cases, we record these revenues under "Subscriber" in our income statement. We also sell direct to consumers through paid advertising or other per enquiry marketing relationships. When sold to corporations, affinity and membership organizations, hospitals and other business to business customers, we charge a minimum monthly fee plus user fees to the organization based on the number of users who will have access to our services through such organization, whether or not such users actually activate there authorized account. During the three and six months ended June 30, 2014, we received $28,955, and $58,718 from subscriber revenues, respectively, which represents 52.4% and 10.9% of our revenues for such periods, respectively. In addition, MMR has numerous patents issued, pending or applied for pertaining to provisioning of online medical and Personal Health Records in 12 countries of commercial interest including the U.S. Accordingly, as of this point in time, the Company has filed five significant patent infringement complaints against the following defendants: Walgreens, Quest Diagnostic, Jardogs, WebMD and Allscripts in an effort to enforce its global intellectual property rights and protect and expand its brand. The complaint against Walgreens was settled, and while the Company remains optimistic about additional settlements and licensing agreements, it cannot predict the outcome of litigation or any licensing negotiations, and it plans on continuing to enforce its intellectual property rights where appropriate. The Company is also in negotiations with several providers of HIT products and services regarding strategic relationships that also involve licensing its IP without the need for litigation. The Company has already demonstrated its ability to enter into such Patent Agreements with several licensees and strategic relationships including 4Medica, VisiInc PLC, AccessMyRecords, drugstore.com, Walgreens, Whole Foods Market, XN Financial, Interbit Data, Coverdell, Fairway Physicians Insurance Company, Vida Senior Resources, Cerner Corporation, Salutopia, and Claydata. 20 -------------------------------------------------------------------------------- Notwithstanding those infringement matters where complaints have been filed, the Company continues to focus on settlement of infringement matters wherever possible. Such settlements may include the purchasing and reselling of the Company's products and services in addition to the licensing of intellectual property domestically, internationally or exclusively in selected vertical markets in consideration of significant license fees. As a result of some of these settlements, the Company believes it will generate meaningful revenue from licensing in addition to revenues from retail sales and direct-to-consumer business. We also derive our revenues from the sale of our MMRPro system, which includes an optional scanner, various licenses to use third party software, a license to use MMR's proprietary MMRPro application software, dedicated telephone lines, secure online storage and product warranties. Installation and training are provided as part of the sales agreement. Software licenses, telephone lines, online secure storage and warranties are provided over the three year term of the agreement. Our customers pay these contracts in advance and are not refundable. The Company's latest offering, MMRPro Plus, does not require the use of a scanner. MMRPro Plus, is one of the most cost-effective ways for healthcare professionals to scan and digitize medical records while providing patients timely online access to their personal health information through MyMedicalRecords. MMRPro Plus is also an integrated, end-to-end document scanning and imaging solution that works with virtually any Windows-based or Mac OS scanning system at one-third the cost of the original MMRPro network scanning solution. With more health care professionals adopting Electronic Medical Record systems demand is increasing for cost-effective scanning and document management solution. Specialty practices including ambulatory surgery centers, home health care professionals, chronic care disease managers and in particular concierge medical professionals are a few of the many areas requiring the ability to store paper based records in EMR systems. MMRPro with our integrated patient portal, MMRPatientView, meets that need. Additionally, as the use of Teleconsulting and Telemedicine becomes more prevalent, MMRPro's patient portal and MyMedicalRecords PHR are solutions that provide a proprietary platform to facilitate collaboration between doctors and other healthcare providers with patients, such as those programs in development with Alcatel-Lucent and ng Connect. We allocate the revenue derived from MMRPro and MMRPro Plus allocated to all the deliverables based on the relative selling price of each deliverable. With the exception of MMR's proprietary MMRPro application software, we used third party evidence to set the selling prices used for this allocation. During the three and six months ended June 30, 2014, we recognized $4,499, and $12,068 from MMRPro revenues, respectively, which represents 8.1% and 2.2% of our revenues for such periods, respectively. We also generate revenues from the licensing of our Health IT and biotech assets, which may include non-refundable license and up-front fees, non-refundable milestone payments that are triggered upon achievement of a specific event and future royalties or lump-sum payments on sales of related products. We record these licensing revenues under "License Fees" in our income statement. We are sometimes paid an upfront license fee and milestone payments and we recognize those fees as revenue as payments are received. In addition, the Company is also continuing to work on licensing and otherwise exploiting a portfolio of biotech assets, including its anti-CD20 monoclonal antibodies, data from vaccine trials, tumor samples, and other intellectual property including numerous worldwide patents in various stages. We intend to continue generating revenues from the licensing of our biotech and health IT patents. We will record those fees as revenue when payments are received. During the three and six months ended June 30, 2014, we received $14,376 and $462,538 from license fees revenues, respectively, which represents 1.2% and 85.5% of our revenues for such periods, respectively. We also have generated revenues from licensing the sale and marketing of our services internationally and, to a lesser extent, from ancillary fee payments including web and marketing development services, amongst others. We record these licensing revenues under "License Fees" and other ancillary revenues under "Other Revenues" in our income statement. When we enter into a licensing arrangement, we are sometimes paid an upfront license fee and typically receive ongoing royalty payments that are often based on a percentage of revenue earned by our licensee. We recognize these fees over the license period. When we receive ancillary one-time payments, we record them when services or products are delivered. Cost of Revenue Our cost of revenue includes the cost of manufacturing our retail product and related packaging, maintaining our voice and fax mailboxes, long-distance call transport costs, fax and voice call processing costs, credit card transaction processing costs, web hosting and management fees, website maintenance and support costs, costs associated with creating and mailing enrollment packages to our subscribers and the cost of scanners. Cost of revenue also includes customer service costs. We also charge to cost of revenue our direct selling costs, which include commissions paid to sales representatives who sell our wholesale and access based accounts. 21 -------------------------------------------------------------------------------- Operating Expenses The largest component of our operating expenses is our general and administrative expenses, which include personnel salaries and benefits, office rent and supplies, insurance costs, fees for legal and professional services, as well as our expenses for corporate telecommunications and internet access not associated with our products. Our operating expenses also include sales and marketing expenses (which include expenses associated with attending trade shows and travel costs, as well as a portion of personnel salaries allocated to sales and marketing activities), as well as technology development expenses (which includes expenses related to research and development as well as a portion of personnel salaries allocated to development activities). Recent Accounting Pronouncements For a description of recent accounting pronouncements and how we apply such pronouncements to our financial statements, see the accompanying notes to our consolidated financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. Factors Affecting Future Results Intellectual Property Since inception, our health IT business has evolved from a development stage company, to a provider and reseller of Personal Health Records and document imaging and scanning systems (MMR Services), to a Licensor of MMR's intellectual property. Throughout the first half of 2014, we remained focused on maximizing the value of our intellectual property portfolio, particularly our 13 U.S. health IT patents that have been granted to date.. Our health IT patent portfolio, which we have been building since 2005, currently includes our U.S. patents (with over 300 issued claims), 17additional pending U.S. patent applications (with over 300 claims), seven foreign patents including two in Australia with others in New Zealand, Singapore, Japan, Mexico and Canada, and 25 other pending patent applications in foreign countries. These patents have the potential effect of enabling us to control a dominant marketplace position in personal healthcare, being well-positioned to benefit from the explosion in health IT globally. The full term of our health IT patents will not expire until September 12, 2025 or after. Our health IT patent portfolio includes issued patents on our health IT products and services including our MyMedicalRecords, MyEsafeDepositBox and MMRPro product and services, which is in addition to our portfolio of biotech patents. MMR acquired significant intellectual property assets from the Merger with Favrille and continues to seek ways to exploit and monetize those assets, which include, but are not limited to, data from our pre-Merger clinical vaccine trials, the FavId™/Specifid™ vaccine, and the anti-CD20 antibodies. The Company now has three patent portfolio groups comprising of over 49 issued patents and additional pending applications and continuation applications. The first group is directed at Electronic Medical Records with a primary focus on Personal Health Records; another group centers around the use of PHRs in connection with Clinical Trials, which MMR plans on licensing through existing relationships with Big Pharma and the biotech community. The third group includes MMR's legacy biotech patents from the Company's FavId™ vaccine trials and clinical research related to cancer-fighting anti-CD20 monoclonal antibodies. Health IT Patents Through our wholly owned subsidiary, MyMedicalRecords, Inc., we currently have 13 issued U.S. patents. Our eleventh U.S. patent, 8,725,537, entitled "Method and System for Providing Online Records," was issued on May 13, 2014 by the United States Patent and Trademark Office (USPTO). The `537 patent expands MMR's health IT patents with claims directed toward storing, managing and sharing legal records. This patent has the effect of broadening MMR's intellectual property beyond PHRs and other forms of Electronic Medical Records into the legal field, which is particularly relevant to the management of wills and powers of attorney and advanced directives which can be included as part of an individual's Personal Health Record account. In June, we announced that the USPTO granted Notices of Allowance for two additional patents which were subsequently issued the first week of July. U.S. Patent No. 8,768,725, "Method and System for Providing Online Records," was issued on July 1st and has 15 claims, including claims directed to the sharing of records with a second healthcare provider to better manage and facilitate second opinions. Our 13th patent, U.S. Patent No. 8,775,212, "Electronic Health Records in Clinical Trials," was issued on July 8th and includes 18 claims directed to methods and systems which provide for self-reporting in clinical trials. This is a whole new patent, not a continuation patent, and the Company believes it opens the door to completely new revenue generating opportunities through sales and licensing of MMR's Personal Health Record products and services and other patented intellectual property to Contract Research Organizations and pharmaceutical companies conducting clinical trials. Because clinical trials are extremely time-consuming and expensive, we believe the `212 patent and additional continuation patents coming from this patent will be of significant value to the Company. 22 -------------------------------------------------------------------------------- Our most recent patents in the second quarter were preceded earlier this year by the issuance of U.S. Patent No. 8,626,532, "Method for Providing a User with a Web-Based Service for Accessing and Collecting Health Records," which was our ninth patent issued on January 7, 2014 after being allowed on August 8, 2013. The patent includes 27 claims, a portion of which are directed toward enabling users to access and collect their medical records in a secure and private manner using wireless devices such as smartphones, tablets or telemedicine platforms, amongst other systems, and represented a significant addition to MMR's U.S. patent portfolio. Additionally, our tenth U.S. patent, entitled "Method and System for Providing Online Records," was allowed on December 4, 2013 and subsequently issued on February 4, 2014. U.S. Patent No. 8,645,161, covers 30 claims directed toward methods for accessing and collecting health records by providing a user interface that further includes a number of additional features which collect and display prescriptions, help submit prescriptions to pharmacies, collect and display health insurance information, send outgoing faxes, allow users to annotate health records and set up appointment reminders for visits with providers as wells as recurring medication reminders through a calendaring function. At the start of 2013, we were issued two U.S. patents with claims totaling 57: U.S. Patent Nos. 8,352,287 and 8,352,288 were issued on January 8, 2013 after being allowed on November 28 and December 3, 2012, respectively. Significantly, claims in the `287 Patent expanded MMR's patent portfolio with additional claims directed toward a Web-based service to access and collect health records from different types of service providers, including, but not limited to, retail pharmacies as well as hospitals, providers and other healthcare professionals providing services over the Internet. The health records, including prescriptions, may be collected from service providers using various types of messaging including email, facsimile, uploads, and voice. The `288 Patent, our seventh, further raised the bar for our PHR intellectual property in that there are additional claims related to collecting insurance information, calendaring, and other features which are already provided by MMR's products and services. Claims in this patent address how healthcare providers send requested patient information to the patient, caretaker, provider or user by various means, including voice, fax, email or other electronic formats connected to a Personal Health Record system, patient portal or other locations on the Web. They also cover how users collect Personal Health Information on the Web or at other destination addresses without the healthcare provider having to enter specific personal identification numbers of the user. The information collected includes but is in not limited to a patient's medical history, chart notes, vaccination records, laboratory and other test results, prescriptions, and X-rays and images, as well as birth certificates and other important documents such as wills and advance directives. . These comprised this sixth and seventh patents issued to MMR respectively. Our eighth U.S. patent - U.S. Patent No. 8,498,883 - was issued on July 30, 2013 after being allowed on June 6, 2013. Claims in the eighth patent, entitled "Method for Providing a User with a Service for Accessing and Collecting Prescriptions," includes 28 claims which are directed toward providing a user with the ability to access and manage prescriptions online by providing features that include sending prescriptions to a pharmacy, accessing prescriptions from a pharmacy, scheduling prescription refills, sending reminders regarding prescription refills including by text or email, and identifying adverse drug interactions by analyzing prescription medications. We received a Notice of Allowance from the USPTO for our ninth patent on August 8, 2013, entitled "Method for Providing a User with a Web-based Service for Accessing and Collecting Health Records," which was issued on January 7, 2014, U.S. Patent No. 8,626,532. The patent includes 27 claims, a portion of which are directed toward enabling users to access and collect their medical records in a secure and private manner using wireless devices such as smartphones, tablets or telemedicine platforms, amongst other systems, and represented a significant addition to MMR's U.S. patent portfolio. Internationally, we have patents issued, pending and applied for in 11 other countries or regional authorities of commercial interest. Seven of the patents issued are in Australia, New Zealand, Singapore, Mexico, Japan and Canada. Each entitled "Method and System for Providing Online Medical Records," the Japanese Patent (#5191895) with 40 claims was issued on February 8, 2013, and the Canadian Patent (#2,615,128) was issued on September 10, 2013 and has 40 claims including claims corresponding to those in U.S. Patent No. 8,301,466. With the Canadian patent, our health IT intellectual property includes all of North America. MMR also has 14 other pending patent applications in foreign countries or regional authorities further including, Hong Kong, Israel, South Korea, Japan, Mexico, Europe, and China. There are also three pending Patent Cooperation Treaty ("PCT") applications. We also have hundreds of patent claims in pending U.S. applications including 17 U.S. utility patent applications related to health information technology. These include applications directed toward a Mobile Platform for Personal Health Records, a Method and System for Managing Personal Health Records with Telemedicine and Personal Health Monitoring Device Features, Prepaid Card Services related to Personal Health Records, a Universal Patient Record Conversion Tool, Aggregation of Data from Third Party Systems into a Personal Health Record Account, Data Exchange with Personal Health Record Service, Delivery of Electronic Medical Records or Electronic Health Records into a Personal Health Records Management System, a Health Record with Inbound and Outbound Fax Functionality, a Method and System for Providing Online Medical Records with Emergency Password, Identifying Individual Associated with a Personal Health Record with Health Record Destination Address, Method for Providing a User with a Service for Accessing and Collecting Records, Identifying a Personal Health Record Using a Phone Number, and Personal Health Record with Genomics, We believe that many of the pending claims will ultimately be allowed including both health IT and non-health IT/medical applications which are pending in our entire patent portfolio. 23 -------------------------------------------------------------------------------- With MMR's patent issuances, we believe we hold significant foundational patents under a "Method and System for Providing Online Medical Records," and "Method and System for Providing Online Records" and that the patents are relevant to any provider who transmits Electronic Health Records in that they limit their ability to communicate without infringement. As a result, the process of enforcement and licensing of our patent portfolio through the law firm Liner LLP (aka Liner Grode Stein Yankelevitz Sunshine Regenstreif& Taylor LLP) continues to build in 2014. The Liner law firm is also representing us in the collection of $30 million dollars under our Settlement and Patent License Agreement with SCM as further described in our Litigation Matters section. Exploiting MMRGlobal Biotech Assets and Patents Although our primary business is the web-based storage and management of personal and professional health and vital records, we acquired intellectual property rights to certain biotech assets through the 2009 Merger with Favrille, Inc. which currently include five U.S. patents, four U.S. pending patent applications, 24 patents in foreign countries and 18 pending patent applications in foreign countries. Following the acquisition of the initial biotech assets, we have perfected the patent condition of numerous assets, including the revival of Favrille's original U.S. Patent directed to treating B-cell pathologies, along with ongoing additional filings to enhance the international value associated therewith. As a result, we now have biotech patents and patent applications pending in 23 foreign countries of commercial interest that provide competitive advantages for this biotechnology. The foreign countries include major European, Asian, North American, and South American markets, including for example, in the United States, Mexico, Australia, Brazil, Canada, China, Hong Kong, Singapore, Europe (including United Kingdom, France, Germany, Switzerland, Spain, Italy, the Netherlands, Denmark, Sweden, Finland, Ireland and Belgium), India, Japan, and South Korea. The biotech assets include technologies relating to anti-CD20 monoclonal antibodies and B-Cell vaccine patents. The anti-CD20 monoclonal antibody assets continue to result in issued patents in the U.S. and foreign countries. Notices of Allowance and thereafter patents for our anti-CD20 monoclonal antibody assets have been issued for patents titled "Antibodies and Methods for Making and Using Them." The Mexican patent office was the first to grant a patent for this technology as Application No. MXa/2009/006659. Thereafter, as announced on April 15, 2013, we received a Notice of Allowance from the United States Patent and Trademark Office, resulting in U.S. Patent No. 8,465,741 (issued in June 2013), for our first U.S. patent for the anti-CD20 monoclonal antibody IP. Shortly thereafter, on April 22, 2013, we announced that the Australian Patent Office had issued a Notice of Allowance for our anti-CD20 monoclonal antibody assets, Application No. 2007338607 (issued in July 2013), followed by the issuance of the patent in Korea (10-2009-7015196), both under the same title. These various U.S. and foreign patents reinforce the value of the antibody assets, and continue to be used to seek expedited allowance in other countries operating under international patent treaties (referred to as the Patent Prosecution Highway). Use of the Patent Prosecution Highway allows both expedited examination and often allowance by demonstrating willingness to amend patent claims to the same scope of allowed patent claims granted in another jurisdiction (such as the issued U.S. patent claims in U.S. Patent No. 8,465,741). In countries that do not participate in such treaties (or do not allow the same type of claims as those issued in the U.S.), additional antibody patent applications are being filed or the examining offices are being notified with a request for expedited examination to further enhance the review and issuance of patents. These patents for our anti-CD20 monoclonal antibodies have particular utility in fighting cancers and are considered important assets based on benefits and commercial value demonstrated by Rituxan®, an anti-CD20 monoclonal antibody with reported sales of USD $7.5 billion in 2013, which is due to go off patent in 2015. MMRGlobal's biotech assets also include the B-Cell vaccine patents and patent applications entitled "Method and Composition for Altering a B Cell Mediated Pathology" and "Altering a B Cell Pathology Using Self-Derived Antigens in Conjunction with Specific-Binding Cytoreductive Agent" which relate to methods of manufacturing compositions for B-cell vaccines used in the fight against lymphoma and potentially other forms of cancer, including U.S. Patent Nos. 8,637,638; 8,114,404; 8,133,486 and 6,911,204. Most recently in January 2014, the fourth U.S. patent for B-Cell vaccine technology was issued (Patent No. 8 therewith in the U.S. to pursue still further protection for this technology to be used in the fight against lymphoma and potentially other forms of cancer. Issued foreign patents have also been granted for this technology in Europe, Hong Kong, Singapore, Japan and Mexico. Additional manufacturing patent applications are filed as such countries award new patents to further enhance the protection of the manufacturing patents already issued. For example, in 2013 additional patents were filed in the U.S., Mexico and Japan to introduce additional patent claims protecting additional methods and compositions for altering B-cell pathologies using self-derived antigens in conjunction with specific-binding cytoreductive agents. The validation of the European Union Patent No. 01979228.2 in late 2013 for methods of manufacturing the B-cell vaccines provides enforceable patents in countries of commercial interest including: the United Kingdom, France, Germany, Switzerland, Spain, Italy, the Netherlands, Denmark, Sweden, Finland, Ireland and Belgium. 24 -------------------------------------------------------------------------------- Currently, our biotech patent portfolio includes U.S. and foreign patents with expiration dates of August 2021 or later, relating to the manufacture of the B-cell vaccines. The issued antibody patents (and other patents which may issue relating to this technology) have substantially later expiration dates of September 2027 or later. Additional patent applications once granted may obtain additional term of biotech patent protection. Our biotech assets are comprised of patents and pending patent applications, patient samples and data from the FavId™/Specifid™ idiotype vaccine trials and our proprietary anti-CD20 antibody panels to treat B-cell lymphoma and additional B-Cell mediated conditions such as rheumatoid arthritis. Subsequent to the Merger, we have recovered additional intellectual property, including certain physical assets used by Favrille, Inc. in the form of over 1,800 patient tissue samples, samples of the B-Cell vaccine, a collection of insect cells used in the manufacture of the vaccine (as protected by various U.S. and foreign patents) and other materials collected during the pre-Merger FavId/Specifid vaccine trials. On December 22, 2010, we entered into a non-exclusive agreement with Celgene to license the use of our clinical and scientific data (originated by Favrille) related to targeted immunotherapies for cancer and other disease treatments to stimulate a patient's immune response and certain other confidential information. In consideration for the rights granted under the Agreement, Celgene agreed to pay us certain upfront fees and development milestones. When a milestone is reached it automatically triggers a payment to MMR. We continue to work with scientists and experienced venture capitalists to assist us in generating revenue through licensing agreements as would be usual and customary in that industry. Moreover, we plan to continue pursuing license agreements with companies like Celgene that have expertise in the area of biotechnology and specifically in treating lymphomas and other cancers, and which can benefit from the use of our clinical and scientific data. Other Intellectual Property and Trademarks We own federal registrations for the trademarks MMRGlobal, MMRPRO, and MY MEDICAL RECORDS. In addition, we own the URL and domain name for the web address www.MyMedicalRecords.com. We also own the domain names www.MyMedicalRecordsMD.com, www.MMRPro.com and www.MMRPatientView.com for use with MyMedicalRecords Pro and own the domain name www.MyEsafeDepositBox.com for use with our MyEsafeDepositBox product as well as numerous other domains for marketing and new product development purposes. We also own the source code for our products. As we continue to develop our products, we continue to register our trade names and logos as trademarks and service marks and will seek to protect the copyrights in the initial and any other proprietary content that we develop to support our MyMedicalRecords PHR, MyEsafe and MMRPro products. We also own the source code for a handheld software program, developed to operate on the Palm operating system, which allows Palm users to create a personal medical history on a personal data assistant, or PDA, so that they can have access to this information while traveling and in the event an Internet connection is not available. We are in the process of developing applications to use MyMedicalRecords and MMRPro products on other handheld devices. Competition MyMedicalRecords PHR Although we believe that no other product in the marketplace compares to what we provide in our comprehensive PHR and other offerings, there are other PHR providers in the consumer health information management marketplace today that compete for our services. These include NoMoreClipboard.com, Dossia, WebMD Health Manager, ZweenaHealth, MiVia, and numerous others including patient-portals offered by EMR Vendors, health exchanges, and insurance companies, hospitals and HMOs for their policyholders and patients. Each of our competitors offers varying PHR products and services for online storage and access to medical records at varying price points (at the basic "free" level, with minimal recordkeeping capability that usually includes advertising). MyEsafeDepositBox Our MyEsafeDepositBox product competes with a number of online backup and electronic data storage services. The increasing use of external hard drives and flash drives to backup data also has the potential to compete with online data storage services such as our MyEsafeDepositBox product. 25 -------------------------------------------------------------------------------- MMRPro MMRPro competes with scanning services that market their services to doctors seeking to convert their historical paper records into electronic files, as well as EMR systems. MMRPro also competes with EMR systems that offer doctors the opportunity to make their entire office paperless. Marketing and Sales Marketing Update Demand for both our consumer and professional medical records products is driven primarily by the U.S. healthcare market and the need for health information technology products and services worldwide. The growth of health IT in the U.S. is being driven by billions of dollars in health IT spending and consumer awareness campaigns highlighting the importance of managing their health on-line. We are also seeing a drive to reduce healthcare spending through government initiatives and financial incentives. More consumers than ever before recognize the importance of managing their personal health based on the media attention given to the Affordable Care Act (aka Obamacare) and Healthcare.gov as well as the aging population of baby boomers, rising incidences of chronic illnesses and employer worksite wellness initiatives. The key government drivers for PHR adoption are the Health Information Technology for Economic and Clinical Health Act (HITECH), which was part of the 2009 American Recovery and Reinvestment Act, and its mandates calling for the Meaningful Use of Electronic Health Records. Starting in August 2012 when the Centers for Medicare and Medicaid Services (CMS) released its final rule for Meaningful Use Stage 2 under HITECH, Personal Health Records came to occupy a dominant position in the healthcare IT landscape. Moreover, the target year was 2014 when eligible healthcare providers had to begin offering at least 50% of their patients timely online access to their personal health information such as through a Personal Health Record or patient portal to continue receiving full incentives under CMS's EHR Incentive Program. Beyond HITECH and its specific patient engagement requirements, we believe that the Affordable Care Act is a factor in driving PHR adoption. Though ACA does not directly crossover into the federal incentive programs for EMR/EHR adoption, it supports health IT by incorporating the electronic transmission and exchange of health information, which is needed to coordinate care in Accountable Care Organizations. Moreover, with an overall anticipated influx of over 30 million Americans becoming insured, it is expected that the newly insured need health IT solutions such as those provided by MMR to better manage their health and out-of-pocket costs. This also intersects with employers, worksite wellness programs and retail health clinics that are supported by initiatives to incentivize employees to take greater control of their health and healthcare expenditures. The growth in demand for PHRs is reflected in our strategic relationships with licensees and other partners such as 4medica, Claydata, VisiInc PLC, AccessMyRecords, Walgreens, Whole Foods Market, XN Finacial, Interbit Data, Coverdale, Fairway Physicians Insurance Company, Salutopia Vida Senior Resources, as well as Cerner Corporation. In the case of Interbit Data the Company also provides our MMRPatientView portal to users of the MEDITECH EMR system. We continue to work with 4medica in integrating our PHR with laboratory reporting services which are used by more than100 institutional customers including more than 30,000 doctors nationwide. We also are working with 4medica to create a "fax portal" for their more than 30,000 doctors to facilitate better handling of the still large number of lab results that are paper-based in their network. That portal, which creates a new revenue stream for us, was made available by 4medica to its client doctors late in 2012. We also have completed our initial implementation with the 4medica Electronic Medical Records system. Now, when consumers enroll in a MyMedicalRecords Personal Health Record account, their data can be sent into 4medica in HL7 format so that a Medical Record Number (MRN) can be established in 4medica.In February 2014, the federal regulatory environment became more favorable to these efforts with the passage of a final rule that amended the Clinical Laboratory Improvement Amendments of 1988. This has opened the door to meaningful licensing and settlement communication with laboratory providers and others. The rule removed the legal barriers which had prevented patients from receiving laboratory results direct from the labs without prior authorization from their doctor in all 50 states plus the District of Columbia. So with 4medica, laboratory information can now be made available directly into MMR accounts, without limitation of which state subscribers reside in, whereas prior to the rule having gone into effect on April 7, only seven states required direct access for the patient. Having entered into the second term of a Non-Exclusive License Agreement with Whole Foods Market, Medical and Wellness Centers Inc. ("WFM") in the second quarter of 2013, MMR is providing a customized version of the MyMedicalRecords Personal Health Record that connects directly to the EMR system(s) utilized by WFM. Users can fill out patient registration and authorization forms from within the PHR and selected data in the forms are sent as HL7 into a 4medica EMR so that patient demographics are fully populated in the EMR. Because we are sending data in standard HL7 and PDF formats, this can also work with any EMR system. 26 -------------------------------------------------------------------------------- Additionally, we plan on continuing to expand our consumer market through strategic partnerships with major national and local pharmacies, nurse advocates and home healthcare specialists, all of whom have significant one-on-one relationships with patients who can benefit immediately from the use of our PHR. Likewise, starting in 2012, we created a retail consumer model through the use of Prepaid Personal Health Record cards which is currently evolving into a Personal Health Record kit being sold through retail outlets including pharmacies. We are also expanding our presence into the wellness and prevention market. While the U.S. holds the largest share of the global healthcare IT market, slated to grow domestically at a CAGR of nearly 20% during 2014-2018, health IT is also a growth industry internationally, expected to continue increasing so that by 2017 the global market will expand at a compound annual growth rate of 7.0 percent. Countries sharing a common goal to control healthcare costs are looking to EMR and PHR solutions to achieve this. Moreover, in a global economy, companies are increasingly sending employees overseas, a practice which is expected to increase demand for our MyMedicalRecords PHR among ex-pats, particularly in Europe and the Middle East. Also, medical tourism is on the rise with estimates of a $100 billion market, and this fuels the need for medical records that are truly universal and can be accessed anytime from anywhere. It should be noted here that the growth of health IT at home and abroad is further impetus for ensuring the protection and enforcement of our patent portfolio worldwide. In light of the continued occurrence of emergencies and natural disasters, demand for both our MyMedicalRecords and MyEsafeDepositBox products are driven by relief and educational organizations, as well as by consumers and small businesses, with international focus based on tools that help in disaster preparedness and personal protection. Additionally, we are continuing to use online advertising to take advantage of awareness in online health management following the hundreds of millions of dollars in advertising spent on Healthcare.gov. We continue to deploy key word advertising, per enquiry affiliated advertising and marketing programs, smartphone advertising and other online interactive media campaigns where our products and services are offered through marketing partners which include online publishers and other health-related websites whereby we can bring Personal Health Records to customers on a "Per Acquisition" basis. This means MMR only pays them if we receive a paid subscription. This program gives MMR the ability to put its marketing message in front of millions of new viewers, in a targeted manner, without having to pay costs of advertising upfront. The Company is also utilizing social media (YouTube, Facebook, Twitter, Instagram) to build greater awareness for our products and services, to enhance brand loyalty for our MyMedicalRecords PHR, and to connect with a greater number of potential users. . Results of Operations for the three and six months ended June 30, 2014 as compared to the three and six months ended June 30, 2013 Revenues Revenues for the three months ended June 30, 2014 and 2013 were $55,330 and $300,549, respectively, a decrease of $245,219 or 94.5%. The decrease for the quarter was primarily due to the Company's focus on patent licensing and a delay in the launch of its Personal Health Record kit to a major pharmacy chain, which shipped in July. The Company also showed a decrease in MMRPro sales due to the changeover to MMRProPlus and lags related to the introduction of the product into a large wholesale/retail channel that incorporates several reseller networks that have to be trained. Revenues for the six months ended June 30, 2014 and 2013 were $540,824 and $422,577, respectively, an increase of $118,247 or 28.0%. The increase for the six months ended June 30, 2014 was primarily due increased licensing fees. Cost of revenue Cost of revenues for the three months ended June 30, 2014 and 2013 were $43,041 and $78,111, respectively, a decrease of $35,070 or 44.9%. The decrease for the quarter was primarily due to the re-negotiation of lower website hosting fees. Cost of revenues for the six months ended June 30, 2014 and 2013 were $141,442 and $104,254, respectively, an increase of $37,188 or 35.7%. The increase for the six months ended June 30, 2014 was primarily due to higher website development maintenance and support fees. Gross profit for the three months ended June 30, 2014 and 2013 were $12,289 and $222,438, respectively, a decrease of $210,149 or 94.5%. The decrease for the quarter was primarily due to decreased revenues in the second quarter of 2014 compared to the same period in 2013. Gross profit for the six months ended June 30, 2014 and 2013 were $399,382 and $318,323, respectively, an increase of $81,059 or 25.5%. The increase for the six months ended June 30, 2014 was primarily due to increased licensing fees. 27 -------------------------------------------------------------------------------- Operating expenses Total operating expenses for the three months ended June 30, 2014 and 2013 were $1,296,754 and $1,363,083, respectively, a decrease of $66,329 or 4.9%. The decrease for the quarter was primarily due to a reduction in investor relations expenses, salaries, and sales, marketing and consulting fees as the Company works towards streamlining expenses. Total operating expenses for the six months ended June 30, 2014 and 2013 were $3,220,247 and $2,835,641, respectively, an increase of $384,606 or 13.6%. The increase for the six months ended June 30, 2014 was primarily due to higher non-cash stock base compensation expenses, consulting fees, and insurance premiums. General and administrative expenses for the three months ended June 30, 2014 and 2013 were $913,241 and $1,004,094, respectively, a decrease of $90,853 or 9.0%. The decrease was primarily due to a reduction in investor relations expenses, salaries, and consulting fees. General and administrative expenses for the six months ended June 30, 2014 and 2013 were $2,343,221 and $1,893,656, respectively, an increase of $449,565 or 23.7%. The increase for the six months ended June 30, 2014 was primarily due to higher non-cash stock base compensation expenses in the first quarter, consulting fees, insurance, amortization of patents, and travel expenses. Sales and marketing expenses for the three months ended June 30, 2014 and 2013 were $357,660 and $349,720, respectively which remained relatively flat. Sales and marketing expenses for the six months ended June 30, 2014 and 2013 were $826,390 and $908,743, respectively, a decrease of $82,353 or 9.1%. The decrease for the six months ended June 30, 2014 was primarily due to lower business development fees and marketing consulting fees. Technology development expenses for the three months ended June 30, 2014 and 2013 were $25,853 and $9,269, respectively, an increase of $16,584 or 178.9%. Technology development expenses for the six months ended June 30, 2014 and 2013 were $50,636 and $33,242, respectively, an increase of $17,394 or 52.3%. The increase was primarily due to an increase in expenses related to a software upgrade design of MMRPro software for the three and six months ended June 30, 2014. Other Income Other income for the three months ended June 30, 2014 and 2013 was $0 and $10,234, respectively. Other income for the six months ended June 30, 2014 and 2013 was $0 and $10,234, respectively. Interest and Other Finance Charges, Net Interest and other finance charges for the three months ended June 30, 2014 and 2013 were $145,695 and $16,541, respectively, an increase of $129,154 or 780.8%. The increase for the quarter was primarily due to increased interest expense related to convertible notes. Interest and other finance charges for the six months ended June 30, 2014 and 2013 were $258,647 and $151,689, respectively, an increase of $106,958 or 70.5%. The increase for the six months ended June 30, 2014 and 2013was primarily due to increased interest expense related to convertible notes. Net loss As a result of the foregoing, net loss for the three months ended June 30, 2014 and 2013 was $1,430,160 and $1,146,952, respectively, an increase of $283,208 or 24.7%. Net loss for the six months ended June 30, 2014 and 2013 was $3,079,512 and $2,658,773, respectively, an increase of $420,739 or 15.8%. Going Concern As more fully described in Note 1 to the consolidated financial statements appearing above in this Quarterly Report on Form 10- Q, our independent registered public accounting firm included an explanatory paragraph in their report on our 2013 financial statements for the year ended December 31, 2013 related to the uncertainty of our ability to continue as a going concern. As of June 30, 2014, our current liabilities of $10.9 million exceeded our current assets of $0.5 million by $10.4 million. For a description of our management's plan regarding our ability to continue as a going concern, please see Note 1 to the financial statements included above. 28 -------------------------------------------------------------------------------- Liquidity and Capital Resources As of June 30, 2014, our current liabilities exceeded our current assets by $10.4 million. We have incurred net losses of $1,430,160 and $1,146,952 for the three months ended June 30, 2014 and 2013, respectively, and $3,079,512 and $2,658,773 for the six months ended June 30, 2014 and 2013, respectively. At the current level of borrowing, we require cash of $275,000 per year to service our debt. Furthermore, not including debt service, in order to continue operating our business, we use an average of $278,000 in cash per month, or $3.3 million per year. At this rate of cash burn, our existing current assets combined with future anticipated financing activities and proceeds from sales will sustain our business for less than one year. In addition to the above cash burn from operations, we will be required to obtain additional financing in order to meet the obligations for installment payments of $621,000 under the Creditor Plan and our obligations under the secured indebtedness to The RHL Group under the Ninth Amended Note (which had a balance of $1.47 million at June 30, 2014), amongst other debt obligations. Such obligations are currently due and payable pursuant to the terms of the notes. The components of the RHL Group Note payable and the related balance sheet presentation as of June 30, 2014 are as follows: $0.95 million, which is included in the line of credit, related party; and $0.52 million for other obligations due to The RHL Group, which is included in related party payables. Traditionally, we have relied on the sale of stock and convertible debt as well as draws from the RHL Group line of credit to finance our activities. As of June 30, 2014, we had a line of credit with The RHL Group in the amount of $4.5 million. As of June 30, 2014, availability under this line of credit was $1.71 million. Furthermore, we may utilize portions of our standby equity facility with Granite as needed. Additionally, we raised $200,000 and $1,386,250 in convertible debt during 2014 and 2013, respectively and $781,680 and $0 in direct sales of common stock during 2014 and 2013, respectively. We expect to continue offering a limited amount of convertible debt and common stock in 2014. We also expect sales from MMRPro, our prepaid Personal Health Record kits, and fees from patent licensing and settlement agreements to generate revenue and reduce annual cash burn from operations. Cash Flows for the six months ended June 30, 2014 compared to six months ended June 30, 2013 Net cash used in operating activities for the six months ended June 30, 2014 and 2013 was $949,207 and $1,622,504, respectively. In 2014, we had a net loss of $3,079,512, less non-cash adjustments (depreciation, amortization, common stock and warrants issued for services and interest, and stock compensation expense) of $1,187,281, less changes in operating assets and liabilities of $943,024. In 2013, cash used in operating activities included net loss of $2,658,773, less similar non-cash adjustments of $802,314, less changes in operating assets and liabilities of $233,955. Compared to 2013, non-cash adjustments in 2014 were higher primarily due to an increase in stock base compensation and amortization of loan discount and patent amortization. Net cash used in investing activities in the six months ended June 30, 2014 and 2013 totaled $188,423 and $329,498, respectively. Compared to 2013, investing activities in 2014 were lower mainly due to a decrease in costs of patents. Net cash provided by financing activities in the six months ended June 30, 2014 and 2013 totaled $1,295,533 and $1,925,977, respectively. Financing activities primarily included proceeds generated from the issuance of convertible notes and common shares. Compared to 2013, financing activities in 2014 were lower primarily due to a decrease in convertible notes and line of credit activities. As of June 30, 2014, we had cash and cash equivalents of $168,262, compared to $10,630 as of June 30, 2013. Description of Indebtedness The RHL Group For a description of our indebtedness to The RHL Group, please See Note 3 - Related Party Note Payable, included above in this Quarterly Report on Form 10-Q. Convertible Notes For information relating to our Convertible Notes, please see Note 9 to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. 29 -------------------------------------------------------------------------------- Commitments and Contingencies For information relating to our commitments and contingent liabilities, please see Note 5 to our financial statements appearing elsewhere in this Quarterly Report on Form 10-Q. Off-Balance Sheet Arrangements On January 4, 2010, we entered into a Cooperation Agreement with UNIS, which we refer to as the "Cooperation Agreement". Under the Cooperation Agreement, we agreed to form the JV for the purpose of deploying our PHR services and document imaging and management solutions in China. We will own 40% of the JV and UNIS will own 60% and each party will have the right to designate two members of the JV's board of directors, with the fifth member being a Chinese citizen mutually designated by us and UNIS. Under the Cooperation Agreement, board actions will require the approval of more than three of the five members of the JV's board of directors and no material actions may be taken unless all board members are present and voting at the meeting. Under the Cooperation Agreement, we will contribute an aggregate of 50 million RMB to the joint venture, based on each party's respective ownership, in the form of intellectual property rights, equipment, brand value, cash and such other consideration as may be agreed upon by the parties. Each party's obligation to contribute to the joint venture is subject to a number of conditions, including obtaining all necessary approvals of and licenses from the Chinese government, as well as the joint venture meeting its budget, goals and objectives at the time contributions are due. Under the Cooperation Agreement, each party's contributions will be made over a period of sixty months. For a more complete description of the terms of the Cooperation Agreement, please see Exhibit 10.26 in our annual Report on Form 10-K for the year ended December 31, 2009, as filed with the SEC on March 31, 2010. On August 10, 2010, we entered into a Supplementary Agreement for the purpose of clarifying certain non-material terms of the original Cooperation Agreement mentioned above. On July 2, 2012, we received our official business license from the Chinese government to operate the JV. The JV is officially licensed with the Chinese government and is approved to operate and generate revenue. The license enables the JV to develop medical information management software, medical information technology software, health records management systems, and provision of related services, including our PHR systems. The JV will offer its products and services to the Chinese government, hospitals, healthcare facilities, and to the public and is valid through 2042. Our entry into the Cooperation Agreement described above constitutes the creation of a direct financial obligation as described above. As of June 30, 2014, we have not incurred obligations to fund the joint venture nor has there been any activity to date. |