16-Jan-2014
Quarterly Report
ITEM 2. Management's Discussion And Analysis of Financial Condition and Results of Operation
THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS CERTAIN STATEMENTS WHICH ARE FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE SAFE HARBOR PROVISIONS OF
SECTION 27A OF THE SECURITIES ACT OF 1993, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE STATEMENTS RELATE TO FUTURE EVENTS, INCLUDING THE FUTURE FINANCIAL PERFORMANCE OF ONCOLOGIX. IN SOME CASES, YOU CAN IDENTIFY FORWARD-LOOKING STATEMENTS BY TERMINOLOGY SUCH AS "MAY," "WILL," "SHOULD," "EXPECTS," "PLANS," "ANTICIPATES," "BELIEVES," "ESTIMATES," "PREDICTS," "POTENTIAL," OR "CONTINUE" OR THE NEGATIVE OF SUCH TERMS AND OTHER COMPARABLE TERMINOLOGY. THESE STATEMENTS ONLY REFLECT MANAGEMENT'S EXPECTATIONS AND ESTIMATES AS OF THE DATE OF THIS REPORT. ACTUAL EVENTS OR RESULTS MAY DIFFER MATERIALLY FROM THESE EXPECTATIONS. IN EVALUATING THOSE STATEMENTS, YOU SHOULD SPECIFICALLY CONSIDER VARIOUS FACTORS, INCLUDING THE RISKS INCLUDED IN THE REPORTS FILED BY ONCOLOGIX WITH THE SEC. THESE FACTORS MAY CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM ANY FORWARD-LOOKING STATEMENTS. ONCOLOGIX IS NOT UNDERTAKING ANY OBLIGATION TO UPDATE ANY FORWARD-LOOKING STATEMENTS CONTAINED IN THIS REPORT.
This report should be read in conjunction with our Annual report on Form 10-K for the fiscal year ended August 31, 2013.
GENERAL DISCUSSION
We were originally formed in 1995. In 2000 we changed our name to "BestNet Communications Corp." Our business at the time was to provide worldwide long distance telephone communication and teleconferencing services to commercial and residential consumers through the internet. That business was never profitable and we disposed of that business in February 2007.
In July 2006 we acquired through the acquisition of JDA Medical Technologies, Inc. ("JDA"), which was merged into our wholly owned subsidiary, Oncologix Corporation. On January 22, 2007, we changed our name to Oncologix Tech, Inc., to reflect this new business. Our business at this time was the development of a medical device for brachytherapy (radiation therapy), called the "Oncosphere" (or "Oncosphere System"), for the advanced medical treatment of soft tissue cancers. It is a radioactive micro-particle designed to deliver therapeutic radiation directly to a tumor site by introducing the micro-particles into the artery that feeds the tumor tissue. Its first application is expected to be the treatment of liver cancer. Due to a lack of funding, we suspended these development activities on December 31, 2007 On November 1, 2013, because the development of the brachytherapy device was years off and could not be marketed at that time, the Company's management and Board of Directors determined to dispose of Oncologix Corporation and ? its Brachytherapy medical device subsidiary. With our acquisition of Dotolo we currently have a viable FDA approved medical device which management believes requires minimal capital investment to bring the Company to cash breakeven. Continued support of Oncologix Corporation would cost the Company substantial additional investment that is beyond its means with no guarantee of FDA approval. Furthermore, as part of the disposal, the Company will be relieved of over $90,000 in debt.
On March 22, 2013, we acquired all the outstanding stock of Dotolo Research Corporation ("DRC"), a FDA Registered, Class II, medical device manufacturer with 30 years of product sales in the hydro-colonic irrigation, bowel preparation market. Dotolo Research Corporation began operations in 1989 and is a world-wide leader in hardware and disposable products sales and has an active customer base of over 900+ customers both domestically and internationally.
On August 1, 2013, we acquired all the outstanding stock of Angels of Mercy, Inc. ("AOM"). Angels provides non-medical, Personal Care Attendant (PCA) services, Supervised Independent Living (SIL), Long-Term Senior Care, and other approved programs performed by a trained caregiver that will meet the health service needs of beneficiaries whose disabilities preclude the performance of certain independent living skills related to the activities of daily living (ADL).
CRITICAL ACCOUNTING POLICIES
"Management's Discussion and Analysis of Financial Condition and Results of Operations " ("MDA") discusses our consolidated financial statements that have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amount of assets and liabilities at the date of the financial statements, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, we evaluate our estimates and judgments, including those related to research and development costs, deferred income taxes and the impairment of long-lived assets. We base our estimates and judgments on historical experience and on various other factors that are believed to be reasonable under the circumstances. The result of these estimates and judgments form the basis for making conclusions about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions; changes in these estimates as a result of future events may have a material effect on the Company's financial condition. The SEC suggests that all registrants list their most "critical accounting policies" in MDA. A critical accounting policy is one which is both important to the portrayal of the Company's financial condition and results of operations and requires management's most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. Management believes the following critical accounting policies affect its more significant judgments and estimates in the preparation of its consolidated financial statements: The impairment of long-lived assets, stock based compensation, deferred income tax valuation allowances, pending or threatening litigation and the allocation of assets acquired and liabilities assumed in acquisitions. Please see Note 2 - Critical Accounting Policies for a further discussion of our accounting policies.
Revenue Recognition. Revenue is recognized by the Company in accordance with Accounting Standards Codification Topic ("ASC") 605. Accordingly, revenue is recognized when all the following criteria are met: persuasive evidence of an arrangement exists; delivery has occurred; the seller's price to the buyer is fixed and determinable; and collectability is reasonably assured. Currently, the primary revenue for the Company is derived from its sales in its Personal Care Services Segment. AOM is reimbursed for each approved "Unit of Service" provided, as determined by the Health Care Financing Administration (HCFA), the Department of Social Services and based upon a detailed Case Management, Plan of Care for each beneficiary. A unit of service for PCA services will be one-half hour. At least fifteen (15) minutes of service must be provided to the individual in order for AOM to bill for a unit of service. A maximum of 1,825 hours (3,650 half-hour units) per beneficiary, per year can be billed under the Medicaid waiver program. Our only customer is the State of Louisiana who reimburses us for the services we provide. We currently experience less than a two percent claims rejection rate.
Accounts Receivable. The Company's receivables in its medical device segment are subject to credit risk, and the Company typically does not require collateral on its accounts receivable. Receivables are generally due within 30 days. The Company maintains an allowance for uncollectable receivables that reduces the receivables to amounts that are expected to be collected. Due to the current lack of product manufacturing, we maintain an allowance account approximately 50% of accounts receivable since we are unable to properly manufacture and deliver products. The Company's receivables in its personal care segment are generally repaid in 14 days on average. We bill the State of Louisiana on a weekly basis and are reimbursed two weeks later via electronic funds transfer. We are able to resubmit any rejected claims an additional two times to the state for payment within the next twelve months. Currently we do not maintain an allowance for uncollectible receivables as we analyze our claim rejection rate and make significant changes to prior company policies regarding rejected claims. Upon final rejection, these receivables are written off to bad debt expense.
Long-Lived Assets. ASC 360 - Property, Plant and Equipment addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The Company periodically evaluates whether events and circumstances have occurred that may warrant revision of the estimated useful life of property and equipment or whether the remaining balance of property and equipment, or other long-lived assets, should be evaluated for possible impairment. Instances that may lead to an impairment include: (i) a significant decrease in the market price of a long-lived asset group; (ii) a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition; (iii) a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset or asset group, including an adverse action or assessment by a regulatory agency;
(iv) an accumulation of costs significantly in excess of the amount originally expected for the acquisition or construction of a long-lived asset or asset group; (v) a current-period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group; or (vi) a current expectation that, more likely than not, a long-lived asset or asset group will be sold or otherwise disposed of significantly before the end of its previously estimated useful life.
An estimate of the related undiscounted cash flows, excluding interest, over the remaining life of the property and equipment and long-lived assets is used in assessing recoverability. Impairment loss is measured by the amount which the carrying amount of the asset(s) exceeds the fair value of the asset(s). The Company primarily employs two methodologies for determining the fair value of a long-lived asset: (i) the amount at which the asset could be bought or sold in a current transaction between willing parties or (ii) the present value of estimated expected future cash flows grouped at the lowest level for which there are identifiable independent cash flows.
Goodwill and other intangible assets. The Company adopted Accounting Standards Update 2011-08 "Intangibles - Goodwill and Other (Topic 350): Testing Goodwill for Impairment ("ASU 2011-08") in the fourth quarter of fiscal 2013 due to its recent acquisition of Dotolo Research Corporation. ASU 2011-08 permits an entity to first assess qualitative factors to determine whether it is more likely that not that the fair value of a reporting unit is less than its carrying amount.
Goodwill represents the excess of the cost of a business combination over the fair value of the net assets acquired. Purchased goodwill is amortized over 15 years. Other intangible assets are deemed to have indefinite lives and are not amortized but are subject to annual impairment tests.
The Company evaluates the recoverability of its indefinite lived intangible assets, which consist of Dotolo Research Corporation and Goodwill in Angels of Mercy, Inc., based on estimates of future royalty payments that are avoided through its ownership of the intangibles and patents, discounted to their present value. In determining the estimated fair value of the intangibles and patents, management considers current and projected future levels of revenue based on its plans for Dotolo, business trends, prospects and market and economic conditions. See Note 4 - Acquisitions for further information on the acquisition of Dotolo.
COMPARISON OF THE THREE MONTH PERIODS ENDED NOVEMBER 30, 2013 TO THE THREE MONTH PERIODS ENDED NOVEMBER 30, 2012
RESULTS OF OPERATIONS
Comparison of the three months ended November 30, 2013 ("fiscal 2014" and 2012
("fiscal 2013")
Revenue
Revenues were $724,632 for the three months ended November 30, 2013.There were no revenues reflected in the comparable period in fiscal 2013 Revenues were primarily driven by personal care service segment acquired in August 2013.
Cost of Revenues
Cost of revenues were $482,388 for the three months ended November 20, 2013 as a result of our acquisitions of DRC and AOM. There were no cost of revenues reflected in the comparable period of fiscal 2013. Cost of revenues for DRC were $12,167 for the three months ended November 30, 2013, and consist primarily of direct labor and minor purchases of materials for our products. Cost of revenues for AOM were $482,388 for fiscal 2014, and consist primarily of wages paid to personal care service employees who directly provide the PCA and SIL services.
General and Administrative Expense
General and administrative expenses primarily include officer and administrative salaries, office rent, utilities, legal and accounting services, insurance, public filing costs as well as other incidental overhead costs.
General and administrative expense increased to $277,360 during the three months ended November 30, 2013, from $43,714, an increase of 152% or $198,898 from the comparable period in fiscal 2013. The primary reason for the increase is due to the general and administrative expenses associated with the operations of our recent acquisitions, DRC and AOM during fiscal 2013. Payroll and related expenses increased to $118,191 during the three months ended November 30, 2013, from $27,806 in the comparable period in fiscal 2013, due primarily to the hiring of our CEO, President of AOM, and administrative salaries at AOM. Accounting expense increased to $29,519 during the three months ended November 30, 2013, from $7,046 in the comparable period in fiscal 2013, due primarily to increased audit fees incurred in fiscal 2014 related to the acquisitions of DRC and AOM. Rent expense increased to $23,200 during the three months ended November 30, 2013, from $0 in the comparable period in fiscal 2013, as a result of facilities rented by both DRC and AOM. Travel and meals expense increased to $11,280 during the three months ended November 30, 2013, from $0 in the comparable period in fiscal 2013, due primarily to our mileage reimbursement policy with AOMs' employees. Insurance expense increased to $30,440 during the three months ended November 30, 2013, from $2,837 in the comparable period in fiscal 2013, due primarily to workers compensation and liability insurance related to AOM. Investor relations expense increased to $11,915 during the three months ended November 30, 2013, from $0 in the comparable period in fiscal 2013, due primarily to an investor relation consulting contract signed in September 2013. Telephone expense increased to $12,499 during the three months ended November 30, 2013, from $397 in the comparable period in fiscal 2013, due primarily to AOM phone activity.
Depreciation and Amortization
Depreciation and amortization increased to $5,726 during the three months ended November 30, 2013, from $90 during fiscal 2013. The increase in depreciation and amortization was the result of fixed assets acquired with the acquisitions of DRC and AOM in fiscal 2013.
Interest Income
We had no interest income in during the three months ended November 30, 2013 or 2012.
Interest and Finance Charges
Interest and finance charges increased to $88,792 during the three months ended November 30, 2013 from $2,851, an increase of over 100% from the comparable period in fiscal 2013. The increase is primarily attributable to the acquisition of additional non-related party debt as a result of the acquisition of DRC and AOM during fiscal 2013, as well as the expensing of warrants issued for finders' fees.
Interest and finance charges - related parties increased to $152,870 during the three months ended November 30, 2013, from $3,653, an increase of over 100% from the comparable period in fiscal 2013. The increase is primarily attributable to the issuance of warrants as finders' fees to a related party during the 4th quarter of fiscal 2013 and 1st quarter fiscal 2014..
A summary of interest and finance charges is as follows:
For the Three Months Ended
November 30, November 30,
2013 2012
Interest expense on non-convertible notes $ 46,849 $ -
Interest expense on non-convertible notes - related
parties 835 137
Interest expense on convertible notes payable 6,103 2,493
Interest expense on convertible notes payable - related
parties - 3,516
Amortization of note payable discounts 78,693 -
Amortization of note payable discounts - related parties 4,041 -
Other interest and finance charges 30,973 358
Total interest and finance charges $ 167,494 $ 6,504
Loss on Conversion of Notes Payable
Loss on conversion of notes payable increased to $36,380 during the three months ended November 30 2013, from $0, for the comparable period in fiscal 2013. The increase was due to the issuance of shares of common stock for the conversion of a non-related party convertible promissory note during the first quarter of fiscal 2014at below market value.
LIQUIDITY AND CAPITAL RESOURCES
During fiscal year 2013, we acquired Dotolo Research Corporation and Angels of Mercy, Inc. While these acquisitions greatly increase the value of our Company, they are not fully cash flow positive. Angels is currently cash flow positive but alone is unable to support all the corporate overhead or needs of our other subsidiary, Dotolo. In addition, we will need additional funds for further development and improvement of our medical device product. We also decided to dispose of Oncologix Corporation and cease our relationship with IUTM. We anticipated that the cost of taking the Oncosphere project would take years and would cost the company millions of dollars without any guarantee of FDA approval. We anticipate that we will require $1,500,000 for operations and debt reductions during the next fiscal year. These funds will allow us to make improvements to our medical device products, procure raw materials for manufacturing, and establish additional sales channels thereby moving the company to cash-flow breakeven, cover corporate overhead and service our debt.
On November 30, 2013, we had cash and cash equivalents of $94,143. Our historical and current operating losses to date have been covered by equity and debt financing obtained from private investors, including certain present and former members of our Board of Directors. To date, we never achieved positive cash flow or profitability.
As of November 30, 2013, we had total outstanding short-term and long-term debt and liabilities totaling $2,445,165. Please see Note 8 for further information.
OFF-BALANCE SHEET ARRANGEMENTS
As of November 30, 2013 and August 31, 2013, we had no off-balance sheet arrangements.
Recent Accounting Pronouncements
We have evaluated all Accounting Standards Updates through the date the financial statements were issued and do not believe any will have a material impact.
New Accounting Standard
In July 2012, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update 2012-02 "Intangibles - Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment" ("ASU 2012-02"). ASU 2012-02 permits entities to first assess qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform the quantitative impairment test. Under the amendments in ASU 2012-02, an entity is not required to calculate the fair value of an indefinite-lived intangible asset unless it determines that it is more likely than not that the fair value of the asset is less than its carrying amount. An entity also will have the option to bypass the qualitative assessment for any indefinite-lived intangible asset in any period and proceed directly to performing the quantitative impairment test. ASU 2012-02 is effective for interim and annual indefinite-lived intangible asset impairment tests performed for fiscal years beginning on or after September 15, 2012, with early adoption permitted. The Company's adoption of ASU 2012-02 is not expected to have an impact on its consolidated financial statements.biz.yahoo.com/e/140116/oclg10-q.html
