NOTES
TO FINANCIAL STATEMENTS
NOTE
1 – BASIS OF PRESENTATION & NATURE OF OPERATIONS
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with the instruction to and requirements of Form 10-QSB
and Article 10 of Regulation S-X. Accordingly, they do not include
all of the information and footnotes required by GAAP for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary in order to make the financial
statements not misleading have been included. Results for the three and nine
month periods ended September 30, 2007 are not necessarily indicative of the
results that may be expected for the year ending December 31, 2007. For further
information, refer to the financial statements and footnotes thereto included
in
The Amacore Group, Inc. annual report on Form 10-KSB/A for the year ended
December 31, 2006.
Nature
of Operations
The
Amacore Group, Inc. (“The Amacore Group” or the “Company”) markets, in addition
to its discount vision plan, various discount programs that provide members
with
5% to 50% savings on doctor visits, a hospital savings program, discounts on
long-term care, and savings on alternative medicine, vitamins and nutritional
supplements. Program members also have access to a 24-hour nurse hotline,
24-hour counseling and the services of a personal patient advocate. For
travelers, the program offers worldwide assistance in over 200 countries and
territories and a Global Med-Net ID that can get medical histories to medical
service providers around the world. With the addition of these new programs,
the
Company changed its business from just a provider of vision care to a provider
of an entire array of medical services. The Company is also in a position to
market limited medical indemnity and accident group insurance
programs.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles
of Consolidation
The
consolidated financial statements as of and for the nine months ended September
30, 2007 and 2006 include the accounts of The Amacore Group, Inc. and its
wholly-owned subsidiaries LBI, Inc. and JRM Benefits Consultants LLC
(“JRM”). All significant intercompany balances and transactions have
been eliminated in consolidation.
Cash
and Cash Equivalents
For
purposes of the statement of cash flows, The Amacore Group considers all highly
liquid debt instruments purchased with a maturity of three months or less to
be
cash equivalents.
Impairment
of Assets
In
accordance with the provisions of Statement of Financial Accounting Standard
No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets, The Amacore
Group’s policy is to evaluate whether there has been a permanent impairment in
the value of long-lived assets, certain identifiable intangibles and goodwill
when certain events have taken place that indicate the remaining unamortized
balance may not be recoverable. When factors indicate that the intangible assets
should be evaluated for possible impairment, The Amacore Group uses an estimate
of related undiscounted cash flows. Factors considered in the valuation include
current operating results, trends and anticipated undiscounted future cash
flows. There were no impairment losses during the first nine months of 2007,
thus no impairment loss is recorded.
Concentration
of Credit Risk
Concentrations
of credit risk with respect to sales existed during the nine months ended
September 30, 2007 in that approximately 36% of total sales were to a single
plan sponsor, up from 27% for the same period in 2006. The concentration of
sales to a single plan sponsor to that extent creates a risk to the extent
that
if that customer is lost, revenues would be significantly affected. In addition,
sales to three customers during the nine months ended September 30, 2007 was
approximately 46% of total sales and 77% for the same period in 2006. The
Amacore Group has sought to address this risk on a going forward basis through
expansion of its customer base by organic growth and by its recent
acquisitions.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Advertising
Costs
The
Amacore Group charges advertising costs to expense as incurred. During the
nine
months ended September 30, 2007 and 2006, advertising costs were $23,770 and
$0,
respectively.
Intellectual
Property
In
December 2004, The Amacore Group acquired 100% of the rights to a number of
patents and technology known as the PhotoScreener (Screener). The PhotoScreener
technology and related patents enable the owner to manufacture devices that
can
quickly scan individual eyes to discover medical abnormalities to be referred
for treatment. The Screener can be used for preverbal infants as young as six
months up to adults and has been effective in revealing early stage eye
abnormalities that can be treated effectively. The Amacore Group purchased
the
technology for an initial payment of 937,500 shares of common A stock valued
at
approximately $2,307,572. The remainder of the purchase price was contingent
on
proving its marketability with a final payment due by October 2005 in the amount
of 1,562,500 shares. The Company had the right to not make the final
payment when due, and as a result would forfeit all rights to the patent and
technology. The Amacore Group had obtained an independent valuation of the
technology in excess of the purchase price. The Company had determined that
the useful life for purposes of amortization of the PhotoScreener patent
(intellectual property) was 20 years. SFAS 142 provides the criteria to be
considered in determining the useful life. Those criteria are: a) the expected
use of the patent by the Company, b) the expected useful life of other assets
which the useful life of the patent may relate, c) any legal, regulatory or
contractual provisions that may limit the useful life of the patent, d) any
legal, regulatory or contractual provisions that enable renewal or extension
of
the PhotoScreener patent without substantial cost, e) effects of obsolescence,
demand, competition and other economic factors, and f) the level of maintenance
expenditures required to obtain expected future cash flows from the
PhotoScreener. After reviewing the criteria the Company concluded that a) the
useful life of the PhotoScreener patent is 20 years, b) there are no other
assets with which the PhotoScreener patent relates, c) the Company has all
legal
rights to the PhotoScreener patent, d) the expected cost of renewing the patent
is minimal - less than $10,000, e) the patent and related technology are unique
and the Company expected significant revenues from the use of the technology,
and f) the patent does not require any maintenance to obtain the expected cash
flows. In March 2006, the Company sold its rights to the patents and technology
of the PhotoScreener, and thus reduced the value on the Company’s books and
records at December 31, 2005 by $2,348,020 to the net realizable value of
$92,051. The asset was sold in March 2006 for $50,000 and the return of 1.75
million shares of the Company’s common stock previously issued in the
acquisition of the asset.
Use
of Estimates
The
preparation of the Company’s condensed consolidated financial statements in
conformity with the Rules and Regulations of the Securities and Exchange
Commission that require management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues, if any, and expenses during the reporting period. The
accounting estimates that require management’s most difficult and subjective
judgments include capitalization of certain assets, depreciable/amortizable
lives, impairment of long-lived assets, the expected volatility of common stock,
and the fair value of common stock and options issued for services as well
as
the allocation of proceeds from the issuance of debt and equity instruments.
Because of the uncertainty inherent in such estimates, actual results may differ
from these estimates.
Revenues
and Commissions Recognition
The
Company recognizes revenues in accordance with SEC Staff Accounting Bulletin
No.
101,
Revenue Recognition in Financial Statements
(“SAB No. 101”) as
amended by SEC Staff Accounting Bulletin No. 104,
Revenue Recognition
,
revised and updated (“SAB No. 104”), which stipulates that revenue generally is
realized or realizable and earned, once persuasive evidence of an arrangement
exists, delivery has occurred or services have been rendered, the fee is fixed
or determinable and collectability is reasonably assured. The Company’s main
source of revenue during the nine months ended September 30, 2007 was from
the
sales of bundled discount benefits with added insurance components that
have a monthly renewal period. This revenue is recorded as
earned. We record a provision for estimated refunds, returns, and
allowances which are computed based upon prior actual history of refunds,
returns, and allowances. Commission expense associated with this
revenue is recorded at the time of sale and is adjusted for refunds, returns,
and allowances. Approximately $1,030,274 of revenue was from the sale of
the Company’s programs with an estimate for refunds, returns, and allowances of
approximately $242,000 resulting in approximately $788,000 in sales
revenue. Another component of revenue consists of straight
commissions with no direct expense or ultimate risk related to this type of
revenue generation. Commission revenue during 2007 was
immaterial. During 2006, revenues were generated primarily from
membership fees and were recognized over the life of the memberships which
generally are one year from the month after a member signs up for the
program. Also during 2006, the Company sold two and three year
memberships which were and still are amortized over the life of these
memberships. During 2007, these revenues are immaterial.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
In
March
2007, the Company began selling two new programs entitled SmartHealth Plus
and
SmartHealth Premier, which are comprised of a group of bundled products acquired
through contracts with other vendors, as well as the Company’s discount vision
plan. We have reviewed the reporting requirements discussed in EITF 99-19
entitled “Reporting Revenue Gross as a Principal versus Net as an Agent”, issued
by the Financial Accounting Standards Board, and have determined that revenue
from the sale of these two products should be reported on the gross
basis.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation is calculated using the
straight line method over the estimated useful lives of the assets, generally
ranging from 5 to 7 years. Additions and major improvements to property and
equipment are capitalized. Repair and maintenance expenditures are charged
to
expense as incurred. As property or equipment is sold or retired, the applicable
cost and accumulated depreciation are eliminated from the accounts and any
gain
or loss is recorded.
Accounts
Receivable
Accounts
receivable are stated at estimated net realizable value. Accounts
receivable are primarily comprised of balances due from memberships, net of
estimated allowances for uncollectible accounts. In determining
collectability, historical trends are evaluated and specific customer issues
are
reviewed to arrive at appropriate allowances. (See Note 5)
Fixed
Assets
Fixed
Assets, consisting principally of furniture and fixtures, equipment, computer
equipment and capitalized purchased and internally developed software programs,
are recorded at cost. Depreciation and amortization are provided for, using
the
straight-line method, in amounts sufficient to relate the cost of depreciable
and amortizable assets to operations over their estimated useful lives. Repairs
and maintenance are charged to operations as incurred.
A
summary
of the estimated useful lives of the property and equipment is presented
below:
|
|
|
Estimated
useful lives
|
|
Computer
hardware
|
|
3
years
|
|
Computer
software
|
|
3
years
|
|
Equipment
|
|
5
years
|
|
Furniture
and fixtures
|
|
7
years
|
|
Leasehold
improvements
|
|
Shorter
of life of asset or lease term
|
The
Company has adopted Statement of Position 98-1,
Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use
. This statement
requires that certain costs incurred in purchasing or developing software for
internal use be capitalized as internal use software development costs and
included in fixed assets. Amortization of the software begins
as software is ready for its intended use.
Convertible
Instruments
The
Company reviews the terms of convertible debt and equity securities for
indications requiring bifurcation, and separate accounting for the embedded
conversion feature. Generally, embedded conversion features where the ability
to
physical or net-share settle the conversion option is not within the control
of
the Company are bifurcated and accounted for as derivative financial
instruments. (See “
Derivative Financial Instruments
” below). Bifurcation
of the embedded derivative instrument requires allocation of the proceeds first
to the fair value of the embedded derivative instrument with the residual
allocated to the debt instrument. The resulting discount to the face value
of
debt instrument is amortized through periodic charges to interest expense using
the Effective Interest Method. (See Note 8) The resulting discount to the
redemption value of redeemable preferred securities is accreted through periodic
charges to retained earnings over the term of the instrument using the Effective
Method. In June 2006 the Company redeemed the convertible debt that had been
identified as derivative financial instruments.
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Derivative
Financial Instruments
The
Company generally does not use derivative financial instruments to hedge
exposures to cash-flow or market risks. However, certain other financial
instruments, such as warrants to acquire common stock and the embedded
conversion features of debt and preferred instruments that are indexed to the
Company’s common stock, are classified as liabilities when either (a) the holder
possesses rights to net-cash settlement or (b) physical or net-share settlement
is not within the control of the Company. In such instances, net-cash settlement
is assumed for financial accounting and reporting, even when the terms of the
underlying contracts do not provide for net-cash settlement. Such financial
instruments are initially recorded at fair value and subsequently adjusted
to
fair value at the close of each reporting period. Fair value for option-based
derivative financial instruments is determined using the Black-Scholes Valuation
Model.
Income
Taxes
The
Amacore Group has adopted SFAS 109. The Amacore Group has not made a
provision for income tax purposes due to incurring losses since inception.
There is no current tax expense, and after consideration of a valuation
allowance, there is no deferred tax benefit. The cumulative net operating
losses of approximately $63 million can be carried forward to offset future
taxable income. The net operating loss carry-forward begins expiring in
2012.
Loss
Per Common Share
Basic
loss per common share was computed using (a) net loss adjusted for preferred
stock dividends and accretions as the numerator and (b) the weighted average
number of shares outstanding during the periods presented as the denominator.
Diluted loss per common share is considered to be the same as basic loss per
common share since the effects of convertible securities and common stock
options equivalents are anti-dilutive.
Recent
Accounting Pronouncements Issued But Not Yet Adopted
In
September 2006, the FASB issued FASB Statement No. 157,
Fair Value
Measurements
(“SFAS No. 157”), which defines fair value, establishes a
framework for measuring fair value under GAAP, and expands disclosures about
fair value measurements. SFAS No. 157 applies to other accounting pronouncements
that require or permit fair value measurements. The new guidance is effective
for financial statements issued for fiscal years beginning after November 15,
2007, and for interim periods within those fiscal years. The Company is
evaluating the potential impact, if any, of the adoption of SFAS No. 157 on
its
condensed consolidated financial statements.
In
February 2007, FASB issued Statement No. 159,
The Fair Value Option for
Financial Assets and Financial Liabilities
(“SFAS No. 159”). SFAS No. 159
provides a “Fair Value Option” under which a company may irrevocably elect fair
value as the initial and subsequent measurement attribute for certain financial
assets and liabilities. SFAS No. 159 will be available on a contract-by-contract
basis with changes in fair value recognized in earnings as those changes occur.
SFAS No. 159 is effective for fiscal years after November 15, 2007. SFAS No.
159
also allows early adoption provided that the entity also adopts the requirements
of SFAS No. 157. The Company does not believe the adoption of SFAS No. 159
will
have a material impact, if any, on its condensed consolidated financial
statements.
Management
does not believe that any other recently issued, but not yet effected,
accounting standards if currently adopted would have a material effect on the
Company’s condensed consolidated financial statements.
NOTE 3
- INCOME TAXES
In
July
2006, the FASB issued FIN No. 48,
Accounting for Uncertainty in Income
Taxes, and Interpretation of FASB Statement No. 109
(“FIN 48”). FIN 48
clarifies the accounting for uncertainty in income taxes recognized in a
company’s financial statements and prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in an income tax return. FIN 48
also provides guidance in derecognition, classification, interest and penalties,
accounting in interim periods, disclosures and transition. FIN 48 is effective
for fiscal years beginning after December 15, 2006. The adoption of FIN 48
did
not have a significant effect on the Company’s unaudited condensed consolidated
financial statements.
NOTE
3 – INCOME TAXES (Continued)
For
the
nine months ended September 30, 2007 and 2006, the temporary differences between
book income and taxable income consisted of the deferred compensation.
Computation of any deferred tax asset is computed by multiplying these temporary
differences by the approximate applicable tax rate of 34 percent. The
Amacore Group has had continued operating losses since inception and the
prospect for utilization is remote therefore, no deferred tax assets have been
recorded.
Income
taxes for the nine months ended September 30, 2007 and 2006 differ from the
amounts computed by applying the effective income tax rate of 34% to income
before income taxes as a result of the following:
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Computed
tax (benefit) expense at the statutory rate 34%
|
|
|
(2,476,893
|
)
|
|
|
(236,800
|
)
|
|
Permanent
difference - Derivative income/(expense) and other
|
|
|
-
|
|
|
|
(171,500
|
)
|
|
|
|
|
|
|
|
|
(408,300
|
)
|
|
Change
in deferred tax valuation
|
|
|
2,476,893
|
|
|
|
408,300
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
income tax expense (benefit)
|
|
|
-
|
|
|
|
-
|
|
Temporary
differences that give rise to deferred tax assets and liabilities:
|
|
|
2007
|
|
|
2006
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
|
Net
operating loss carry forward
|
|
$
|
22,785,193
|
|
|
$
|
20,308,300
|
|
|
Less
valuation allowance
|
|
|
(22,785,193
|
)
|
|
|
(20,308,300
|
)
|
|
Gross
deferred tax asset
|
|
|
-
|
|
|
|
-
|
|
|
Gross
deferred tax liability
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
deferred tax asset
|
|
$
|
-
|
|
|
$
|
-
|
|
As
of
September 30, 2007, realization of The Amacore Group’s net deferred tax assets
of approximately $23,148,448 was not considered more likely than not, and
accordingly, a valuation allowance of an equal amount was provided. The net
change in the total valuation allowance during the nine months ended September
30, 2007 was $2,661,293.
NOTE 4
- DUE TO STOCKHOLDERS/OFFICERS
As
of
September 30, 2007, due to stockholders/officers included deferred compensation
of $554,719
.
NOTE 5
- ACCOUNTS RECEIVABLE, NET
Accounts
receivable, net of allowance for uncollectible accounts, was $50,402 as of
September 30, 2007.
NOTE 6
- FIXED ASSETS, NET
As
of
September 30, 2007, fixed assets, net of accumulated depreciation of $91,960,
was $112,881.
NOTE 7 -
UNALLOCATED ASSETS
As
of
September 30, 2007, unallocated assets was $492,146. This amount
relates to all the assets acquired in the acquisition of JRM on August 31,
2007. Assets include all tangible assets such as plant and equipment,
fixtures and fittings and non-tangible assets which include customer lists
and
intellectual property. The Company is in the process of obtaining
fair market values with respect to all such assets and will reallocate to the
appropriate asset categories when completed.
NOTE 8
- NOTES AND LOANS PAYABLE
Notes
and
loans payable consist of the following as of September 30, 2007 and December
31,
2006:
|
|
|
September
30,
2007
|
|
|
December
31,
2006
|
|
|
|
|
|
|
|
|
|
|
Promissory
notes payable to investors and shareholders; bearing interest ranging
from
8% to 10% per annum; due through September 2007; currently in
default.
|
|
$
|
512,500
|
|
|
$
|
512,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
promissory notes to investors and shareholders; bearing interest
ranging
from 8% to 10% per annum; due through September 2007; currently in
default
|
|
|
662,000
|
|
|
|
692,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
notes payable to investors and shareholders; bearing interest
ranging from 8% to 10% per annum; due through June
2008.
|
|
|
140,000
|
|
|
|
195,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Convertible
promissory notes to investors and shareholders; bearing interest
ranging
from 8% to 10% per annum; due through September 2007.
|
|
|
395,500
|
|
|
|
402,500
|
|
|
|
|
|
|
|
|
|
|
|
|
Promissory
note payable to shareholders; bearing 1.53% interest per annum through
June 2004, increasing to 15% thereafter; currently in
default.
|
|
|
114,950
|
|
|
|
114,950
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
notes and loans payable
|
|
$
|
1,824,950
|
|
|
$
|
1,916,950
|
|
At
the
date of issue of each of the convertible notes, the conversion price was equal
to or exceeded the stock price at that time of issue, and as such, no intrinsic
value was allocated to the embedded option of each note. As of
September 30, 2007, all notes and loans payable were classified as current
maturities.
The
Company notes that approximately $1,300,000 of the above listed notes in
default
are held by investors who have been supporters of the Company over the past
years. The Company is in the process of negotiating a conversion to
equity for these notes. Whilst the Company believes that such a
conversion is likely, it cannot assure that this will be the eventual
outcome.
Two
notes
included in the table of above listed notes in default, totaling approximately
$385,000, are currently in dispute by the Company. The Company
believes that these notes are not payable but has retained the notes on the
balance sheet at September 30, 2007 and will continue to do so until such
notes
are legally extinguished.
NOTE
9 - CONVERTIBLE DEBENTURES
There
were no convertible debentures as of September 30, 2007 and December 31,
2006.
NOTE
10 - PREFERRED STOCK
In
August
2004, the Company raised a total of $602,000 from the sale of (a) 86 shares
of
Mandatory Convertible Series C, 6% Cumulative, Preferred Stock, par value $0.001
per share (the “Series C Convertible Preferred Stock”) and (b) detachable
warrants to acquire 400,000 shares of common stock at a strike price of $2.40
per share over a term of five years (the “Warrants”).
Each
share of Series C Convertible Preferred Stock was to be converted at any time
until July 30, 2006, when conversion became mandatory. At the time of
conversion, each share would have been deemed to have a value of $10,000 and
convertible into Class A common stock at the lesser of $2.88 per common share
or
75% of the lowest closing bid price during the five days immediately prior
to
the conversion. As part of the agreements with the Series C investors, the
Company agreed to register shares which were issuable upon the conversion of
the
Warrants and the Series C Convertible Preferred Stock. In addition, for each
share of Series C Convertible Preferred Stock purchased by them, they had the
right to purchase up to 1% of the issuances of equity securities issued under
subsequent funding transactions.
The
embedded conversion feature on the Series C Convertible Preferred Stock and
the
Warrants were required to be carried separately as derivative liabilities
because physical or net-share settlement under these contracts is not within
the
control of the Company. Further, since proceeds from the sale of Series C
Convertible Preferred Stock and Warrants were less than the fair values of
the
embedded conversion feature of the Series C Convertible Preferred Stock
($1,071,782) and the Warrants ($976,000), the amount received was allocated
to
the embedded conversion feature, immediately followed by charges to derivative
instrument expense in the amounts of $469,782 and $976,000 to increase the
derivative instruments to fair value.
As
a
result of the aforementioned allocation, the Series C Convertible Preferred
Stock had no initial carrying value, but it was to be accreted to its redemption
value of $860,000 through periodic charges to retained earnings over the period
through the redemption date. Accretions on the Series C Convertible Preferred
Stock amounted to $0 and $353,704 during the nine months ended September 30,
2007 and 2006, respectively.
In
July
2006, pursuant to a Preferred Stock Purchase and Exchange Agreement with VICIS
Capital Master Fund (“Vicis”), the Company exchanged 86 shares of its
Series C Mandatory Convertible Preferred Stock held by Vicis and having a
maturity date of July 30, 2006, for 86 shares of a newly-created 6% Series
D
Convertible Preferred Stock, convertible into Class A Common Stock of the
Company at a price of $.01 per share and having a maturity date of July 15,
2011. In addition, Vicis purchased for approximately $840,000, 84 shares of
a
newly-created 6% Series E Convertible Preferred Stock, convertible into Class
A
Common Stock of the Company at a price of $.02 per share and having a maturity
date of July 15, 2011. Both of the Preferred Stock Series may be converted
into
the Company’s Class A common stock at their respective convertible prices at any
time after July 11, 2008.
The
Company has the right to redeem the Series E Preferred Stock at any time,
provided (a) the closing trading price of the Class A Common Stock exceeds
$.50
per share (as quoted on the principal exchange, including for this purpose,
the
Nasdaq National Market on which it is then listed, or if it is not so listed,
the closing bid price per share for such stock, as reported by Nasdaq, the
OTC
Bulletin Board, the National Quotation Bureau, Incorporated or other similar
service which regularly reports closing bid quotations for such stock) for
15
trading days during any 20-trading day period; and (b) there is at the time
of
the call for redemption by the Corporation, and has been for the period
specified in (a) above preceding such call, an effective registration statement
covering the resale of the shares of Class A Common Stock underlying the Series
E Preferred Stock
In
January 2007, the Company raised $750,000 by issuing 75 shares of Series D
Mandatory convertible preferred stock to Vicis; another $1,500,000 by issuing
an
additional 150 shares of the same series stock to Vicis, and on March 30, 2007,
raised $3.3 million through the issuance of a mandatory convertible promissory
note to Vicis, which, along with accrued interest of 4%, was converted into
331.1 shares of the same series stock on May 1, 2007. The Company has the right
to redeem 90% of the 331.1 shares during the period ending December 1,
2007.
In
connection with these transactions, the Company recorded beneficial conversion
features of $860,000 associated with Series D Preferred Stock and $420,000
associated with Series E Preferred Stock. The resulting discounts are
being accreted through charges to retained earnings. Aggregate
accretions at September 30, 2007 amounted to $191,997.
NOTE
11 - COMMON STOCK
In
January 2007, The Amacore Group received approval from its shareholders, to
increase its authorized shares from six hundred forty million shares to one
billion shares. The authorized shares for Class A common stock were increased
from five hundred million shares to eight hundred sixty million; its Class
B
common stock remained at one hundred twenty million shares and its preferred
shares remained at twenty million shares. On all matters required by law to
be
submitted to a vote of the holders of common stock, each share of Class A common
stock is entitled to one vote per share, and each share of Class B common stock
is entitled to five votes per share.
NOTE
12 - WARRANTS
During
the nine months ended September 30, 2007 and 2006, The Amacore Group issued
warrants to purchase 10,820,000 and 13,949,000 shares of Class A common
stock, respectively. At September 30, 2007 there were 17,685,600 shares
of common stock outstanding, exercisable at varying prices through
2012. The following table summarizes this warrant activity:
|
|
|
2007
|
|
|
2006
|
|
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Warrants
outstanding, beginning of year
|
|
|
10,727,000
|
|
|
$
|
.27
|
|
|
|
4,472,428
|
|
|
$
|
2.38
|
|
|
Additional
warrants
|
|
|
10,820,000
|
|
|
|
.12
|
|
|
|
13,949,000
|
|
|
|
.16
|
|
|
Warrants
cancelled/expired
|
|
|
(583,400
|
)
|
|
|
.04
|
|
|
|
(369,428
|
)
|
|
|
2.35
|
|
|
Warrants
exercised
|
|
|
(3,278,000
|
)
|
|
|
.07
|
|
|
|
(7,325,000
|
)
|
|
|
-
|
|
|
Warrants
outstanding, ending of year
|
|
|
17,685,600
|
|
|
$
|
.22
|
|
|
|
10,617,000
|
|
|
$
|
.74
|
|
NOTE
12 – WARRANTS (Continued)
The
following table summarizes the status of warrants outstanding at September
30,
2007; all warrants are immediately exercisable:
|
Exercisable
and Outstanding Warrants
|
|
|
Exercise
Price
|
|
Number
|
|
Weighted
average remaining
contractual
life in years
|
|
|
$0.005
|
|
|
2,600,000
|
|
|
3.75
|
|
|
$0.01
|
|
|
890,000
|
|
|
2.47
|
|
|
$0.025
|
|
|
6,000,000
|
|
|
4.5
|
|
|
$0.05
|
|
|
20,000
|
|
|
.33
|
|
|
$0.10
|
|
|
350,000
|
|
|
3.57
|
|
|
$0.15
|
|
|
30,000
|
|
|
1.79
|
|
|
$0.16
|
|
|
2,375,000
|
|
|
2.6
|
|
|
$0.21
|
|
|
200,000
|
|
|
.46
|
|
|
$0.30
|
|
|
3,700,000
|
|
|
4.49
|
|
|
$0.32
|
|
|
50,000
|
|
|
4.96
|
|
|
$1.25
|
|
|
900,000
|
|
|
2.47
|
|
|
$2.40
|
|
|
400,000
|
|
|
1.85
|
|
During
2007, the Company issued 10,820,000 warrants to directors, employees and
consultants for services. The warrants were valued using the
Black-Scholes Option Model with a volatility of 245%, a risk free interest
rate
of 4.52% and a life of five years and a zero dividend rate. This
resulted in a compensation expense of approximately $1,241,000 for the nine
months ended September 30, 2007. All warrants are fully vested so all
expenses were recorded at the time of issue.
NOTE
13 - EARNINGS (LOSS) PER SHARE
Earnings
(loss) per share are computed using the basic and diluted calculations on the
face of the statement of operations. Basic earnings (loss) per share are
calculated by dividing net income (loss) available to common shareholders by
the
weighted average number of shares of common stock outstanding for the period.
Diluted earnings (loss) per share is calculated by dividing the net income
(loss) by the weighted average number of shares of common stock outstanding
for
the period, adjusted for the dilutive effect of common stock equivalents, using
the treasury stock method. Convertible debt and warrants, officer, employee
and
non-employee stock options that are considered potentially dilutive are not
included in the fully diluted shares calculation.
The
following sets for the computation of basic and diluted net earnings (loss)
per
common share for the nine months ended September 30, 2007 and 2006:
|
|
|
2007
|
|
|
2006
|
|
|
Numerator:
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(7,284,982
|
)
|
|
$
|
(745,421
|
)
|
|
Less
preferred stock dividend and accretions
|
|
|
(449,897
|
)
|
|
|
(425,373
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
applicable to common stockholders
|
|
$
|
(7,734,879
|
)
|
|
$
|
(1,170,794
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
Weighted
average basic share outstanding
|
|
|
98,893,979
|
|
|
|
82,408,259
|
|
|
Weighted
average fully diluted shares outstanding
|
|
|
98,893,979
|
|
|
|
82,408,259
|
|
|
Net
earnings per common share - basic and diluted
|
|
$
|
(0.08
|
)
|
|
$
|
(0.01
|
)
|
During
the period presented, common stock equivalents were not considered as their
effect would be anti-dilutive.
NOTE
14 - FINANCIAL INSTRUMENTS
Fair
Value of Financial Instruments (other than Derivative Financial
Instruments)
The
carrying amount of cash, accounts receivable, accounts payable and accrued
expenses approximates fair value because of their short maturity. The carrying
amount of loans and notes payable approximates fair value based on interest
rates that approximate market interest rates for these instruments.
Derivative
Financial Instruments
The
caption derivative financial instruments consists of (a) the embedded conversion
feature bifurcated from the 7% Convertible Debentures, (b) the embedded
conversion feature bifurcated from the Series C Preferred Stock, (c) the
Warrants issued in connection with the Series C Preferred Stock, and (d) Other
Warrants. (Also See Note 9—Convertible Debentures and Note 10—Redeemable
Preferred Stock). As of September 30, 2006, the Company redeemed the convertible
notes that had been determined to be derivative financial instruments, which
resulted in the recording of a gain on extinguishment of debt of $493,695.
There
are no derivative financial instruments as of September 30, 2007
NOTE
15 - LITIGATION AND CONTINGENCIES
At
September 30, 2007, The Amacore Group was involved in various lawsuits, claims
or disputes arising in the normal course of business. The settlement of
such claims cannot be determined at this time. Management does not believe
that the ultimate outcome of these matters will have a material impact on
the
Company’s operations or cash flows.
In
addition to various lawsuits, claims or dispute arising in the ordinary course
of business, on January 9, 2006, the Company was served with a Summons and
Complaint (the "Complaint") in an Action captioned, "Richard Abrahamson, M.D.,
Plaintiff vs. The Amacore Group, Inc., F/K/A Eye Care International, Inc.,
Defendant." The Complaint, which was filed in The Court of Common Pleas for
Hamilton County, Ohio on December 30, 2005, alleged nonpayment by the Company
of
certain Promissory Notes and sought damages in the amount of $111,839. The
Company believed, at that time, that the plaintiff's records were in error
and
proceeded to document to plaintiff's counsel full payment of all monies due
plaintiff under the Promissory Notes. Plaintiff's counsel and the Company agreed
to extend the Company's time to answer or move with respect to the Complaint
for
an indefinite period of time in order to provide plaintiff with an opportunity
to recheck plaintiff's records. It was the Company's belief that when so
rechecked, plaintiff would withdraw the Complaint.
On
February 15, 2007, Plaintiff filed an Amended Complaint in The Court of Common
Pleas for Hamilton County, Ohio, Case No. A 0511133, captioned, "Richard
Abrahamson, Plaintiff vs. The Amacore Group, Inc., F/K/A Eye Care International,
Inc. and Clark A. Marcus, Defendants," alleging Breach of Promissory Notes,
Breach of Oral Loan Agreements, Action on Account of Promissory Notes and Oral
Agreements, Breach of Third Party Beneficiary Contracts, Breach of Fiduciary
Duty to Issue Share Certificate Upon Gift of Share to Plaintiff, Breach of
Fiduciary Duties and Unjust Enrichment. Actual damages alleged are in excess
of
$3.9 million, not including interest. An additional $2.4 million in punitive
damages is also claimed. The Amended Complaint also asserts the right to
attorney's fees.
While
the
Company is unable to predict the ultimate outcome of the litigation, after
reviewing the Amended Complaint, the Company believes that neither it nor Mr.
Marcus is liable to the plaintiff; they have defenses to each and every
allegation of the Amended Complaint; and intend to vigorously defend their
position and advance appropriate counterclaims.
NOTE
16 - GOING CONCERN
The
accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States of America, which
contemplates continuation of The Amacore Group as a going concern.
However, The Amacore Group has sustained operating losses in recent years.
Further for the nine months ended September 30, 2007, The Amacore Group had
negative working capital of approximately $2,006,073, a net loss of $7,841,882
and has incurred substantial losses in previous years resulting in an
accumulated deficit of approximately $63,000,000. Although these factors
raise substantial doubt about the ability of The Amacore Group to continue
as a
viable entity, The Amacore Group has taken several actions it believes will
allow it to continue operations through September 30, 2008. The Company
obtained additional financing in the first nine months of 2007 totaling $4.8
million from Vicis Capital Master Fund and has generated significant
revenues from new product sales.
NOTE
17 - SUBSEQUENT EVENTS
On
October 9, 2007, we completed the acquisition of 100% ownership of LifeGuard
Benefit Services, Inc., a Texas corporation, through a stock-for-stock merger
between LifeGuard and our wholly owned subsidiary, LBS Acquisition Corp. In
consideration for the merger we issued 2.469771 shares of our common stock
with
a deemed value of $5 per share for each share of outstanding LifeGuard common
stock.
LifeGuard
offers specialized healthcare benefits supported by a comprehensive
administrative and service platform designed to provide turnkey solutions for
its customers. LifeGuard also offers membership programs that provide access
to
healthcare providers, and aims to preserve the doctor-patient relationship,
similar in concept to our Smarthealth Plus and Smarthealth Premier programs.
LifeGuard's current distribution channels include direct call center
relationships, employer groups, agent distribution and the wholesale market.
Through these channels LifeGuard provides insured and non-insured health
benefits along with its services to over 1.5 million families.
On
October 15, 2007, the Company entered into an agreement with Vicis Capital
Master Fund to sell Vicis $3,000,000.00 worth of our Convertible Preferred
stock, convertible at $5.00 per share.