If you think thats free money -think again, its being paid back with interest and shares and in the mean time we are 16,000,000 in the red - Educate yourself-READ IT ALL!
Interest and Other Finance Charges, Net. We had interest and other finance charges, net of $4,446,014 for the nine months ended September 30, 2010, an increase of $2,110,399 from $2,335,615 for the nine months ended September 30, 2009. The increase was due to non-cash interest expense of $3,431,075 attributed to the conversion feature and warrant issued with the Convertible Promissory Notes and $456,480 attributed to warrant granted to The RHL Group in connection with the Fourth Amended Note. This was offset by a decrease as a result of common stock and warrants issued during the nine months ended September 30, 2009 in exchange for the Company to continue to defer payments to their debtors and consultants of $361,205, to The RHL Group for waiving MMR's payment default under the Third Amended Note of $1,063,763 and to Mr. Lorsch in consideration of a personal guaranty given to a vendor for services rendered of $68,069.
Net loss. As a result of the foregoing, we had a net loss of $16,014,391 for the nine months ended September 30, 2010 compared to a net loss of $6,779,635 for the nine months ended September 30, 2009.
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 2009 financial statements for the year ended December 31, 2009 related to the uncertainty of our ability to continue as a going concern. At September 30, 2010, our current liabilities of $6,120,340 exceeded our cash and cash equivalents of $241,522.
Liquidity and Capital Resources
We have incurred net losses of $16,014,391 and $6,779,635 for the nine months ended September 30, 2010 and 2009, 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 $265,000 in cash per month, or $3.2 million per year. At this rate of cash burn, over the next twelve months, our existing current assets will sustain our business for approximately five months.
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 subordinated secured indebtedness to The RHL Group (which note payable had a balance of $997,703 at September 30, 2010), among other debt obligations. Such obligations are currently due and payable pursuant to the terms of the notes.
To finance our activities, we have relied on the issuance of stock and debt to the RHL Group. At September 30, 2010, we had a line of credit with The RHL Group in the amount of $3 million. Availability under this line of credit at this time is $2.0 million. Furthermore, we may utilize portions of our $10 million standby equity line facility with Dutchess Opportunity Fund, II, L.P. Additionally, during 2010, we issued $2,700,277 of convertible debt. We expect to continue offering a limited amount of convertible debt during the remainder of 2010. We also expect sales from our new MMRPro system to generate revenue and gross profit that will significantly improve our monthly and annual cash burn from operations.
The RHL Group, which had a balance of $997,703 at September 30, 2010. As a result of the above, we express uncertainty about our ability to continue as a going concern.
Description of Indebtedness
The RHL Group, Inc.
In July 2007 we issued a promissory note to The RHL Group, Inc., a California corporation wholly-owned by Robert H. Lorsch, our Chairman and Chief Executive Officer, to borrow up to $100,000 under a revolving line of credit, which was subsequently increased to $1,000,000 in August 2007. In July 2007, we also entered into a Security Agreement, pursuant to which MMR granted a blanket security interest to The RHL Group, Inc. over all of MMR's assets in order to secure the satisfaction of its obligations under the note. Interest on outstanding loan balances under the note accrued at a rate equal to the lesser of the Wall Street Journal Prime Lending Rate (7.5% on August 23, 2007) plus 3% or the maximum rate allowed by law under the California Constitution (5% per annum) plus the rate prevailing at the Federal Reserve Bank of San Francisco on November 25, 2007, for advances to member banks. In addition to interest, The RHL Group, Inc. received one share of MMR common stock for each dollar drawn on the line of credit, in increments of 100,000, with a minimum grant of 400,000 shares, for each three month term of the line. In addition, we were required to maintain certain financial covenants.
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In August 2008, we entered into the Second Amended and Restated Promissory Note Agreement, or the RHL Note, with The RHL Group, Inc., for the renewal of the $1,000,000 secured line of credit on substantially the same terms, with the one change being the quarterly grant of shares under the earlier agreement was accelerated to a one time grant of 5,000,000 common shares (including 4,413,053 shares of Treasury stock) for borrowings of up to $1,000,000 at any time during the twelve month term of the renewal ending on July 31, 2009. In addition, The RHL Group, Inc. also receives one share of common stock for each dollar of the line of credit, in increments of 100,000, for each 3 month term of the line for borrowings over $1,000,000. The entire unpaid principal and any unpaid interest under the note were due and payable on July 31, 2009.
The amount of outstanding principal and interest on the renewal date in August 2008 was $751,174. As of December 31, 2008, we had an outstanding balance on the RHL Note of $822,520. Interest expense on this note for the year ended December 31, 2008 was $62,442, and the unpaid balance of interest $24,963. MMR issued the RHL Group, Inc. a total of 1,400,000 common shares valued at $210,000 under the terms of this agreement during the year ended December 31, 2008, which is included in interest expense. These common shares were converted into shares of MMRIS common stock in the Merger.
At December 31, 2008, we were in compliance with all of our covenants, including the requirement that at any time after September 1, 2007, we have at least $125,000 in cash, including availability under this line of credit or such other amount as necessary to maintain operations through the subsequent thirty (30) days. The RHL Note was amended and restated on April 29, 2009, as described below.
As contemplated by the Merger Agreement and the Creditor Plan, as a condition to the Merger, at the effective time of the Merger, MMR and The RHL Group, Inc. entered into an Allonge to the RHL Note and the Security Agreement pursuant to which The RHL Group, Inc. agreed to suspend certain of its rights under the Security Agreement and the RHL Note until the earlier of (a) the date that we repay all amounts outstanding under any promissory notes issued to Old Favrille's creditors under the Creditor Plan, (b) the date that we deposit into an escrow fund the maximum amount of cash payable in satisfaction of the promissory notes issued to Old Favrille's creditors under the Creditor Plan or (c) ten days after the two year anniversary of the closing date of the Merger. The suspended rights include any right of The RHL Group, Inc. to (1) declare a default or event of default under the Security Agreement or the RHL Note, (2) accelerate the maturity date of the RHL Note, (3) exercise any of its principal remedies for a default or event of default under the Security Agreement, (4) assign the RHL Note, the proceeds of the RHL Note or to otherwise negotiate the RHL Note and (5) receive payment of the outstanding principal and interest owing under the RHL Note.
On April 29, 2009, we restructured our secured credit facility with The RHL Group, Inc. and entered into a Secured Credit Restructuring Agreement with MMR Information Systems, Inc., The RHL Group, Inc. and Robert H. Lorsch, our Chairman, Chief Executive Officer and President, or the Restructuring Agreement. We issued The RHL Group, Inc. a Third Amended and Restated Note, or the Third Amended Note, and MMR Information Systems, Inc. agreed to guaranty our obligations under the Third Amended Note, or the Guaranty. The Restructuring Agreement, Third Amended Note and Guaranty are filed as Exhibits to this current report on Form 10-K. As part of the Restructuring Agreement we terminated the Allonge.
The Third Amended Note amends and restates the RHL Note, matures November 30, 2009, and bears interest at the lesser of 10% or the highest rate then permitted by law, and is secured (similar to the RHL Note) by the Security Agreement. Although the reserve credit line has been increased to $3,000,000, The RHL Group, Inc. is only obligated to make a minimum of $100,000 of loans, advances and guarantees under the Third Amended Note within 30 days of execution pursuant to the Restructuring Agreement. Notwithstanding, the balance on the Note was $1,545,767 at December 31, 2009.
The RHL Group was due to receive, as an origination fee, or the Fee, a promissory note for $200,000, bearing interest at 10% per annum and due on demand. On August 17, 2009, the Company paid the 200,000 origination fee by granting 2,800,000 shares of common stock to The RHL Group. When the term of the Third Amended Note is renewed in April 2010, we may grant The RHL Group an additional origination fee on terms to be negotiated at such time.
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On August 18, 2009, the Company and The RHL Group entered into a Waiver Agreement, pursuant to which, in consideration of The RHL Group's waiver of MMR's payment default under the Third Amended Note, the Company granted to The RHL Group a warrant to purchase an aggregate of 11,039,378 shares of the Company's common stock, with an exercise price equal to $0.13 per share, the closing price of the Company's common stock on the date immediately preceding the date of grant. Under the Waiver Agreement, The RHL Group agreed to waive MMR's payment default until August 31, 2009, which waiver period will automatically continue until The RHL Group notifies MMR otherwise. In addition, as repayment of the unpaid origination fee owed to The RHL Group by MMR in connection with the credit line restructuring, the Company granted to The RHL Group 2,800,000 shares of common stock.
The RHL Group Note payable had a balance of $1,545,767 at December 31, 2009. The components of the Group Note payable and the related balance sheet presentation as of December 31, 2009 are: (1) $940,620, which is included in the line of credit, related party payable; (2) $295,484, which is related to credit card charges and a vendor guaranty, is included in accounts payable and accrued expenses; and (3) $309,663, which is related to deferred salary and consulting expenses is included in related party payables. The RHL Group was due to receive, as the Fee, a promissory note for $200,000, bearing interest at 10% per annum and due on demand. On August 17, 2009, [B]the Company paid the $200,000 origination fee by granting 2,800,000 shares of common stock to The RHL Group[/B] to the value of $364,000 and recorded a loss on issuance of $164,000. The origination fee was recorded as a deferred financing cost and is being amortized over the Third Amended Note maturity period. As of December 31, 2009, the remaining unamortized origination fee was $0, and the Fee of $200,000 is included in interest expense for the year ended December 31, 2009.
In addition, under the Restructuring Agreement, The RHL Group, Inc. agreed to use commercially reasonable efforts to raise additional financing from third parties, and agreed to extend the maturity of the Third Amended Note for an additional six-month term if we are in full compliance with our covenants and other obligations under the Third Amended Note, on terms to be negotiated at such time. Additionally, Mr. Lorsch agreed to exercise all of his outstanding options prior to May 1, 2009 (which were exercised April 30, 2009), which resulted in a $113,220 reduction in principal owing The RHL Group, Inc. Finally, as a condition to agreeing to restructure our secured credit arrangement, we also terminated the Allonge. Thus, if at any time after June 1, 2009 we are not in compliance with our covenants under the Third Amended Note or Security Agreement, The RHL Group, Inc. may, but is not obligated to, declare an event of default.
Additional information regarding the Third Amended Note and the Restructuring Agreement is contained in our current report on Form 8- K filed with the SEC on May 4, 2009.
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