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TMCNet:  DECISION DIAGNOSTICS CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

[November 19, 2012]

DECISION DIAGNOSTICS CORP - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

(Edgar Glimpses Via Acquire Media NewsEdge) Overview Decision Diagnostics Corp. is a nationwide prescription and non-prescription diagnostics and home testing products distributor. The U.S. FDA, in a manner similar to prescription drugs, regulates diagnostic test kits and at-home patient testing products similarly to the regulation of prescription medicine.


The company has, since 2005, contracted with independent pharmacies for use of their prescription drug distribution licenses. However, the products we currently distribute, for the most part, do not require a doctor's prescription for anything other than insurance benefit compliance. Our business model works well in this regulated environment.

Our subsidiaries, Pharma Tech Solutions, Inc. and PDA Services, Inc. operate in several healthcare products distribution channels. We distribute brand name prescription and non-prescription diagnostics products, as well as several lines of ostomy, wound care and post-surgery medical products. We have also continued to ready the company, subject only to receipt of an expected FDA 510(k) approval, to introduce a proprietary diagnostic product, the Shasta Genstrip, for at-home testing of blood glucose. The worldwide market for at-home blood glucose testing is an estimated $22.5 billion. Shasta Genstrip will compete directly with one of the largest worldwide platform manufacturer for at-home blood glucose testing, a product currently used daily by over 3 million diabetes afflicted Americans. In anticipation of the introduction of Genstrip, which is in the final stages of FDA approval, and currently completing that approval process, we have evaluated our brand-name distribution model, a model that provides streams of revenue but extremely low profit margins, and over the course of the last 15 months has phased out sales of those brand name products that have been a backbone of our current distribution business but provide low profit margins, if any at all, and will, in the future, compete directly with our Shasta Genstrip. Phasing out these products lowered our order intake by approximately $8,450,000 in FY2011 and $7,400,000 through the period ending June 30, 2012.

Typically, and except for our own Shasta Genstrip, which is an alternative product, we distribute name brand products manufactured primarily by large U.S.

and international pharmaceutical companies. The company directs its marketing efforts to ambulatory and semi-ambulatory older Americans afflicted with diabetes and complications caused by diabetes and old age. The company, originally a medical IT company with proprietary IT product lines, acquired its medical products distribution business in late 2004 through a merger with Phoenix, Arizona based CareGeneration, Inc. We have grown the original CareGeneration business through subsequent acquisitions of private businesses and strategic partnerships with larger private pharmacies.

On November 1, 2011 we completed the acquisition of Diagnostic Newco LLC from its owner Kimberly Binder. Diagnostic Newco LLC is a design company that specializes in product packaging design, medical products advertising design and graphic art. Ms. Binder has joined the staff of the company's Pharma Tech Solutions, Inc. subsidiary and has worked closely with the contract manufacturer for Genstrip, making subtle changes to packaging design among other responsibilities. She will also be responsible for the package design for new diagnostic products the company is currently working on. We also intend to acquire additional private companies, focusing on small engineering companies that have developed technology requiring either regulatory approval, distribution or both. In December 2011 we made another small acquisition, to acquire the services of Mr. Patrick DiParini. We are moving quickly to achieve our goal of becoming a vertically integrated, full service value added provider of products and services to an ever-growing market. The at-home diabetes testing market continues to grow as diabetics continue to be diagnosed. The market for diabetes testing products is expected to grow from a current $22.5+ billion worldwide base in 2010 to over $32 billion in 2017.

The company's current proprietary product offering, although not yet approved by the FDA for commercial distribution, is the Shasta Genstrip blood glucose diagnostic test strip for at-home testing. Shasta Genstrip is a product conceived and designed by Shasta Technologies LLC, and fits into a diagnostic product niche and will sell into the world-wide self-test (home test) market that is expected to grow to $32 billion worldwide by 2017. The company has been involved with Genstrip since early 2010. Products like Genstrip require FDA approval but travel toward this approval through a well defined albeit slow and unresponsive regulatory process. The company believes that all regulatory hurdles have been addressed and satisfied, but as of this writing, Genstrip has not received final regulatory approval or disapproval from the FDA. In March 2012 and then again in September 2012, representatives of the company met face-to-face with the FDA, the September 2012 meeting at FDA's request, in an effort to iron out remaining FDA questions, and in the case of the September 2012 meeting, to address two final issues, both concerns related to certain post-approval manufacturing processes. Subsequent to each of these meetings with FDA the company has received and responded to a series of follow up questions and comments by FDA. In September 2012 these FDA comments and questions were changed to a semi-informal process indicating to the company the approaching end of the approval process. In early November 2012 the company received an informal communication from FDA staff asking for clarification of two issues remaining from the September 2012 face to face meeting. The company responded to these requests. Within the body of the communication received from FDA staff the company was informed that we [FDA] was close to reaching resolution on this issue.

The company maintains a practice where comments and questions are responded to as quickly as practical. Since Genstrip is a unique offering, employing a razor blade only model (diagnostic test strip) into a razor (diagnostic meter)-razor blade (diagnostic test strip) market, the Genstrip 510(k) application has presented some unusual challenges for the FDA and an educational challenge/opportunity for the company. Since the company plans additional similar products in the future for other diagnostic platforms, the Genstrip experience, however slow and unresponsive, has provided lessons and experience.

12 -------------------------------------------------------------------------------- Two years (and growing) is a standard development to market timeline for in-vitro diagnostic products similar to Genstrip. As a result of previous delays by Shasta Technologies in completing its FDA approval application [510(k)] and then problems Shasta encountered in prosecuting its original application with FDA staff, the company changed its contractual responsibilities and obligations in June 2011 to include program management, regulatory process management, management of the manufacturing forecasting and distribution processes, and new products planning and development. As of October 31, 2012 the company has narrowed the issues with FDA to two issues, the publication of two post-manufacturing protocols. All other issues have been resolved.

In June 2010 the company was approached by the largest retailer in the world for the distribution and sale of Genstrip at over 5,000 retail stores worldwide. A contract with this retailer was negotiated in September 2010 and subsequently renegotiated and renewed in April 2011, and as soon as the retail contract was agreed to and as a means to conduct market research, the company began seeking pre-conditioned letters of intent (pre-orders) for Genstrip, while continuing the prosecution of the 510(k) application before the FDA. During this process it became clear that initial market interest in Genstrip outstripped the initially available manufacturing capacity. Thus the company quickly ended its pre-order initiative. Management is confident that there is a very large market available for Genstrip. Currently that market is dominated by four large pharmaceutical manufacturers who provide very similar and equally focused products, selling at essentially equal prices. Genstrip's introduction should not only allow the company to achieve market share but because of the business model to be employed by Genstrip is different than those models employed by the major market players, the company may be able to change the market, lowering average price or allowing for increased testing by diabetics for a lesser price, thereby affecting all market segments.

We also offer information technology solutions in several medical care market channels by providing physicians with information at the point of care. Our products, unlike those from many other medical information companies, make use of smart cell phones such as the Apple iPhone, the Palm Pre, the Google Droid and a wide selection of Microsoft Windows based smart phones and operate in either in a wireless or "wired" mode, which allow physicians to carry, access and update their patients' histories, also known as electronic medical records or EMR, medication data, and best care guidelines - all at the point of care, or from any other location the physician may be located. In addition, the company's products employ proprietary mathematical game theory features adapted by the company for medical use that allow acceptance of diagnoses and treatment protocols where the medical information may have originated from one or several locations and one time or several times.

On February 26, 2010 we filed a full utility patent application, Management and Communications System and Method, Serial No. 13/034,639. The patent application covers one hundred four (104) separate processes and encompasses the method, system and apparatus of our software technology and the integration of our software technology into commercial computer networks through commercial smart cell phone devices. In September 2011, the USPTO published our patent application. In April 2011 the patent reached the prosecution stage with the USPTO. We expect approval in a matter of a few months. Given that our patent application lists a substantial number of claims, and that the company's technologies are truly unique, we felt it prudent to engage counsel to prosecute any of these claims against persons and entities that may have or will in the future breach our patent. The company has created an asset pool for the purpose of prosecuting any claims that may arise as a result of our patent approval.

Claims prosecution is standard fare for high technology companies.

We have entered into nine partnerships with freestanding pharmacies and Durable Medical Goods distributors in the states of New York, Maryland, New Jersey, Texas and Arizona. We believe that we will be able to provide value added services to our customers by cost reductions brought about by increased efficiencies and cross marketing opportunities.

We have received multiple inquiries from companies interested in perhaps collaborating with the company for the implementation of its cell phone centric technologies MD@Hand and MD@Work. However, the market available for products similar to MD@Hand and MD@Work has changed since its introduction in 2009. The legal challenges to the new health care law, and the federal government's inability to enact regulations have altered the landscape, again. We remain in discussions with multiple concerns for the marketing of our MD@ products, and any agreement we may enter will require us to provide contract software programming, providing a new source of revenue for the company. In addition to any proposed partnerships, we continue to discuss alternative propositions with other interested companies ranging from clinical laboratories, service organizations owned or aligned with medical health insurers, a medical content provider and legacy healthcare systems companies. There remains sustained interest in our MD@ products and technology. All of our discussions are with companies are much larger than Decision Diagnostics. We may or may not entertain additional proposed partnerships for our implementation of the cell phone centric technologies, which has been hindered, as has the overall market, by the slow implementation of regulations, protocols and data formats by the Federal government, as well as a change in previously announced Federal government monetary incentives.

In May 2010, we entered into agreement with Shasta Technologies, Inc. and Broadtree, Inc. This agreement granted our Pharma Tech Solutions, Inc.

subsidiary the exclusive marketing rights to a new diagnostic product not yet on the market named Shasta Genstrip ("Genstrip"). The Genstrip product was developed to compete against the market leader in the $20 billion at home testing market. In April 2011, the company renegotiated its agreement changing its many roles and adding responsibility for regulatory approval, manufacturing and forecasting, international sales and additional sales markets in the U.S.

13 -------------------------------------------------------------------------------- We currently employ five full-time staff at our executive office located at 2660 Townsgate Road, Suite 300, Westlake Village, California 91361. In addition, we maintain two full-time and seven part-time positions between our distribution centers located in Florida, Arizona, California and New Jersey. The company is currently hiring pharmaceutical detail representatives and three medically trained college interns across the country and three additional interns to work out of its California office.. All of our positions existing, and newly listed, are for sales and marketing, distribution, product development and customer service representatives. Our telephone number is (805) 446-1973 and our website address is www.decisiondiagnostics.com.

Business activities throughout the next twelve months: The company's business on a day-to-day basis includes the distribution of prescription and non-prescription diagnostics, at-home testing, post-surgical products, and, as soon as the FDA grants pre-market approval, the sales and distribution of Shasta Genstrip.

Beginning in November 2009, we introduced our cell-phone centric medical IT products that offer solutions in medical care and management by providing physicians with information at the point of care. Unlike other medical information systems using standard computer terminals or even palm-sized computers (PDA's), our software applications operate on a series of late generation smart e-cell phones including the Apple iPhone, the Palm Pre, the Google Droid, several makes of RIM's Blackberry and many versions of the Microsoft Windows smart phones. Our products allow physicians to access and update their patients' histories, medication data, and best care guidelines - all at the point of care. The company's Electronic Medical Records software is believed to be the first EMR application running on any palm sized mobile device. Recently we ported our software to run on a series of pad computers such as Apple iPad and the 'Droid powered pads.

Our business objectives include: 1. The practice of specializing in the distribution of Shasta Genstrip and several brand-name medical diagnostic and medical disposable products associated with the on-going care of diabetes-inflicted patients and upon receipt of the pre-market letter from the U.S. FDA, the world-wide distribution of our new proprietary diagnostic product Shasta Genstrip.

2. Combining our wholesale and retail drug distribution with our cell phone centric technologies, creating wholesale and retail ePharmacies similar in function to existing Internet pharmacies but directed to serving the large base of underinsured and uninsured Americans; and 3. Providing medical communication and EMR medical history and storage devices based on networks of smart cell phones These products are believed to provide benefits of on demand medical information to private practice physicians, licensed medical service providers such as diagnostic testing laboratories, and medical insurers. We have created cell phone-centric products and a suite of Internet enhanced software applications that include those features that specifically respond to the requirements of the practicing physician and the regulations currently being promulgated by the Federal government.

We also have adapted our medical communications and EMR technologies to service the real estate management and hotel/motel/convenience industries in their own commercial settings. In March 2010, our Board approved the sale of the company's hotel/motel technologies and business base so we can focus on our core medical IT and medical distribution businesses. In past years when we had market focus on the hotel/motel industry, our real estate and hotel/motel objectives include building electronic commerce networks based on personal digital assistants (PDA) and pad based computers to the hotels, motels and single building, multi-unit apartment buildings with a desire to offer local advertising and electronic services to their tenants/guests.

Financing Requirements At September 30, 2012, we had cash of $7,590 and working capital of $892,215.

We anticipate that we will require $56 million in trade debt financing to finance our expected first year sales of Genstrip. In March 2012 we renewed our agreement with Alpha Credit Resources to obtain this debt financing. We will continue to seek a combination of equity and long-term debt financing as well as other traditional cash flow and asset backed financing to meet our financing needs and to reduce our overall cost of capital. Additionally, in order to accelerate our growth rate and to finance general corporate activities, we may supplement our existing sources of funds with financing arrangements at the operating system level or through additional short-term borrowings. As a further capital resource, we may sell or lease certain rights or assets from our portfolio as appropriate opportunities become available. However, there can be no assurance that we will be able to obtain any additional financing, on acceptable terms or at all.

14 -------------------------------------------------------------------------------- Results of Operations for the three months ended September 30, 2012 and 2011 compared.

The following tables summarize selected items from the statement of operations for the three months ended September 30, 2012 compared to 2011.

For the Three Months Ended September 30, 2012 2011 3 Months % Revenue $ 1,223,060 $ 3,585,006 (2,361,946) (65.88) Cost of sales 747,550 2,617,756 (1,870,206) (71.44) Gross profit 475,511 967,250 (491,739) (50.84) Expenses: General & administrative expenses 553,597 1,111,276 (557,679) (50.18) Consulting 34,905 12,928 21,977 170.00 Compensation expense 7,886 6,228 1,658 26.62 Professional fees 88,876 34,375 54,501 158.55 Total expenses 685,264 1,164,807 (479,543) 41.17 Net operating (loss) (209,753) (197,557) (12,196) 6.17 Other income (expense): Financing costs (5,000) (109,040) 104,040 (95.41) Interest expense, net (178,443) (127,755) (50,688) 39.68 Settlement expense (51,942) (7,500) (44,442) 592.56 Total other income (expense) (235,385) (244,295) 8,910 (3.65) Net (loss) $ (445,138) $ (441,852) (3,286) (0.74) The following discussion should be read in conjunction with the unaudited interim condensed consolidated financial statements (including the notes thereto) included under Item 1 in this Form 10-Q.

Revenues and cost of sales During the 3rd quarter of 2012, we experienced a decline in revenue compared to the same period in the previous year. We attribute the decline in revenue to the phasing out of sales of those brand name diagnostic products that will directly compete with our new Shasta Genstrip. In addition, the overall at home testing market is being hindered by the general poor economic conditions, longer payment cycles from insurers, and because the company's business model does not include the sale of retail brand-name products. These conditions have continued into the current year. Our decrease in cost of sales is primarily the direct result of our revenue decline. However, we were able to achieve an increase in our overall gross profit margin based on our re-negotiated wholesale pricing.

Operational Expenses Operational expenses include general and administration expenses, compensation expense consulting and professional fees.

General and administration expenses include office expenses (including bad debt, rent, cleaning and maintenance, utilities, and telephone), insurance, and bank charges. During the 3rd quarter of 2012, general and administration expenses decreased by $557,679 to $553,597 (3rd quarter 2011 - $1,111,276). The decrease was due primarily to bad debt expense recorded in the 3rd quarter 2011. General and administration expenses normally account for approximately 2% of our total revenue and are not expected to increase significantly during the remainder of 2012 in relation to revenue. As we experience growth in revenues, general and administration expenses are expected to decrease on a percentage of revenue basis.

Consulting expenses during the 3rd quarter 2012 increased by $21,977to $34,905 (3rd quarter 2011 - $12,928). Historically, management shifts its labor requirements between, outside consultants, casual labor and in-house management dependent upon availability and cost effectiveness of resources. During 2012, the majority of our labor was derived from the use of outside consultants. Our compensation structure is comprised of both cash and equity of the Company.

15 -------------------------------------------------------------------------------- Professional fees include accounting services, legal fees and regulatory reporting compliance. The increase of $54,501 is the result of an increase in our contingency for legal fees. During the 3rd quarter of 2011, we engaged additional legal counsel to assist in the review of potential new sales/distributing agreements as well as to review general corporate matters. We anticipate our legal fees to continue until all ongoing litigation issues are resolved.

Other Income and Expense Our other income and expense includes costs related to our financing activities, more specifically the interest expense associated with our line of credit with Alpha Credit Resources, LLC. ("Alpha"). Alpha has provided us a line of credit up to $2,500,000. The interest rate of our line of credit is 24% per annum.

Interest expense increased by $50,688 to $178,443 (3rd quarter 2011 - $127,755).

For the three-month periods ended September 30, 2012 and 2011, management has entered into various agreements for the settlement of the Company's historic debt obligations. As a result of these negotiated settlements, the Company's obligations have been reduced from their historical carrying amounts. In 2012, settlement losses were $51,942 as compared to settlement losses of $7,500 in 2011. We may incur further gains or losses on debt settlement or other settlement cost during 2012.

Net Income (Loss) We recorded a net loss for the 3rd quarter of 2012 of $445,138 compared $441,852 for the 3rd quarter of 2011, representing a change of $3,286.

Results of Operations for the nine months ended September 30, 2012 and 2011 compared.

The following tables summarize selected items from the statement of operations for the nine months ended September 30, 2012 compared to 2011.

For the Nine Months Ended September 30, 2012 2011 9 Months % Revenue $ 6,049,471 $ 10,604,519 (4,555,048) (42,95) Cost of sales 4,561,938 8,500,912 (3,938,974) (46.34) Gross profit 1,487,533 2,103,607 (616,074) (50.84) Expenses: General & administrative expenses 1,822,949 1,616,042 206,907 12.80 Consulting 224,807 116,688 108,119 92.66 Compensation expense 33,408 39,688 (6,280) (15.82) Professional fees 243,361 126,899 116,462 91.78 Total expenses 2,324,525 1,899,317 425,208 22.39 Net operating (loss) (836,992) 204,290 (1,041,282) (509.71) Other income (expense): Financing costs (5,036) (422,173) 417,137 (98.81) Interest expense, net (394,399) (367,598) (26,801) 7.29 Settlement expense (51,942) (135,650) 83,709 (61.71) Total other income (expense) (451,377) (925,421) (474,045) (51.22) Net (loss) $ (1,288,369) $ (721,131) (567,237) (78.66) The following discussion should be read in conjunction with the unaudited interim condensed consolidated financial statements (including the notes thereto) included under Item 1 in this Form 10-Q.

16 -------------------------------------------------------------------------------- Revenues and cost of sales During the 3rd quarter of 2012, we experienced a decline in revenue compared to the same period in the previous year. We attribute the decline in revenue to the phasing out of sales of those brand name diagnostic products that will directly compete with our new Shasta Genstrip. In addition, the overall at home testing market is being hindered by the general poor economic conditions, longer payment cycles from insurers, and because the company's business model does not include the sale of retail brand-name products. These conditions have continued into the current year. Our decrease in cost of sales is primarily the direct result of our revenue decline. However, we were able to achieve an increase in our overall gross profit margin based on our re-negotiated wholesale pricing.

Operational Expenses Operational expenses include general and administration expenses, compensation expense consulting and professional fees.

General and administration expenses include office expenses (including bad debt, rent, cleaning and maintenance, utilities, and telephone), insurance, and bank charges. During the nine months ended September 30, 2012, general and administration expenses increased by $206,907 to $1,822,949 (2011 - $1,616,042).

The increase was due primarily to bad debt expense. General and administration expenses normally account for approximately 2% of our total revenue and are not expected to increase significantly during the remainder of 2012 in relation to revenue. As we experience growth in revenues, general and administration expenses are expected to decrease on a percentage of revenue basis.

Consulting expenses during the nine months ended September 30, 2012 increased by $108,119 to $224,807 (2011 - $116,688). Historically, management shifts its labor requirements between, outside consultants, casual labor and in-house management dependent upon availability and cost effectiveness of resources.

During 2012, the majority of our labor was derived from the use of outside consultants. Our compensation structure is comprised of both cash and equity of the Company.

Professional fees include accounting services, legal fees and regulatory reporting compliance. The increase of $116,462 is primarily attributable to an increase in contingent legal fees. During the nine months ended September 30, 2012, we engaged additional legal counsel to assist in the review of potential new sales/distributing agreements as well as to review general corporate matters. We anticipate our legal fees to continue until all ongoing litigation issues are resolved.

Other Income and Expense Our other income and expense includes costs related to our financing activities, more specifically the interest expense associated with our line of credit with Alpha Credit Resources, LLC. ("Alpha"). Alpha has provided us a line of credit up to $2,500,000. The interest rate of our line of credit is 24% per annum.

Interest expense increased by $26,801 to $394,399 (2011 - $367,598).

For the nine-month periods ended September 30, 2012 and 2011, management has entered into various agreements for the settlement of the Company's historic debt obligations. As a result of these negotiated settlements, the Company's obligations have been reduced from their historical carrying amounts. In 2012, settlement losses were $51,942 as compared to settlement losses of $135,650 in 2011. We may incur further gains or losses on debt settlement or other settlement cost during 2012.

Net Income (Loss) We recorded a net loss for the nine months ended September 30, 2012 of $1,288,369 compared to a net loss for the nine months ended September 30, 2011 of $721,131, representing a total change of $567,238.

Liquidity and Capital Resources A critical component of our operating plan affecting our continued existence is the ability to obtain favorable capital through additional equity and/or debt financing. We do not anticipate generating sufficient positive internal operating cash flow until we can increase our existing market share and improve operating margins, which may take several years. In the event we cannot obtain the necessary capital to pursue our strategic plan, we may have to cease or significantly curtail our operations. This would materially impact our ability to continue operations.

17 -------------------------------------------------------------------------------- The following table summarizes our current assets, liabilities and working capital at September 30, 2012 compared to December 31, 2011.

SEPTEMBER 30, DECEMBER 31, INCREASE (DECREASE) 2012 2011 $ % Current assets $ 4,366,818 $ 4,537,949 $ (171,131) (3.77%) Current liabilities 3,357,336 2,532,217 825,119 32.58% Working capital $ 1,009,482 $ 2,005,732 $ (996,250) (49.67%) Cash to Operating Activities During the nine months, ended September 30, 2012, operating activities provided cash of $32,466 compared to using cash of $558,387 in 2011. Our loss for 2012 was $1,288,368, and included bad debt write-downs of $1,669,451 (2011 - $1,241,043); and consulting expenses settled with equity $197,440 (2011 - $77,400). Our accounts receivables have increased by $1,453,756 (2011 - $3,217,737) due to a slowdown in our revenue cycle. Prepaid expenses decreased by $16,472 (2011 - $1,293,582) due to the expiration of prepaid insurance in 2012. Accounts payable and accrued liabilities have increased by $368,554 (2011 -$524,739) due to a slowdown in our revenue cycle. Our contingent liabilities increased $148,000 (2011 - $0.00) due to the uncertainty of our involvement in legal matters.

Cash from Investing Activities During the nine months ended September 30, 2012, investing activities used cash of $37,225 (2011 - $5,490).

Cash from Financing Activities During the nine months ended September 30, 2012, financing activities used cash of $2,500 (2011 - 350,638). Cash was used for payments on notes payable of $2,500 (2011 - $4,475).

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