UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(MARK ONE)
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2003
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE TRANSITION PERIOD FROM TO .
Commission File Number 33-30743
Emergisoft Holding, Inc.
(Name of small business issuer as specified in its charter)
| Nevada | 84-1121360 | |
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification Number) |
| 2225 Avenue J, Arlington, Texas | 76006 | |
| (Address of principal executive offices) | (Zip Code) |
Issuer’s telephone number, including area code: (800)-682-7729
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes x No ¨
Number of shares outstanding as of August 13, 2003:
| Class: Common Stock, par value $.001 | Shares outstanding: 24,475,658 |
Transitional Small Business Disclosure Format
(check one)
Yes ¨ No x
EMERGISOFT HOLDING, INC. AND SUBSIDIARIES
INDEX
| PART I. FINANCIAL INFORMATION | ||||
| Item 1. | Financial Statements | |||
Consolidated Balance Sheets June 30, 2003 (unaudited) and December 31, 2002 | ||||
Consolidated Statements of Operations Three and six months ended June 30, 2003 and 2002 (unaudited) | ||||
Consolidated Statements of Cash Flows Six months ended June 30, 2003 and 2002 (unaudited) | ||||
Consolidated Statement of Stockholders’ Equity (Deficit) as of June 30, 2003 (unaudited) | ||||
| Item 2. | ||||
| Item 3. | ||||
| PART II. OTHER INFORMATION | ||||
| Item 2. | ||||
| Item 6. | ||||
| Signatures | ||||
| Certifications | ||||
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PART I. – FINANCIAL INFORMATION
Item 1. Financial Statements
Emergisoft Holding, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2003 | December 31, 2002 | |||||||
| (Unaudited) | ||||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 1,862,912 | $ | 427,331 | ||||
Trade accounts receivable | 130,149 | 158,579 | ||||||
Prepaid expenses | 88,725 | 103,966 | ||||||
Employee advances | 42,260 | 43,000 | ||||||
Total current assets | 2,124,046 | 732,876 | ||||||
Equipment and fixtures, net | 525,735 | 465,539 | ||||||
Other assets | 29,000 | 35,221 | ||||||
Total assets | $ | 2,678,781 | $ | 1,233,636 | ||||
Liabilities and Stockholders’ Equity (Deficit) | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 367,878 | $ | 539,232 | ||||
Deferred revenue, net of deferred costs | 462,570 | 106,957 | ||||||
Notes payable | 43,132 | 113,990 | ||||||
Notes payable with Related Parties, net of discounts | 715,985 | 615,221 | ||||||
Total current liabilities | 1,589,565 | 1,375,400 | ||||||
Notes payable with Related Parties – long term, net of discounts | — | 615,222 | ||||||
Commitments and contingencies | ||||||||
Stockholders’ equity (deficit): | ||||||||
Common Stock, $.001 par value, 37,500,000 shares authorized, 25,017,390 and 16,579,870 issued and outstanding at June 30, 2003 and December 31, 2002, respectively | 25,018 | 16,580 | ||||||
Additional capital | 29,879,700 | 25,388,138 | ||||||
Deferred compensation | (15,000 | ) | (26,248 | ) | ||||
Treasury stock, at cost, 541,732 and 0 shares at June 30, 2003 and December 31, 2002, respectively | (216,693 | ) | — | |||||
Accumulated deficit | (28,583,809 | ) | (26,135,456 | ) | ||||
Total stockholders’ equity (deficit) | 1,089,216 | (756,986 | ) | |||||
Total liabilities and stockholders’ equity (deficit) | $ | 2,678,781 | $ | 1,233,636 | ||||
See accompanying notes
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Emergisoft Holding, Inc. and Subsidiaries
Consolidated Statements of Operations
| Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
| (Unaudited) | (Unaudited) | (Unaudited) | (Unaudited) | |||||||||||||
Revenue | $ | 69,066 | $ | 78,842 | $ | 153,097 | $ | 158,933 | ||||||||
Cost of revenue | 4,730 | 8,575 | 41,860 | 11,553 | ||||||||||||
General and administrative | 951,676 | 1,018,794 | 2,011,770 | 2,321,145 | ||||||||||||
Product development | 296,189 | 276,232 | 599,856 | 665,809 | ||||||||||||
Total operating expenses | 1,252,595 | 1,303,601 | 2,653,486 | 2,998,507 | ||||||||||||
Loss from operations | (1,183,529 | ) | (1,224,759 | ) | (2,500,389 | ) | (2,839,574 | ) | ||||||||
Interest expense | 30,766 | 255,770 | 222,661 | 496,876 | ||||||||||||
Interest income | (5,798 | ) | (3,638 | ) | (5,943 | ) | (7,809 | ) | ||||||||
Other income | — | — | (268,754 | ) | — | |||||||||||
Net loss | $ | (1,208,497 | ) | $ | (1,476,891 | ) | $ | (2,448,353 | ) | $ | (3,328,641 | ) | ||||
Basic and diluted net loss per share | $ | (.05 | ) | $ | (.13 | ) | $ | (.12 | ) | $ | (.35 | ) | ||||
Weighted average shares used to compute basic and diluted net loss per share | 24,475,783 | 10,975,458 | 21,056,258 | 9,504,509 | ||||||||||||
See accompanying notes
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Emergisoft Holding, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
| Six Months Ended June 30 | ||||||||
| 2003 | 2002 | |||||||
| (Unaudited) | (Unaudited) | |||||||
Operating Activities | ||||||||
Net loss | $ | (2,448,353 | ) | $ | (3,328,641 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Depreciation and amortization | 74,007 | 45,041 | ||||||
Gain on extinguishment of debt | (268,754 | ) | — | |||||
Amortization of debt discount | 235,541 | 409,718 | ||||||
Amortization of deferred compensation | 11,248 | 393,992 | ||||||
Changes in assets and liabilities: | ||||||||
Accounts receivable | 28,430 | 63,476 | ||||||
Prepaid expenses, employee advances and other assets | 22,202 | (70,528 | ) | |||||
Deferred revenue | 355,613 | (60,223 | ) | |||||
Accounts payable and accrued expenses | (171,354 | ) | 157,683 | |||||
Net cash used in operating activities | (2,161,420 | ) | (2,389,482 | ) | ||||
Investing Activity | ||||||||
Purchase of equipment and fixtures | (134,203 | ) | (12,784 | ) | ||||
Cash used in investing activity | (134,203 | ) | (12,784 | ) | ||||
Financing Activities | ||||||||
Repayment of notes payable and line of credit | (552,103 | ) | (134,694 | ) | ||||
Purchase of treasury stock | (216,693 | ) | — | |||||
Proceeds from issuance of common stock and exercise of options | 4,500,000 | 3,107,291 | ||||||
Net cash provided by financing activities | 3,731,204 | 2,972,597 | ||||||
Net increase in cash and cash equivalents | 1,435,581 | 570,331 | ||||||
Cash and cash equivalents, beginning of period | 427,331 | 661,509 | ||||||
Cash and cash equivalents, end of period | $ | 1,862,912 | $ | 1,231,840 | ||||
Supplemental cash flow information: | ||||||||
Non-cash activities: | ||||||||
Common stock issued in connection with conversion of convertible note | $ | — | $ | 7,291 | ||||
See accompanying notes
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Emergisoft Holding, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders’ Equity (Deficit)
As of June 30, 2003 Unaudited
| Shares | |||||||||||||||||||||||||||
| Common Stock | Treasury Stock | Common Stock | Additional Capital | Deferred Compensation | Treasury Stock | Accumulated Deficit | Total | ||||||||||||||||||||
Balance at December 31, 2002 | 16,579,870 | — | $ | 16,580 | $ | 25,388,138 | $ | (26,248 | ) | $ | — | $ | (26,135,456 | ) | $ | (756,986 | ) | ||||||||||
Common stock issued in private placements | 8,437,520 | — | 8,438 | 4,491,562 | — | — | — | 4,500,000 | |||||||||||||||||||
Common stock repurchased from shareholder | — | (541,732 | ) | — | — | — | (216,693 | ) | — | (216,693 | ) | ||||||||||||||||
Amortization of deferred compensation | — | — | — | — | 11,248 | — | — | 11,248 | |||||||||||||||||||
Net loss | — | — | — | — | — | — | (2,448,353 | ) | (2,448,353 | ) | |||||||||||||||||
Balance at June 30, 2003 | 25,017,390 | (541,732 | ) | $ | 25,018 | $ | 29,879,700 | $ | (15,000 | ) | $ | (216,693 | ) | $ | (28,583,809 | ) | $ | 1,089,216 | |||||||||
See accompanying notes
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Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Emergisoft Holding, Inc. and Subsidiaries (the Company) for the three and six month periods ended June 30, 2003 and 2002 have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-QSB and Item 310(b) of Regulation S-B. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and six month periods ended June 30, 2003 are not necessarily indicative of the results that may be expected for the year ended December 31, 2003. The balance sheet at December 31, 2002 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.
2. Liquidity and Capital Resources
We have historically financed our operations primarily through private placements of our common stock and advances from stockholders. At various times since January 1, 2002 through the date of this report, we have issued a total of 18,812,536 common shares in exchange for $9,600,000 in financing provided by Berlwood Five, Ltd (Berlwood). As a result of such common stock purchases and others, Berlwood now owns 95% of the outstanding shares and thereby controls our company. See page 13 – Risk Factors.
In 2001, lines of credit totaling $1,500,000 were made available to us by two of our stockholders. Throughout 2001, we requested and received advances totaling $1,500,000 against the lines of credit. In connection with these advances, warrants were issued allowing the stockholders to purchase in total 300,000 shares of our common stock at prices ranging from $15 to $30 per share. These warrants terminate on dates ranging from April 30, 2006 to August 3, 2011. The warrants contain a cashless exercise feature and the warrant holders have registration rights. Under the terms of the promissory notes, all outstanding principal and interest was originally due on April 30, 2002. On October 24, 2001, the two stockholders agreed to extend the maturity on the $1,500,000 indebtedness one year to April 30, 2003. In consideration for the extension, we reduced the exercise price per share on the warrants issued in connection with the advances from a weighted average exercise price of $18.00 to $0.534. On February 28, 2003, $750,000 of the indebtedness, warrants covering 173,118 shares, and 541,732 shares of our common stock, were repurchased by us for a total of $741,693 in accordance with a Securities Purchase Agreement approved by our Board of Directors. On March 19, 2003, the maturity on the remaining $750,000 indebtedness was extended to April 30, 2004.
On November 13, 2002 Berlwood committed to provide additional financing to us of up to $5,000,000. As of March 25, 2003, Berlwood has provided the entire commitment to us.
As of August 13, 2003, we had approximately $1,357,000 in cash and cash equivalents.
Other than funding our ongoing operations, including the development of our software products, our primary uses of cash have been to acquire fixed assets and repay our indebtedness. During the first six months of 2003 we acquired fixed assets in the amount of $134,203 and we repaid $552,103 of our indebtedness.
We utilize significant capital to design, develop and commercialize our products. During 2003, we may need additional capital to further develop or enhance our current planned product offerings, introduce new products and services, and to address unanticipated competitive threats, technical problems, economic
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conditions or for other requirements. In addition, we may enter into discussions to merge with or acquire other companies. Additional financing, if any, may include the issuance of convertible debt, convertible preferred stock, common stock or other equity securities in exchange for a cash investment in us. There can be no assurance that any such additional financing will be available to us on acceptable terms, or at all. Additional equity financing may involve substantial dilution to our then existing stockholders. In the event we are unable to raise additional capital, we may be required to substantially reduce or curtail our activities.
At August 13, 2003, we had no material commitments for capital expenditures.
3. Stock-Based Compensation
The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (FAS 123),Accounting for Stock-Based Compensationand Statement of Financial Accounting Standards No. 148 (FAS 148), Accounting for Stock-Based-Compensation—Transition and Disclosure—An Amendment of FASB Statement No. 123 and continues to apply APB Opinion No. 25 in accounting for its stock-based compensation plans. Under the provision of FAS 123, compensation expense is recognized based on the fair value of option on the grant date.
The following table illustrates the effect on net loss if the Company had applied the fair value recognition provisions of FAS 123 for the three and six month periods ended June 30, 2003 and 2002:
Three Months Ended June 30 | Six Months Ended June 30 | |||||||||||||||
| 2003 | 2002 | 2003 | 2002 | |||||||||||||
Net loss, as reported | $ | (1,208,597 | ) | $ | (1,476,891 | ) | $ | (2,448,353 | ) | $ | (3,328,641 | ) | ||||
Plus: Stock-based compensation expense, net of tax, included in net loss, as reported | 5,624 | 4,869 | 11,248 | 393,992 | ||||||||||||
Less: Stock-based compensation expense determined under the fair – value based method | (17,694 | ) | (55,022 | ) | (87,300 | ) | (467,920 | ) | ||||||||
Net loss, pro forma | (1,220,667 | ) | $ | (1,527,044 | ) | $ | (2,524,405 | ) | $ | (3,402,569 | ) | |||||
Basic and diluted loss per share, as reported | $ | (.05 | ) | $ | (.13 | ) | $ | (.12 | ) | $ | (.35 | ) | ||||
Basic and diluted loss per share, pro forma | $ | (.05 | ) | $ | (.14 | ) | $ | (.12 | ) | $ | (.36 | ) | ||||
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting periods. Because options vest over a period of several years and additional awards are generally made each year, the pro forma information presented above is not necessarily indicative of the effects on reported or pro forma earnings or losses for future years.
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Item 2. Management’s Discussion and Analysis
CAUTION REGARDING FORWARD-LOOKING STATEMENTS
Throughout this report, there are forward-looking statements that are based upon our current expectations, estimates and projections about our industry and that reflect the beliefs and assumptions based upon information available to us at the date of this report. In some cases, you can identify these statements by words such as “may,” “might,” “will,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” or “continue,” and other similar terms. These forward-looking statements include, among other things, projections of our future financial performance, our anticipated growth, our strategies and trends we anticipate in our business and the markets in which we operate and the competitive nature and anticipated growth of those markets.
We caution investors that forward-looking statements are only predictions, based upon our current expectations about future events. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict. Our actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements. Some of the important factors that could cause our results to differ are discussed later in “Risk Factors”. We encourage you to read this section carefully. You should carefully consider those risks, in addition to other information in this report and in our other filings with the SEC, before deciding to invest in our stock or to maintain or change your investment. We caution investors not to rely on these forward-looking statements, which reflect management’s analysis only as of the date of this report. We undertake no obligation to revise or update any forward-looking statement for any reason.
CORPORATE BACKGROUND
Emergisoft Corporation, our operating subsidiary, began operations in 1992 and was incorporated in 1998 in Delaware. Our principal executive office is located at 2225 Avenue J, Arlington, Texas and our telephone number is 1-800-682-7729. When we refer to “we,” “our,” or “Emergisoft” in this report, we mean Emergisoft Holding, Inc. a Nevada corporation and its subsidiaries, including Emergisoft Corporation, our operating subsidiary.
BUSINESS OVERVIEW
Emergisoft’s Mission: To provide clinicians and administrators the most comprehensive, functional and efficient clinical information systems that enhance and improve the delivery and documentation of patient care.
Our goal is to design and implement information systems so profound our customers wouldn’t dream of going back to their old ways of paper documentation in the clinical setting. Emergisoft is committed to automating the workflow processes of the Emergency Department, commonly referred to as the “ED”, “Emergency Room” or “ER.”
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Emergisoft is a designer and developer of a comprehensive Emergency Department Information System, or EDIS, software applications that allow clinicians to:
| • | electronically collect complete patient data at the point of care; |
| • | time and date stamp workflow processes of ED nurses and physicians; |
| • | produce department management reports; and |
| • | monitor trends, including but not limited to, department bottlenecks, patient wait times, and syndromic surveillance. |
Our principal products and services include:
| • | EmergisoftED™ a comprehensive, full-interface EDIS; |
| • | training for Emergisoft applications; |
| • | implementation and interfacing of Emergisoft applications with legacy systems; and |
| • | maintenance and service of Emergisoft applications. |
Company Growth Strategy
Emergisoft has a goal to provide successful customer-driven innovation, using technology to address complex customer problems and develop solutions to make clinical documentation and workflow easier. By applying strategic and operational rigor to this foundation, we believe we can accelerate our customer-driven innovation, and deliver stronger revenue and profit potential.
There are three key fundamentals that support our growth strategy:
| • | We deliberately choose to be in business where we believe we can achieve the strategic and durable advantage to produce long-term profitable growth. |
| • | We believe we have targeted a large, underserved portion of the healthcare information technology market, and strive to deliver customer-driven, innovative solutions to address these unmet customer needs. |
| • | By applying strategic and operational rigor, we believe we can execute well to capitalize on a large growth opportunity. |
By being both disciplined and innovative, we seek to improve execution and deliver more – for example, we believe that by tightening development cycles, we can introduce products and product enhancements faster.
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2003 COMPARED TO
THE QUARTER ENDED JUNE 30, 2002
Revenues
We recognize software license revenues consistent with Financial Accounting Standards Board (FASB) Statement of Position 97-2,SOFTWARE REVENUE RECOGNITIONand Staff Accounting Bulletin 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS. These statements provide guidance on applying generally accepted accounting principles in recognizing revenue.
During 2002, our revenues were generated by maintenance fees related to our ICUS based product. We replaced the ICUS based product called Emergisoft with a newly developed product called EmergisoftED™ and no longer sell the ICUS based product. As of December 31, 2002, we have sunset the ICUS based product. We
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are currently installing EmergisoftED™ in our existing client base and marketing it to new customers. In 2003 we expect to generate revenue primarily through the sale and support of EmergisoftED™. There can be no assurances that we will be successful in our efforts to sell EmergisoftED™.
We aggressively market our products through direct sales utilizing our sales staff, advertising campaigns and attendance at tradeshows for emergency department physicians, nurses and hospital information technology professionals.
We have insignificant revenues under contract and no assurances can be given that our revenues will increase to a level that would allow us to achieve profitability.
Revenues for the quarter ended June 30, 2003 were $69,066 compared to $78,842 for the quarter ended June 30, 2002. The decrease was primarily due to lower maintenance revenue resulting from transitioning one of our existing customers to EmergisoftED™. Contracted maintenance and support revenue was $67,250 in the second quarter of 2003 compared to $76,921 in the second quarter of 2002. We currently have seven clients contracted for installation, support and maintenance of EmergisoftED™. These seven clients represent nine hospital locations.We do not recognize license revenue until the installation is complete and customer acceptance has been obtained.
Cost of Revenues
Costs of revenues during the second quarter of 2003 were $4,730 compared to $8,575 in the same period of 2002.
In the future, we expect additional costs of revenue related to client support and maintenance agreements as we build a customer base using our products. Most of these costs will be related to increased headcount to staff customer support and technical positions, as well as, installation and training costs related to sales of EmergisoftED™.
General and Administrative Expenses
General and administrative expenses include salaries and benefits, professional services fees, facilities costs, advertising, and other expenses related to operations of our executive, sales and financial functions.
Our general and administrative expenses decreased to $951,676 in the first quarter of 2003 from $1,018,794 in the same period of 2002, a decrease of $67,118. The difference is primarily due to a decrease in legal fees of $152,814 offset by increases in insurance, travel, recruiting fees and sales and marketing expenses.
Development Expenses
Development expenses consist of costs primarily related to the development and testing of our core product EmergisoftED™. Development expenses were $296,189 in the first quarter of 2003 compared to $276,232 in the same period of 2002, a decrease of $19,957. The decrease was primarily due to decreases in consulting and contract labor of $24,431.
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RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2003 COMPARED TO
THE SIX MONTHS ENDED JUNE 30, 2002
Revenues
Revenues for the six months ended June 30, 2003 were $153,097 compared to $158,933 for the six months ended June 30, 2002. Contracted maintenance and support revenues were $131,083 in the first six months of 2003 compared to $153,843 in the first six months of 2002. During the first six months of 2003, we recognized $20,000 in license fee revenue related to the installation of EmergisoftED™ compared to none in the same period of 2002.
Cost of Revenues
Costs of revenues during the six months ended June 30, 2003 were $41,860 compared to $11,553 in the same period of 2002. The increase of $30,307 was due to the recognition of deferred costs related to a completed installation of our system.
In the future, we expect additional costs of revenue related to client support and maintenance agreements as we build a customer base using our products. Most of these costs will be related to increased headcount to staff customer support and technical positions, as well as, installation and training costs related to sales of EmergisoftED™.
General and Administrative Expenses
General and administrative expenses include salaries and benefits, professional services fees, facilities costs, advertising, and other expenses related to operations of our executive, sales and financial functions.
Our general and administrative expenses decreased to $2,011,770 in the six months ended June 30, 2003 from $2,321,145 in the same period of 2002, a decrease of $309,375. The decrease is primarily due to decreased stock based compensation expense of $382,744 and a decrease in legal fees of $230,577 offset by increases in advertising and marketing $211,757, recruiting fees of $25,829, insurance of $36,210 and travel $9,046.
Development Expenses
Development expenses consist of costs primarily related to the development and testing of our core productEmergisoftED™. Development expenses were $599,856 in the six months ended June 30, 2003 compared to $665,809 in the same period of 2002, a decrease of $65,953. The decrease was primarily due to a reduction in outside contractor labor related to development activities in 2002 of $127,661 and slightly lower salary and related expenses of $27,893 offset by increased expenses incurred for our offsite data center of $53,704 and software maintenance fees for software tools used internally of $26,294.
LIQUIDITY AND CAPITAL RESOURCES
We have historically financed our operations primarily through private placements of our common stock and advances from stockholders. At various times since January 1, 2002 through the date of this report, we have issued a total of 18,812,536 common shares in exchange for $9,600,000 in financing provided by Berlwood Five, Ltd (Berlwood). As a result of such common stock purchases and others, Berlwood now owns
12
95% of the outstanding shares and thereby controls our company. See page 13 – Risk Factors.
In 2001, lines of credit totaling $1,500,000 were made available to us by two of our stockholders. Throughout 2001, we requested and received advances totaling $1,500,000 against the lines of credit. In connection with these advances, warrants were issued allowing the stockholders to purchase in total 300,000 shares of our common stock at prices ranging from $15 to $30 per share. These warrants terminate on dates ranging from April 30, 2006 to August 3, 2011. The warrants contain a cashless exercise feature and the warrant holders have registration rights. Under the terms of the promissory notes, all outstanding principal and interest was originally due on April 30, 2002. On October 24, 2001, the two stockholders agreed to extend the maturity on the $1,500,000 indebtedness one year to April 30, 2003. In consideration for the extension, we reduced the exercise price per share on the warrants issued in connection with the advances from a weighted average exercise price of $18.00 to $0.534. On February 28, 2003, $750,000 of the indebtedness, warrants covering 173,118 shares, and 541,732 shares of our common stock, were repurchased by us for a total of $741,693 in accordance with a Securities Purchase Agreement approved by our Board of Directors. On March 19, 2003, the maturity on the remaining $750,000 indebtedness was extended to April 30, 2004.
On November 13, 2002 Berlwood committed to provide additional financing to us of up to $5,000,000. As of March 25, 2003, Berlwood has provided the entire commitment to us.
As of August 13, 2003, we had approximately $1,357,000 in cash and cash equivalents.
Other than funding our ongoing operations, including the development of our software products, our primary uses of cash have been to acquire fixed assets and repay our indebtedness. During the first six months of 2003 we acquired fixed assets in the amount of $134,203 and we repaid $552,103 of our indebtedness.
We utilize significant capital to design, develop and commercialize our products. During 2003, we may need additional capital to further develop or enhance our current planned product offerings, introduce new products and services, and to address unanticipated competitive threats, technical problems, economic conditions or for other requirements. In addition, we may enter into discussions to merge with or acquire other companies. Additional financing, if any, may include the issuance of convertible debt, convertible preferred stock, common stock or other equity securities in exchange for a cash investment in us. There can be no assurance that any such additional financing will be available to us on acceptable terms, or at all. Additional equity financing may involve substantial dilution to our then existing stockholders. In the event we are unable to raise additional capital, we may be required to substantially reduce or curtail our activities.
At August 13, 2003, we had no material commitments for capital expenditures.
RISK FACTORS
Control by Existing Management and One Stockholder
Our major investor, Berlwood Five, Ltd., owns more than 95% of our issued and outstanding common stock as of the date of this report. As a consequence, Berlwood Five, Ltd. exercises control over our affairs, controls the election of the entire Board of Directors and controls the disposition of any matter submitted to a vote of stockholders.
We have had a history of losses, we expect losses in the future, and there can be no assurance that we will be profitable in the future.
For our fiscal year ended December 31, 2002, we incurred net losses of $6,036,864. As of June 30,
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2003, we had an accumulated deficit of $28,583,809. Management expects these losses to continue in 2003. If our revenues do not increase substantially, we may never become profitable. Even if we do achieve profitability, we may not sustain profitability on a quarterly or annual basis in the future.
We may require additional financing, but we may be unable to obtain it on favorable terms or at all.
We may require additional funding to continue operations beyond 2003. However, there can be no assurance that we will be successful in locating such sources.
Our ability to obtain additional financing will be subject to a number of factors, including our operating performance, the terms of existing indebtedness, and general economic and market conditions. We cannot be certain that we will be able to obtain additional financing on acceptable terms, if at all. If we issue additional equity securities to raise capital, our stockholders may experience significant dilution and the new securities may have rights, preferences or privileges greater than those of our existing stockholders. If we cannot obtain additional financing when needed, we may not be able to fund our operations or to remain in business, which could result in a total loss of your investment.
Dependence on Principal Product
We expect to derive a significant percentage of our revenue from sales of our core system, EmergisoftEDTM. As a result, any event adversely affecting expected sales of the product could have a material adverse effect on our results of operations, financial condition or business. Revenue associated with EmergisoftEDTM could fail to materialize as a result of several factors, including price competition and sales practices. There can be no assurance that we will be successful in marketing our current products or any new or enhanced products.
Dependence on Proprietary Software
Our success is dependent to a significant extent on our ability to protect the proprietary and confidential aspects of our software technology. Our software technology is not patented and existing copyright laws offer only limited practical protection. We rely on a combination of trade secret, copyright and trademark laws, license agreements, nondisclosure and other contractual provisions and technical measures to establish and protect our proprietary rights in our products. There can be no assurance that the legal protections afforded to us or the steps taken by us will be adequate to prevent misappropriation of our technology. In addition, these protections do not prevent independent third-party development of competitive products or services. We believe that our products, trademarks and other proprietary rights do not infringe upon the proprietary rights of third parties. There can be no assurance, however, that third parties will not assert infringement claims against us in the future or that any such assertion will not require us to enter into a license agreement or royalty arrangement with the party asserting the claim. As competing healthcare information systems increase in complexity and overall capabilities and the functionality of these systems further overlap, providers of such systems may become increasingly subject to infringement claims. Responding to and defending any such claims may distract the attention of our management and otherwise have a material adverse effect on our results of operations, financial condition or business.
Risks Related to Technological Change and New Product Development
The market for our products is characterized by rapid change and technological advances requiring ongoing expenditures for research and development and the timely introduction of new products and enhancements of existing products. Our future success will depend in part upon the ability to enhance our current products, to respond effectively to technological changes, to sell additional products to our existing client base and to introduce new products and technologies that address the increasingly sophisticated needs of
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our clients. We will devote significant resources to the development of enhancements to our existing products and the migration of existing products to new software platforms. There can be no assurance that we will successfully complete the development of new products or the migration of products to new platforms or that our current or future products will satisfy the needs of the market for ED software systems. Further, there can be no assurance that products or technologies developed by others will not adversely affect our competitive position or render our products or technologies noncompetitive or obsolete.
Quality Assurance and Product Acceptance Concerns
Healthcare providers demand the highest level of reliability and quality from their information systems. Although we devote substantial resources to meeting these demands, our products may, from time to time, contain errors. Such errors may result in loss of, or delay in, market acceptance of our products. Delays or difficulties associated with new product introductions or product enhancements could have a material adverse effect on our results of operations, financial condition or business.
Many healthcare providers are consolidating to create integrated healthcare delivery systems with greater market power. These providers may try to use their market power to negotiate price reductions for our products and services. As the healthcare industry consolidates, our client base could be eroded, competition for clients could become more intense and the importance of acquiring each client is likely to become greater.
Reliance on Third Party Vendors
We depend on third-party suppliers to provide data related to our online patient demographic and insurance eligibility verification tool and hardware and software suppliers related to our other products. We cannot be sure that our suppliers will continue to sell or lease their products and services to us at commercially reasonable prices or at all. Difficulties in developing alternative sources of supply, if required, could adversely affect our business.
We Depend on Protection of Our Proprietary Rights
We rely on a combination of copyright, trademark and trade secret laws to protect our proprietary rights. We cannot be certain that the steps we have taken will be adequate to prevent the misappropriation of our technology or that third parties, including competitors, will not independently develop technologies that are substantially equivalent or superior to our proprietary technology.
Risk of Product-Related Claims
Certain of our products provide applications that relate to patient medical records and treatment plans. Any failure of the products to provide accurate, confidential and timely information could result in product liability or breach of contract claims against us by our clients, their patients or others. We intend to maintain insurance to protect against claims associated with the use of our products, but there can be no assurance that such insurance coverage will be available at a reasonable cost or, if available, will adequately cover any claim asserted against us. A successful claim brought against us in excess of our insurance coverage could have a material adverse effect on our results of operations, financial condition or business. Even unsuccessful claims could result in the expenditure of funds in litigation, as well as diversion of management time and resources. There can be no assurance that we will not be subject to product liability or breach of contract claims, that such claims will not result in liability in excess of our insurance coverage, that our insurance will cover such claims or that appropriate insurance will continue to be available to us in the future at commercially reasonable rates. Emergisoft has had actual claims related to the premature release of its Windows based product in 1997. These claims have currently been settled; however, we can give no assurance that we will not have similar or other product related claims, or that we could settle other similar product related claims.
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Risks Associated with Government Regulation
The healthcare industry in the United States is subject to changing political, economic and regulatory influences that may affect the procurement practices and operations of healthcare organizations. During the past several years, the healthcare industry has been subject to increasing levels of government regulation of, among other things, reimbursement rates and certain capital expenditures. From time to time, certain proposals to reform the healthcare system have been considered by Congress. These proposals, if enacted, may increase government involvement in healthcare, lower reimbursement rates and otherwise change the operating environment for our clients. Healthcare organizations may react to these proposals and the uncertainty surrounding such proposals by curtailing or deferring investments, including those for our products and services. We cannot predict with any certainty what impact, if any, such proposals or healthcare reforms might have on our results of operations, financial condition or business.
Reliance on Management and Key Personnel
Management decisions of our business will be made exclusively by our directors and officers. Our stockholders will have no right or power to take part in management other than their right to vote for the election of our directors. Our operations are dependent on the continued efforts of our executive officers and senior management. Furthermore, we will likely be dependent on the senior management of any businesses acquired in the future. If any of these persons becomes unable or unwilling to continue in his or her role with us, or if we are unable to attract and retain other qualified employees, our business or prospects could be adversely affected. There can be no assurance that any individual will continue in his present capacity with us for any particular period of time. Our success is also dependent to a significant degree on our ability to attract, motivate and retain highly skilled sales, marketing and technical personnel, including software programmers and systems architects skilled in the computer language with which our products operate. The loss of key personnel or the inability to hire or retain qualified personnel could have a material adverse effect on our results of operations, financial condition or business. Although we have been successful to date in attracting and retaining skilled personnel, there can be no assurance that we will continue to be successful in attracting and retaining the personnel we require to successfully develop new and enhanced products and to continue to grow and operate profitably.
Possible Volatility of Stock Price
The market price of our common stock may be subject to significant fluctuations in response to numerous factors, including variations in our annual or quarterly financial results or our competitors, changes by financial research analysts in their estimates of our earnings, conditions in the economy in general or in the healthcare or technology sectors in particular, announcements of technological innovations or new products or services by us or our competitors, proprietary rights development, unfavorable publicity or changes in applicable laws and regulations (or judicial or administrative interpretations thereof) affecting us or the healthcare or technology sectors. Moreover, from time to time, the stock market experiences significant price and volume volatility that may affect the market price of the common stock for reasons unrelated to our performance.
Competition
We experience significant competition in conducting our business, and we expect such competition to continue to increase. A number of our competitors offer a broader variety of services and products and may have done so for longer periods of time. Our current and prospective competitors include large companies, some of which may be better known than us and may have greater financial, technical and marketing resources than we do.
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As a result of increased competition in our industry, we expect to encounter significant pricing pressure. We cannot be certain that we will be able to offset the effects of any required price reductions through an increase in the volume of our sales, higher revenues from other business services, cost reduction or otherwise, or that we will have the resources to continue to compete successfully.
Item 3. Controls and Procedures
As required by new Rule 13a-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) within 90 days prior to the date of filing this report, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Controller, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based upon that evaluation, the Chief Executive Officer concluded that the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. However, due to the limited size of the Company’s staff, there is inherently a lack of segregation of duties related to the authorization, recording, processing and reporting of transactions. We periodically assess the cost versus benefit of adding the resources that would remedy this situation and currently, with the concurrence of the board of directors, do not consider the benefits to outweigh the costs of adding additional staff in light of the limited number of transactions related to the Company’s operations.
There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluations.
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PART II. – OTHER INFORMATION
On March 25, 2003, we issued 5,531,264 shares of common stock in exchange for $2,950,000 in accordance with the November 13, 2002 financing commitment provided by Berlwood.
On March 11, 2003, we issued 281,251 shares of common stock in exchange for $150,000 in accordance with the November 13, 2002 financing commitment provided by Berlwood.
On February 24, 2003, we entered into a Securities Purchase Agreement with four holders of our securities. Under that agreement:
| • | We purchased from one holder of our securities, for a total consideration of $105,000; a warrant to purchase common stock that entitled the holder to purchase up to 30,000 shares of our common stock; a warrant to purchase common stock that entitled the holder to purchase up to 23,118 shares of the our common stock; and a note payable representing $150,000 in principal amount of indebtedness, plus accrued and unpaid interest, owed to the holder; |
| • | We purchased from another holder of our securities, for a total consideration of $420,000: a warrant to purchase common stock that entitled the holder to buy 120,000 shares of our common stock; and a note payable representing $600,000 in principal amount of indebtedness, plus accrued and unpaid interest, owed to the holder; and |
| • | We purchased 541,732 of our shares of common stock from the other two holders, for a total consideration of $216,693. |
To finance the repurchase of these securities under the Securities Purchase Agreement and to obtain additional working capital, we issued 1,875,005 shares of our common stock to Berlwood for $1,000,000, or a per share purchase price of approximately $0.53.
On February 7, 2003, we issued 375,001 shares of our common stock in exchange for $200,000 in accordance with the November 13, 2002 financing commitment provided by Berlwood.
On each of January 27, 2003 and January 29, 2003, we issued 187,500 shares of our common stock in exchange for $100,000 in accordance with the November 13, 2002 financing commitment provided by Berlwood.
The issuances were deemed exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act, as a transaction not involving any public offering.
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Item 6. Exhibits and Reports on Form 8-K
(a) The following exhibits are filed as part of this quarterly report.
| Exhibit No. | Sequential Description | |
| 2.1 | Agreement and Plan of Merger, dated March 28, 2001, among Emergisoft Holding, Inc., a Nevada corporation (f/k/a Pierce International Discovery, Inc.), EMS Acquisition Corp. and Emergisoft Holding, Inc., a Delaware corporation (filed as Exhibit 2.1 to Emergisoft’s Form 8-K filed June 4, 2001 and incorporated herein by reference). | |
| 3.1 | Articles of Incorporation of Emergisoft Holding, Inc. (filed as Exhibit 3.1 to Emergisoft’s Form 8K-A filed August 2, 2001 and incorporated herein by reference). | |
| 3.2 | Articles of Amendment to the Articles of Incorporation, dated May 9, 1999 (filed as Exhibit 3.2 to Emergisoft’s Form 8K-A filed August 2, 2001 and incorporated herein by reference). | |
| 3.4 | Articles of Amendment to the Articles of Incorporation, dated January 17, 2001 (filed as Exhibit 3.4 to Emergisoft’s Form 8K-A filed August 2, 2001 and incorporated herein by reference). | |
| 3.5 | Bylaws of Emergisoft Holding, Inc. (filed as Exhibit 3.5 to Emergisoft’s Form 8K-A filed August 2, 2001 and incorporated herein by reference). | |
| 4.1 | Investment Letter and Grant of Repurchase Right, dated October 24, 2001 (filed as Exhibit 4.1 to Emergisoft’s Form 8-K filed November 8, 2001 and incorporated herein by reference). | |
| 4.2 | Letter Agreement between Berlwood Five, Ltd. and Emergisoft Holding, Inc., dated October 24, 2001 (filed as Exhibit 4.2 to Emergisoft’s Form 8-K filed November 8, 2001 and incorporated herein by reference). | |
| 4.3 | Letter Agreement between Woodcrest Capital LLC, Westpoint Investors Limited Partnership and Emergisoft Holding, Inc., dated October 24, 2001 (filed as Exhibit 4.3 to Emergisoft’s Form 8-K filed November 8, 2001 and incorporated herein by reference). | |
| +10.1 | Emergisoft Holding, Inc. 2001 Stock Incentive Plan (filed as Exhibit 10.1 to Emergisoft’s Form 10-KSB filed on April 1, 2002 and incorporated herein by reference). | |
| +10.2 | Emergisoft Holding, Inc. 2001 Non-Employee Director Stock Option Plan (filed as Exhibit 10.2 to Emergisoft’s Form 10-KSB filed on April 1, 2002 and incorporated herein by reference). | |
| 10.3 | Financing Commitment by Berlwood Five, Ltd., dated November 13, 2002 (filed as Exhibit 10.3 to Emergisoft’s Form 10-QSB filed on November 14, 2002 and incorporated herein by reference). | |
| *31 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | |
| *32 | Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | |
| * | Filed herewith |
| + | Identifies management contracts and compensatory plans or arrangements |
(b) We filed the following reports on Form 8-K during the fiscal quarter ended June 30, 2003:
None
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Emergisoft Holding, Inc. | ||||||||
Date: August 13, 2003 | By: | /s/ Ash Huzenlaub | ||||||
Ash Huzenlaub Chairman of the Board, President and Chief Executive Officer | ||||||||
By: | /s/ Ann Crossman | |||||||
Ann Crossman Controller, Secretary and Treasurer | ||||||||
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