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, 2002
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 (IRS Employer Identification Number)
incorporation or organization)
2225 Avenue J, Arlington, Texas 76006
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (817) 633-6665
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 14, 2002:
CLASS: Common Stock, par value $.001 SHARES OUTSTANDING: 12,829,859
Transitional Small Business Disclosure Format
(check one)
Yes __ No X
1
EMERGISOFT HOLDING, INC. AND SUBSIDIARIES
INDEX
Facing Sheet
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
June 30, 2002 (unaudited) and December 31, 2001
Consolidated Statements of Operations
Three and six months ended June 30, 2002 and 2001 (unaudited)
Consolidated Statements of Cash Flows Six months ended June 30, 2002
and 2001 (unaudited)
Consolidated Statement of Stockholders' Equity (Deficit)
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
PART I. - FINANCIAL INFORMATION
Emergisoft Holding, Inc. and Subsidiaries
Consolidated Balance Sheets
June 30, 2002 December 31, 2001
---------------- -----------------
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 1,231,840 $ 661,509
Trade accounts receivable, net of allowance for
doubtful accounts of $0 and $26,000 respectively 41,404 104,880
Other 20,000 -
-------------------------------------
Total current assets 1,293,244 766,389
Equipment and fixtures, net 409,895 442,152
Other 92,945 42,417
-------------------------------------
Total assets $ 1,796,084 $ 1,250,958
=====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued expenses $ 521,023 363,340
Notes payable, net of discounts 197,004 328,564
Notes payable with Related Parties, net of discounts 817,120 -
Deferred revenue 93,580 153,803
-------------------------------------
Total current liabilities 1,628,727 845,707
Notes payable with Related Parties - long-term, net
of discounts - 410,536
-------------------------------------
Total liabilities 1,628,727 1,256,243
Commitments and contingencies - -
Stockholders' equity (deficit):
Common Stock, $.001 par value, 37,500,000 shares
authorized, 12,829,859 and 6,193,891 issued and
outstanding at June 30, 2002 and December 31, 2001,
respectively 12,830 6,194
Additional capital 23,616,388 20,515,733
Deferred compensation (34,628) (428,620)
Accumulated deficit (23,427,233) (20,098,592)
-------------------------------------
Total stockholders' equity (deficit) 167,357 (5,285)
-------------------------------------
Total liabilities and stockholders' equity $ 1,796,084 $ 1,250,958
=====================================
See accompanying notes
3
Emergisoft Holding, Inc. and Subsidiaries
Consolidated Statements of Operations
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
2002 2001 2002 2001
--------------- -------------- ------------- --------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue 78,842 $ 79,283 $ 158,933 $ 188,724
Cost of revenue 8,575 1,792 11,553 1,792
General and administrative 1,018,794 951,083 2,321,145 1,924,831
Product development 276,232 818,766 665,809 1,772,145
-------------------------------------------------------------------
Total operating expenses 1,303,601 1,771,641 2,998,507 3,698,768
Loss from operations (1,224,759) (1,692,358) (2,839,574) (3,510,044)
Interest expense 255,770 2,059 496,876 9,157
Interest income (3,638) (22,263) (7,809) (46,063)
-------------------------------------------------------------------
Loss before extraordinary gain on
extinguishment of debt (1,476,891) (1,672,154) (3,328,641) (3,473,138)
Gain on extinguishment of debt - (196,132) - (196,132)
Net loss $ (1,476,891) $ (1,476,022) $ (3,328,641) $ (3,277,006)
===================================================================
Basic and diluted net loss per share $ (.13) $ (.60) $ (.35) $ (1.34)
===================================================================
Weighted average shares used to compute
basic and diluted net loss per share 10,975,458 2,442,373 9,504,509 2,438,550
===================================================================
See accompanying notes
4
Emergisoft Holding, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
SIX MONTHS ENDED JUNE 30
2002 2001
-------------------------------------
(UNAUDITED) (UNAUDITED)
OPERATING ACTIVITIES
Net loss $ (3,328,641) $ (3,277,006)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 45,041 17,312
Amortization of debt discount 409,718 33,153
Amortization of deferred compensation 393,992 456,204
Gain on extinguishment of debt - (196,132)
Stock-based expenses for equity issued to
vendors for services - 197,781
Changes in assets and liabilities:
Accounts receivable 63,476 47,010
Other assets (70,528) (31,173)
Deferred revenue (60,223) (42,130)
Accounts payable and accrued expenses 157,683 (148,907)
-------------------------------------
Net cash used in operating activities (2,389,482) (2,943,888)
INVESTING ACTIVITY
Purchase of equipment and fixtures (12,784) (97,838)
-------------------------------------
Cash used in investing activity (12,784) (97,838)
FINANCING ACTIVITIES
Repayment of notes payable and line of credit (134,694) (145,545)
Proceeds from notes payable - 8,042
Proceeds from issuance of common stock and
exercise of options 3,107,291 -
-------------------------------------
Net cash provided by (used in) financing
activities 2,972,597 (137,503)
-------------------------------------
Net increase (decrease) in cash and cash
equivalents 570,331 (3,179,229)
Cash and cash equivalents, beginning of year 661,509 3,415,040
-------------------------------------
Ending cash and cash equivalents $ 1,231,840 $ 235,811
=====================================
Supplemental cash flow information:
Non-cash activities:
Stock-based expenses for equity issued to
vendors for services $ - $ 197,781
Common stock issued in connection with
conversion of convertible note 7,291 7,768
See accompanying notes
5
Emergisoft Holding, Inc. and Subsidiaries
Consolidated Statement of Changes in Stockholders' Equity (Deficit)
As of June 30, 2002
COMMON STOCK
------------------------- ADDITIONAL DEFERRED ACCUMULATED
SHARES PAR VALUE CAPITAL COMPENSATION DEFICIT TOTAL
------------------------------------------------------------------------------------------
Balance at December 31, 2001 6,193,891 $ 6,194 $ 20,515,733 $ (428,620) $ (20,098,592) $ (5,285)
Common stock issued in
private placements 6,625,005 6,625 3,093,375 - - 3,100,000
Common stock issued upon
conversion of convertible
notes 10,963 11 7,280 - - 7,291
Amortization of deferred
compensation - - - 393,992 - 393,992
Net loss - - - - (3,328,641) (3,328,641)
------------------------------------------------------------------------------------------
Balance at June 30, 2002 12,829,859 $ 12,830 $ 23,616,388 $ (34,628) $ (23,427,233) $ 167,357
==========================================================================================
See accompanying notes
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of Emergisoft
Holding, Inc. and Subsidiaries for the three and six months ended June 30, 2002
and 2001 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, 2002 are not necessarily indicative of the results
that may be expected for the year ended December 31, 2002. The balance sheet at
December 31, 2001 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.
On March 13, 2002, we declared a 20-for-1 reverse stock split effective
March 31, 2002. The effect of this reverse stock split has been retroactively
reflected throughout the 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. On June 28, 2002,
we issued 1,875,005 shares of common stock in exchange for $1,000,000 in
accordance with the terms of a financing commitment provided by our major
stockholder. On April 1, 2002 we issued 1,000,000 shares in exchange for
$100,000 to the same stockholder. In February of 2002, we issued 3,750,000
shares of common stock to the same stockholder in exchange for $2,000,000. On
October 24, 2001, we issued 3,750,000 shares of common stock to the same
stockholder in exchange for $2,000,000.
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 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.
As of August 14, 2002 we had approximately $607,000 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 2002 we acquired
$12,784 in fixed assets and we repaid $134,694 of our indebtedness.
On March 28, 2002, a current stockholder of ours committed to provide
financing to us of up to $2,500,000. On June 28, 2002, we requested and received
$1,000,000 of that commitment. We may draw on the remaining $1,500,000 of the
financing commitment in whole or in part, from time to time and at any time
prior to June 30, 2003, by giving the stockholder five days advance written
notice. Upon receipt of a draw request from us, the stockholder will fund the
request in exchange for an issuance of our common stock at a per share price of
$.533332. Shares issued to the stockholder under the financing commitment will
be subject to a
7
right of repurchase at $2.40 per share for a period of one year following the
date of issuance.
We utilize significant capital to design, develop and commercialize our
products. During 2002, 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. This additional capital
financing 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 14, 2002, we had no material commitments for capital
expenditures.
8
MANAGEMENT'S DISCUSSION AND ANALYSIS
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements. Forward-looking
statements include statements concerning plans, objectives, goals, strategies,
future events or performance and underlying assumptions and other statements
that are other than statements of historical facts.
Words such as, "expects," "anticipates," "estimates," "believes" and
similar expressions are intended to identify forward-looking statements. Such
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those projected. Such risks and uncertainties
are set forth below.
Our expectations, beliefs and projections are expressed in good faith
and are believed to have a reasonable basis, including, without limitation, our
examination of historical operating trends, data contained in our records and
other data available from third parties, but there can be no assurance that our
expectations, beliefs or projections will result, be achieved or be
accomplished.
In addition to other factors and matters discussed elsewhere in this
document, the following are important factors that, in our view, could have
material adverse effects on our financial condition and results of operations:
the risk factors discussed in this document; general economic, market or
business conditions; changes in laws or regulations; acceptance of our principal
software product, EmergisoftED(TM) formerly, CareLyncED, by the marketplace;
competition from developers of software products which perform functions similar
to the functions performed by EmergisoftED(TM); the successful implementation of
EmergisoftED(TM) in hospital emergency rooms who choose to utilize it; and our
ability to raise capital in sufficient amounts and on acceptable terms.
Overview
We were incorporated under the laws of the State of Colorado in 1989 but
became inactive in July 1997. In 2001, we created and later merged with a Nevada
subsidiary and became a Nevada corporation.
In May 2001, we changed our name from Pierce International Discovery, Inc.
to Emergisoft Holding, Inc. In addition, on May 25, 2001, EMS Acquisition Corp.,
a Delaware corporation and our wholly-owned subsidiary, merged with and into
Emergisoft Holding, Inc., a Delaware corporation (Emergisoft Delaware). In
accordance with an Agreement and Plan of Merger, we issued one share of our
common stock in exchange for each one share of Emergisoft Delaware common stock
outstanding immediately prior to the closing of the transaction. Pursuant to a
Share Cancellation Agreement by and between us, Emergisoft Delaware and Robert
Kropf, our primary stockholder prior to the merger, 1,168,236 of Robert Kropf's
shares were canceled effective upon the consummation of the merger. The former
stockholders of Emergisoft Delaware owned approximately 94.6% of our common
stock upon consummation of the merger.
As a result of the merger, we are now a holding company with Emergisoft
Delaware as a wholly-owned subsidiary. Emergisoft Delaware also has a
wholly-owned subsidiary, Emergisoft Corporation, a Delaware corporation. We and
our direct and indirect subsidiaries operate from our principal offices in
Arlington, Texas. In the remainder of this document the terms "we," "our," and
"us" refer to Emergisoft Holding, Inc., a Nevada corporation, and, where
appropriate, to our direct and indirect subsidiaries. The term
9
"Emergisoft" refers to Emergisoft Holding, Inc., a Delaware corporation and its
direct subsidiary.
Business of Emergisoft
Emergisoft designs, installs, and maintains software systems for hospitals
that wish to make a transformation from paper and pen based medical records to
an electronic environment through the use of an Emergency Department Information
System (EDIS).
The installation of Emergisoft designed systems reduces the chaos found in
hectic emergency departments by tracking patients from arrival (triage) through
departure (discharge). There are over 103 million emergency visits a year in the
United States. We believe that implementation of electronic systems by hospitals
and physicians will improve the flow of patients, and more importantly, will
increase the prevention of clinical medical errors, thereby creating a safer and
more efficient emergency department and improving healthcare.
Emergisoft markets two separate products, EmergisoftED(TM) and
EmergisoftPF(TM) and provides various consulting services for use in hospital
emergency departments and business offices. Our flagship product,
EmergisoftED(TM) (formerly called CareLyncED), is a fully comprehensive system
that manages the complete flow of patients from triage all the way through
discharge (including prescriptions, medical records, and the creation of a
graphical record of the patient's injury). In July of 2002, we launched a newly
developed software product called EmergisoftPF(TM) designed to provide
demographic and real-time insurance eligibility patient data to healthcare
provider organizations. The software is designed to improve the accuracy of
submitted insurance claims and improve the billing collection rates of
healthcare providers.
Results of Operations for the Quarter Ended June 30, 2002 Compared to the
Quarter Ended June 30, 2001
Revenue
We recognize software license revenues consistent with Financial Accounting
Standards Board (FASB) Statement of Position 97-2, SOFTWARE REVENUE RECOGNITION
and Staff Accounting Bulletin 101, REVENUE RECOGNITION IN FINANCIAL STATEMENTS.
These statements provide guidance on applying generally accepted accounting
principles in recognizing revenue.
During 2001, our revenues were generated by, deferred license fees,
maintenance fees and equipment sales related to our ICUS based product. We have
replaced the ICUS based product called Emergisoft with a newly developed product
called EmergisoftED(TM) and no longer sell the ICUS based product. We continue
to provide software support to our existing customer base using the ICUS based
product. In 2002 we expect to generate sales primarily through the sale and
support of EmergisoftED(TM). There can be no assurances that we will be
successful in our efforts to sell EmergisoftED(TM).
We 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
estimate that the sales cycle for EmergisoftED(TM) is approximately ten to
twelve months long. No assurances can be given that any of the marketing efforts
will result in revenue.
We have insufficient revenues under contract to support our current level
of operations and no assurances can be given that our revenues will increase to
a level that will allow us to achieve profitability.
Revenues for the quarter ended June 30, 2002 were $78,842 compared to
$79,283 for the quarter ended June 30, 2001. The revenues for both quarters are
relatively the same reflecting the ongoing contracted
10
maintenance and support of our existing customer base. We currently have seven
clients contracted for support and maintenance of the ICUS based system. We
intend to "sunset" the ICUS based product within one year and migrate our
existing clients to EmergisoftED(TM). No assurances can be given that our
existing clients will choose to install EmergisoftED(TM).
Cost of Revenue
Cost of revenue for the three months ended June 30, 2002 was $8,575
compared to $1,792 for the three months ended June 30, 2001. The increase is due
to costs related to our newly developed product EmergisoftPF(TM).
In the future, we expect additional cost of revenues related to client support
and maintenance agreements as we build a customer base that will be using our
new product EmergisoftED(TM). The majority of these future costs will be related
to increased headcount in customer support positions and other technical areas
such as installation and project management professionals.
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 were $1,018,794 in the second
quarter of 2002 compared to $951,083 in the same period of 2001. Although the
total expenses are relatively unchanged, there were changes in the detail of
expenses within the general and administrative category. For the three months
ended June 30, 2002 compared to the same period in 2001, legal expenses
increased by $88,878, advertising expenses increased $63,501 and sales related
travel increased $41,992. Offsetting these increased expenses were, reductions
in recruiting fees of $45,586, and reduced stock based compensation expense of
$109,316.
Product Development Expenses
Development expenses consist primarily of costs related to the development
and testing of our core product EmergisoftED(TM). Development expenses were
$276,232 in the second quarter of 2002 compared to $818,766 in the same period
of 2001, a decrease of $542,534. The decrease was primarily due to lower outside
contractor costs related to development. Outside contractor costs in the second
quarter of 2002 were $10,534 compared to $626,028 in the second quarter of 2001,
a $615,494 reduction. The decrease reflects significantly lower resources needed
for our product EmergisoftED(TM). The reduction in outside development was
offset by higher salary and related personnel expenses in the second quarter of
2002 of $69,215. We will continue to incur development costs related to
enhancements to our current products. We expect the trend toward reduced outside
development costs to continue in 2002.
11
Results of Operations for the six months ended June 30, 2002 compared to the six
months ended June 30, 2001
Revenue
Revenue for the six months ended June 30, 2002 was $158,933 compared to
$188,724 for the six months ended June 30, 2001, a decrease of $29,791. The
decrease was due primarily to no recognition of license revenues in 2002
compared to license revenues in 2001 of $26,000.
Cost of Revenue
Cost of revenue for the six months ended June 30, 2002 was $11,553 compared
to $1,792 for the six months ended June 30, 2001. The increase is due to costs
related to our newly developed product EmergisoftPF.
In the future, we expect additional cost of revenues related to client
support and maintenance agreements as we build a customer base that will be
using our new product EmergisoftED(TM). The majority of these future costs will
be related to increased headcount in customer support positions and other
technical areas such as installation and project management professionals.
General and Administrative Expenses
Our general and administrative expenses increased by $396,314 to $2,321,145
for the six months ended June 30, 2002 compared to $1,924,831 for the same
period in 2001. This increase is related to increases in legal expenses of
$109,013, salaries and related taxes of $68,917, advertising of $85,412, sales
related travel of $63,459, insurance of $72,751 and increases in expenses such
as printing and mailing costs related to our annual reporting to stockholders of
$18,579. We expect the trend toward increased expenses related to our sales and
marketing functions to continue as we market our products.
Product Development Expenses
Development expenses consist of costs related to the development of
EmergisoftED(TM) and other products that we may develop. Product development
expenses decreased by $1,106,336 for the six month period ended June 30, 2002 to
$665,809 compared to $1,772,145 for the six-month period ended June 30, 2001.
The decrease is primarily due to the decreased use of outside contractors in the
first two quarters of 2002 compared to the same period in 2001. For the six
month period ended June 30, 2002 outside contractor expenses were $138,625
compared to $1,437,726 in the same period of 2001, a decrease of $1,299,101.
Expenses related to salary and taxes for internal personnel increased by
$204,838 in the first six months of 2002 compared to the same period in 2001,
offsetting the decrease in external contractors. We use our own personnel as
well as outside contractors in the development efforts of our products. We will
continue to incur expenses related to enhancements and testing of our current
products.
Legal Proceedings
In December 1999, a stockholder and former officer of Emergisoft filed suit
in federal court alleging that we were infringing on a copyright for the ICUS
database and tool set that he claims to own personally. Our ICUS based product
offering uses ICUS, a proprietary database, at all current customer sites. We
believe we have an existing license to use and sublicense ICUS.
In January 2000, the federal court issued a preliminary injunction allowing
us to keep one copy of the ICUS source code for purposes of providing support to
our current customers, but prohibiting us from selling and/or marketing our
ICUS-based product. On January 8, 2001, the federal court granted our motion for
12
summary judgment, dismissing all of the former officer's claims and dissolving
the preliminary injunction. The federal court is now reviewing the plaintiff's
motion to set aside that summary judgment and our motion for attorney's fees.
Oral arguments are scheduled for September 6, 2002. The former officer also has
made us a party in his divorce action, which is pending in a Tarrant County,
Texas district court. Many of the claims asserted in this action are the same or
essentially the same as the claims filed in federal court, which were dismissed
by the federal court.
On June 18, 2002, we filed suit in Tarrant County, Texas, 96th District
Court, against TevixMD Corporation, d/b/a TevixMD, Inc. seeking a declaratory
judgment that an Electronic Data Interchange Agreement under which TevixMD
agreed to provide our customers with on-line real time access to patient
eligibility and demographics data, is rescinded and nullified, and that we are
relieved from our duties and obligations under the EDI Agreement.
Representations made to us by TevixMD, upon which we relied in entering into the
EDI Agreement, subsequently proved to be inaccurate in many material respects.
TevixMD's performance under the EDI Agreement was also highly unsatisfactory to
us and our customers. While our current monetary obligations to TevixMD under
the EDI Agreement, if any, are not significant, nullification of the EDI
Agreement is important to us so that there can be no claims made that certain
provisions of the EDI Agreement restrict us from offering EmergisoftPF(TM) to
our current and potential customers.
Liquidity and Capital Resources
We have historically financed our operations primarily through private
placements of our common stock and advances from stockholders. On June 28, 2002,
we issued 1,875,005 shares of common stock in exchange for $1,000,000 in
accordance with the terms of a financing commitment provided by our major
stockholder. On April 1, 2002 we issued 1,000,000 shares in exchange for
$100,000 to the same stockholder. In February of 2002, we issued 3,750,000
shares of common stock to the same stockholder in exchange for $2,000,000. On
October 24, 2001, we issued 3,750,000 shares of common stock to the same
stockholder in exchange for $2,000,000.
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 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.
As of August 14, 2002 we had approximately $607,000 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 2002 we acquired
$12,784 in fixed assets and we repaid $134,694 of our indebtedness.
On March 28, 2002, a current stockholder of ours committed to provide
financing to us of up to $2,500,000. On June 28, 2002, we requested and received
$1,000,000 of that commitment. We may draw on the remaining $1,500,000 of the
financing commitment in whole or in part, from time to time and at any time
prior to June 30, 2003, by giving the stockholder five days advance written
notice. Upon receipt of a draw request from us, the stockholder will fund the
request in exchange for an issuance of our common stock at a per
13
share price of $.533332. Shares issued to the stockholder under the financing
commitment will be subject to a right of repurchase at $2.40 per share for a
period of one year following the date of issuance.
We utilize significant capital to design, develop and commercialize our
products. During 2002, 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. This additional capital
financing 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 14, 2002, we had no material commitments for capital
expenditures.
Risk Factors
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, 2001, we incurred net losses of
$6,648,379. As of June 30, 2002, we had an accumulated deficit of $23,427,233.
Management expects these losses to continue in 2002. 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 will require additional financing, but we may be unable to obtain it on
favorable terms or at all.
We will require the use of additional funding from our equity commitment by
our major stockholder to continue operations through 2002. Beyond 2002 we may
continue to require additional financing to fund our operations. 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 will expect to derive a significant percentage of our revenue from sales
of our core system, EmergisoftED(TM). 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
EmergisoftED(TM) 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
14
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
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.
15
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.
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.
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.
Control by Existing Management and Stockholders
Our primary stockholder, Berlwood Five, Ltd., beneficially owns
approximately 87% of the outstanding shares of our common stock. This level of
ownership allows it to exercise control over our affairs, to elect the entire
Board of Directors and to control the disposition of any matter submitted to a
vote of stockholders.
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
16
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. 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.
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.
17
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
This information has already been disclosed within this report in Part I
- - Management's Discussion and Analysis - Legal Proceedings - and is incorporated
by reference in to this Part II.
Item 2. Changes in Securities
Berlwood Five, Ltd., a current stockholder of ours, made a $100,000
equity investment in us on April 1, 2002. Berlwood received 1,000,000 newly
issued shares of our common stock in the transaction. On June 28, 2002, Berlwood
Five, Ltd made an additional $1,000,000 equity investment in us and received
1,875,005 newly issued shares of common stock in exchange for the investment.
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
Our annual meeting of the stockholders was held on June 21, 2002. The
number of our shares outstanding on the record date of the meeting and the
number of shares represented in person or by proxy at the meeting were as
follows:
Class of Stock Shares Outstanding Number of Shares Present
--------------- ------------------ ------------------------
Common 10,954,854 9,543,950
At the meeting, Mr. Ash R. Huzenlaub, Ms. Kenna J. Bridgmon, Mr. Ron Hellstern,
Mr. Jeff McCurdy, Mr. Jim Ross and Mr. Jason Sear were elected directors to
serve until the next annual meeting of our stockholders. Proxies for the meeting
were solicited pursuant to Regulation 14A under the Securities Exchange Act of
1934, as amended, and there was no solicitation in opposition to the
management's nominees as listed in the proxy statement.
Also during the meeting, ratification of the appointment by the board of
directors of our independent public accountants for the fiscal year ending
December 31, 2002 was received from our stockholders; our 2001 Stock Incentive
Plan was adopted and approved by our stockholders; and our 2001 Non-Employee
Director Stock Option Plan was adopted and approved by our stockholders. All
shares represented at the meeting were voted in favor of the ratification of the
independent public accountants, with no shares abstaining or voting against the
ratification of the independent public accountants. All shares represented at
the meeting were voted in favor of our 2001 Stock Incentive Plan and our 2001
Non-Employee Director Stock Option Plan, with the exception of 28,685 votes
against, and 5,459 abstentions.
Item 5. Other Information
NONE
Item 6. Exhibits and Reports on Form 8-K
18
(a) The exhibits listed on the accompanying Exhibit Index 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 10K-SB 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 10K-SB filed on April
1, 2002 and incorporated herein by reference).
99.1 Certification Pursuant to 18 U.S.C. Section 1350, AS Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
99.2 Certification Pursuant to 18 U.S.C. Section 1350, AS Adopted Pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
+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, 2002
On April 8, 2002 we announced that on March 28, 2002, Berlwood IV, LTD
agreed to a financing commitment of $2,500,000. In the same report we announced
our trading symbol changed due to the reverse split on March 31, 2002.
SIGNATURES
19
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 14, 2002 By: /s/ Ash Huzenlaub
------------------
Ash Huzenlaub
Chairman of the Board
and Chief Executive Officer
By: /s/ Ann Crossman
----------------
Ann Crossman
Corporate Controller and Treasurer
Principal Accounting Officer
20