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 SEPTEMBER 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 (IRS Employer
of incorporation or organization) Identification Number)
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 November 14, 2002:
Class: Common Stock, par value $.001 Shares outstanding: 15,642,367
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
September 30, 2002 (unaudited) and December 31, 2001
Consolidated Statements of Operations
Three and nine months ended September 30, 2002 and 2001 (unaudited)
Consolidated Statements of Cash Flows
Nine months ended September 30, 2002 and 2001 (unaudited)
Consolidated Statement of Changes in Stockholders' Deficit
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
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
September 30, 2002 December 31, 2001
------------------ -----------------
(Unaudited)
Assets
Current assets:
Cash and cash equivalents $ 863,204 $ 661,509
Trade accounts receivable, net of allowance for
doubtful accounts of $0 and $26,000, respectively 66,251 104,880
Other 18,000 -
-----------------------------------------
Total current assets 947,455 766,389
Equipment and fixtures, net 456,094 442,152
Other 112,527 42,417
-----------------------------------------
Total assets $ 1,516,076 $ 1,250,958
=========================================
Liabilities and Stockholders' Deficit
Current liabilities:
Accounts payable and accrued expenses $ 463,444 $363,340
Notes payable, net of discounts 127,573 328,564
Notes payable with Related Parties, net of discounts 1,023,782 -
Deferred revenue 124,478 153,803
-----------------------------------------
Total current liabilities 1,739,277 845,707
Notes payable with Related Parties - long-term, net
of discounts - 410,536
-----------------------------------------
Total liabilities 1,739,277 1,256,243
Commitments and contingencies - -
Stockholders' deficit:
Common Stock, $.001 par value, 37,500,000 shares
authorized, 14,704,864 and 6,193,891 issued and
outstanding at September 30, 2002 and December 31,
2001, respectively 14,705 6,194
Additional capital 24,614,513 20,515,733
Deferred compensation (30,465) (428,620)
Accumulated deficit (24,821,954) (20,098,592)
-----------------------------------------
Total stockholders' deficit (223,201) (5,285)
-----------------------------------------
Total liabilities and stockholders' deficit $ 1,516,076 $ 1,250,958
=========================================
See accompanying notes
3
Emergisoft Holding, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended Nine Months Ended
September 30 September 30
2002 2001 2002 2001
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue $ 80,254 $ 89,706 $ 239,187 $ 278,430
Cost of revenue 3,368 7,022 14,921 8,814
General and administrative 846,262 975,459 3,167,407 2,900,290
Product development 375,353 587,167 1,041,162 2,359,312
------------------------------------------------------------------------
Total operating expenses 1,224,983 1,569,648 4,223,490 5,268,416
Loss from operations (1,144,729) (1,479,942) (3,984,303) (4,989,986)
Interest expense 250,741 215,894 747,617 225,049
Interest income (750) (61) (8,558) (46,123)
------------------------------------------------------------------------
Loss before extraordinary gain on
extinguishment of debt (1,394,720) (1,695,775) (4,723,362) (5,168,912)
Gain on extinguishment of debt - - - (196,132)
------------------------------------------------------------------------
Net loss $ (1,394,720) $ (1,695,775) $ (4,723,362) $ (4,972,780)
========================================================================
Basic and diluted net loss per share $ (.11) $ (.69) $ (.44) $ (2.04)
========================================================================
Weighted average shares used to compute
basic and diluted net loss per share 13,054,044 2,443,690 10,687,687 2,440,264
========================================================================
See accompanying notes
4
Emergisoft Holding, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended September 30
2002 2001
---------------------------------
(Unaudited) (Unaudited)
Operating Activities
Net loss $ (4,723,362) $ (4,972,780)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 68,866 53,943
Amortization of debt discount 616,380 203,874
Amortization of deferred compensation 398,155 568,718
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 38,629 22,734
Other assets (88,110) (18,759)
Deferred revenue (29,325) (83,164)
Accounts payable and accrued expenses 100,104 (206,240)
---------------------------------
Net cash used in operating activities (3,618,663) (4,430,025)
Investing Activity
Purchase of equipment and fixtures (82,808) (148,453)
---------------------------------
Cash used in investing activity (82,808) (148,453)
Financing Activities
Repayment of notes payable and line of credit (196,834) (182,711)
Proceeds from notes payable - 1,350,000
Proceeds from issuance of common stock and
exercise of options 4,100,000 8,042
---------------------------------
Net cash provided by financing activities 3,903,166 1,175,331
---------------------------------
Net increase (decrease) in cash and cash
equivalents 201,695 (3,403,147)
Cash and cash equivalents, beginning of year 661,509 3,415,040
---------------------------------
Ending cash and cash equivalents $ 863,204 $ 11,893
=================================
Supplemental cash flow information: -
Non-cash activities:
Additional capital recorded for fair value of
warrants issued to convertible note-holders $ - $ 1,350,000
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' Deficit
As of September 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 8,500,010 8,500 4,091,500 - - 4,100,000
Common stock issued upon
conversion of convertible
notes 10,963 11 7,280 - - 7,291
Amortization of deferred
compensation - - - 398,155 - 398,155
Net loss - - - - (4,723,362) (4,723,362)
-------------------------------------------------------------------------------------------------
Balance at September 30, 2002 14,704,864 $ 14,705 $ 24,614,513 $ (30,465) $ (24,821,954) $ (223,201)
=================================================================================================
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 nine months ended September 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 nine month periods ended September 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 November 13,
2002, we issued 937,503 shares of common stock in exchange for $500,000 in
accordance with the terms of a financing commitment provided by Berlwood Five,
LTD. (Berlwood). Berlwood owns 89.4% of our common stock. On each of September
19, 2002 and June 28, 2002, we issued 1,875,005 shares of common stock in
exchange for $1,000,000 in accordance with the terms of the same financing
commitment. On April 1, 2002 we issued 1,000,000 shares in exchange for $100,000
to Berlwood. In February of 2002, we issued 3,750,000 shares of common stock to
Berlwood in exchange for $2,000,000. On October 24, 2001, we issued 3,750,000
shares of common stock to Berlwood 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 November 13, 2002 we had approximately $655,000 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 nine months of 2002, we acquired
$82,808 in fixed assets and we repaid $196,834 of our indebtedness.
On March 28, 2002, Berlwood committed to provide financing to us of up to
$2,500,000. As of November 13, 2002 we have received the entire commitment.
Shares issued to the stockholder under the financing commitment are subject to a
right of repurchase at $2.40 per share for a period of one year following the
date of issuance.
On November 13, 2002, Berlwood committed to provide additional financing to
us of up to $5,000,000. We may draw on the financing commitment in part, from
time to time and at any time prior to November 13, 2003, by giving Berlwood five
days advance written
7
notice. Upon receipt of a draw request from us, Berlwood will fund the request
in exchange for an issuance of our common stock at a per share price of
$.533332. Shares issued to Berlwood 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. Berlwood's obligation to make the initial
advance and each subsequent advance to or for our account under the financing
commitment shall be subject to our achievement of performance milestones or
criteria to be determined by Berlwood and furnished to us by December 13, 2002.
We utilize significant capital to design, develop and commercialize our
products. We expect that our working capital needs will require us to continue
to seek additional capital financing which 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, including the funds from Berlwood, unless the performance milestones
are met by us and then we will be able to draw on the $5,000,000 funding from
Berlwood discussed above. Additional equity financing may involve substantial
dilution to our then existing stockholders.
At November 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
9
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 "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), 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 September 30, 2002 Compared to the
Quarter Ended September 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 the future, 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. 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.
10
Revenues for the quarter ended September 30, 2002 were $80,254 compared to
$89,706 for the quarter ended September 30, 2001. The revenues for both quarters
are relatively the same reflecting the ongoing contracted 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 on December 31, 2002 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 September 30, 2002 was $3,368
compared to $7,022 for the three months ended September 30, 2001. The decrease
is related to $5,110 in equipment delivered to a customer in the third quarter
of 2001 compared to none in 2002, offset by higher depreciation expense in 2002.
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 $846,262 in the third quarter
of 2002 compared to $975,459 in the same period of 2001. The primary reason for
the decrease of $129,197 is a decrease in stock based compensation expense of
$108,350, legal and accounting fees of $73,922, insurance expense of $13,257,
employee recruiting fees of $14,915 and a decrease in salaries and related taxes
of $63,401. Offsetting these decreased expenses were increases in advertising
and marketing of $38,585, travel expenses of $54,197, printing costs of $4,855
and utilities of $12,250. We expect the trend towards increases in advertising,
marketing and travel expenses to continue as we add to our sales staff.
Product Development Expenses
Development expenses consist primarily of costs related to the development
and testing of our core product EmergisoftED(TM). Development expenses were
$375,353 in the third quarter of 2002 compared to $587,167 in the same period of
2001, a decrease of $211,814. The decrease was primarily due to lower outside
contractor costs related to development. Outside contractor costs in the third
quarter of 2002 were $12,668 compared to $314,614 in the third quarter of 2001,
a $301,946 reduction. The decrease reflects significantly lower resources needed
for our product EmergisoftED(TM). The reduction in outside development was
offset by rental expense related to our new offsite data center of $30,826 and
higher salary and related personnel expenses in the third quarter of 2002 of
$19,214. We will continue to incur costs related to enhancements to our current
products and may at times utilize third party contractors in the future.
Results of Operations for the nine months ended September 30, 2002 compared to
the nine months ended September 30, 2001
Revenue
11
Revenue for the nine months ended September 30, 2002 was $239,187
compared to $278,430 for the nine months ended September 30, 2001, a decrease of
$39,243. The decrease was due primarily to recognition of no license revenues in
2002 compared to license revenues in 2001 of $26,000.
Cost of Revenue
Cost of revenue for the nine months ended September 30, 2002 was
$14,921 compared to $8,814 for the nine months ended September 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
Our general and administrative expenses increased by $267,117 to
$3,167,407 for the nine months ended September 30, 2002 compared to $2,900,290
for the same period in 2001. This increase is related to increases in legal
expenses of $54,273, travel of $135,925, advertising and marketing expenses of
$132,704, utilities of $39,060 and increases in expenses such as printing and
mailing costs related to our annual reporting to stockholders of $23,141. These
increases were offset by a reduction in stock based compensation expense of
$173,196. We expect the trend toward increased expenses related to our sales and
marketing and travel expenses to continue as we market our products, and
increase our sales staff.
Product Development Expenses
Product development expenses consist of costs related to the
development of EmergisoftED(TM) and other products that we may develop. Product
development expenses decreased by $1,318,150 for the nine month period ended
September 30, 2002 to $1,041,162 compared to $2,359,312 for the nine month
period ended September 30, 2001. The decrease is primarily due to the decreased
use of outside contractors in the first three quarters of 2002 compared to the
same period in 2001. For the nine month period ended September 30, 2002 outside
contractor expenses were $41,400 compared to $1,752,340 in the same period of
2001, a decrease of $1,710,940. Expenses related to salary and taxes for
internal personnel increased by $412,354 in the first nine months of 2002
compared to the same period in 2001, offsetting the decrease in third party
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. On January 8, 2001, the court granted our motion for summary judgement,
dismissing all the former officer's claims. The case is now on appeal, where it
has been briefed and argued. We are now awaiting a decision.
12
The former officer also has made us a party in his divorce action which
is pending in State District Court in Tarrant County (Ft. Worth), Texas. Many of
the claims asserted in this action are the same or essentially the same as those
dismissed by the federal court. The court has dismissed part of the claims,
severed the remaining claims from divorce action, and stayed the severed claims
pending a ruling on the federal appeal.
We intend to continue to defend these claims vigorously.
On June 18, 2002, we filed suit in Tarrant County, Texas, 96/th/ 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. The litigation is currently in the preliminary discovery phase.
Liquidity and Capital Resources
We have historically financed our operations primarily through private
placements of our common stock and advances from stockholders. On November 13,
2002, we issued 937,503 shares of common stock in exchange for $500,000 in
accordance with the terms of a financing commitment provided by Berlwood Five,
LTD. (Berlwood). Berlwood owns 89.4% of our common stock. On each of September
19, 2002 and June 28, 2002, we issued 1,875,005 shares of common stock in
exchange for $1,000,000 in accordance with the terms of the same financing
commitment. On April 1, 2002 we issued 1,000,000 shares in exchange for $100,000
to Berlwood. In February of 2002, we issued 3,750,000 shares of common stock to
Berlwood in exchange for $2,000,000. On October 24, 2001, we issued 3,750,000
shares of common stock to Berlwood 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 November 13, 2002 we had approximately $655,000 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 nine months of 2002, we
acquired $82,808 in fixed assets and we repaid $196,834 of our indebtedness.
On March 28, 2002, Berlwood committed to provide financing to us of up
to $2,500,000. As of November 13, 2002 we have received the entire commitment.
Shares issued to the stockholder under the financing commitment are subject to a
right of repurchase at $2.40 per share for a period of one year following the
date of issuance.
On November 13, 2002, Berlwood committed to provide additional
financing to us of up to $5,000,000. We may draw on the financing commitment in
part, from time to time and at any time prior to November 13, 2003, by giving
Berlwood five days advance written notice. Upon receipt of a draw request from
us, Berlwood will fund the request in exchange for an issuance of our common
stock at a per share price of $.533332. Shares issued to Berlwood under the
13
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. Berlwood's obligation
to make the initial advance and each subsequent advance to or for our account
under the financing commitment shall be subject to our achievement of
performance milestones or criteria to be determined by Berlwood and furnished to
us by December 13, 2002.
We utilize significant capital to design, develop and commercialize our
products. We expect that our working capital needs will require us to continue
to seek additional capital financing which 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, including the funds from Berlwood, unless the performance milestones
are met by us and then we will be able to draw on the $5,000,000 funding from
Berlwood discussed above. Additional equity financing may involve substantial
dilution to our then existing stockholders.
At November 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 September 30, 2002, we had an accumulated deficit of
$24,821,954. 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 to fund our operations.
If we do not achieve certain performance criteria that are part of a
recent financing commitment from our major stockholder, we may require
additional financing from other sources, and we may be unable to obtain such
additional financing on favorable terms or at all. In the event we fail to meet
the performance criteria referred to above or we are unable to locate other
sources for financing, then we may be required to substantially reduce or
curtail our activities.
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. Issuance of our common
stock to our major stockholder pursuant to the financing commitment referred to
above will cause significant dilution to our stockholders. If we issue
additional equity securities to raise capital from sources other than our major
stockholder, our stockholders may experience significant dilution and the new
securities may have rights, preferences or privileges greater than those of our
existing stockholders.
Dependence on Principal Product
We 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
14
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 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 89.4% 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
16
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. 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.
17
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.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Based on their most recent evaluation, which was completed within 90
days of the filing of this quarterly report on Form 10-QSB the Company's Chief
Executive Officer and Principal Accounting Officer/Chief Financial Officer
believe that the Company's disclosure controls and procedures were adequate and
were designed to ensure that material information relating to the Company,
including its consolidated subsidiaries, would be made known to them by others
within the Company.
Changes in Internal Controls
There were no significant changes in the Company's internal controls
that could significantly affect its disclosure controls and procedures
subsequent to the date of their evaluation
18
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
On September 19, 2002, Berlwood Five, Ltd., our major shareholder, 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. The sale of the
shares of common stock were made in reliance on the exemption from registration
provided by Section 4(2) of the Securities Act of 1933, as amended.
Item 5.
On November 12, 2002, we issued 937,503 shares of common stock in
exchange for $500,000 in accordance with the terms of a financing commitment
provided by Berlwood Five, Ltd., our major stockholder. This was the final
$500,000 available to us under the $2,500,000 financing commitment. Issuance of
the shares to Berlwood Five, Ltd. increased the total number of our issued and
outstanding shares from 14,704,864 to 15,642,367 and increased Berlwood's
percentage ownership interest in us from 88.67% to 89.35%.
On November 13, 2002, Berlwood committed to provide additional
financing to us of up to $5,000,000. We may draw on the financing commitment in
whole or in part, from time to time and at any time prior to November 13, 2003,
by giving Berlwood five days advance written notice. Upon receipt of a draw
request from us, Berlwood will fund the request in exchange for an issuance of
our common stock at a per share price of $.533332. Shares issued to Berlwood
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. Berlwood's
obligation to make the initial advance and each subsequent advance to or for our
account under the financing commitment shall be subject to our achievement of
performance milestones or criteria to be determined by Berlwood and furnished to
us by December 13, 2002.
Item 6. Exhibits and Reports on Form 8-K
(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).
19
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).
10.3 Financing Commitment by Berlwood Five, Ltd., dated November 13, 2002.
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
September 30, 2002
On July 10, 2002, we announced that Berlwood Five, Ltd., our major
stockholder, made an additional $1,000,000 investment in us on June 28, 2002.
Berlwood received 1,875,005 shares of our common stock in the transaction.
On September 19, 2002 we announced that Berlwood Five, Ltd., our major
stockholder, made an additional $1,000,000 investment in us on September 19,
2002. Berlwood received 1,875,005 shares of our common stock in the transaction.
Signatures
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: November 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
20
Principal Accounting Officer
21
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ash Huzenlaub, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Emergisoft Holding,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Ash Huzenlaub
- -----------------
Ash Huzenlaub
Chief Executive Officer
22
CERTIFICATION PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ann Crossman, certify that:
1. I have reviewed this quarterly report on Form 10-QSB of Emergisoft Holding,
Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this quarterly
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the effectiveness of
the disclosure controls and procedures based on our evaluation as of the
Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on our
most recent evaluation, to the registrant's auditors and the audit committee of
registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies in the design or operation of internal controls
which could adversely affect the registrant's ability to record, process,
summarize and report financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: November 14, 2002
/s/ Ann Crossman
- ----------------
Ann Crossman
Corporate Controller and Treasurer
23