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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the quarterly period ended MARCH 31, 2001
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OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
For the transition period from to
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Commission file number 0-22019
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HEALTH GRADES, INC.
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(Exact Name of Registrant as Specified in its Charter)
DELAWARE 62-1623449
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
44 UNION BOULEVARD, SUITE 600, LAKEWOOD, COLORADO 80228
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(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (303) 716-0041
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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 registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
On April 30, 2001, 21,273,425 shares of the Registrant's common stock,
$.001 par value, were outstanding.
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Health Grades, Inc. and Subsidiaries
INDEX
PART I. FINANCIAL INFORMATION:
Item 1. Consolidated Balance Sheets
March 31, 2001 and December 31, 2000......................3
Consolidated Statements of Operations -
Three Months Ended March 31, 2001 and 2000................4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2001 and 2000................5
Notes to Consolidated Financial
Statements................................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................9
Item 3. Quantitative and Qualitative Disclosure About
Market Risk..............................................10
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings........................................11
Item 6. Exhibits and Reports on Form 8-K.........................11
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PART I. FINANCIAL INFORMATION
Health Grades, Inc. and Subsidiaries
Consolidated Balance Sheets
MARCH 31 DECEMBER 31
2001 2000
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(UNAUDITED)
ASSETS
Cash and cash equivalents $ 3,755,743 $ 4,797,868
Accounts receivable, net 416,333 827,694
Due from affiliated practices in litigation, net -- 1,944,919
Prepaid expenses, inventories and other 207,225 206,417
Current portion notes receivable 23,913 635,186
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Total current assets 4,403,214 8,412,084
Property and equipment, net 727,180 860,953
Goodwill, net of accumulated amortization of
$1,026,334 and $816,609 in 2001 and 2000, respectively 4,823,666 5,033,391
Other assets 65,641 64,746
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Total assets $ 10,019,701 $ 14,371,174
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LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Accounts payable $ 16,607 $ 69,591
Accrued payroll, incentive compensation and related
expenses 258,434 599,463
Accrued expenses 458,954 646,110
Notes payable 189,446 1,559,213
Deferred income 1,325,957 1,170,009
Income taxes payable 77,045 75,000
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Total current liabilities 2,326,443 4,119,386
Deferred income 83,662 188,021
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Total liabilities 2,410,105 4,307,407
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.001 par value, 2,000,000
Shares authorized, no shares issued or outstanding -- --
Common stock, $0.001 par value, 50,000,000
shares authorized, and 28,832,400 and 28,817,400 shares
issued and outstanding in 2001 and 2000, respectively 28,832 28,817
Additional paid-in capital 87,395,740 87,381,917
Accumulated deficit (66,547,396) (64,266,887)
Treasury stock (13,267,580) (13,080,080)
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Total stockholders' equity 7,609,596 10,063,767
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Total liabilities and stockholders' equity $ 10,019,701 $ 14,371,174
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See accompanying notes to consolidated financial statements
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Health Grades, Inc. and Subsidiaries
Consolidated Statements of Operations
(Unaudited)
THREE MONTHS ENDED
MARCH 31
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2001 2000
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REVENUE:
Ratings and advisory revenue $ 558,862 $ 310,533
Physician practice service fees 136,016 1,579,430
Other 2,709 2,719
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697,587 1,892,682
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COSTS AND EXPENSES:
Ratings and advisory costs and expenses:
Production, content and product development 291,435 618,827
Sales and marketing 371,652 269,309
Physician practice services costs and expenses:
Litigation and other costs 45,087 369,223
General and administrative 2,296,250 2,174,166
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3,004,424 3,431,525
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Loss from operations (2,306,837) (1,538,843)
Other:
Income (loss) on sale of assets and other 325 (336,653)
Interest income 54,566 51,154
Interest expense (28,563) (316,075)
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Loss before income taxes (2,280,509) (2,140,417)
Income tax benefit -- --
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Net loss $ (2,280,509) $ (2,140,417)
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Net loss per share (basic) $ (0.11) $ (0.16)
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Weighted average shares outstanding (diluted) 21,507,758 13,504,008
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Net loss per share (diluted) $ (0.11) $ (0.16)
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Weighted average shares outstanding (diluted) 21,507,758 13,504,008
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See accompanying notes to consolidated financial statements.
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Health Grades, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Unaudited)
THREE MONTHS ENDED MARCH 31
2001 2000
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OPERATING ACTIVITIES
Net loss $ (2,280,509) $ (2,140,417)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation 139,564 241,486
Amortization 209,725 187,435
Bad debt expense 47,405 99,015
Officer notes financing fee -- 347,200
Loss (gain) on disposal of assets (325) 336,653
Non-cash compensation expense-stock options -- 9,644
Retainer warrants 5,400 --
Changes in operating assets and liabilities:
Accounts receivable, net 363,956 (178,986)
Due from affiliated practices in litigation 1,944,919 --
Prepaid expenses and other assets (808) (68,399)
Accounts payable and accrued expenses (240,140) 49,883
Accrued payroll, incentive compensation and
related expenses (341,029) 9,592
Income taxes payable and prepaid and
recoverable income taxes, net 2,045 122,671
Deferred income 51,589 (303,864)
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Net cash used in operating activities (98,208) (1,288,087)
INVESTING ACTIVITIES
Purchases of property and equipment (5,791) (133,351)
Proceeds from sale of medical equipment -- 125,000
Proceeds from sale of equipment 325 --
Increase in other assets (895) (834)
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Net cash used in investing activities (6,361) (9,185)
FINANCING ACTIVITIES
Principal repayments on notes payable (1,369,767) (3,691,672)
Net proceeds from equity financing -- 14,358,592
Repayments from notes receivable 611,273 3,027,711
Purchase of treasury stock (187,500) --
Exercise of common stock options 8,438 45,824
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Net cash (used in) provided by financing activities (937,556) 13,740,455
Net (decrease) increase in cash and cash equivalents (1,042,125) 12,443,183
Cash and cash equivalents at beginning of period 4,797,868 316,767
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Cash and cash equivalents at end of period $ 3,755,743 $ 12,759,950
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See accompanying notes to consolidated financial statements.
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Health Grades, Inc. and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)
March 31, 2001
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated condensed financial statements of Health
Grades, Inc. and subsidiaries (collectively the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and the instructions to Rule 10-01 of Regulation S-X. 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, these statements include all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation of the results
of the interim periods reported herein. Operating results for the three months
ended March 31, 2001 are not necessarily indicative of the results that may be
expected for the year ending December 31, 2001. For further information, refer
to the consolidated financial statements and footnotes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000.
DESCRIPTION OF BUSINESS
Health Grades, Inc. is a healthcare information services company. The Company
grades, or provides the means to assess and compare the quality or
qualifications of, various types of healthcare providers. The Company also
provides profile information for a variety of providers and facilities.
The Company makes this information available to consumers, employers and health
plans to assist them in selecting healthcare providers. For consumers, this
information is available free of charge on the Company's website,
www.healthgrades.com. For employers, the Company provides, for a fee, customized
information designed to encourage employees to utilize quality providers, which
can reduce medical benefit costs as well as indirect costs of lost workdays and
productivity. For health plans, the Company provides, for a fee, customized
information designed to assist them in selecting network providers who can
enhance the quality of care for their members.
The Company also offers services to healthcare providers. For providers who have
received high ratings, the Company offers the opportunity to license its ratings
and trademarks and provide assistance in their marketing programs. For providers
who have not received high ratings, the Company offers quality improvement
services designed to identify deficiencies and improve quality. The Company also
provides limited physician practice management services to musculoskeletal
practices under management services agreements that have terms expiring through
September 2002.
All significant intercompany balances and transactions have been eliminated in
consolidation.
EARNINGS PER SHARE
The calculation of weighted average shares outstanding for the three months
ended March 31, 2001 and 2000 does not included the impact of certain stock
options whose exercise price was less than the average market price of the
common shares because the effect on loss per share would have been antidilutive.
If such options were included in the calculation, weighted average shares
outstanding would have increased by approximately 6,500 and 1.5 million shares,
respectively.
NOTE 2 - SEGMENT DISCLOSURES
Management regularly evaluates the operating performance of the Company by
reviewing results on a product or service provided basis. The Company's
reportable segments are Ratings and Advisory Revenue ("RAR") and Physician
Practice Services ("PPS"). RAR revenue is derived primarily from marketing
arrangements with hospitals and fees related to the licensing of its content
(including set-up fees). PPS revenue is derived primarily from management
services provided to physician practices.
The Company uses net loss before income taxes for purposes of performance
measurement. The measurement basis for segment assets includes intangible
assets.
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Summary information by segment is as follows:
AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31
2001 2000
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RAR
Revenue from external customers $ 558,862 $ 433,283
Interest income 44,669 3,852
Segment net loss before income taxes (946,581) (1,096,899)
Segment assets 5,856,012 6,668,203
Segment asset expenditures 715 125,539
PPS
Revenue from external customers $ 136,016 $ 1,579,430
Interest income 9,897 47,302
Interest expense (28,563) (316,075)
Segment net loss before income taxes (1,333,928) (1,043,518)
Segment assets 22,348,067 35,706,643
Segment asset expenditures 5,076 7,812
A reconciliation of the Company's segment revenue, segment net loss before
income taxes, segment assets and other significant items to the corresponding
amounts in the Consolidated Financial Statements is as follows:
AS OF AND FOR THE THREE MONTHS ENDED
MARCH 31,
2001 2000
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REVENUE
Total for reportable segments $ 694,878 $ 2,012,713
Other revenue 2,709 2,719
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Total consolidated revenue $ 697,587 $ 2,015,432
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LOSS BEFORE INCOME TAXES
Total net loss before tax for
reportable segments $ (2,280,509) $ (2,140,417)
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Loss before income taxes $ (2,280,509) $ (2,140,417)
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ASSETS
Total assets for reportable segments $ 28,204,079 $ 42,374,846
Elimination of advance to subsidiaries (10,389,358) (6,849,774)
Elimination of investment in subsidiaries (7,795,020) (7,795,020)
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Consolidated total assets $ 10,019,701 $ 27,730,052
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For each of the periods presented, the Company's primary operations and assets
were within the United States.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
Cash interest paid amounted to approximately $38,000 and $259,000 for the three
months ended March 31, 2001 and 2000, respectively. Refunds received from income
taxes amounted to approximately $2,000 and $123,000 for the three months ended
March 31, 2001 and 2000, respectively.
Supplemental schedule of noncash investing and financing activities are as
follows:
During the three months ended March 31, 2000, approximately $1.2 million in
restricted cash was used to pay amounts outstanding under the Company's term
loan.
In January 2000, the Company received 850,000 shares of its common stock under
the terms of a settlement agreement with one of its former affiliated practices.
In February 2000, the Company merged its majority-owned subsidiary, HG.com,
Inc., into a recently formed, wholly-owned subsidiary, HealthCare Ratings, Inc.
(hereafter, the "Merger Transaction"). In connection with the Merger
Transaction, the minority shareholders of HG.com were given 800,000 shares of
Company common stock.
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NOTE 4 - SEVERANCE AGREEMENT WITH OFFICER
Effective March 29, 2001, Mr. Jaeckle resigned his employment with the Company.
In connection with his resignation, the Company entered into a severance
agreement with Mr. Jaeckle. Under the agreement, Mr. Jaeckle agreed to serve as
a consultant to the Company through September 30, 2001 and to surrender 250,000
shares of Health Grades common stock to the Company. The Company agreed to make
payments to Mr. Jaeckle totaling approximately $435,000 in consideration of his
consulting services, the surrender of his shares and other commitments,
including certain confidentiality commitments. The Company also extended the
termination date of options to purchase 861,351 shares of Company common stock
held by Mr. Jaeckle until September 30, 2003. In addition, the Company agreed to
pay Mr. Jaeckle a fee of approximately $90,000 if he provides to the Company a
bona fide written offer of an entity to provide equity financing or enter into a
business combination transaction with the Company on terms specified in the
agreement.
NOTE 5 - SUBSEQUENT EVENTS
Effective April 16, 2001, the Company reached an agreement with Chancellor V.,
L.P. ("Chancellor V") and Essex Woodlands Health Ventures Fund IV, L.P.
("Essex"), regarding a commitment to provide up to $2.0 million of equity
financing to the Company. In consideration for the commitment, the Company
issued to Chancellor and Essex warrants (the "Commitment Warrants") to purchase
an aggregate of 500,000 shares of the Company's common stock at an exercise
price per share of $0.26, which was the closing market price per share of the
Company's common stock as reported by Nasdaq on April 16, 2001. The Commitment
Warrants will expire on April 16, 2007. In addition, in connection with the
agreement with Chancellor V and Essex, the Company repriced warrants to purchase
100,000 shares of the Company's common stock that were issued to Chancellor V
and Essex in March 2000 to the same $0.26 exercise price.
Under the terms of the agreement with Chancellor V and Essex, the Company was
granted the option, which may be exercised solely at its discretion until
December 31, 2001, to sell Company common stock to Chancellor V and Essex at an
aggregate purchase price of up to $2.0 million. If the Company exercises the
option, the price per share will be equal to the lesser of $0.26 and the closing
market price per share of the Company's common stock as reported by Nasdaq on
the date that the Company provides notice to Chancellor V and Essex that the
Company intends to exercise the option, but in no event less than $0.15 per
share. If the Company decides to exercise the option, the Company will also
issue warrants to purchase up to an additional 350,000 shares of its common
stock at an exercise price per share equal to the price at which the Company
sells its common stock upon the exercise of the option. The warrants will have a
six-year term.
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ITEM 2:
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Statements in this section, including statements concerning the sufficiency of
available funds, anticipated future revenues, anticipated costs to further
develop and market our Internet sites and litigation costs are "forward looking
statements." Actual events or results may differ materially from those discussed
in forward looking statements as a result of various factors, including failure
to achieve revenue increases, unanticipated expenditures, adverse litigation
developments and other factors discussed below and in the Company's Annual
Report on Form 10-K for the year ended December 31, 2000, particularly under
"Risk Factors" in Item 1.
GENERAL
We are a healthcare information services company. We grade, or provide the means
to assess and compare the quality or qualifications of, various types of
healthcare providers. We also provide profile information for a variety of
providers and facilities. We make this information available to consumers,
employers and health plans to assist them in selecting healthcare providers. For
consumers, this information is available free of charge on our website,
www.healthgrades.com. For employers, we provide, for a fee, customized
information designed to encourage employees to utilize quality providers, which
can reduce medical benefit costs as well as indirect costs of lost workdays and
productivity. For health plans, we provide, for a fee, customized information
designed to assist them in selecting network providers who can enhance the
quality of care for their members.
We also offer services to healthcare providers. For providers who have received
high ratings, we offer the opportunity to license our ratings and trademarks and
provide assistance in their marketing programs. For providers who have not
received high ratings, we offer quality improvement services designed to
identify deficiencies and improve quality. We also provide limited physician
practice management services to musculoskeletal practices under management
services agreements that have terms expiring through September 2002.
RESULTS OF OPERATIONS
Ratings and advisory revenue. For the three months ended March 31, 2001, ratings
and advisory revenue was approximately $559,000, an increase of $248,000 over
revenue of $311,000 for the three months ended March 31, 2000. This increase is
primarily due to the addition of a number of hospitals under our strategic
quality initiative program.
Physician practice service fee revenue. Physician practice service fee revenue
is recognized based upon the contractual arrangements of the underlying service
agreements between the Company and the affiliated practices. For the three
months ended March 31, 2001, physician practice service fee revenue was
approximately $136,000, compared to revenue of $1.6 million for the three months
ended March 31, 2000. Revenue for the three months ended March 31, 2000 includes
a non-recurring payment of approximately $810,000 related to the termination of
a management services agreement with one of our affiliated practices. As of
March 31, 2001, we have service agreements remaining with five affiliated
practices, the last of which will expire in September 2002.
Production, content and product development costs. Production, content and
product development costs relate to the development and support of our
HealthGrades.com and ProviderWeb.net web sites. These costs (which consist
primarily of salaries and benefits, consulting fees and other costs related to
software development, application development and operations expense) are
expensed as incurred. Compared with the three months ended March 31, 2000, these
costs decreased by approximately $327,000, from $618,827 to 291,435, during the
three months ended March 31, 2001. Costs for the three months ended March 31,
2000 reflected expenses relating to the launch and expansion of both the
HealthGrades.com and ProviderWeb.net web sites which were completed during the
first quarter of 2000.
Sales and marketing expenses. Sales and marketing expenses are costs incurred to
sell, market and advertise for our two Internet web site information services.
We incurred approximately $372,000 in sales and marketing costs for the three
months ended March 31, 2001 compared to costs of $269,000 for the three months
ended March 31, 2000. The increase in sales and marketing expense is primarily
due to a severance payment made to one of our sales employees in March 2001.
Litigation and other costs. For the three months ended March 31, 2001, we
incurred approximately $45,000 in legal fees related to disputes with two of our
affiliated practices. Litigation and other costs decreased approximately
$324,000 from the same period in 2000 due to the fact that during the latter
part of 1999 and in the first half of 2000 we reached settlement agreements with
several
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former affiliated practices. In addition, in March 2001 we entered into a
settlement agreement with another former affiliated practices. Currently, we
have one remaining lawsuit involving a former affiliated practices.
Loss on sale of assets and other. For the three months ended March 31, 2000, the
loss consists primarily of a loss of approximately $275,000 on the sale of two
MRI units.
Interest expense. During the three months ended March 31, 2001, we incurred
interest expense of approximately $29,000 compared to interest expense of
approximately $316,000 for the same period of 2000. This decrease is due to our
repayment of the balance of our bank term loan in March 2001.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, we had working capital of approximately $2.1 million, a
decrease of $2.2 million from approximately $4.3 million as of December 31,
2000. For the first three months of 2001, cash flow used in operations was
approximately $98,000 compared to $1.3 million for the same period of 2000. In
addition, we paid the $1,369,769 remaining balance on our bank term loan during
this period.
Effective April 16, 2001, we reached an agreement with Chancellor V., L.P.
("Chancellor V") and Essex Woodlands Health Ventures Fund IV, L.P. ("Essex"),
regarding a commitment to provide up to $2.0 million of equity financing to us.
In consideration for the commitment, we issued to Chancellor and Essex warrants
(the "Commitment Warrants") to purchase an aggregate of 500,000 shares of our
common stock at an exercise price per share of $0.26, which was the closing
market price per share of our common stock as reported by Nasdaq on April 16,
2001. The Commitment Warrants will expire on April 16, 2007. In addition, in
connection with our agreement with Chancellor V and Essex, we repriced warrants
to purchase 100,000 shares of our common stock that were issued to Chancellor V
and Essex in March 2000 to the same $0.26 exercise price.
Under the terms of the agreement with Chancellor V and Essex, we were granted
the option, which may be exercised solely at our discretion until December 31,
2001, to sell our common stock to Chancellor V and Essex at an aggregate
purchase price of up to $2.0 million. If we exercise the option, the price per
share will be equal to the lesser of $0.26 and the closing market price per
share of our common stock as reported by Nasdaq on the date that we provide
notice to Chancellor V and Essex that we intend to exercise the option, but in
no event less than $0.15 per share. If we decide to exercise the option, we will
also issue warrants to purchase up to an additional 350,000 shares of our common
stock at an exercise price per share equal to the price at which we sell our
common stock upon our exercise of the option. The warrants will have a six-year
term.
We anticipate incurring costs in excess of revenues for at least most of 2001 to
further develop and market our product offerings. As of March 31, 2001, we have
settled all but one lawsuit between our former affiliated practices and us. We
anticipate continuing to incur substantial legal fees in connection with the
remaining lawsuit until trial is completed or a settlement is reached. During
the first quarter of 2001, three of our officers resigned; one will continue in
a consulting capacity with us through September 2001. The vacated offices are
being filled by current employees; and we do not anticipate any additional
hiring to replace the departing officers. We believe that this reduction in
headcount will help us to contain our expenses. Based upon our current business
plan and the commitment provided by Chancellor V and Essex described above, we
anticipate that we have sufficient funds available to support ongoing operations
and future development and marketing efforts for at least the next twelve
months. However, if revenues do not increase as anticipated, or we incur
significant unanticipated expenses, we may require additional funds, the terms
and availability of which will depend on market and other conditions. We cannot
assure that sufficient funds will be available on terms acceptable to us, if at
all.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
As described in Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations - Liquidity and Capital Resources, in April
2001 we were granted the option to sell our common stock to Chancellor V and
Essex at an aggregate purchase price of up to $2.0 million. If we exercise the
option, the price per share will be equal to the lesser of $0.26 and the closing
market price per share of our common stock as reported by Nasdaq on the date
that we provide notice to Chancellor V and Essex that we intend to exercise the
option, but in no event less than $0.15 per share. Therefore, if we determine to
exercise the option in order to fund operations, and the price per share of our
common stock decreases to the $0.15 share minimum price, we will be required to
issue more shares to our investors in order to exercise our option. If we were
to fully exercise our option for $2.0 million, we could be obligated to issue up
to 13,333,333 based on a price per share of our common stock of $0.15 per share.
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PART II. OTHER INFORMATION
ITEM 1: LEGAL PROCEEDINGS
Effective March 28, 2001, we entered into a settlement agreement with the
Orthopaedic Institute of Ohio ("OIO"). Under the terms of the agreement, we
received a cash payment of $1,750,000 on March 28, 2001 in full satisfaction of
certain notes receivable and other assets with the practice, the termination of
the current service agreement with the practice and the settlement of a dispute
of amounts owed to us arising out of the restructure transaction with OIO.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - There are no exhibits filed as part of this quarterly
report on Form 10-Q.
(b) Reports on Form 8-K. During the period covered by this report, the
Company did not file any reports on Form 8-K with the Commission.
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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.
HEALTH GRADES, INC.
Date: May 15, 2001 By: /s/ Allen Dodge
-----------------------------------
Allen Dodge
Senior Vice President - Finance and
Chief Financial Officer
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