UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended March 31, 1999
Commission File Number 0-21177
NETSMART TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3680154
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
146 Nassau Avenue, Islip, NY 11751
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 968-2000
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 of common stock outstanding as of May 14, 1999: 2,967,253
Netsmart Technologies, Inc. and Subsidiary
Index
Part I: - Financial Information:
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets - March 31, 1999
and December 31, 1998 1-2
Consolidated Statements of Operations-
Three Months Ended March 31, 1999 and March 31, 1998 3
Consolidated Statements of Cash Flows-
Three Months Ended March 31, 1999 and March 31, 1998 4-5
Consolidated Statement of Stockholders' Equity-
Three Months Ended March 31, 1999 6-7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
March 31, December 31,
1999 1998
-------- -----------
------------ -----------------
Assets:
Current Assets:
Cash and Cash Equivalents $ 122,447 $ 198,689
Accounts Receivable - Net 4,183,739 3,600,025
Costs and Estimated Profits in Excess
of Interim Billings 2,205,983 2,899,695
Note Receivable 105,000 150,000
Other Current Assets 198,941 109,595
---------- ----------
Total Current Assets 6,816,110 6,958,004
---------- ----------
Property and Equipment - Net 389,087 354,036
---------- ----------
Other Assets:
Software Development Costs - Net 132,275 142,450
Customer Lists - Net 2,650,071 2,733,392
Other Assets 98,665 101,064
---------- ----------
Total Other Assets 2,881,011 2,976,906
---------- ----------
Total Assets $10,086,208 $10,288,946
========== ==========
See Notes to Consolidated Financial Statements.
-1-
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- --------------------------------------------------------------------------------
March 31, December 31,
1999 1998
-------- -----------
Liabilities and Stockholders' Equity:
Current Liabilities:
Notes Payable $ 804,830 $ 1,639,694
Capitalized Lease Obligations 22,959 27,283
Accounts Payable 2,314,360 2,166,333
Accrued Expenses 1,410,164 1,178,893
Interim Billings in Excess of Costs
and Estimated Profits 1,650,569 1,803,999
Due to Related Parties 52,000 84,000
Deferred Revenue 28,682 47,619
--------- ---------
Total Current Liabilities 6,283,564 6,947,821
--------- ---------
Capitalized Lease Obligations 85,272 57,033
--------- ---------
Commitments and Contingencies -- --
--------- ---------
Stockholders' Equity:
Preferred Stock, $.01 Par Value;
Authorized 3,000,000
Series D 6% Redeemable Preferred Stock - $.01 Par
Value 3,000 Shares Authorized, 1,210 Issued and
Outstanding [Liquidation Preference of $1,210
and redemption value of $1,210,000] 12 12
Additional Paid-in Capital -
Series D Preferred Stock 1,209,509 1,209,509
Common Stock - $.01 Par Value; Authorized
15,000,000 Shares; Issued 2,872,586 Shares
at March 31, 1999, 2,786,921 Shares at
December 31, 1998 28,726 27,869
Additional Paid-in Capital - Common Stock 17,309,226 17,203,904
Accumulated Deficit (14,770,101) (15,097,202)
3,777,372 3,344,092
Less cost of 5,333 shares of Common Stock
held in Treasury 60,000 60,000
---------- ----------
Total Stockholders' Equity 3,717,372 3,284,092
---------- ----------
Total Liabilities and Stockholders' Equity $ 10,086,208 $ 10,288,946
========== ==========
See Notes to Consolidated Financial Statements.
-2-
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF OPERATIONS
- --------------------------------------------------------------------------------
Three months ended
March 31,
------------------
1999 1998
---- ----
Revenues:
Software and Related
Systems and Services:
General $ 4,110,698 $ 1,547,587
Maintenance Contract
Services 598,731 313,921
--------- ---------
Total Software and Related
Systems and Services 4,709,429 1,861,508
Data Center Services 525,354 679,234
--------- ---------
Total Revenues 5,234,783 2,540,742
--------- ---------
Cost of Revenues:
Software and Related
Systems and Services:
General 2,740,485 920,323
Maintenance Contract
Services 397,883 267,035
--------- ---------
Total Software and Related
Systems and Services 3,138,368 1,187,358
Data Center Services 308,798 282,679
--------- ---------
Total Cost of Revenues 3,447,166 1,470,037
--------- ---------
Gross Profit 1,787,617 1,070,705
Selling, General and
Administrative Expenses 1,177,743 705,504
Related Party Administrative Expense - 45,000
Research and Development 202,196 314,605
--------- ---------
Income from Continuing
Operations before interest 407,678 5,596
Interest Expense 80,577 67,023
--------- ---------
Income (Loss) from Continuing Operations 327,101 (61,427)
--------- ---------
Loss from Discontinued Operations - 213,297
--------- ---------
Net Income (Loss) $ 327,101 $ (274,724)
========= =========
Earnings Per Share of Common Stock:
Basic and Diluted:
Income (Loss) from Continuing Operations $ .11 $ (.02)
(Loss) from Discontinued Operations - (.08)
---------- ---------
Net Income (Loss) $ .11 $ (.10)
========== =========
Weighted Average Number of Shares of
Common Stock Outstanding 3,024,454 2,777,999
See Notes to Consolidated Financial Statements.
-3-
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Three months ended
March 31
------------------
1999 1998
---- ----
Operating Activities:
Net Income [Loss] from Continuing
Operations $ 327,101 $ (61,427)
Adjustments to Reconcile Net Income
[Loss] from Continuing Operations
to Net Cash [Used for] Operating
Activities:
Depreciation and Amortization 136,496 132,597
Cash Used in Discontinued Operations - (213,297)
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (583,714) (134,608)
Costs and Estimated Profits in
Excess of Interim Billings 693,712 (273,925)
Other Current Assets (44,346) (25,134)
Other Assets 2,399 (2,798)
Increase [Decrease] in
Accounts Payable 148,027 32,723
Accrued Expenses 231,271 19,408
Interim Billings in Excess of
Costs and Estimated Profits (153,430) (117,504)
Deferred Revenue (18,937) (44,816)
-------- -------
Total Adjustments 411,478 (627,354)
-------- -------
Net Cash - Operating Activities 738,579 (688,781)
======== =======
Investing Activities:
Acquisition of Property and Equipment (78,051) (34,272)
-------- ------
Net Cash - Investing Activities (78,051) (34,272)
======== ======
See Notes to Financial Statements.
-4-
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
- --------------------------------------------------------------------------------
Three months ended
March 31
------------------
1999 1998
---- ----
Financing Activities:
Proceeds (payments) on
Short term notes $ (834,864) $ 274,658
Payment of Capitalized Lease Obligations (16,085) (5,879)
Repayment of Loans from Related Parties (32,000) -
Proceeds from Capitalized Lease Obligation 40,000 -
Proceeds from Stock Options Exercised 106,179 -
-------- ---------
Net Cash - Financing Activities (736,770) 268,779
======== =========
Net [Decrease] in Cash (76,242) (454,274)
Cash - Beginning of Periods 198,689 854,979
-------- ---------
Cash - End of Periods $ 122,447 $ 400,705
======== ========
Supplemental Disclosure of Cash Flow Information
Cash paid during the periods for:
Interest $ 87,300 $ 72,219
Taxes $ - 10,272
See Notes to Financial Statements.
-5-
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
For the Three Months Ended March 31, 1999
Series D Preferred Stock at .01 Par Value Shares Amount
------ ------
Beginning Balance 1,210 $ 12
------- ---------
Ending Balance 1,210 $ 12
======= =========
Additional Paid-In Capital Preferred Stock
Beginning Balance $1,209,509
---------
Ending Balance $1,209,509
=========
Common Stock $.01 Par Value Authorized
15,000,000 Shares
Beginning Balance 2,786,921 $ 27,869
Common Stock Issued - Exercise of Options 83,165 832
Common Stock Issued - Consulting 2,500 25
--------- ---------
Ending Balance 2,872,586 $ 28,726
========= =========
See Notes to Financial Statements.
-6-
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
- --------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
- --------------------------------------------------------------------------------
For the Three Months Ended March 31, 1999
Additional Paid-In Capital Common Stock Shares Amount
------ ------
Beginning Balance $ 17,203,904
Common Stock Issued - Exercise of Options 99,722
Common Stock Issued - Financing Costs 5,600
Ending Balance $ 17,309,226
==========
Accumulated Deficit
Beginning Balance $(15,097,202)
Net Income 327,101
----------
Ending Balance $(14,770,101)
==========
Treasury Stock
Beginning Balance 5,333 $ (60,000)
----- ----------
Ending Balance 5,333 $ (60,000)
----- ----------
Total Stockholders Equity $ 3,717,372
==========
See Notes to Financial Statements.
-7-
NETSMART TECHNOLOGIES, INC. AND SUBSIDIARY
------------------------------------------------------------------------------
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------------------------------------------
(1) In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of the Company as
of March 31, 1999 and the results of its operations for the three months ended
March 31, 1999 and 1998 and the changes in cash flows for the three months
ended March 31, 1999 and 1998. The results of operations for the three months
ended March 31, 1999 and 1998 are not necessarily indicative of the results to
be expected for the full year.
(2) The accounting policies followed by the Company are set forth in Notes 1
and 2 to the Company's consolidated financial statements as filed in its Form
10-K for the year ended December 31, 1998.
(3) Income (Loss) per share - Income (Loss) per share is computed by dividing
the net loss for the period by the weighted average number of shares of common
stock. The Common stock equivalents are assumed converted to common stock when
dilutive. During periods in which losses were incurred, common stock
equivalents were excluded from the weighted average number of shares of common
stock because their inclusion would be anti-dilutive.
(4) During the quarter ended March 31, 1999, stock options to purchase 83,165
shares were exercised and the Company received gross proceeds of $100,554. As a
result, Common stock and additional paid in capital increased by $832 and
$99,722, respectively.
During the quarter ended March 31, 1999, the Company issued 2,500 common shares
to a consultant. As a result $5,625 was charged to general and administrative
expense.
(5) On March 25, 1999, the Company entered into an agreement with Consolidated
Technology Group Ltd. ("Consolidated"), SIS Capital Corp., a wholly-owned
subsidiary of Consolidated ("SISC"), and a group of purchasers, consisting
principally of the Company's management and directors. Pursuant to the
agreement, on April 8 and 15, 1999, the purchasers bought an aggregate of
585,750 shares of the Company's common stock from SISC for $2.015 per share. The
purchasers or their designees have the right to purchase an additional 206,874
shares from Consolidated's subsidiary at the same price per share.
In addition, on April 8, 1999, Consolidated transferred to the Company the 1,210
shares of the Company's Series D 6% Redeemable Preferred Stock ("Series D
Preferred Stock"), including the right to receive $145,200 of dividends thereon,
and warrants to purchase shares of the Company's common stock, for which the
Company issued 100,000 shares of its common stock to Consolidated.
The acquisition of the Series D Preferred Stock will be reflected on the
Company's balance sheet through the elimination of the Series D Preferred Stock
and the transfer of the additional paid-in capital - Series D Preferred Stock to
additional paid-in capital.
-8-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Three Months Ended March 31, 1999 and 1998
Our revenue for the three months ended March 31, 1999 (the "March 1999 period")
was $5,235,000, an increase of $2,694,000, or 106% from the revenue for the
three months ended March 31, 1998 (the "March 1998 period") which was
$2,541,000. The largest component of revenue in the March 1999 period was
revenue from third party hardware and software, which increased to $1,732,000
in the March 1999 period from $360,000 in the March 1998 period, an increase of
381%. Sales of third party hardware and software are made in connection with
the sales of turnkey systems. Turnkey systems labor revenue increased to
$1,563,000 in the March 1999 period, from $650,000 in the March 1998 period,
reflecting a 140% increase. The increases in both revenue from third party
hardware and software and turnkey systems is substantially the result of growth
in the behavioral health information systems business and our ability to
provide the staff necessary to generate additional revenue. The data center
(service bureau) revenue decreased to $525,000 in the March 1999 period from
$679,000 in the March 1998 period, reflecting a decrease of 23%. This decrease
was substantially the result of a special project performed for a client during
the March 1998 period which did not continue at the same rate in the March 1999
period. License revenue increased to $570,000 in the March 1999 period from
$308,000 in the March 1998 period, an increase of 85%. License revenue is
generated as part of a sale of a behavioral health information system pursuant
to a contract or purchase order that includes delivery of the system and
maintenance. Maintenance revenue increased to $599,000 in the March 1999 period
from $314,000 in the March 1998 period, reflecting an increase of 91%,
resulting from maintenance contracts relating to new turnkey systems installed
during 1998 and the first quarter of 1999. Revenue from the sales of the
Company's small turnkey division increased to $246,000 in the March 1999 period
from $229,000 in the March 1998 period, reflecting an increase of 7%.
Revenue from contracts from government agencies represented 58% of revenue for
the March 1999 period and 31% of revenue for the March 1998 period.
Gross profit increased to $1,788,000 in the March 1999 period from $1,071,000
in the March 1998 period, a 67% increase. Our overall gross margin was 34% for
the March 1999 period compared to 42% for the March 1998 period. The decline in
gross margin was substantially attributable to the hiring of additional staff
to support our increased order backlog. Since there is approximately a three
month lag time between the commencement of employment and the ability to
generate revenue, our margins were negatively impacted in the March 1999
period.
Selling, general and administrative expenses were $1,178,000 in the March 1999
period, an increase of 67% from the $706,000 in the March 1998 period. This
increase was substantially the result of an increase in sales and marketing
salaries and related direct selling costs, commissions expense and an increase
in the provision for incentive bonuses.
We incurred product development expense of $202,000 in the March 1999 period, a
decrease of 36% from the $315,000 in the March 1998 period. These expenses were
related to our behavioral health information systems products such as our
clinician workstation, behavioral health information system for Windows,
managed care and methadone dispensing products.
Interest expense was $81,000 in the March 1999 period, an increase of $14,000,
or 20% from the $67,000 in the March 1998 period. This increase was the result
of higher borrowings during the March 1999 period, which were substantially
offset by a reduction in the cost of borrowings. The most significant component
of the interest
-9-
expense on an ongoing basis is the interest payable to our asset-based lender.
We paid interest on such loans at a rate equal to prime plus 5 %.
Related party administrative expense was $45,000 in the March 1998 period.
These charges were pursuant to a management services agreement with
Consolidated Technology Group to provide general business, management and
financial consulting services for a monthly fee of $15,000. This agreement was
mutually terminated, effective April, 1 1998.
The net loss from our discontinued operations, the smart card division, was
$213,000 in the March 1998 period.
As a result of the foregoing factors, we generated a net income of $327,000, or
$.11 per share in the March 1999 period, as compared to a net loss of $275,000,
or ($.10) per share (basic and diluted) in the March 1998 period.
Liquidity and Capital Resources
We had working capital of $533,000 at March 31, 1999 as compared to working
capital of $10,000 at December 31, 1998. Our cash position decreased from
$199,000 at December 31, 1998 to $122,000 at March 31, 1999. The increase in
working capital for the three months ended March 31, 1999 was substantially due
to the net income after adding back depreciation and amortization.
Our principal source of funds, other than revenue, is an accounts receivable
financing agreement with an asset based lender whereby we may borrow up to 80%
of eligible accounts receivable up to a maximum of $2,000,000. At March 31,
1999, the outstanding borrowings under this facility was $805,000. At March 31,
1999, the maximum amount available under this formula was $1,470,000.
At March 31, 1999, accounts receivable and costs and estimated profits in
excess of interim billings were approximately $6.4 million, representing
approximately 110 days of revenue based on annualizing the revenue for the
three months ended March 31, 1999, although no assurance can be given that
revenue will continue at the same level as the three month period. Accounts
receivable at March 31, 1999 increased by $584,000 from $3,600,000 at December
31, 1998 to $4,184,000 at March 31, 1999. We believe that, the profits being
generated from the behavioral health information systems business, the
availability with our asset based lender and the cash on hand, will be
sufficient to enable us to continue to operate at least through the end of 1999
without additional funding. If we continue to grow at the existing rate into
2000 and beyond, we may require significant additional funding. We are
therefore exploring various long term funding possibilities with several
investment banking organizations. No assurances can be given as to the ability
of Netsmart to obtain additional financing and our inability to do so could
have a material adverse affect on our ability to grow.
Forward Looking Statements
The statements in this Form 10-Q that are not descriptions of historical facts
may be forward-looking statements that are subject to risks and uncertainties.
In particular, statements in this Form 10-Q that state our intentions, beliefs,
expectations, strategies, predictions or any other statements relating to our
future activities or other future events or conditions are "forward-looking
statements." Forward-looking statements are subject to risks, uncertainties and
other factors, including, but not limited to, those identified under "Risk
Factors" and Management's Discussion and Analysis of Financial Conditions and
Results of Operations in our Form 10-K for the year ended December 31, 1998,
those described in Management's Discussion and Analysis of Financial
-10-
Conditions and Results of Operations in this Form 10-Q, and those described in
any other filings we make with the Securities and Exchange Commission, as well
as general economic conditions, any one or more of which could cause actual
results to differ materially from those stated in such statements.
Item 6. Exhibits and Reports on Form 8-K
(b) Reports on Form 8-K
A Form 8-K dated March 25, 1999, reporting Items 5 and 7 was filed with the
Commission on March 30, 1999.
Statements in this Form 10-Q include forward-looking statements that are
subject to risks and uncertainties. Actual results could differ materially from
those currently anticipated due to a number of factors, including those
identified in this Form 10-Q, the Company's Annual Report on Form 10-K for the
year ended December 31, 1998 and in other documents filed by the Company with
the Securities and Exchange Commission.
-11-
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.
NETSMART TECHNOLOGIES, INC.
/s/ James L. Conway President, Chief Executive May 14, 1999
- --------------------- Officer and Director (Principal
James L. Conway Executive Officer)
/s/ Anthony F. Grisanti Chief Financial Officer May 14, 1999
- ---------------------- (Principal Financial and
Anthony F. Grisanti Accounting Officer)