UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2001
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 Identification Number)
of incorporation or organization)
2225 Avenue J, Arlington, Texas 76006
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (817) 633-6665
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares outstanding as of August 10, 2001:
Class: Common Stock, par value $.001 Shares outstanding: 48,873,818
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
December 31, 2000 and June 30, 2001 (unaudited)
Consolidated Statements of Operations
Three and six months ended June 30, 2001 and 2000 (unaudited)
Consolidated Statements of Cash Flows Six months ended June 30, 2001
and 2000 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition and
Plan of Operation
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
PART I. - FINANCIAL INFORMATION
Emergisoft Holding, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2000 June 30, 2001
Unaudited
Assets
Current assets:
Cash and cash equivalents $ 3,415,040 $ 235,811
Trade accounts receivable, net of allowance for
doubtful accounts of $11,290 100,839 53,829
Prepaid expenses -- 44,800
------------ ------------
Total current assets 3,515,879 334,440
Equipment and fixtures, net 24,640 101,318
Other assets 32,127 18,500
------------ ------------
Total assets $ 3,572,646 $ 454,258
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 832,843 $ 683,936
Notes payable 367,088 46,948
Deferred revenue 111,717 69,587
------------ ------------
Total current liabilities 1,311,648 800,471
Notes payable - long-term 35,560 35,560
------------ ------------
Total liabilities 1,347,208 836,031
Commitments and contingencies
Stockholders' equity:
Common Stock, $.001 par value, 750,000,000 shares authorized,
and 48,873,818 issued and outstanding at
December 31, 2000 and June 30, 2001, respectively 48,025 48,874
Additional capital 16,733,970 16,948,493
Deferred compensation (1,106,344) (651,921)
Accumulated deficit (13,450,213) (16,727,219)
------------ ------------
Total stockholders' equity 2,225,438 (381,773)
------------ ------------
Total liabilities and stockholders' equity $ 3,572,646 $ 454,258
============ ============
See accompanying notes
3
Emergisoft Holding, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended June 30 Six Months Ended June 30
-------------------------- ------------------------
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
----------- ----------- ----------- -----------
Revenue $ 79,283 $ 67,138 $ 188,724 $ 346,975
Cost of revenue 1,792 40,671 1,792 98,082
General and administrative 951,083 968,534 1,924,831 2,083,288
Product development 818,766 392,901 1,772,145 440,083
------------ ------------ ------------ ------------
Total operating expenses 1,771,641 1,402,106 3,698,768 2,621,453
Loss from operations (1,692,358) (1,334,968) (3,510,044) (2,274,478)
Interest expense (income) (20,204) 39,927 (36,906) 81,127
------------ ------------ ------------ ------------
Loss before extraordinary gain on
extinguishment of debt (1,672,154) (1,374,895) (3,473,138) (2,355,605)
------------ ------------ ------------ ------------
Gain on extinguishment of debt (196,132) -- (196,132) --
Net loss $ (1,476,022) $ (1,374,895) $ (3,277,006) $ (2,355,605)
============ ============ ============ ============
Basic and diluted net loss per share $ (.03) $ (.07) $ (.07) $ (.14)
------------ ------------ ------------ ------------
Weighted average shares used to compute
basic and diluted net loss per share 48,847,452 20,200,808 48,771,006 17,032,903
============ ============ ============ ============
See accompanying notes
4
Emergisoft Holding, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Six Months Ended June 30
------------------------
2001 2000
Unaudited Unaudited
--------- ---------
Operating Activities
Net loss $(3,277,006) $(2,355,605)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 50,465 118,853
Amortization of deferred compensation 456,204 180,330
Gain on extinguishment of debt (196,132) --
Stock-based expenses for equity issued to
vendors for services 197,781 811,393
Changes in assets and liabilities:
Accounts receivable 47,010 136,859
Other assets (31,173) 431
Deferred revenue (42,130) (216,975)
Accounts payable and accrued expenses (148,907) (2,734)
----------- -----------
Net cash used in operating activities (2,943,888) (1,327,448)
Investing Activity
Purchase of equipment and fixtures (97,838) (39,408)
----------- -----------
Cash used in investing activity (97,838) (39,408)
Financing Activities
Proceeds from notes payable 8,042 100,000
Repayment of notes payable and line of credit (145,545) (185,807)
Proceeds from issuance of common stock and exercise
of options -- 1,482,450
----------- -----------
Net cash (used in) provided by financing activities (137,503) 1,396,643
----------- -----------
Net increase (decrease) in cash and cash equivalents (3,179,229) 29,787
Cash and cash equivalents, beginning of year 3,415,040 6,871
----------- -----------
Ending cash and cash equivalents $ 235,811 $ 36,658
=========== ===========
Supplemental cash flow information:
Cash paid for interest -- 14,186
Non-cash activities:
Exchange of common stock for advances from
stockholders -- 156,920
Additional capital recorded for fair value of
warrants issued to convertible noteholders -- 54,942
Exchange of common stock for account payable to
officer -- 137,539
Stock-based expenses for equity issued to vendors
for services 197,781 811,393
Common stock issued in connection with conversion
of convertible note 7,768 --
See accompanying notes
5
Notes to Consolidated Financial Statements (Unaudited)
1. Basis of Presentation
The accompanying unaudited consolidated financial statements of
Emergisoft Holding, Inc. and Subsidiaries (the Company) for the three month and
six month periods ended June 30, 2001 and 2000 have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the instructions to Form 10-Q and Article 10 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, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month period ended June 30, 2001 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 2001
2. Liquidity and Capital Resources
We have historically financed our operations primarily through private
placements of our common stock and advances from stockholders. In 2000, we
issued 20,437,237 shares of common stock in a private placement for proceeds of
approximately $6,900,000. In addition, we issued 1,314,376 shares of common
stock in exchange for conversion of related party notes and advances totaling
$341,862. In 2000, we also issued 6,880,479 shares of common stock to a
stockholder for anti-dilution protection granted in connection with an
investment the stockholder made in 1999. In 1999, we issued 1,975,147 shares of
common stock in a private placement of common stock and approximately 3,250,000
shares of common stock to employees and related parties for proceeds of
approximately $909,000. As of June 30, 2001 we had approximately $236,000 in
cash and cash equivalents.
We have also historically issued common stock and stock options to
vendors as consideration for goods and services received. For the six months
ended June 30, 2001, we have issued 708,704 shares of common stock and have
recorded charges totaling $197,781 related to stock for services transactions.
In 2000 we issued 2,417,692 shares of common stock and options to acquire
746,000 shares of common stock to third party vendors. In addition, we issued
6,875,000 shares of common stock to a shareholder in return for a consulting
agreement. We recorded charges totaling approximately $4.1 million in 2000
related to stock for services transactions. In 1999, we issued 45,000 shares of
common stock and options to acquire 171,976 shares of common stock to vendors
and recorded charges totaling $65,457 related to stock for services
transactions.
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. We acquired fixed assets in the amount of
$97,838, $44,201 and $36,568 for the six months ended June 30, 2001 and the
years ended December 31, 2000 and 1999 respectively. We repaid $145,545,
$295,848 and $113,499 of our indebtedness for the six months ended June 30, 2001
and the years ended December 31, 2000 and 1999, respectively.
We have available lines of credit totaling $1.5 million that were
provided by two of our stockholders. On August 7, 2001 we requested and received
advances totaling $300,000 against the lines of credit provided by the two major
stockholders. In connection with these advances warrants were issued allowing
the two stockholders to purchase in total 1,200,000 shares of common stock at
$1.50 per share. The warrants have a term of 10 years or the warrants expire on
August 3, 2011, if not exercised. The warrants contain a cashless exercise
feature and the warrant holders have registration rights. Promissory notes were
executed allowing for advances against the lines of credit up to $750,000 each
or $1,500,000 in the aggregate. Under the terms of the promissory notes all
outstanding principal and interest is due on April 30, 2002. There is no
assurance that we will not request additional advances against the lines of
credit in the future, which would cause additional shareholder dilution.
6
We utilize significant capital to design, develop and commercialize its
products. During the remainder of 2001, we intend to fund the marketing of our
products and related operational activities by utilizing our lines of credit and
cash contributed from operations. We may need additional capital to further
develop or enhance our current planned product offerings, introduce new products
and services, and to address unanticipated competitive threats, technical
problems, economic conditions or for other requirements. We anticipate that if
additional capital is required such financing may include the issuance of
convertible debt, convertible preferred stock, common stock or other equity
securities in exchange for a cash investment in us. There can be no assurance
that any such additional financing will be available to us on acceptable terms,
or at all. Additional equity financing may involve substantial dilution to our
then existing stockholders. In the event we are unable to raise additional
capital, we may be required to substantially reduce or curtail our activities.
At June 30, 2001, we had no material commitments for capital
expenditures.
3. Reverse Merger
On May 25, 2001, EMS Acquisition Corp., a Delaware corporation and a
wholly owned subsidiary of Pierce International Discovery, Inc., a Nevada
corporation now known as Emergisoft Holding, Inc. (Pierce), merged with and into
Emergisoft Holding, Inc., a Delaware corporation (Emergisoft Delaware). Pierce
issued one share of its common stock in exchange for each one share of
Emergisoft Delaware common stock outstanding immediately prior to the
transaction. Pursuant to a Share Cancellation Agreement by and between Pierce,
Emergisoft Delaware and the primary stockholder of Pierce prior to the merger,
23,364,275 of the stockholder's shares of Pierce common stock were canceled
effective upon consummation of the merger. Upon the execution of this Share
Cancellation Agreement, Pierce had 2,638,733 shares of common stock outstanding.
The former stockholders of Emergisoft Delaware now own approximately 94.6% of
Pierce's common stock and Emergisoft Delaware, as the survivor of the merger, is
a wholly owned subsidiary of Pierce. Pierce had no assets and minimal
liabilities at the time of the merger and had been inactive since July 1997. The
merger has been accounted for as a re-capitalization of the Emergisoft Delaware
and Emergisoft Delaware's historical financial statements have become the
financial statements of Pierce. For all periods presented, Emergisoft Delaware's
historical financial statements have been retroactively restated to reflect the
2,638,733 outstanding shares of common stock of Pierce. See Management's
Discussion and Analysis.
4. Gain on Extinguishments of Debt
In February 1999, a settlement agreement was entered into with a
customer involving a claim for refund of license fees paid to Emergisoft whereby
Emergisoft agreed to pay the customer a total of $342,000 plus interest of 6%.
At December 31, 2000 the outstanding balance of the note payable was $283,312
plus accrued interest. On June 12, 2001, the Company and the former customer
signed an agreement to mutually release all claims in consideration for $54,000
to be paid by Emergisoft to the former customer. As a result, a gain on
extinguishment of debt of $196,132 was recorded.
5. Subsequent Events
On July 23, 2001, we signed a non-binding letter of intent with
CyberPlus Corporation contemplating the potential acquisition of the assets and
specified liabilities of EmSTAT Corporation (EmSTAT), a wholly owned subsidiary
of CyberPlus Corporation. EmSTAT provides a hospital emergency department
software. EmSTAT has marketed its product for 13 years.
On August 7, 2001 we requested and received advances totaling $300,000
against the lines of credit provided by two major stockholders. In connection
with these advances, warrants were issued
7
allowing the two stockholders to purchase in total 1,200,000 shares of common
stock at $1.50 per share. The warrants have a term of 10 years or the warrants
expire on August 3, 2011, if not exercised. The warrants contain a cashless
exercise feature and the warrant holders have registration rights. Promissory
notes were executed allowing for advances against the lines of credit up to
$750,000 each or $1,500,000 in the aggregate. Under the terms of the promissory
notes, all outstanding principal and interest is due on April 30, 2002.
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, CareLyncED(TM), by the marketplace; competition from
developers of software products which perform functions similar to the functions
performed by CareLyncED(TM); the successful implementation of CareLyncED(TM) in
hospital emergency rooms who choose to utilize it; and our ability to raise
capital in sufficient amounts and on acceptable terms.
Management's Discussion and Analysis
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, 23,364,725 of Robert Kropf's
shares were canceled effective upon the consummation of the merger. The former
stockholders of Emergisoft Delaware now own approximately 94.6% of our common
stock.
As a result of the Merger, we are now a holding company with Emergisoft
Delaware as a wholly-owned subsidiary. Emergisoft Delaware also has a
wholly-owned subsidiary, Emergisoft Corporation, a Delaware corporation. We and
our direct and indirect subsidiaries operate from our principal offices in
Arlington, Texas. In the remainder of this document the terms "we," "our," and
"us" refer to Emergisoft
8
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 develops and markets software products directly to the
emergency departments of hospitals in the United States. The products automate
the pen and paper-based process of moving patients through the emergency
department (ED). The software is intuitive and is designed by physicians and
clinicians to emulate the systems currently in use. Additionally, it is designed
to be faster, reduce medical errors, increase hospital revenue through improved
reimbursement and improve patient care due to more accurate charting.
Results of Operations for the Three Months Ended June 30, 2001 Compared to the
Three Months Ended June 30, 2000
Revenues
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 the three and six months ended June 30, 2001 and 2000 our
revenues were generated by deferred license fee revenue and maintenance fees
pertaining to our ICUS based product. We will replace the ICUS based product
called Emergisoft with a newly developed product called CareLyncED(TM) and no
longer sell the ICUS based product. (See "Legal Proceedings"). We continue to
provide software support to our existing customer base using the ICUS based
product. In the future, we expect to generate revenue through the sale of the
newly developed product called CareLyncED(TM) and license and professional fees
pertaining to GroupLyncEM(TM). We expect that the majority of future revenues
will be generated from license and professional fees pertaining to
CareLyncED(TM).
We plan to aggressively market the CareLyncED(TM) and GroupLyncEM(TM)
products through the addition of a national sales staff, advertising campaigns
and attendance at tradeshows for emergency department physicians, nurses and
hospital information technology professionals. No assurances can be given that
any of the marketing efforts will result in revenue.
Revenues for the three months ended June 30, 2001 were $79,283 compared
to $67,138 in the same period last year. The increase in revenues is primarily
due to the addition of one customer maintenance contract. We currently support
seven clients.
Cost of Revenues
Cost of revenues include salaries, commissions, cost of hardware,
licensing fees paid to third party vendors, product duplication, manuals and
miscellaneous costs related to the actual installation of a product at a client
site.
Cost of revenue totaled $1,792 in the second quarter of 2001which
related to fees for services compared to $40,671 recognized in the same period
of 2000. The cost of revenue in the second quarter of 2000 related to
depreciation and cost of equipment, which was due under contract to an existing
customer.
We expect cost of revenues to increase in the future as we develop a
comprehensive customer service department, which will manage installations of
CareLyncED(TM) and GroupLyncEM(TM), and support existing
9
and new clients under support and maintenance agreements. We will provide a
twenty-four hour, seven day a week support for clients. These expenses primarily
will consist of the costs related to additional personnel.
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.
General and administrative expenses for the first quarter 2001 were
$951,083 compared to $968,534 in 2000. Although expenses were relatively flat
there were several changes in the mix of the expenses. During the three months
ended June 30, 2001 legal and professional fees were lower by $166,261 compared
to the same period of 2000, but were offset by higher salaries of $52,109 due to
the addition of personnel, higher advertising costs due to increased marketing
efforts of $21,170, increased corporate insurance expense of 15,335, increased
stock based compensation expense of 22,581 and increases in other expenses
related to the increase in operations during the three months ended June 30,
2001.
Product Development Expenses
Development expenses consist of costs related to the development of
CareLyncED(TM) and GroupLyncEM(TM). Product development expenses increased in
the three months ended June 30, 2001 to $818,766 from $392,901 in the same
period of 2000, an increase of $425,865. The increase was due to accelerated
efforts to complete the CareLyncED(TM) product and the increased use of outside
contractors in 2001 compared to the same period in 2000. In the three months
ended June 30, 2001, outside contract development expenses were $626,028
compared to $392,901 for the same period in 2000 resulting from outside
contractors and consultants.
We believe that continued investment in the development of our products
is critical to attaining our strategic objectives and as a result we expect to
continue to incur development costs related to enhancements and testing of our
current products. To date, all software development costs have been expensed as
incurred.
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 current service
offering uses ICUS at all current customer sites. We believe we have an existing
license to use and sublicense ICUS.
In January 2000, the court issued a preliminary injunction allowing us
to keep one copy of the ICUS source code for purposes of providing support to
our current customers, but prohibiting us from selling and/or marketing the
current ICUS-based product.
On January 8, 2001, the federal court granted our motion for summary
judgment, dismissing all of the former officer's claims and dissolving the
preliminary injunction. The court is now reviewing the plaintiff's motion to set
aside that summary judgment and our motion for attorney's fees.
The former officer also has made us a party in his divorce action,
which is pending in a Tarrant County, Texas district court. Many of the claims
asserted in this action are the same or essentially the same as the claims which
were dismissed by the federal court. We will seek dismissal of those claims at
the appropriate time and contest the remainder of the plaintiff's claims
vigorously.
10
Results of Operations for the six months ended June 30, 2001 compared to the six
months ended June 30, 2000
Revenues
Revenue for the six months ended June 30, 2001 was $188,724 compared to
$346,975 for the six months ended June 30, 2000, a decrease of 46%. The decrease
was due primarily to lower license revenues in 2001 of $26,000 compared to
license revenues in 2000 of $212,000, which resulted from revenues deferred at
December 31, 1999.
Cost of Revenues
Cost of revenues for the six months ended June 30, 2001 was $1,792
compared to $98,082 for the six months ended June 30, 2000, reflecting reduced
license revenues from our ICUS based product.
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 products CareLyncED(TM) and GroupLyncEM(TM). Most of these costs
will be related to increased headcount to staff customer support positions and
depreciation related to purchases of assets such as customer tracking software
and computers for use by customer support personnel.
General and Administrative Expenses
Our general and administrative expenses decreased by $158,457 to
$1,924,831 for the six months ended June 30, 2001 compared to $2,083,288 for the
same period in 2000. This decrease is primarily related to a change in
allocation of salaries of personnel in the information technology areas from
work related to ongoing operations in 2000 to our product development efforts on
the CareLyncED product. For the six months ended June 30, 2001 $167,000 in
salaries and related payroll taxes were allocated to development which were
included in general and administrative expense in 2000. These personnel were
assigned to work on the legacy product and internal operations in 2000 and are
now assigned to product development of CareLyncED(TM).
Product Development Expenses
Development expenses consist of costs related to the development of
CareLyncED(TM) and GroupLyncEM(TM). Product development expenses increased for
the six month period ended June 30, 2001 to $1,772,145 compared $440,083 for the
six month period ended June 30, 2000. The increase is due to the increased use
of outside contractors and our effort to accelerate the completion of
CareLyncED(TM) and GroupLyncEM(TM). For the six month period ended June 30, 2001
outside contractor expenses were $1,437,726. Of this amount, $197,781 was paid
through the issuance of common stock. We use our own personnel as well as
outside contractors in the development efforts of our new products
CareLyncED(TM) and GroupLyncEM(TM). For the six months ended June 30, 2001
$167,000 in salaries and related payroll taxes were allocated to development
which were included in general and administrative expense in 2000. These
personnel were assigned to work on the legacy product and internal operations in
2000 and are now assigned to product development of CareLyncED(TM). We expect
the general release of CareLyncED(TM) and GroupLyncEM(TM) early in the third
quarter of 2001. We will continue to incur development costs related to
enhancements to our current products. There is no assurance that the general
release of CareLyncED(TM) and GroupLyncEM(TM) will be successful. A successful
general release will be dependent on satisfactory completion of ongoing
functionality and performance testing of the products and actual results of
installations in hospital facilities.
11
Liquidity and Capital Resources
We have historically financed our operations primarily through private
placements of our common stock and advances from stockholders. In 2000, we
issued 20,437,237 shares of common stock in a private placement for proceeds of
approximately $6,900,000. In addition, we issued 1,314,376 shares of common
stock in exchange for conversion of related party notes and advances totaling
$341,862. In 2000, we also issued 6,880,479 shares of common stock to a
stockholder for anti-dilution protection granted in connection with an
investment the stockholder made in 1999. In 1999, we issued 1,975,147 shares of
common stock in a private placement of common stock and approximately 3,250,000
shares of common stock to employees and related parties for proceeds of
approximately $909,000. As of June 30, 2001 we had approximately $236,000 in
cash and cash equivalents.
We have also historically issued common stock and stock options to
vendors as consideration for goods and services received. For the six months
ended June 30, 2001, we have issued 708,704 shares of common stock and have
recorded charges totaling $197,781 related to stock for services transactions.
In 2000 we issued 2,417,692 shares of common stock and options to acquire
746,000 shares of common stock to third party vendors. In addition, we issued
6,875,000 shares of common stock to a shareholder in return for a consulting
agreement. We recorded charges totaling approximately $4.1 million in 2000
related to stock for services transactions. In 1999, we issued 45,000 shares of
common stock and options to acquire 171,976 shares of common stock to vendors
and recorded charges totaling $65,457 related to stock for services
transactions.
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. We acquired fixed assets in the amount of
$97,838, $44,201 and $36,568 for the six months ended June 30, 2001 and the
years ended December 31, 2000 and 1999 respectively. We repaid $145,545,
$295,848 and $113,499 of our indebtedness for the six months ended June 30, 2001
and the years ended December 31, 2000 and 1999, respectively.
We have available lines of credit totaling $1.5 million that were
provided by two of our stockholders. Under the terms of the promissory notes,
all outstanding principal and interest is due on April 3, 2002. On August 7,
2001 we requested and received advances totaling $300,000 against the lines of
credit provided by the two major stockholders. In connection with these advances
warrants were issued allowing the two stockholders to purchase in total
1,200,000 shares of common stock at $1.50 per share. The warrants have a term of
10 years or the warrants expire on August 3, 2011, if not exercised. The
warrants contain a cashless exercise feature and the warrant holders have
registration rights. Promissory notes were executed allowing for advances
against the lines of credit up to $750,000 each or $1,500,000 in the aggregate.
Under the terms of the promissory note all outstanding principal and interest is
due on April 30, 2002. There is no assurance that we will not request additional
advances against the lines of credit in the future, which would cause additional
shareholder dilution.
We utilize significant capital to design, develop and commercialize its
products. During the remainder of 2001, we intend to fund the marketing of our
products and related operational activities by utilizing our lines of credit and
cash contributed from operations. We may need additional capital to further
develop or enhance our current planned product offerings, introduce new products
and services, and to address unanticipated competitive threats, technical
problems, economic conditions or for other requirements. We anticipate that if
additional capital is required such financing may include the issuance of
convertible debt, convertible preferred stock, common stock or other equity
securities in exchange for a cash investment in us. There can be no assurance
that any such additional financing will be available to us on acceptable terms,
or at all. Additional equity financing may involve substantial dilution to our
then existing stockholders. In the event we are unable to raise additional
capital, we may be required to substantially reduce or curtail our activities.
At June 30, 2001, we had no material commitments for capital
expenditures.
12
Risk Factors
History of Losses
For our fiscal year ended December 31, 2000, we incurred net losses of
$8,405,545. We had net losses of $3,298,359 in 1999. We have incurred net losses
of $3,277,006 for the six months ended June 30, 2001 and, as of June 30, 2001 we
have an accumulated deficit of $16,727,219. These continuing losses may increase
from current levels. 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.
Dependence on Principal Product
We will derive a significant percentage of our revenue from sales of
our core system, CareLyncEDTM. As a result, any event adversely affecting sales
of the product could have a material adverse effect on our results of
operations, financial condition or business. Revenue associated with
CareLyncEDTM 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.
13
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.
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 directors, executive officers and holders of more than 5% of our
shares beneficially own approximately 64.56% of the outstanding shares of our
common stock. An agreement or understanding to act in concert would allow them
to continue 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.
14
Reliance on Management and Key Personnel
Management decisions of our business will be made exclusively by our
directors and officers. Our stockholders will have no right or power to take
part in management other than their right to vote for the election of our
directors. Our operations are dependent on the continued efforts of our
executive officers and senior management. Furthermore, we will likely be
dependent on the senior management of any businesses acquired in the future. If
any of these persons becomes unable or unwilling to continue in his or her role
with us, or if we are unable to attract and retain other qualified employees,
our business or prospects could be adversely affected. Although we have entered
into an employment agreement, which includes confidentiality and non-compete
provisions, with each of our key executive officers, there can be no assurance
that any individual will continue in his present capacity with us for any
particular period of time. Our success is also dependent to a significant degree
on our ability to attract, motivate and retain highly skilled sales, marketing
and technical personnel, including software programmers and systems architects
skilled in the computer language with which our products operate. The loss of
key personnel or the inability to hire or retain qualified personnel could have
a material adverse effect on our results of operations, financial condition or
business. Although we have been successful to date in attracting and retaining
skilled personnel, there can be no assurance that we will continue to be
successful in attracting and retaining the personnel we require to successfully
develop new and enhanced products and to continue to grow and operate
profitably.
Possible Volatility of Stock Price
The market price of our common stock may be subject to significant
fluctuations in response to numerous factors, including variations in our annual
or quarterly financial results or our competitors, changes by financial research
analysts in their estimates of our earnings, conditions in the economy in
general or in the healthcare or technology sectors in particular, announcements
of technological innovations or new products or services by us or our
competitors, proprietary rights development, unfavorable publicity or changes in
applicable laws and regulations (or judicial or administrative interpretations
thereof) affecting us or the healthcare or technology sectors. Moreover, from
time to time, the stock market experiences significant price and volume
volatility that may affect the market price of the common stock for reasons
unrelated to our performance.
Reliance on Third Party Vendors
We depend on third-party vendors to provide software consulting and
development services. We currently obtain most software consulting and
development services from InfoSphere Incorporated. We cannot be certain that
InfoSphere Incorporated will continue to provide its services to us at
commercially reasonable prices or at all. Difficulties in obtaining alternative
sources of services, if required, could adversely affect our business, future
financial condition or operating results. Moreover, failure of InfoSphere
Incorporated to provide to us the requested software consulting and development
services for any reason would cause interruption in our ability to update,
support and maintain our products, which may materially and adversely affect our
business, financial condition and operating results.
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.
15
PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
On May 25, 2001, we acquired Emergisoft Holding, Inc., a Delaware
corporation ("Emergisoft Delaware"), a leader in the design and implementation
of clinical patient management systems for hospital emergency department
automation across the United States. The acquisition was effectuated pursuant to
an Agreement and Plan of Merger, dated March 28, 2001 (the "Merger Agreement"),
by and among EMS Acquisition Corp. ("EMS"), our wholly-owned subsidiary,
Emergisoft Delaware and us. In the merger, EMS was merged with and into
Emergisoft Delaware with Emergisoft Delaware surviving the merger as our
wholly-owned subsidiary.
Pursuant to the Merger Agreement, we issued one share of our common
stock for each one share of Emergisoft Delaware common stock outstanding
immediately prior to the close of the transaction, or a total of 46,235,085
shares. In addition, we assumed all Emergisoft Delaware stock options, notes and
warrants outstanding at the effective time of the merger. The transaction was
intended to be treated as a tax-free reorganization within the meaning of
Section 368(a) of the Internal Revenue Code of 1986, as amended. The transaction
was accounted for as a recapitalization of Emergisoft Delaware and the
historical financial statements of Emergisoft Delaware became our financial
statements.
We changed our name to Emergisoft Holding, Inc. in connection with the
merger and 23,364,275 shares of our common stock, held by a single individual,
were canceled, leaving a total of 48,873,818 shares issued and outstanding. The
former stockholders of Emergisoft Delaware currently own approximately 94.60% of
our outstanding equity interests and voting rights.
The terms of the Merger Agreement were determined on the basis of
arms-length negotiations. Prior to the execution of the Merger Agreement,
neither we nor any of our affiliates had any material relationship with
Emergisoft Delaware or its stockholders.
In May 2001, each of Berlwood Five, Ltd. and Woodcrest Capital, L.L.C.,
two of our stockholders, signed letters of commitment, approving commitments of
$750,000 in financing for our benefit and allowing us to draw on such
commitments in whole or in part, from time to time, and at any time prior to
April 30, 2002. The letters of commitment allowed each of Woodcrest and Berlwood
to elect to fund draws on the basis of a promissory note or a common stock
investment or a combination of the two. If a common stock investment were
selected by either Berlwood or Woodcrest, the common stock was to be issued at
$.2536855 per share.
On August 7, 2001 we delivered to each of Woodcrest and Berlwood, a
promissory note in the stated principal amount of $750,000. These notes will
permit us to draw, from time to time, amounts up to but not exceeding an
aggregate of $1,500,000. On that date we also requested advances under the notes
totaling $300,000. We are obligated to repay the principal amount of the notes,
or such lesser amounts as may be advanced thereunder, and all accrued interest,
on or before April 30, 2002. Interest will accrue at the rate of ten percent
(10%) per annum.
Each of the stockholders also received a warrant to purchase 600,000
shares of our common stock at $1.50 per share. In connection with any future
advances under the promissory notes, we will issue similar
16
warrants to purchase four shares of our common stock for each $1.00 advanced.
The warrants are exercisable at any time prior to August 3, 2011. Both
"piggyback" and "demand" registration rights related to the shares to be
acquired upon exercise of the warrants are provided for in the warrants.
Item 3. Defaults Upon Senior Securities
NONE
Item 4. Submission of Matters to a Vote of Security Holders
NONE
Item 5. Other Information
NONE
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.
(b) We filed the following reports on form 8-K during the fiscal quarter ended
June 30, 2001
On June 4, 2001 we reported that Emergisoft Holding, Inc., a Nevada
corporation acquired Emergisoft Corporation, a Delaware corporation on
May 25, 2001. The acquisition was effectuated pursuant to an Agreement
and Plan of Merger, dated March 28, 2001 (the "Merger Agreement"), by
and among Emergisoft Nevada, Emergisoft Delaware, and EMS Acquisition
Corp.
On August 2, 2001 we reported interim financial results for the three
months ended March 31, 2001 on form 8-K/A and Form 10-SB Information.
17
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: August 14, 2001 By: /s/ Dan Witte
----------------------------
Dan Witte
Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
18
Exhibit Index
4.1 Berlwood Five, Ltd. Original Commitment Letter
4.2 Berlwood Five, Ltd. Commitment Letter
4.3 Berlwood Five, Ltd. Promissory Note
4.4 Berlwood Five, Ltd. Warrant
4.5 Woodcrest Capital, L.L.C. Original Commitment Letter
4.6 Woodcrest Capital, L.L.C. Commitment Letter
4.7 Woodcrest Capital, L.L.C. Promissory Note
4.8 Woodcrest Capital, L.L.C. Warrant