UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-QSB
(MARK ONE)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 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
of incorporation or organization) Number)
2225 Avenue J, Arlington, Texas 76006
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (817) 633-6665
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Number of shares outstanding as of November 14, 2001:
Class: Common Stock, par value $.001 Shares outstanding: 123,873,818
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 September 30, 2001 (unaudited)
Consolidated Statements of Operations
Three and nine months ended September 30, 2001 and 2000 (unaudited)
Consolidated Statements of Cash Flows
Nine months ended September 30, 2001 and 2000 (unaudited)
Notes to Consolidated Financial Statements (unaudited)
Item 2. Management's Discussion and Analysis of Financial Condition
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
Signatures
2
PART I. - FINANCIAL INFORMATION
Emergisoft Holding, Inc. and Subsidiaries
Consolidated Balance Sheets
December 31, 2000 September 30, 2001
Unaudited
Assets
Current assets:
Cash and cash equivalents $ 3,415,040 $ 11,893
Trade accounts receivable, net of allowance for
doubtful accounts of $11,290 100,839 78,104
Prepaid expenses - 32,387
----------- ---------
Total current assets 3,515,879 122,384
Equipment and fixtures, net 24,640 149,737
Other assets 32,127 18,500
----------- ---------
Total assets $ 3,572,646 $ 290,621
=========== =========
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable and accrued expenses $ 832,843 $626,607
Notes payable (net of discounts) 367,088 46,621
Deferred revenue 111,717 28,553
----------- ---------
Total current liabilities 1,311,648 701,781
Notes payable - long-term (net of discounts) 35,560 203,874
----------- ---------
Total liabilities 1,347,208 905,655
Commitments and contingencies
Stockholders' equity (deficit):
Common Stock, $.001 par value, 750,000,000 shares
authorized, 48,025,138 and 48,873,818 issued
and outstanding at December 31, 2000 and
September 30, 2001, respectively 48,025 48,874
Additional capital 16,733,970 18,304,930
Deferred compensation (1,106,344) (545,844)
Accumulated deficit (13,450,213) (18,422,994)
----------- -----------
Total stockholders' equity (deficit) 2,225,438 (615,034)
----------- -----------
Total liabilities and stockholders' equity $ 3,572,646 $ 290,621
=========== ============
See accompanying notes
3
Emergisoft Holding, Inc. and Subsidiaries
Consolidated Statements of Operations
Three Months Ended September 30 Nine Months Ended September 30
2001 2000 2001 2000
---- ---- ---- ----
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
Revenue $ 89,706 $ 491,812 $ 278,430 $ 838,787
Cost of revenue 7,022 27,125 8,814 125,207
General and administrative 975,459 1,412,008 2,900,290 3,495,296
Product development 587,167 579,269 2,359,312 1,019,352
---------- ----------- ---------- ----------
Total operating expenses 1,569,648 2,018,402 5,268,416 4,639,855
Loss from operations (1,479,942) (1,526,590) (4,989,986) (3,801,068)
Interest expense 215,833 43,669 178,927 124,793
---------- ----------- ---------- ----------
Loss before extraordinary gain on
extinguishment of debt (1,695,775) (1,570,259) (5,168,913) $ (3,925,861)
Gain on extinguishment of debt - - (196,132) -
Net loss $ (1,695,775) $ (1,570,259) $ ( 4,972,781) $ (3,925,861)
============= ============= ============== =============
Basic and diluted net loss per share $ (.03) $ (.07) $ (.10) $ (.20)
------------ ------------ ------------- -------------
Weighted average shares used to
compute basic and diluted net loss 48,873,818 23,816,194 48,805,277 19,294,000
per share ============ ============= ============= =============
See accompanying notes
4
Emergisoft Holding, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
Nine Months Ended September 30
----------------------------------------
2001 2000
----------------------------------------
Unaudited Unaudited
Operating Activities
Net loss $ (4,972,781) $ (3,925,861)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 257,814 209,612
Amortization of deferred compensation 568,718 342,267
Gain on extinguishment of debt (196,132) -
Stock-based expenses for equity issued to
vendors for services 197,781 1,771,001
Changes in assets and liabilities:
Accounts receivable 22,735 148,440
Other assets (18,760) (10,219)
Deferred revenue (83,164) (671,737)
Accounts payable and accrued expenses (206,236) 166,739
--------------- ----------------
Net cash used in operating activities (4,430,025) (1,969,758)
Investing Activity
Purchase of equipment and fixtures (148,453) (39,662)
--------------- ----------------
Cash used in investing activity (148,453) (39,662)
Financing Activities
Proceeds from notes payable 1,350,000 100,000
Repayment of notes payable and line of credit (182,711) (185,807)
Proceeds from issuance of common stock and
exercise of options 8,042 2,144,793
--------------- ----------------
Net cash provided by financing activities 1,175,331 2,058,986
--------------- ----------------
Net increase (decrease) in cash and cash equivalents (3,403,147) 49,566
Cash and cash equivalents, beginning of year 3,415,040 6,871
--------------- ----------------
Ending cash and cash equivalents $ 11,893 $ 56,437
================ ================
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 1,350,000 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 1,771,001
Deferred stock based compensation 8,218 630,000
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 nine month
periods ended September 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 nine-month period ended September 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. On October 24,
2001, Berlwood Five, Ltd., a current shareholder of ours, made an additional
$2,000,000 equity investment in exchange for 75,000,000 newly issued shares of
common stock. We have the right, but not the obligation, to repurchase all or
any portion of the 75,000,000 shares at a repurchase price per share of $.06,
exercisable at any time prior to October 25, 2002. 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 September 30, 2001 we had $11,893 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 nine months ended
September 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 $148,453
for the nine months ended September 30, 2001. We repaid $182,711 of our
indebtedness for the nine months ended September 30, 2001.
In April of this year lines of credit totaling $1,500,000 were made
available to us by two of our stockholders. On August 7, 2001 we requested and
received advances totaling $300,000 against the lines of credit. In connection
with these advances, warrants were issued allowing the stockholders to purchase
in total 1,200,000 shares of common stock at $1.50 per share. These warrants
terminate on August 3, 2011. Throughout the remainder of the third quarter of
2001 we requested and received advances against the lines of credit totaling
$1,050,000. In connection with these advances, warrants were issued allowing the
stockholders to purchase in total 4,200,000 shares of common stock at $.75 per
share. These warrants have a termination date of April 30, 2006. The warrants
contain a cashless exercise feature and the warrant holders have registration
rights. Under the terms of the promissory notes all outstanding principal and
interest was to be due
6
on April 30, 2002. The remaining available credit of $150,000 was advanced in
October of 2001. The advance in October 2001 brought the total due in connection
with the promissory notes to $1,500,000 and the total number of shares subject
to warrants issued in connection with the lines of credit to 6,000,000.
On October 24, 2001 the two shareholders agreed to extend the maturity on
the $1,500,000 indebtedness one year to April 30, 2003. In consideration for the
extension, we reduced the exercise price per share on the warrants issued in
connection with the advances from a weighted average exercise price of $.90 to
$.0267.
We utilize significant capital to design, develop and commercialize our
products. During the remainder of 2001, we intend to fund the marketing of our
products and related operational activities with our latest capital investment
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 unable to continue as a going concern or we may be required
to substantially reduce or curtail our activities.
At September 30, 2001, we had approximately $350,000 in commitments for
capital expenditures purchases. The payments for these purchases will be spread
over the next eight months.
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 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. Subsequent Events
On October 18, 2001 we announced termination of a letter of intent to
acquire EmSTAT Corporation, which had been entered into on July 24, 2001. The
termination was by mutual agreement.
On October 24, 2001 Berlwood Five, Ltd., a current shareholder of ours,
made an additional $2,000,000 equity investment in exchange for common stock.
Berlwood received 75,000,000 newly issued shares of our common stock in the
transaction. We have the right, but not the obligation, to
7
repurchase all or any portion of the 75,000,000 shares at a repurchase price per
share of $.06, exercisable at any time prior to October 24, 2002.
The share issuance to Berlwood increases the total number of our issued and
outstanding shares of common stock from 48,873,818 to 123,873,818, and increases
Berlwood's percentage ownership interest in our outstanding shares of capital
stock from 32.26% to 73.27%.
In connection with Berlwood's additional investment, Berlwood and Woodcrest
Capital, L.L.C. agreed to the termination of two agreements existing between
them concerning voting of their shares of our capital stock in the election of
directors and maintenance by them of equal levels of ownership of our capital
stock.
James A. Ryffel, a founding member of Woodcrest, resigned as a member of
our Board of Directors effective November 1, 2001. On November 2, 2001, Jim R.
Ross was elected to fill the vacancy created by Mr. Ryffel's resignation. Mr.
Ross is currently an attorney in private practice in Arlington, Texas.
Also, on October 24, 2001, Berlwood, Woodcrest and Westpoint Investors
Limited Partnership extended the maturity date on $1,500,000 of indebtedness
owed by us to those entities. The one year extension gives us until April 30,
2003 to repay the indebtedness. In consideration for the extension, we reduced
the exercise price per share on warrants issued to Berlwood, Woodcrest and
Westpoint to acquire up to a total of 6,000,000 shares of our common stock from
a weighted average exercise price per share of $.90 to $.0267.
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.
8
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 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 September 30, 2001 Compared to
the Three Months Ended September 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 nine months ended September 30, 2001 and 2000 our
revenues were generated by deferred license fee revenue and maintenance fees
pertaining to our ICUS based product. We have replaced 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).
9
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 September 30, 2001 were $89,706
compared to $491,812 in the same period last year. The decrease in revenues is
primarily due to the recognition of deferred license revenue of $433,075 for one
customer in the third quarter of 2000.
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 $7,022 in the third quarter of 2001which related to
depreciation of equipment and software used in the customer service area
compared to $27,125 recognized in the same period of 2000. The cost of revenue
in the third quarter of 2000 also related to depreciation of equipment used in
the customer service area and to license revenue deferred at December 31, 1999.
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 and new clients under
support and maintenance agreements. We provide a twenty-four hour, seven day a
week support for clients. These expenses will primarily consist of the costs
related to additional personnel and the equipment necessary to support the
customer support center.
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 third quarter 2001 were
$975,459 compared to $1,412,008 in 2000. The decrease of $436,549 is primarily
the result of lower stock based compensation expense. During the three months
ended September 30, 2001 we recorded $112,514 in stock based compensation
expense. In the three months ended September 30, 2000 we recorded $542,415 in
stock based compensation expense.
Product Development Expenses
Development expenses consist of costs related to the development of
CareLyncED(TM) and GroupLyncEM(TM). Product development expenses were virtually
unchanged in the three months ended September 30, 2001 compared to the same
period of 2000. Development expenses for the three months ended September 30,
2001 were $587,167 compared to $579,269 in the same period of 2000. Outside
contractor expenses were lower in the third quarter of 2001, but were offset by
increased salary expense due to efforts to increase involvement of Emergisoft's
personnel in the development and testing processes for CareLyncED(TM) and
GroupLyncEM(TM). In the three months ended September 30, 2001 expenses resulting
from outside contractors and consultants were $319,938 compared to $579,269 for
the same period in 2000.
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.
10
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.
Results of Operations for the nine months ended September 30, 2001 compared to
the nine months ended September 30, 2000
Revenues
Revenue for the nine months ended September 30, 2001 was $278,430 compared
to $838,787 for the nine months ended September 30, 2000, a decrease of
$560,357. The decrease was due primarily to lower license revenues in 2001 of
$26,000 compared to license revenues in 2000 of $645,075, which resulted from
revenues deferred at December 31, 1999.
Cost of Revenues
Cost of revenues for the nine months ended September 30, 2001 was $8,814
compared to $125,207 for the nine months ended September 30, 2000, reflecting
reduced deferred 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). The majority of these
future costs will be related to increased headcount in customer support
positions and depreciation related to purchases of assets such as customer
tracking software and equipment for use by the customer support department.
General and Administrative Expenses
Our general and administrative expenses decreased by $595,006 to $2,900,290
for the nine months ended September 30, 2001 compared to $3,495,296 for the same
period in 2000. This decrease is primarily related to stock based compensation
expense which decreased by $742,282. The decrease in stock based compensation
was offset in 2001 by higher advertising expenses of $61,221, higher recruiting
fees of $61,017, and higher expenses related to tradeshow attendance of $20,045.
11
Product Development Expenses
Development expenses consist of costs related to the development of
CareLyncED(TM) and GroupLyncEM(TM). Product development expenses increased for
the nine month period ended September 30, 2001 to $2,359,312 compared to
$1,019,352 for the nine month period ended September 30, 2000. The increase is
primarily due to the increased use of outside contractors in the first two
quarters of 2001 and our effort to accelerate the completion of CareLyncED(TM)
and GroupLyncEM(TM). For the nine month period ended September 30, 2001 outside
contractor expenses were $1,757,665 compared to $1,019,352 in the same period of
2000. Development expenses related to internal personnel were $450,541 in
salaries and related payroll taxes and $63,010 in recruiting fees for the nine
months ended September 30, 2001. There were no internal personnel costs
allocated or recruiting fees related to development in 2000. We use our own
personnel as well as outside contractors in the development efforts of our new
products CareLyncED(TM) and GroupLyncEM(TM). We announced the release of
CareLyncED(TM) on July 26, 2001 and we anticipate GroupLyncEM(TM) to be
completed during the first quarter of 2002. 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.
Liquidity and Capital Resources
We have historically financed our operations primarily through private
placements of our common stock and advances from stockholders. On October 24,
2001, Berlwood Five, Ltd., a current shareholder of ours, made an additional
$2,000,000 equity investment in exchange for 75,000,000 newly issued shares of
common stock. We have the right, but not the obligation, to repurchase all or
any portion of the 75,000,000 shares at a repurchase price per share of $.06,
exercisable at any time prior to October 25, 2002. 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 September 30, 2001 we had $11,893 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 nine months ended
September 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 $148,453
for the nine months ended September 30, 2001. We repaid $182,711 of our
indebtedness for the nine months ended September 30, 2001.
In April of this year lines of credit totaling $1,500,000 were made
available to us by two of our stockholders. On August 7, 2001 we requested and
received advances totaling $300,000 against the lines of credit. In connection
with these advances, warrants were issued allowing the stockholders to purchase
in total 1,200,000 shares of common stock at $1.50 per share. These warrants
terminate on August 3, 2011.
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Throughout the remainder of the third quarter of 2001 we requested and received
advances against the lines of credit totaling $1,050,000. In connection with
these advances, warrants were issued allowing the stockholders to purchase in
total 4,200,000 shares of common stock at $.75 per share. These warrants have a
termination date of April 30, 2006. The warrants contain a cashless exercise
feature and the warrant holders have registration rights. Under the terms of the
promissory notes all outstanding principal and interest was to be due on April
30, 2002. The remaining available credit of $150,000 was advanced in October of
2001. The advance in October 2001 brought the total due in connection with the
promissory notes to $1,500,000 and the total number of shares subject to
warrants issued in connection with the lines of credit to 6,000,000.
On October 24, 2001 the two shareholders agreed to extend the maturity on
the $1,500,000 indebtedness one year to April 30, 2003. In consideration for the
extension, we reduced the exercise price per share on the warrants issued in
connection with the advances from a weighted average exercise price of $.90 to
$.0267.
We utilize significant capital to design, develop and commercialize our
products. During the remainder of 2001, we intend to fund the marketing of our
products and related operational activities with our latest capital investment
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 unable to continue as a going concern or we may be required
to substantially reduce or curtail our activities.
At September 30, 2001, we had approximately $350,000 in commitments for
capital expenditures purchases. The payments for these purchases will be spread
over the next eight months.
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 $4,972,781 for the nine months ended September 30, 2001 and, as of September
30, 2001 we have an accumulated deficit of $18,422,994. 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.
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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.
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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.
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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.
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PART II. - OTHER INFORMATION
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
Berlwood Five, Ltd., a current shareholder of ours, made an additional
$2,000,000 equity investment in us on October 24, 2001. Berlwood received
75,000,000 newly issued shares of our common stock in the transaction. We have
the right, but not the obligation, to repurchase all or any portion of the
75,000,000 shares at a repurchase price per share of $.06, exercisable at any
time prior to October 24, 2002.
The share issuance to Berlwood increases the total number of our issued and
outstanding shares of common stock from 48,873,818 to 123,873,818, and increases
Berlwood's percentage ownership interest in our outstanding shares of capital
stock from 32.26% to 73.27%.
In connection with Berlwood's additional investment, Berlwood and Woodcrest
Capital, L.L.C. agreed to the termination of two agreements existing between
them concerning voting of their shares of our capital stock in the election of
directors and maintenance by them of equal levels of ownership of our capital
stock.
James A. Ryffel, a founding member of Woodcrest, resigned as a member of
our Board of Directors effective November 1, 2001. On November 2, 2001, Jim R.
Ross was elected to fill the vacancy created by Mr. Ryffel's resignation. Mr.
Ross is currently an attorney in private practice in Arlington, Texas.
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.
None
(b) We filed the following reports on form 8-K during the fiscal quarter ended
September 30, 2001
On August 2, 2001, we reported interim financial results for the three month
period ended March 31, 2001 on Form 8-K/A and Form 10-SB information
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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.
Emergisoft Holding, Inc.
Date: November 14, 2001 By: /s/ Dan Witte
-----------------------------------
Dan Witte
Chief Operating Officer and
Chief Financial Officer
(Principal Financial and Accounting
Officer and Duly Authorized Officer)
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