UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 1997
--------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission file number O - 22083
------------------------
GLOBAL MED TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its charter)
COLORADO 84-116894
- ---------------------------- --------------------------------
(State or other jurisdiction (IRS Employer Identification No.)
of incorporation or organization)
12600 West Colfax, Suite A-500, Lakewood, Colorado 80215
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(Address of principal executive offices)
(303) 238-2000
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(Issuer's telephone number)
Not Applicable
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(Former name, former address and former fiscal year, if changed
since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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
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As of September 30, 1997, 8,135,755 shares of the issuer's Common Stock were
outstanding.
Transitional Small Business Disclosure Format Yes No X
----- -----
<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1997
TABLE OF CONTENTS
PAGE NO.
Part I. Financial Information
Item 1. Financial Statements
a. Consolidated Balance Sheets as of
September 30, 1997 (unaudited) and
December 31, 1996 . . . . . . . . . . . . . . . . . . 3
b. Unaudited Consolidated Statements of Operations
for the three months ended September 30, 1997 and
September 30, 1996 and for the nine months ended
September 30, 1997 and September 30, 1996 . . . . . . 5
c. Unaudited Consolidated Statement of Stockholders'
Equity (Deficit) for the nine months ended
September 30, 1997. . . . . . . . . . . . . . . . . . 6
d. Unaudited Consolidated Statements of Cash Flows
for the nine months ended September 30, 1997
and 1996. . . . . . . . . . . . . . . . . . . . . . . 7
e. Notes to Unaudited Consolidated Financial Statements. 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . 14
Part II. Other Information . . . . . . . . . . . . . . . . . . . . . . . 26
Item 2. Changes in Securities and Use of Proceeds
f. Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
b. Reports on Form 8-K
2
<PAGE>
Part I - Financial Information
Item 1. Financial Statements
Global Med Technologies, Inc.
Consolidated Balance Sheets
(In thousands)
SEPTEMBER 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
---------------------------
ASSETS:
Cash and cash equivalents $ 2,522 $ 489
Accounts receivable-trade, net of
allowance for uncollectible
accounts of $175 and $75 at
September 30, 1997 and December 31,
1996, respectively 825 875
Unbilled revenues, net of allowance
for uncollectible accounts of $125
at September 30, 1997
and December 31, 1996 113 326
Prepaid expenses and other assets 275 196
Deferred offering costs - 486
----------------------------
Total current assets 3,735 2,372
Equipment and fixtures, at cost:
Furniture and fixtures 348 67
Machinery and equipment 276 -
Computer hardware and software 1,088 613
----------------------------
1,712 680
Less accumulated depreciation
and amortization (529) (189)
----------------------------
1,183 491
Capitalized software development
costs, less accumulated amortization
of $343 and $163 at September 30, 1997
and December 31, 1996, respectively 196 376
----------------------------
Total assets $ 5,114 $ 3,239
============================
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
3
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Global Med Technologies, Inc.
Consolidated Balance Sheets (continued)
(In thousands, except par value information)
SEPTEMBER 30,
1997 DECEMBER 31,
(UNAUDITED) 1996
---------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable $ 506 $ 483
Accrued expenses 505 731
Accrued payroll 219 243
Accrued compensated absences 389 352
Noncompete accrual 150 150
Unearned revenue 1,922 1,359
Short-term debt - 1,097
Notes payable (including $181 to
related parties at December 31, 1996) - 651
Current portion of capital lease
obligations 235 169
Net liabilities of discontinued
operations 666 1,132
----------------------------
Total current liabilities 4,592 6,367
Capital lease obligations,
less current portion 235 232
Commitments and contingencies - -
Stockholders' equity (deficit):
Preferred stock, $.01 par value:
Authorized shares - 10,000
None issued or outstanding - -
Common stock, $.01 par value:
Authorized shares - 40,000
Issued and outstanding shares - 8,136
and 4,994 at September 30, 1997 and
December 31, 1996, respectively 81 50
Additional paid-in capital 13,349 4,282
Accumulated deficit (13,143) (7,692)
----------------------------
Total stockholders' equity (deficit) 287 (3,360)
----------------------------
Total liabilities and stockholders'
equity (deficit) $ 5,114 $ 3,239
============================
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
4
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Global Med Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per common share information)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
1997 1996 1997 1996
--------------------------------------------------
<S> <C> <C> <C> <C>
Revenue:
Software sales and consulting $ 564 $ 656 $ 1,929 $ 3,478
Hardware and software,
obtained from vendors 46 731 266 771
--------------------------------------------------
TOTAL REVENUE 610 1,387 2,195 4,249
Cost of revenue:
Software sales and consulting 477 197 1,067 767
Hardware and software,
obtained from vendors 22 749 190 807
--------------------------------------------------
TOTAL COST OF REVENUE AND 499 946 1,257 1,574
PRODUCT DEVELOPMENT
--------------------------------------------------
Gross profit 111 441 938 2,675
Operating expenses:
Payroll and other 359 541 1,330 1,063
General and administrative 338 292 915 600
Sales and marketing 614 299 1,100 700
Research and development 716 427 1,794 1,152
Provision for doubtful accounts 30 5 100 14
Depreciation and amortization 115 43 269 116
--------------------------------------------------
LOSS FROM CONTINUING
OPERATIONS (2,061) (1,166) (4,570) (970)
Interest income 32 16 147 26
Interest expense (20) (56) (67) (124)
Other - - (81) -
--------------------------------------------------
Loss from continuing
operations before provision for
income taxes (2,049) (1,206) (4,571) (1,068)
Provision for income taxes - - - -
--------------------------------------------------
Loss from continuing
operations (2,049) (1,206) (4,571) (1,068)
Loss from discontinued operations - (467) (880) (1,006)
--------------------------------------------------
NET LOSS $ (2,049) $ (1,673) $ (5,451) $ (2,074)
==================================================
NET LOSS PER SHARE
OF COMMON STOCK
Loss from continuing
operations $ (0.27) $ (0.28) $ (0.61) $ (0.24)
Loss from discontinued
operations $ 0.00 $ (0.11) $ (0.12) $ (0.23)
--------------------------------------------------
Net loss $ (0.27) $ (0.39) $ (0.73) $ (0.47)
==================================================
Weighted average of common
shares outstanding 7,484 4,377 7,484 4,377
==================================================
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
5
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Global Med Technologies, Inc.
Consolidated Statement of Stockholders' Equity (Deficit)
(In thousands)
<TABLE>
<CAPTION>
Common Stock Additional
------------------------ Paid-In Accumulated
Shares Amount Capital Deficit Total
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, December 31, 1996 4,994 $50 $ 4,282 $ (7,692) $(3,360)
Issuance of warrants
related to January 1997
12% notes (unaudited) - - 79 - 79
Initial public offering,
including underwriter's
overallotment option-net
of offering expenses
(unaudited) 2,914 29 8,197 - 8,226
Expiration of common stock
options to a business
advisory enterprise
(unaudited) - - (45) - (45)
Share adjustments related
to May 1995 private
placement common stock
(unaudited) 120 1 (1) - -
Issuance of common stock
from exercise of stock
options under Company's
stock option plan
(unaudited) 15 - 21 - 21
Issuance of common stock
related to conversion
of certain 10% notes
(unaudited) 93 1 348 - 349
Option grants under the
Company's stock option
plan (unaudited) - - 268 - 268
Option grants to a business
advisory enterprise(unaudited) - - 200 - 200
Net loss (unaudited) - - - (5,451) (5,451)
----------------------------------------------------------------
Balance, September 30, 1997
(unaudited) 8,136 $81 $13,349 $(13,143) $287
================================================================
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
6
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Global Med Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
---------------------------
OPERATING ACTIVITIES
Net loss $ (5,451) $ (2,074)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Net loss of discontinued operations 880 1,006
Depreciation and amortization 449 164
Loss on disposal of assets 2 -
Warrant issuance 502 -
Changes in operating assets and
liabilities:
Accounts receivable-trade, net 50 (1,362)
Unbilled revenues, net 213 (973)
Note receivable - (250)
Prepaid expenses and other assets (79) (97)
Accounts payable 23 343
Accrued expenses (226) 262
Accrued payroll (24) 960
Accrued compensated absences 37 114
Noncompete accrual - (175)
Unearned revenue 563 398
----------------------------
Net cash used in continuing operations (3,061) (1,684)
Net cash used in discontinued operations (1,255) (1,024)
----------------------------
Net cash used in operating activities $ (4,316) $ (2,708)
INVESTING ACTIVITIES
Purchases of equipment and fixtures (670) (70)
Capital expenditures of discontinued
operations (58) (44)
Increase in software development costs - (70)
----------------------------
Net cash used in investing activities (728) (184)
FINANCING ACTIVITIES
Borrowings on short-term debt 450 575
Principal payments on short-term debt (1,547) (105)
Principal payments under capital
lease obligations (150) (88)
Principle payments under capital lease
obligations of discontinued operations (107) (166)
Principal payments on notes payable (327) -
Issuance of notes payable - 751
Issuance of common stock 8,272 2,441
Deferred offering costs 486 (350)
----------------------------
Net cash provided by financing
activities 7,077 3,058
----------------------------
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
7
<PAGE>
Global Med Technologies, Inc.
Consolidated Statements of Cash Flows (continued)
(Unaudited)
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
---------------------------
(IN THOUSANDS)
Net decrease in cash and
cash equivalents $ 2,033 $ 166
Cash and cash equivalents at
beginning of period 489 422
----------------------------
Cash and cash equivalents at
end of period $ 2,522 $ 588
============================
Supplemental disclosures:
The Company entered into capital lease obligations of approximately
$115,000 and $580,000 during the nine months ended September 30,
1997 and 1996, respectively, including $359,000 related to
discontinued operations during the nine months ended September 30,
1996.
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
8
<PAGE>
Notes to Unaudited Consolidated Financial Statements
1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Global Med
Technologies, Inc. (the "Company") have been prepared by management in
accordance with generally accepted accounting principles for interim
financial information and in accordance with the regulations of the
Securities and Exchange Commission. Accordingly, they do not include all
information and footnotes required by generally accepted accounting
principles for complete financial statements. In the opinion of
management, all adjustments (consisting of only normal recurring
adjustments) considered necessary for a fair presentation of its financial
position at September 30, 1997 and the results of its operations for the
nine months and the three months ended September 30, 1997 and 1996 have
been included.
While management believes the disclosures presented are adequate to prevent
misleading information, it is suggested that the accompanying unaudited
consolidated financial statements be read in conjunction with the audited
consolidated financial statements for the year ended December 31, 1996 and
the notes thereto contained in the Company's Prospectus dated October 29,
1997. The interim results of operations for the nine months and the three
months ended September 30, 1997 are not necessarily indicative of the
results that may be expected for any other interim period of 1997 or for
the year ending December 31, 1997.
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company's management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
The unaudited consolidated financial statements reflect the sale of the
Company's DataMed International division as discontinued operations in
accordance with Accounting Principles Board Opinion No. 30 ("APB 30") (see
Note 2).
2. DISCONTINUED OPERATIONS
On August 18, 1997, the Company entered into an asset purchase agreement
with National Medical Review Offices, Inc. ("NMRO") which provides for the
sale of certain assets and liabilities of the Company's DataMed
International division ("DataMed") to NMRO ("the DataMed Agreement"). The
DataMed Agreement provides that NMRO will (i) pay the Company $1.2 million
in cash, $600,000 of which was deposited into an escrow account with a bank
on July 2, 1997, (ii) assume certain capital lease obligations related to
DataMed as of June 30, 1997, (iii) assume accounts payable and accrued
expenses related to DataMed as of June 30, 1997, and (iv) be assigned
accounts receivable related to DataMed at June 30, 1997. The sale of
DataMed is subject to the approval of the Company's shareholders at a
meeting scheduled to be held on December 2, 1997. NMRO has advised the
Company that following the closing ("the Closing") of the Data Med
Agreement, NMRO has agreed to sell DataMed to Substance Abuse Technologies,
Inc. ("SAT"), a publicly traded company.
9
<PAGE>
Effective at closing of the DataMed Agreement, the existing interim
management agreement (the "Management Agreement"), which was entered into
between the Company and NMRO on July 7, 1997, effective June 30, 1997, will
terminate. Under the Management Agreement, NMRO assumed direction and
control of the business and operations of DataMed. On July 15, 1997, the
Company was notified that NMRO had assigned the Management Agreement to
SAT. The contracts pursuant to which DataMed performs substance abuse
testing for its customers are not assignable. Therefore, the Company has
agreed to encourage DataMed's customers to enter into new substance abuse
testing contracts with NMRO, and to use its best efforts to facilitate
customers' transfer to NMRO. In the event current DataMed customers do not
enter into new substance abuse contracts with NMRO, there will be no
adjustment in the $1.2 million cash purchase price to be paid to the
Company.
NMRO has advised the Company that it received the $600,000 which has been
placed in escrow from SAT. The Company also has been informed that the
additional $600,000 of the $1.2 million to be paid to the Company at
Closing, will also be paid by SAT.
On September 10, 1997, SAT announced that it had filed a voluntary petition
for reorganization under Chapter 11 of the Bankruptcy Code in the United
States Bankruptcy Court for the Southern District of Florida. In the
announcement, as well as within the documents filed with the court, SAT
stated that it plans to complete the acquisition of DataMed from NMRO
through financing it has obtained.
At Closing, NMRO or SAT may offer to employ certain employees of DataMed at
compensation levels to be negotiated, provided that NMRO or SAT may make
changes in job description and other terms to meet operational objectives.
Included in the employees expected to be employed by either NMRO or SAT is
Bart K. Valdez, who is currently the Chief Financial Officer of the
Company, as well as the Director of Operations of DataMed (see Note 8).
The terms of the DataMed Agreement with NMRO resulted from arm's length
negotiations between representatives of the Company and representatives of
NMRO.
Consummation of the DataMed Agreement is dependent upon completion of
NMRO's due diligence, approval of the Company's shareholders at the meeting
of the Company's shareholders scheduled to occur on December 2, 1997 and
various other conditions. The DataMed Agreement will also include the
Company's agreement not to compete with NMRO in the substance abuse testing
business and to maintain the confidentiality of DataMed's trade secrets.
10
<PAGE>
Global Med Technologies, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
(In thousands, except per common share information)
The unaudited operating results of the discontinued operations (DataMed)
are summarized as follows:
NINE MONTHS ENDED
SEPTEMBER 30,
1997 1996
---------------------------
Substance abuse testing and
other revenue $ 2,953 $ 4,680
Cost of revenue 2,151 2,909
----------------------------
Gross profit $ 802 $ 1,771
============================
Net loss $ (880) $ (1,006)
============================
The unaudited net liabilities of the discontinued operations (DataMed) are
summarized as follows:
SEPTEMBER 30, DECEMBER 31,
1997 1996
---------------------------
Current assets $ 913 $ 1,022
Equipment and fixtures, net 472 738
Current liabilities (1,789) (2,426)
Long-term liabilities (262) (466)
----------------------------
Net liabilities $ (666) $ (1,132)
============================
3. INITIAL PUBLIC OFFERING AND LIQUIDITY AND MANAGEMENT'S PLANS
During the first quarter of 1997, the Company completed an initial public
offering in which approximately 2,914,000 shares of common stock were
issued (including approximately 240,000 shares issued in connection with
the exercise of the underwriter's over-allotment option) which
11
<PAGE>
provided the Company with approximately $8.2 million in net proceeds, net
of expenses (the February 1997 public offering).
From inception to September 30, 1997, the Company incurred cumulative net
losses of approximately $13.1 million. The Company expects to continue to
incur losses until 1999, and possibly thereafter, until its existing
SAFETRACE(R) software product is fully implemented and fully operational
within the Company's customers information system environments and until
its transfusion management information system software product, which is
currently under development, is established in its markets.
During the quarter ended June 30, 1997, management became aware of certain
delays in future software license fee revenues expected from certain large
internationally based blood centers and hospital organizations. In
addition, the implementation cycle for Wyndgate's SAFETRACE(R) software
product is running longer than originally anticipated. Based on this
information, management anticipates that the Company's current and
anticipated cash balances, including the proceeds from the February 1997
public offering, will not be sufficient to meet the Company's capital or
liquidity requirements for management's plan of operations and its planned
software development programs. Management's plans include the sale of
additional equity securities and the sale of DataMed (see Note 2). If the
Company is unable to obtain adequate financing and if the sale of DataMed
is not approved by the shareholders of the Company, management will be
required to significantly reduce the Company's software development
programs and most of its operating expenses.
4. COMMITMENTS AND CONTINGENCIES
During November 1996, the Company (through its Wyndgate division) entered
into an Exclusivity and Software Development Agreement with Ortho
Diagnostic Systems, Inc. (ODSI), a subsidiary of Johnson & Johnson ("ODSI
Agreement"). The ODSI Agreement requires the Company to perform certain
software development services in consideration of the payment by ODSI of
$500,000 received by the Company in November 1996, and an additional
payment of $500,000 received by the Company in January 1997. Both payments
received by the Company are included in unearned revenue at September 30,
1997. The ODSI Agreement provided that until May 14, 1997 (the
"Exclusivity Period"), ODSI had the exclusive right to negotiate with the
Company with respect to the Company's activities and developments in
information technology and intellectual property relating to donor and
transfusion medicine (the "Technology") and that, during the Exclusivity
Period, the Company would not, directly or through any intermediary,
accept, encourage, solicit, entertain or otherwise discuss any acquisition
of any of the Company's
12
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common stock, business, property or know-how, including the Technology,
with any person or entity other than ODSI or an affiliate thereof and would
not otherwise encumber the ability of ODSI or an affiliate thereof to enter
into any arrangement with the Company concerning the Technology. Prior to
the expiration of the Exclusivity Period, the Company received
communication from ODSI that it had not yet completed an internal
evaluation of the Company's Technology and would not be prepared at the
conclusion of the Exclusivity Period to discuss any form of proposed
transaction between the Company and ODSI. ODSI requested, and the Company
agreed, that ODSI be permitted to continue its evaluation of the Company's
Technology, on a non-exclusive basis, with the intent of responding to the
Company by July 14, 1997 regarding whether or not they would propose some
form of transaction with the Company. On July 14, 1997, the parties agreed
to a further extension to September 30, 1997. The parties have further
agreed to continue such negotiations, on a non-exclusive basis, until
December 31, 1997.
Pursuant to the ODSI Agreement, the Company granted ODSI a right of first
refusal for a period of six months after the expiration of the Exclusivity
Period in the event the Company proposes to transfer, dispose of, sell,
lease, license (except on a non-exclusive basis in the ordinary course of
its business), mortgage or otherwise encumber or subject to any pledge,
claim, lien, charge, encumbrance or security interest (except for a
security interest with a bank which was in effect at the time the ODSI
Agreement was negotiated) of any kind or any nature of the Technology. In
connection with the extension of the ODSI Agreement to September 30, 1997,
ODSI relinquished its right of first refusal.
5. SHORT-TERM DEBT
As of December 31, 1996, the Company owed $1,097,000 in short-term debt.
This amount, plus accrued interest, was paid in full out of the net
proceeds of the February 1997 public offering during the nine months ended
September 30, 1997.
6. NOTES PAYABLE
As of December 31, 1996, the Company owed $651,000 related to a 1996 10%
note offering. Of the $651,000, $327,000, plus accrued interest, was paid
in full during the nine months ended September 30, 1997 out of the net
proceeds of the February 1997 public offering. The remaining balance of
$324,000, plus accrued interest of $24,750, was converted into
approximately 93,000 shares of common stock during the nine months ended
September 30, 1997.
7. NET LOSS PER SHARE
In February 1997, the Financial Accounting Standards Board issued Statement
No. 128, Earnings Per Share, which is required to be adopted on December
31, 1997. At that time, the Company will be required to change the method
currently used to compute net loss per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact
of Statement 128 on the calculation of primary and fully diluted net loss
per share for the nine months ended September 30, 1997 and September 30,
1996 is not expected to be material.
8. SUBSEQUENT EVENTS
In October 1997, the Company and Bart K. Valdez, the Company's CFO, entered
into a severance agreement pursuant to which Mr. Valdez will terminate his
employment with the Company upon the closing of the sale of DataMed and
will receive a lump sum payment of approximately $55,000.
13
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
- --------
Global Med Technologies, Inc. is comprised of two operating divisions,
Wyndgate Technologies ("Wyndgate") and DataMed International ("DataMed").
Wyndgate designs, develops, markets and supports information management
software products for the blood bank industry, which primarily consists of
blood centers, hospitals and other health care facilities. Revenues for
Wyndgate are derived from licensing of software, providing consulting and
implementation services, on-going customer support services, other value-
added support services and the re-sale of related hardware and software
obtained from vendors. DataMed is in the business of substance abuse
testing and medical surveillance management services, including medical
review officer functions, data management, record storage and coordination
of all substance abuse testing program elements. Revenues for DataMed are
derived from the providing substance abuse testing management services and
the coordination and re-sale of laboratory and collection site services for
substance abuse tests. The Company, has entered into an agreement to sell
DataMed, subject to shareholder approval (See Note 2 to the Unaudited
Consolidated Financial Statements herein).
During the three months ended March 31, 1997, the Company completed an
initial public offering in which approximately 2,914,000 shares of common
stock were issued and provided the Company with approximately $8.2 million,
net of expenses (the February 1997 public offering). Through September 30,
1997, the Company has used approximately $6.2 million of the net proceeds
from the February 1997 public offering. The use of proceeds to date have
been primarily expended to repay short-term debt, notes payable, accounts
payable and other accrued expenses, to fund Wyndgate's research and
development and sales and marketing efforts, as well as for general working
capital purposes. Due to delays in the software license fee revenues and
delays in the implementation cycles discussed below as part of Liquidity
and Capital Resources, the Company's use of the net proceeds from the
February 1997 public offering for working capital purposes has been, and is
expected to continue to be, greater than originally anticipated. As a
result, management anticipates that the remaining funds from the February
1997 public offering and its anticipated net cash flow from continuing
operations will not be sufficient to meet the Company's capital or
liquidity requirements for management's plan of operations and its planned
software development programs.
From inception to September 30, 1997, the Company incurred cumulative net
losses of approximately $13.1 million. The Company expects to continue to
incur losses until 1999, and possibly thereafter, until its existing
SAFETRACE(R) software product is fully implemented and fully operational
within the Company's customers information system environments and until
its transfusion management information system software product, which is
currently under development, is established in its markets.
The Company's Wyndgate division has historically incurred, and expects to
continue to incur, losses related to its operations, including the
continued costs for research and development of new software products by
Wyndgate and the expansion of its sales and marketing organization. The
timing and amounts of the Company's expenditures will depend upon a number
of factors, including the progress of the Company's research and
development efforts, the status and timing of regulatory approval for
Wyndgate's software products, the timing of market acceptance of the
Company's products, the level of support needed by the Company's customers
to implement the software products they license from Wyndgate, and the
efforts required to develop the Company's sales and marketing organization.
This Quarterly Report contains certain forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of 1995
including, without limitation, statements regarding the sufficiency of the
Company's liquidity and sources of capital. Any statements contained
herein which are not historical facts or which contain the words expect,
believe or anticipate, or words of similar import shall be deemed to be
forward-looking statements. These
14
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forward-looking statements are subject to certain risks, uncertainties and
other factors which could cause actual results to differ materially.
Additional information regarding factors that could potentially affect the
Company or its financial results may be included in the Company's filings
with the Securities and Exchange Commission.
The results of operations for the nine months and the three months ended
September 30, 1997 are not necessarily indicative of the results that may
be expected for any other interim period of 1997 or for the year ending
December 31, 1997.
Results of Operations for the three and nine months ended September 30,
- -----------------------------------------------------------------------
1997 and 1996
- -------------
REVENUES. Revenues are comprised of software sales and consulting
revenues, and the re-sale of hardware and software obtained from vendors.
Revenues from software sales and consulting decreased compared to the same
periods in 1996 by $1,549,000 or 45% and $92,000 or 14% for the nine months
and the three months ended September 30, 1997, respectively. This decrease
in software sales and consulting revenue is primarily the result of
significantly reduced sales and related deliveries of Wyndgate's
SAFETRACE(R) software products, which were partially due to the delays in
software license fee revenue previously expected from certain large
internationally based hospitals and blood centers (See Liquidity and
Capital Resources for a further discussion of these delays and Certain
Factors Bearing on Future Results - Revenue Fluctuations).
Revenues from the re-sale of hardware and software, obtained from vendors
decreased compared to the same periods in 1996 by $505,000 or 65%, and
$685,000 or 94%, for the nine months and the three months ended September
30, 1997, respectively. This decrease was primarily due to decreases in the
average price per order and in the number of Wyndgate customers which
ordered third party hardware and software through Wyndgate.
The Company's sales and marketing efforts and its software development
programs will continue to be focused on current and future Wyndgate
software products and services. If future sales of Wyndgate's SAFETRACE(R)
software product licenses are less than management anticipates; if future
sales of Wyndgate's SAFETRACE(R) software product licenses require Wyndgate
to complete significant customizations upon delivery; if there are delays
in the currently anticipated implementation schedules for Wyndgate's
existing SAFETRACE(R) customers; if there are delays in the currently
anticipated development schedule, regulatory clearance timing and market
acceptance for Wyndgate's transfusion management information system
software product currently under development, the Company's future
revenues, gross margins, and liquidity may be materially adversely
affected.
COST OF REVENUE. Cost of revenue as a percentage of revenues was 57% and
82% for the nine months and the three months ended September 30, 1997,
respectively, compared to 37% and 68% for the nine months and the three
months ended September 30, 1996, respectively.
Cost of software sales and consulting as a percentage of the related
revenue was 55% and 85% for the nine months and the three months ended
September 30, 1997, respectively, compared to 22% and 30% for the same
periods in 1996. This increase was primarily a result of decreased sales
of Wyndgate's SAFETRACE(R) software product licenses which are typically
priced at higher profit margins than revenues from consulting and
implementation related services. Additionally, personnel increases and
related benefit and travel expenses for customer implementations, customer
training and customer support services also contributed to the increase in
cost of software sales and consulting.
Cost of hardware and software, obtained from vendors as a percentage of the
related revenue was 71% and 48% for the nine months and the three months
ended September 30, 1997, respectively, compared to 105% and 102% for the
same periods in 1996. Typically, revenues from the re-sale of hardware and
software, obtained from vendors are priced at lower profit margins than
revenues from software sales and consulting.
The Company's consulting, implementation and customer service efforts will
continue to be focused on current and future Wyndgate software products and
services. If the currently anticipated costs of consulting, implementation
and customer service for Wyndgate's current and future SAFETRACE(R)
software product licensees and for future customers of its transfusion
management information system software product currently under development,
are more than management anticipates, the Company's future gross margins,
and liquidity may be materially adversely affected.
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GROSS PROFIT. Gross profit as a percentage of revenue was 43% and 18% for
the nine months and the three months ended September 30, 1997,
respectively, compared to 63% and 32% for the same periods in 1996. This
decrease in gross profit was primarily a result of the decreased sales of
the higher margin SAFETRACE(R) software products discussed above.
PAYROLL AND OTHER. Payroll and other increased $267,000 or 25% for the nine
months ended September 30, 1997, and decreased $182,000 or 34% for the
three months ended September 30, 1997, compared to the same periods in
1996. The increase in payroll and other during the nine months ended
September 30, 1997 was primarily due to increased salary and employee
benefit costs incurred as a result of the hiring of additional personnel
which were anticipated to be necessary to manage Wyndgate's expanded
operations. The decrease in payroll and other during the three months ended
September 30, 1997 was primarily due to decreased administrative and other
management personnel payroll related expenses as a result of less
administrative and related personnel deemed necessary by management for the
Company's remaining Wyndgate operations (See Note 2 to the Unaudited
Consolidated Financial Statements herein).
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
$315,000 or 53% and $46,000 or 16% for the nine months and the three months
ended September 30, 1997, respectively, compared to the same periods in
1996. The increase in general and administrative expenses was attributable
primarily to third quarter 1997 expenses of approximately $80,000 related
to grants of certain stock options and increases in expenses for outside
contract services, various insurance related items, leased office space and
other general and administrative activities which were related to the
increase in the number of Wyndgate employees.
SALES AND MARKETING. Sales and marketing expenses increased $400,000 or
57% and $315,000 or 105% for the nine months and the three months ended
September 30, 1997, respectively, compared to the same periods in 1996. The
increase in sales and marketing expenses was primarily due to 1997 expenses
of approximately $280,000 related to grants of certain stock options to a
business advisory enterprise and to others involved in corporate marketing
efforts for the Company. Management expects there will be additional
increases in sales and marketing expenses if the Company is successful in
developing and introducing its transfusion management information system
software product currently under development and if the Company receives
additional capital as a result of its current capital raising efforts.
RESEARCH AND DEVELOPMENT. Research and development expenses increased
$642,000 or 56% and $289,000 or 68% for the nine months and the three
months ended September 30, 1997, respectively, compared to the same periods
in 1996. The increase in research and development expenses was primarily
due to an increase in the number of employees assigned to the development
of Wyndgate's transfusion management information system software product.
Management expects research and development expenses to increase as
additional software development of Wyndgate's transfusion management
information system software product is planned within the fourth quarter of
1997.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts
increased $86,000 or 614% for the nine months ended September 30, 1997 and
increased $25,000 or 500% for the three months ended September 30, 1997
compared to the same periods in 1996. The provision for doubtful accounts
for the nine months ended September 30, 1997 provided for potential
uncollectability of certain accounts receivable due from Wyndgate's current
SAFETRACE(R) customers as a result of certain implementation delays
discussed below as part of Liquidity and Capital Resources.
DEPRECIATION AND AMORTIZATION. Compared to the same periods in 1996,
depreciation and amortization increased $153,000 or 132% and $72,000 or
167% for the nine months and the three months ended September 30, 1997,
respectively. The increase in depreciation and amortization expense is due
to the increases in purchased fixed assets and due to increases in fixed
assets underlying new capital lease financing obtained during the nine
months and the three months ended September 30, 1997.
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INTEREST INCOME. Interest income increased $121,000 and $16,000 for the
nine months and the three months ended September 30, 1997, respectively,
compared to the same periods in 1996. The increase was primarily due to
interest income derived from the net proceeds of the February 1997 public
offering.
INTEREST EXPENSE. Interest expense decreased $57,000 and $36,000 for the
nine months and the three months ended September 30, 1997, respectively,
compared to the same periods in 1996. This decrease was primarily due to
the repayment of approximately $1.9 million in short term debt and notes
payable from the net proceeds of the February 1997 public offering, which
was partially offset by an increase in interest expense on capital lease
obligations.
OTHER. Compared to the same periods in 1996, other expenses increased
$81,000 and $0 for the nine months and the three months ended September 30,
1997, respectively. This increase was primarily due to $79,000 of expenses
incurred during the first quarter in 1997 in conjunction with the issuance
and registration of warrants to two non-related individuals who were
granted warrants in connection with the issuance of 12% notes payable
totaling $450,000. The $450,000 of 12% notes payable and related accrued
interest were repaid in full during the first quarter of 1997 from a
portion of the net proceeds of the February 1997 public offering.
Liquidity and Capital Resources
- -------------------------------
The Company had cash and cash equivalents of $2.5 million at September 30,
1997, none of which is restricted. During the quarter ended June 30, 1997,
management became aware of delays in future software license fee revenues
expected from certain large internationally based blood centers and
hospital organizations. These delays are expected to cause a greater use of
liquidity and capital resources during the remainder of 1997 than
originally anticipated. Based on this information, management anticipates
that the Company's current and anticipated cash balances will not be
sufficient to meet the Company's capital or liquidity requirements for
management's plan of operations and its planned software development
programs, even if the sale of DataMed is approved by the Company's
shareholders. Management recognizes that the Company must obtain
additional capital resources, consider significant reductions to its
software development programs and/or sharply curtail most of its operating
expenses to enable it to continue operations with available and anticipated
cash resources. Management's plans include the sale of additional equity
securities and the sale of DataMed which would provide sufficient resources
to continue the Company's operations and its software development programs.
The Company anticipates it will continue to incur losses until 1999, and
possibly thereafter; accordingly, the Company may require additional
capital beyond current capital raising efforts.
The Company had a working capital deficit of $857,000 at September 30, 1997
compared to a working capital deficit of $4 million at December 31, 1996.
Excluding the net liabilities of the discontinued operations, the Company
had a working capital deficit of $191,000 at September 30, 1997 compared to
a working capital deficit related to continuing operations of $2.9 million
at December 31, 1996. The change in working capital during the nine months
ended September 30, 1997 was primarily due to the completion of the
February 1997 public offering which generated approximately $8.2 million in
net proceeds. To date, the net proceeds from the February 1997 public
offering have primarily been expended to repay short term debt, notes
payable, accounts payable and other accrued expenses, to fund Wyndgate's
research and development and sales and marketing efforts, and for general
working capital purposes.
The Company used $4.3 million in net cash for operating activities for the
nine months ended September 30, 1997, compared to $2.7 million for the same
period in 1996. These amounts include $1.3 million in net cash used by
discontinued operations for the nine months ended September 30, 1997 and
$1.0 million in net cash used by discontinued operations for the same
period in 1996. The net cash used in operating activities for continuing
operations for the nine months ended September 30, 1997 consisted primarily
of the net loss from continuing operations of $4.6 million, net decreases
of $190,000 in certain current
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liabilities and a net increase of $79,000 in prepaid expenses and other
assets partially offset by an increase of $563,000 in unearned revenue, a
decrease of $263,000 in net accounts receivable and net unbilled revenue,
$449,000 of depreciation and amortization expense and approximately
$502,000 of expenses related to various grants of warrants and stock
options during the nine months ended September 30, 1997.
Net cash used in investing activities was $728,000 and $184,000 for the
nine months ended September 30, 1997 and 1996, respectively. These amounts
include capital expenditures for discontinued operations of $58,000 and
$44,000 for the nine months ended September 30, 1997 and 1996,
respectively. For the nine months ended September 30, 1997, net cash used
in investing activities for continuing operations consisted primarily of
purchases of equipment and fixtures related to the increase in the number
of Wyndgate employees assigned to the development of Wyndgate's transfusion
management information system software product and related to Wyndgate's
occupation of additional office space. For the nine months ended September
30, 1996, net cash used in investing activities for continuing operations
consisted primarily of purchases of equipment and fixtures related to the
increase in the number of Wyndgate employees and an increase in capitalized
software development costs.
Net cash provided by financing activities was $7.1 million and $3.1 million
for the nine months ended September 30, 1997 and 1996, respectively. These
amounts include principal payments on capital lease obligations for
discontinued operations of $107,000 and $166,000 for the nine months ended
September 30, 1997 and 1996, respectively. During the nine months ended
September 30, 1997, the Company completed its February 1997 public offering
and received approximately $8.2 million in net proceeds. The Company used
a portion of these net proceeds to repay approximately $1.9 million in
short term debt and notes payable, and also to pay certain offering and
distribution costs related to the February 1997 public offering. In
addition, the Company paid $150,000 in principal payments on its capital
lease obligations for continuing operations during the nine months ended
September 30, 1997.
During the quarter ended June 30, 1997, management became aware of certain
delays in the implementation cycles of Wyndgate's SAFETRACE(R) software
product. Based on its currently anticipated implementation schedules,
management anticipates that the implementation cycle for Wyndgate's current
SAFETRACE(R) customers which have yet to become fully operational and
implemented, will typically take an average of approximately 17 months from
the date the SAFETRACE(R) software has been delivered to its customers.
The implementation cycles are dependent on various items, including the
relative size of the customers' operations, the relative complexity of the
customers' standard operating procedures, special development and
customization requirements, the amount of the customers' resources which
are available for implementation activities and the customers' anticipated
implementation schedules. Eight of Wyndgate's current SAFETRACE(R)
customers are implemented and are operational using SAFETRACE(R). All of
the existing SAFETRACE(R) customers are expected to be fully implemented
and operational during 1998. The results of the implementation cycle
delays are expected to delay future SAFETRACE(R) maintenance revenues from
Wyndgate's existing SAFETRACE(R) customers which have yet to become
implemented and operational using Wyndgate's SAFETRACE(R) software product,
future progress payments from existing customers not fully implemented, the
previously anticipated increase in future software license fee revenue from
further sales of Wyndgate's SAFETRACE(R) software product, and cause a
greater use of liquidity and capital resources than originally anticipated.
The Company is currently attempting to raise additional capital through the
sale of equity securities with the assistance of certain investment
bankers. The Company also has entered into a definitive asset purchase and
sale agreement to sell DataMed, subject to the approval of the Company's
shareholders at the meeting of the Company's shareholders scheduled to
occur on December 2, 1997. Assuming the Company successfully raises
additional funds and the Company's shareholders approve the sale of
DataMed, there can be no assurance that the Company will achieve
profitability or positive cash flow. If the Company is unable to obtain
adequate financing or if consummation of the DataMed transaction does not
occur, management will be required to sharply curtail most of the Company's
software development programs and most of its operating expenses. If the
Company is successful in raising additional funds through the sale of
additional equity securities, such a change in capitalization could also
increase the number of shares of common stock outstanding, thus diluting
ownership of current shareholders in the Company.
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CERTAIN FACTORS BEARING ON FUTURE RESULTS
CERTAIN OF THE STATEMENTS ABOVE ARE FORWARD-LOOKING STATEMENTS. FURTHER,
THE COMPANY MAY FROM TIME TO TIME MAKE ORAL FORWARD-LOOKING STATEMENTS.
THE FOLLOWING ARE IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE PROJECTED IN ANY FORWARD-LOOKING STATEMENTS.
SIGNIFICANT OPERATING LOSSES; NEGATIVE NET WORTH; NET WORKING CAPITAL
DEFICIT
For the fiscal years ended December 31, 1996 and 1995, the Company incurred
a loss in the approximate amounts of $4.5 million and $2.7 million,
respectively. The 1995 loss was primarily due to (i) employee compensation
which increased because of additional sales and operations staff hired by
the Company in 1995 in anticipation of future growth of the Company's
operations and (ii) expenses related to the merger with The Wyndgate Group,
Ltd. The increased loss in 1996 was primarily due to increases in overall
staffing and related expenses necessary to handle recent and anticipated
future growth of the Company. For the nine months ended September 30,
1997, the Company had a loss of $4.6 million from continuing operations.
As of September 30, 1997 and excluding the net liabilities of the
discontinued operations, the Company had a working capital deficit of
$191,000. Additionally, as of September 30, 1997, the Company had
cumulative net losses of approximately $13.1 million. There can be no
assurance that the Company will be able to generate sufficient revenues
while at the same time manage its expenses to operate profitably in the
future or to pay the Company's debts as they become due. See MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
ANTICIPATED NEGATIVE CASH FLOW
Management anticipates that the Company's current and anticipated cash
balances will not be sufficient to meet the Company's liquidity or capital
requirements for management's plan of operations and its planned software
development programs, even if DataMed is sold. Even if the sale of DataMed
is approved by the Company's shareholders, the Company will require
additional funds to operate through the first quarter of 1998.
Accordingly, the Company must generate additional capital, consider
significant reductions to its software development programs and/or sharply
curtail its operating expenses to enable it to continue operations with
available and anticipated cash resources. The sale of DataMed would
provide additional, but not sufficient, resources to assure the
continuation of the Company's operations and its software development
programs. The Company is currently attempting to raise additional equity
capital. However, no assurances can be given that the Company will be
successful in raising additional capital or that the sale of DataMed will
be approved by the Company's shareholders. Further, there can be no
assurance, assuming the sale of DataMed is approved by the Company's
shareholders, that the Company will achieve profitability or positive cash
flow. If the Company is unable to obtain adequate financing, management
will be required to sharply curtail the Company's software development
programs and most of its operating expenses.
REVENUE FLUCTUATIONS
The Company has experienced revenue fluctuations when its SAFETRACE(R)
software product is delivered to its customers. The SAFETRACE(R) software
product license fees have historically been recognized as revenue upon
delivery of SAFETRACE(R) customers if no significant vendor obligations
exist as of the delivery date. If there are delays in the delivery service
and/or customer delayed delivery requests, the revenue recognition from the
sale of SAFETRACE(R) licenses may also be delayed. Quarter to quarter
revenue fluctuations could also be affected by the decision of whether or
not to recognize revenues based upon the length of time the Company's
customers take to implement the Company's software products, special
development or customization projects required by customers concurrent with
the licensing of the Company's software products and other significant
obligations remaining to be fulfilled by Wyndgate upon delivery of its
software products to its customers.
Based on its currently anticipated implementation schedules, management
anticipates that the implementation cycle for Wyndgate's current
SAFETRACE(R) customers which have yet to become fully operational and
implemented, will typically take an average of approximately 17 months from
the date the SAFETRACE(R) software has been delivered to its customers.
The implementation cycles are dependent on various items, including the
relative size of the customers' operations, the relative complexity of the
customers' standard operating procedures, special development and
customization requirements, the amount of the customers' resources which
are available for implementation activities and the customers' anticipated
implementation schedules. As a result, the Company's operating
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results could fluctuate significantly from quarter to quarter and investors
should put more emphasis on the Company's results for a full year rather
than on the Company's quarterly results.
LACK OF SIGNIFICANT OPERATING HISTORY AND DIFFICULTIES IN ANTICIPATING
REVENUES, EXPENSES, AND NET CASH FLOW
The Company has been in existence since 1989. As such, the Company is
subject to many of the risks common to enterprises with a limited operating
history, including potential under-capitalization, limitations with respect
to personnel, financial and other resources and limited customers and
revenues. As of the date hereof, eight of the licensees of the
SAFETRACE(R) software product, Wyndgate's blood tracking system, have the
SAFETRACE(R) software product in operation. There is no assurance that the
additional licensees of the SAFETRACE(R) software product to date will ever
become operational with the SAFETRACE(R) software product, that the Company
will be able to license the SAFETRACE(R) software product to additional
customers, that the Company will be able to develop and license new
products or that the Company will be successful. Additionally, the
development and marketing of new software applications products, may cause
difficulties in accurately anticipating implementation and development
schedules, future revenues, expenses, financial condition, and net cash
flow. The likelihood of success of the Company must be considered in light
of the problems, expenses, difficulties, complications and delays
frequently encountered in connection with the development and marketing of
new products.
GOVERNMENT REGULATION
The Company's products and services are subject to regulations adopted by
governmental authorities, including the FDA, which governs blood center and
transfusion center computer software products regulated as medical devices.
The U.S. Department of Transportation issues regulations regarding
procedures applicable to certain of the substance abuse testing programs of
the Company's DataMed International division, which is presented in the
Unaudited Consolidated Financial Statements as discontinued operations (See
Note 2 of the Unaudited Consolidated Financial Statements herein).
Government regulations can be burdensome and may result in unexpected
delays and expenses to the Company. In addition, modifications to
regulations could adversely affect the timing and cost of new products and
services introduced by the Company. Failure to comply with applicable
regulatory requirements can result in, among other things, operating
restrictions and fines. For instance, currently the Company believes that
Wyndgate's transfusion management information system software product,
currently under development, requires FDA clearance prior to the marketing
of such product in the United States, the time delay to domestically market
such product could materially and negatively impact the Company's business.
The Company cannot predict the effect of possible future legislation and
regulation. The Company will also be required to follow applicable Good
Manufacturing Practices ("GMP") regulations of the FDA, which include
testing, control and documentation requirements, as well as similar
requirements in other countries, including International Standards
Organization ("ISO") 9001 standards. Failure to meet these requirements
would preclude the Company from marketing its products on a commercial
basis, and therefore would materially and adversely affect the Company's
business, financial condition and results of operations.
FLUCTUATIONS IN OPERATING RESULTS
Results of operations are expected to fluctuate significantly from quarter
to quarter depending upon numerous factors, including demand for Wyndgate's
software products and related services; the timing of new software license
agreements with Wyndgate customers; the ability of the Company to develop,
introduce and market new and enhanced versions of the Company's products on
a timely basis; personnel changes; changes in Company strategy, and the
level of international sales. Quarter to quarter operating results could
also be affected by the timing of the receipt of individual customer orders
and other revenue fluctuation factors discussed above.
LIMITED SALES, MARKETING AND DISTRIBUTION SYSTEMS
The Company's Wyndgate division has made limited sales of its SAFETRACE(R)
software product to date. The Company currently markets its SAFETRACE(R)
software product through a small direct sales force, both in the U.S. and
internationally. Establishment of a complete sales force capable of
effectively commercializing the Company's SAFETRACE(R) software product,
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and other software products currently under development, will require
substantial efforts and require significant management and financial
resources. The Company has also been evaluating other strategic business
alliances, which may assist in the development of a national and
international sales, marketing and distribution system. Any alliance which
is developed by the Company could require substantial capital and financial
resources. There can be no assurance that the Company will be able to
establish such a sales capability on a timely basis, if at all. Moreover,
there can be no assurance that any business alliance entered into by the
Company would be successful in such commercialization efforts.
POTENTIAL DIFFICULTIES IN MANAGING BUSINESS UNDERGOING RAPID GROWTH
The Company's future success will depend to a significant extent on the
ability of its current and future management personnel to operate
effectively, both independently and as a group. Most of the Company's
management team have no prior experience as senior executives of a public
corporation. There can be no assurance that the management team will
operate together effectively. To compete successfully against current and
future competitors, to timely complete customer implementations, to
complete research and development in progress and to develop future
software products and services, the Company believes that it must continue
to expand its operations, particularly in the areas of research and
development, sales and marketing, customer implementation, customer support
and training of its employees. If the Company were to experience
significant growth in the future, such growth would likely place
significant strain upon the Company's management, operating and financial
systems and resources. To accommodate such growth and compete effectively,
the Company must continue to improve its internal information systems,
procedures and controls, and to expand, train, motivate and manage its work
force. There can be no assurance that the Company's personnel, systems,
procedures and controls will be adequate to support the Company's future
operations. Any failure to implement and improve the Company's
operational, financial and management systems or to expand, train, motivate
or manage employees could materially and adversely affect the Company's
business, financial condition and results of operations.
RAPIDLY CHANGING TECHNOLOGY
The market for applications software is characterized by rapidly changing
technology and by changes from mainframe to client/server computer
technology, including frequent new product introductions and technological
enhancements in the applications software business. During the last five
years, the use of computer technology in the information management
industry has expanded significantly to create intense competition. With
rapidly expanding technology, there can be no assurance that the Company,
with its limited resources, will be able to acquire or maintain any
technological advantage. The Company's success will be in large part
dependent on its ability to use the developing technology to its maximum
advantage and to remain competitive in price and product performance. If
the Company is unable to acquire or maintain technological advantages, or
if the Company fails to stay current and evolve in the applications
software and information management fields, its efforts may not be
successful.
ROYALTY AGREEMENTS
Pursuant to certain royalty agreements, the Company is required to pay
certain of its sales proceeds directly to outside parties. Such payments
may adversely affect the Company's available cash to fund future operations
and the Company's future profitability.
POSSIBLE LOSS OF SOFTWARE LICENSES DUE TO FAILURE TO MEET MAINTENANCE
SERVICES COMMITMENTS
The Wyndgate software license agreements have license terms that vary, but
are typically five year licenses which are automatically renewable. The
software license agreement may be terminated by customers if Wyndgate
fails to deliver maintenance services consisting of product bug fixes,
regulatory compliance and updates. Wyndgate may terminate licenses if
customers fail to meet
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their contractual obligations to Wyndgate, primarily the payment of
maintenance fees. However, there can be no assurance that the Company will
be able to meet the maintenance services and contractual commitments
required to keep the license agreements in force or that customers will
continue to make maintenance fee payments.
POSSIBLE SHRINKAGE OF MARKET DUE TO MULTIPLE SITE CONTRACTS AND DUE TO
POTENTIAL CONSOLIDATION WITHIN THE BLOOD BANK INDUSTRY
Presently, the Company has one contract which potentially could cover
multiple blood centers. The potential number of customers for the Company's
SAFETRACE(R) market could be further reduced if the Company were to enter
into additional multiple site contracts. While the Company believes the
license fee charged for such multi-site arrangements is comparable to the
license fee which would be earned on an equivalent number of single site
licenses, there can be no assurance that the Company's revenues will be
equivalent to what it would have earned under single site licenses.
To date approximately five of Wyndgate's SAFETRACE(R) customers have or are
expected to merge to form two SAFETRACE(R) Wyndgate customers. Although
management believes such consolidation within the blood bank industry does
not materially affect future anticipated maintenance fees to be earned from
its customers, such consolidation may cause delays in implementation
schedules and delays in obtaining new customer orders.
PRODUCT AND REPORTING LIABILITY
As of the date hereof, eight of the Company's SAFETRACE(R) software product
licensees have the SAFETRACE(R) software product in operation. Currently,
the Company has product liability exposure for defects in its SAFETRACE(R)
software product which may become apparent through widespread use of the
SAFETRACE(R) software product. No claims have been filed against the
Company involving the SAFETRACE(R) software product and the Company is not
aware of any material problems involving the SAFETRACE(R) software product.
While the Company will continue to attempt to take appropriate precautions,
there can be no assurance that it will completely avoid product liability
exposure. The Company maintains product liability insurance on a claims
made basis for the SAFETRACE(R) software product in the aggregate of at
least $4 million. There can be no assurance that such coverage will be
available in the future, that it will be available at reasonable prices, or
that it will be available in amounts adequate to cover any product
liabilities that may be incurred by the Company.
DEPENDENCE ON MAJOR CUSTOMERS
During the nine months ended September 30, 1997, two Wyndgate customers,
Belle Bonfils Memorial Blood Center, Denver, Colorado and Haemonetics
Corporation, Braintree, Massachusetts (Haemonetics) each accounted for 11%
and 32%, respectively, of the Company's revenues. During the three months
ended September 30, 1997, three Wyndgate customers, Haemonetics, Gulf Coast
Regional Blood Center, Houston, Texas, and the Royalty Group (a group of
eight California blood centers, through a 1992 development agreement with
Wyndgate, paid $1.1 million to partially fund Wyndgate's development of its
SAFETRACE(R) software product), each accounted for 29%, 20% and 16%,
respectively, of the Company's revenues. Of the total accounts receivable
and unbilled revenue amounts as of September 30, 1997, the accounts
receivable and unbilled revenue related to the above customers were
approximately $400,000 and $160,000, respectively. In order to attempt to
reduce its credit risks, the Company generally requires substantial down
payments and progress payments during the course of implementation of its
software products. Non-renewal or termination of the contractual
arrangements with these key Wyndgate customers could have a material
adverse effect on the Company. There can be no assurance that the Company
will be able to retain these key customers or, if such customers are not
retained, that the Company would be able to attract and retain new
customers to replace the revenues currently generated by these customers.
With the sale of DataMed, the Company will lose all of the revenues from
that division's customers.
SUBSTANTIAL COMPETITION
There is substantial competition in all aspects of the blood bank industry.
Numerous companies are developing technologies and marketing products and
services in the health care information management area. Many of these
competitors have been
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in business longer than the Company and have substantially greater
personnel and financial resources available to them than the Company, and
there can be no assurance that the Company will be able to compete with
these competitors successfully.
DEPENDENCE ON DEVELOPMENT OF NEW BUSINESSES
Through the merger with The Wyndgate Group, Ltd., the Company became
engaged in the information management section of the blood bank industry.
To effect its plan of operations, which includes the generation of
increased revenues, the Company must expand its operations significantly
beyond the historical operations of Wyndgate to other markets which require
similar management information services. There is no assurance that the
Company will be able to expand its business operations. The current
activities of Wyndgate in the blood bank industry do not assure future
business expansion or profitability.
PROPRIETARY RIGHTS AND LICENSES
The Company's success depends in part on its ability to obtain and enforce
intellectual property rights for its technology and software, both in the
United States and in other countries. The Company's proprietary software
is protected by the use of copyrights, trademarks, confidentiality
agreements and license agreements that restrict the unauthorized
distribution of the Company's proprietary data and limit the Company's
software products to the customer's internal use only. While the Company
has attempted to limit unauthorized use of its software products or the
dissemination of its proprietary information, there can be no assurance
that the Company will be able to retain its proprietary software rights and
prohibit the unauthorized use of proprietary information.
The Company may file additional applications for patents, copyrights, and
trademarks as management deems appropriate. There can be no assurance that
any patents, copyrights, or trademarks the Company may obtain will be
sufficiently broad to protect the Company's products, or that applicable
law will provide effective legal or injunctive remedies to stop
infringement on the Company's patents (if obtained), trademarks, or
copyrights. In addition, there can be no assurance that any patent,
trademark, or copyright obtained by the Company will not be challenged,
invalidated, or circumvented, that intellectual property rights obtained by
the Company will provide competitive advantages, or that the Company's
competitors will not independently develop technologies or products that
are substantially equivalent or superior to those of the Company. In
addition, if the Company's software products infringe upon the rights of
others, the Company may be subject to suit for damages or an injunction to
cease the use of products. The Company is not aware of any claims or
infringements of the Company's software products upon the rights of others.
DEPENDENCE ON PERSONNEL
The Company is significantly dependent on a limited number of personnel,
including Michael I. Ruxin, M.D. (Chairman and Chief Executive Officer),
Joseph F. Dudziak (President and Chief Operating Officer), William J.
Collard (Secretary/Treasurer, Director and President of the Wyndgate
division), Gerald F. Willman, Jr. (Director and Vice President of the
Wyndgate division)and Thomas F. Marcinek (Chief Operating Officer of the
Wyndgate division). Although most of these individuals are subject to
employment agreements, such agreements are difficult to enforce against
employees. If the Company fails to retain the services of one or more of
these employees, the Company's operations may be adversely affected. The
Company does not have key man insurance on any of its officers or
employees; however, the Company is the designated beneficiary of a term
life insurance policy for its Chairman and Chief Executive Officer in the
face amount of $1,000,000.
23
<PAGE>
NO DIVIDENDS
The Company does not anticipate paying any cash dividends for the
foreseeable future. The Company expects that future earnings, if any, will
be used for expansion of the Company's business.
LIMITED CAPITALIZATION
The Company has only limited capitalization available to it. The Company
anticipates it will need additional capital to pursue its intended business
plan and to fund its planned software development efforts; however, the
Company has received no commitment from any person for that financing, and
there can be no assurance that adequate financing will be available on
reasonable terms, if and when needed.
POTENTIAL LITIGATION DUE TO THE SALE OF DATAMED
DataMed's substance abuse testing service agreements have contract terms
that vary from one to five years and, unless canceled generally ninety days
prior to the end of the license term, most are automatically renewable.
Generally, such contracts are not assignable. The definitive Asset
Purchase Agreement for the sale of DataMed provides that the Company will
assign its DataMed customer contracts to the purchaser, and if the customer
does not consent to the assignment, the purchaser can require the Company to
terminate any such non-consenting customer's contract. The Company will not
conduct any form of substance abuse testing if the sale of DataMed is
approved by the Company's shareholders. While the Company does not consider
it likely, it is possible non-consenting customers could commence litigation
against the Company for failure to provide substance abuse testing pursuant
to such customer's contract with DataMed.
24
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
(f) Use of Proceeds
In February 1997, the Company completed an initial public offering of
1,337,000 Units, each consisting of two shares of Common Stock and one
Class A Common Stock Purchase Warrant (the "IPO"). On March 12, 1997, the
Company received additional net proceeds from the sale of an additional
119,988 Units, each consisting of two shares of Common Stock and one Class
A Common Stock Purchase Warrant, which were included in the Underwriter's
over-allotment option. Net proceeds from the IPO, including the net
proceeds from the Underwriter's over-allotment option, were approximately
$8.2 million. The Units were initially quoted on the NASDAQ Small-Cap
Market. On March 13, 1997, the Common Stock and the Warrants began trading
separately.
Through September 30, 1997, the Company has used a total of approximately
$6.2 million of the net proceeds from the IPO. The net proceeds to the
Company from the IPO of approximately $8.2 million have been applied as
follows: approximately $1.7 million for research and development efforts of
the Company's Wyndgate Technologies division ("Wyndgate"), which includes
approximately $400,000 for capital expenditures; approximately $700,000 for
sales and marketing activities related to Wydngate's current and future
software products and services; approximately $300,000 of capital
expenditures for general operating purposes related to the increased number
of employees assigned to customer support, customer implementations and
training and general operating purposes at Wyndgate; approximately $450,000
for the repayment of certain 12% notes to non-related parties;
approximately $970,000 for the repayment of the Company's $1 million line
of credit which expired during the first quarter of 1997; approximately
$327,000 for the repayment of 10% notes, of which approximately $181,000
was paid to certain significant owners, directors, officers, and other
related parties of the Company; approximately $127,000 for other short-term
debt obligations to non-related parties; approximately $373,000 for general
working capital requirements for the Company's continuing operations; and
approximately $1.2 million for the Company's DataMed International division
which, it is planned, will be sold during the fourth quarter 1997 (See Note
2 of the Unaudited Consolidated Financial Statements herein).
The remaining net proceeds of approximately $2 million have been invested
in short-term investment grade money market instruments.
25
<PAGE>
PART II - OTHER INFORMATION (CONTINUED)
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit No. Description
----------- -----------
11.1 Statement re: Computation of Per Share Loss Over
the Period February 11, 1997 to September 30,
1997
11.2 Statement re: Computation of Per Share Loss Over
the Period January 1, 1997 to September 30, 1997
27 Financial Data Schedule
(b) Current Reports on Form 8-K:
On July 7, 1997, Global Med Technologies, Inc. (the "Company")
filed a Current Report on Form 8-K, dated June 20, 1997,
reporting the June 20, 1997 letter of intent entered into between
the Company and National Medical Review Offices, Inc. ("NMRO")
pursuant to Item 2, Acquisition or Disposition of Assets. The
letter of intent provides, subject to the approval of the
shareholders of the Company and the satisfaction of certain other
conditions to be set forth in a definitive asset purchase
agreement, that the Company will sell its DataMed International
division to NMRO.
On August 21, 1997, the Company filed a Current Report on Form
8-K, dated August 18, 1997, reporting the definitive Asset Purchase
Agreement entered into between the Company and National Medical
Review Offices, Inc. ("NMRO") pursuant to Item 2, Acquisition or
Disposition of Assets. The definitive Asset Purchase Agreement
provides, subject to the approval of the shareholders of the
Company and the satisfaction of certain other conditions, that
the Company will sell its DataMed International division to NMRO.
26
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the
registrant caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
GLOBAL MED TECHNOLOGIES, INC.
Date: November 18, 1997 By /s/ MICHAEL I. RUXIN
---------------------------------
Michael I. Ruxin, M.D.
Chief Executive Officer
Date: November 18, 1997 By /s/ BART K. VALDEZ
---------------------------------
Bart K. Valdez
Chief Financial Officer
GLOBAL MED TECHNOLOGIES, INC.
EXHIBIT 11.1
STATEMENT RE: COMPUTATION OF PER SHARE LOSS
OVER THE PERIOD FEBRUARY 11, 1997 TO SEPTEMBER 30, 1997
Allocation
(Share amounts in thousands) days Calculation
---------- -----------
Total shares issued and
outstanding from February 11, 1997
through March 12, 1997 7,668 x 30 230,040
Underwriter's exercise of over
allotment option on March 13, 1997 241
-------
Total shares issued and
outstanding from March 13, 1997
through March 31, 1997 7,909 x 19 150,271
Adjustment to the May, 1995
Private Placement on April 1, 1997 120
-------
Total shares issued and
outstanding from April 1, 1997
through April 14, 1997 8,029 x 15 120,435
Conversion of notes payable
on April 15, 1997 93
-------
Total shares issued and
outstanding from April 16, 1997
through May 8, 1997 8,122 x 23 186,806
Exercise of employee stock
options on May 9, 1997 14
-------
NOTE: COMMON STOCK EQUIVALENTS HAVE BEEN EXCLUDED FROM THE CALCULATION
FROM FEBRUARY 11, 1997 THROUGH SEPTEMBER 30, 1997 AS THESE COMMON STOCK
EQUIVALENTS ARE ANTI-DILUTIVE
Total shares issued and
outstanding from May 9, 1997
through September 30, 1997 8,136 x 144 1,171,584
----- ---------
231 1,859,136
Divided by 231
---------
Total weighted shares
outstanding February 11, 1997
through September 30, 1997 8,048
=========
GLOBAL MED TECHNOLOGIES, INC.
EXHIBIT 11.2
STATEMENT RE: COMPUTATION OF PER SHARE LOSS
OVER THE PERIOD JANUARY 1, 1997 TO SEPTEMBER 30, 1997
Allocation
(Share amounts in thousands) days Calculation
---------- -----------
Average shares outstanding 3,993
Net effect of common stock, stock
options and warranty-based on the
treasury stock method using the
initial public offering price 391
-------
Total shares to be used in
computing earnings per share
prior to February 11, 1997 4,384 x 42 184,128
Total shares to be used in
computing earnings per share
subsequent to February 11, 1997 8,048 x 231 1,859,088
----- ---------
273 2,043,216
Divided by 273
---------
Total weighted average shares
outstanding January 1, 1997
through September 30, 1997 7,484
=========
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM
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