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 March 31, 1998
--------------------
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
Commission file number O - 22083
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GLOBAL MED TECHNOLOGIES, INC.
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(Exact name of small business issuer as specified in its charter)
COLORADO 84-1116894
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(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 March 31, 1998, 8,148,255 shares of the issuer's Common Stock were
outstanding.
Transitional Small Business Disclosure Format Yes No X
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<PAGE>
GLOBAL MED TECHNOLOGIES, INC.
FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 1998
TABLE OF CONTENTS
PAGE NO.
Part I. Financial Information
Item 1. Financial Statements
a. Consolidated Balance Sheets as of
March 31, 1998 (unaudited) and
December 31, 1997 . . . . . . . . . . . . . . . . . . . .3
b. Unaudited Consolidated Statements of Operations
for the three months ended March 31, 1998
and March 31, 1997. . . . . . . . . . . . . . . . . . . .5
c. Unaudited Consolidated Statement of Stockholder's
Deficit for the three months ended March 31, 1998 . . . .6
d. Unaudited Consolidated Statements of Cash Flows for
the three months ended March 31, 1998
and March 31, 1997. . . . . . . . . . . . . . . . . . . .7
e. Notes to Unaudited Consolidated Financial Statements. . .9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. . . . . . . . . . . 13
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
Part II. Other Information
Item 2. Changes in Securities and Use of Proceeds
f. Use of Proceeds . . . . . . . . . . . . . . . . . . . . 32
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . 33
b. Reports on Form 8-K. . . . . . . . . . . . . . . . . . . 33
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<PAGE>
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Global Med Technologies, Inc.
Consolidated Balance Sheets
(In thousands)
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997
----------------------------
Assets
Current assets:
Cash and cash equivalents $ 782 $ 2,370
Accounts receivable-trade, net of
allowance for uncollectible accounts of
$275 and $175 at March 31, 1998 and
December 31, 1997, respectively 266 175
Unbilled revenues, net of allowance for
uncollectible accounts of $25 and $125 at
March 31, 1998 and December 31, 1997,
respectively 33 158
Prepaid expenses and other assets 330 256
----------------------------
Total current assets 1,411 2,959
Equipment and fixtures, at cost:
Furniture and fixtures 367 367
Machinery and equipment 312 303
Computer hardware and software 1,202 1,166
----------------------------
1,881 1,836
Less accumulated depreciation
and amortization (809) (665)
----------------------------
1,072 1,171
Capitalized software development costs,
less accumulated amortization of $469
and $403 at March 31, 1998 and
December 31, 1997, respectively 270 136
----------------------------
Total assets $ 2,753 $ 4,266
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SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
Global Med Technologies, Inc.
Consolidated Balance Sheets (continued)
(In thousands, except par value amounts)
MARCH 31,
1998 DECEMBER 31,
(UNAUDITED) 1997
----------------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable $ 487 $ 324
Accrued expenses 1,135 599
Accrued payroll 227 398
Accrued compensated absences 445 449
Noncompete accrual 35 150
Unearned revenue 3,493 2,761
Current portion of capital lease
obligations 208 229
Net liabilities of discontinued
operations - 631
----------------------------
Total current liabilities 6,030 5,541
Capital lease obligations,
less current portion 159 198
Commitments and contingencies
Stockholders' 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 - 8,148
at March 31, 1998 and
December 31, 1997 82 82
Additional paid-in capital 13,420 13,420
Accumulated deficit (16,938) (14,975)
----------------------------
Total stockholders' deficit (3,436) (1,473)
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Total liabilities and stockholders'
deficit $ 2,753 $ 4,266
============================
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
Global Med Technologies, Inc.
Consolidated Statements of Operations
(Unaudited)
(In thousands, except per common share information)
THREE MONTHS ENDED
MARCH 31,
1998 1997
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Revenues:
Software sales and consulting $ 768 $ 1,000
Hardware and software, obtained
from vendors 40 170
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808 1,170
Cost of revenues:
Software sales and consulting 471 301
Hardware and software, obtained
from vendors 38 143
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509 444
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Gross profit 299 726
Operating expenses:
Payroll and other 305 496
General and administrative 164 238
Sales and marketing 335 434
Research and development 1,171 429
Provision for doubtful accounts - 70
Depreciation and amortization 144 52
Restructuring charges 138 -
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Loss from continuing operations
before other income (expense) (1,958) (993)
Interest income 12 50
Interest expense (17) (31)
Other - (79)
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Loss from continuing operations (1,963) (1,053)
Loss from discontinued operations - (544)
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Net loss $ (1,963) $ (1,597)
============================
Basic and diluted loss per share of
common stock:
Loss from continuing operations $ (0.24) $ (0.16)
Loss from discontinued operations - $ (0.08)
----------------------------
Net loss $ (0.24) $ (0.24)
============================
Weighted average of common shares
outstanding 8,148 6,485
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SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
Global Med Technologies, Inc.
Consolidated Statement of Stockholders' 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, 1997 8,148 $ 82 $ 13,420 $ (14,975) $ (1,473)
Net loss (unaudited) - - - (1,963) (1,963)
------------------------------------------------------------------
Balance, March 31, 1998
(unaudited) 8,148 $ 82 $ 13,420 $ (16,938) $ (3,436)
==================================================================
</TABLE>
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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<PAGE>
Global Med Technologies, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
(In thousands)
THREE MONTHS ENDED
MARCH 31,
1998 1997
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OPERATING ACTIVITIES
Net loss $ (1,963) $ (1,597)
Adjustments to reconcile net loss to
net cash used in operating activities:
Loss from discontinued operations - 544
Depreciation 144 52
Amortization 66 60
Expense related to issuance of
common stock, options and warrants - 234
Changes in operating assets and
liabilities:
Accounts receivable-trade, net (91) 574
Unbilled revenues, net 125 (403)
Prepaid expenses and other assets (74) 59
Capitalized software development costs (200) -
Accounts payable 163 (149)
Accrued expenses 114 (56)
Accrued payroll (171) (51)
Accrued compensated absences (4) 23
Noncompete accrual (115) -
Unearned revenue 732 223
----------------------------
Net cash used in continuing operations (1,274) (487)
Net cash used for discontinued operations (209) (921)
----------------------------
Net cash used in operating activities (1,483) (1,408)
INVESTING ACTIVITIES
Purchases of equipment and fixtures (45) (77)
Capital expenditures of discontinued
operations - (48)
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Net cash used in investing activities (45) (125)
FINANCING ACTIVITIES
Borrowings on short-term debt - 450
Principal payments on short-term debt - (1,508)
Principal payments under capital
lease obligations (60) (39)
Principal payments under capital
lease obligations of discontinued
operations - (57)
Principal payments on notes payable - (327)
Issuance of common stock - 8,258
Deferred offering costs - 486
----------------------------
Net cash (used in)
provided by financing activities (60) 7,263
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<PAGE>
Global Med Technologies, Inc.
Consolidated Statements of Cash Flows (continued)
(Unaudited)
THREE MONTHS ENDED
MARCH 31,
1998 1997
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(IN THOUSANDS)
Net (decrease) increase in cash and
cash equivalents $ (1,588) $ 5,730
Cash and cash equivalents at
beginning of period 2,370 489
----------------------------
Cash and cash equivalents at
end of period $ 782 $ 6,219
============================
Supplemental disclosures:
The Company entered into capital lease obligations of approximately
$27,000 during the three months ended March 31, 1997.
Interest expense approximates interest paid.
SEE NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS.
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<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 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 March 31, 1998 and the
results of its operations for the three months ended March 31, 1998 and
1997 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 and the notes thereto contained in the
Company's Annual Report on Form 10-KSB for the year ended December 31,
1997, as filed with the Securities and Exchange Commission. The interim
results of operations for the three months ended March 31, 1998 are not
necessarily indicative of the results that may be expected for any other
interim period of 1998 or for the year ending December 31, 1998.
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 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 Company's
DataMed International division, which was sold on December 15, 1997, as
discontinued operations in accordance with Accounting Principles Board
Opinion No. 30 (see Note 3).
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<PAGE>
2. LIQUIDITY AND MANAGEMENT'S PLANS
From inception to March 31, 1998, the Company incurred cumulative net
losses of approximately $17 million. The Company expects to continue to
incur net losses until 1999, and possibly thereafter, until its existing
SAFETRACE(R) software product is completely implemented and operational
within the Company's customers' information system environments and until
its transfusion services software product (to be known as SAFETRACE TX(TM),
which is currently in beta testing, is established in its markets. On
April 14, 1998 and as amended on April 16, 1998 and on April 20, 1998, the
Company entered into two financing agreements with two related parties,
which were previously not affiliated with the Company, as follows: a loan
of $1.5 million and a line of credit of up to $1.65 million. Both the loan
and the line of credit accrue interest at 12% per annum to be paid monthly,
with principal and any unpaid interest to be repaid upon maturity of 366
days after April 14, 1998. The Company agreed to pay a cash finder's fee
of 9% of the amounts drawn upon the line of credit to RAF Financial
Corporation (RAF). RAF is related to the lenders and was also the lead
underwriter for the Company's February 1997 initial public offering.
Pursuant to the agreements, the lenders will have certain rights which will
include the right to appoint five members to the Company's Board of
Directors, the option to cancel all management and employee contracts and
the right to veto any contract for employment, loans or leases valued over
$250,000.
In consideration for the $1.5 million loan, the lender received 6 million
detachable warrants, exercisable at $.25 per warrant, for 6 million shares
of the Company's common stock. The exercise price of the detachable
warrants was substantially below the market price for the Company's common
stock at the grant date of April 14, 1998. In consideration of extending
the $1.65 million line of credit, the lender received 1 million detachable
warrants, exercisable at $.25 per warrant, for 1 million shares of the
Company's common stock. If the Company draws upon the $1.65 million line
of credit, the lender will receive an additional 5 million detachable
warrants, exercisable at $.25 per warrant, for 5 million shares of the
Company's common stock. The warrants are exercisable over a 10-year period
from April 14, 1998. The Company must use its best efforts to register the
common stock underlying the detachable warrants on or before July 14, 1998.
If the Company defaults on the $1.5 million loan or the $1.65 million line
of credit, the debt, including any interest, can be converted into shares
of the Company's common stock on the basis of one share for each $.05 of
debt.
The issuance of the discounted warrants will result in a significant
noncash charge to the Company's 1998 consolidated statement of operations,
which, based on a preliminary managerial assessment using the Black-Scholes
pricing model, could range as high as $7.42 million and $5.3 million for
the 7 million and 5 million discounted warrants, respectively.
In light of the Company's projected net losses and negative cash flows,
management believes the Company has the financial resources with this
additional financing to maintain its planned level of operations until
April 1999 without obtaining additional financing. Management, however,
recognizes that even with the current financing, the Company will need to
obtain additional capital in 1999, or it may be required to substantially
reduce its software development programs and other operating expenses.
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<PAGE>
3. DISCONTINUED OPERATIONS
On August 18, 1997, the Company entered into an asset purchase agreement
with National Medical Review Offices, Inc. (NMRO) to sell its DataMed
division to NMRO contingent upon approval from the Company's stockholders.
In conjunction with the sale, the Company and NMRO also entered into a
management agreement where NMRO agreed effective July 1, 1997 to assume the
direction and control of the business and operations of DataMed.
Accordingly, NMRO managed the business and assumed ownership responsibility
for the operational results from July 1, 1997 through the date of final
close. On December 15, 1997, upon stockholders' approval, the Company
finalized the sale of the assets and operations of DataMed to NMRO which
yielded net proceeds of approximately $775,000 through April 15, 1998, net of
various closing costs and the assumption of certain liabilities.
The operating results of the discontinued operations reflected in the
Company's unaudited consolidated statements of operations are summarized as
follows (in thousands):
THREE MONTHS ENDED
MARCH 31, 1997
------------------
Substance abuse testing
and other revenue $ 1,419
Cost of revenue 1,089
----------------
Gross profit 330
================
Net loss (544)
================
The net liabilities of the discontinued operations are summarized as
follows (in thousands):
MARCH 31, 1997
------------------
Current assets $ 972
Equipment and fixtures, net 708
Current liabilities (1,933)
Long-term liabilities (398)
----------------
Net liabilities $ (651)
================
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<PAGE>
4. REVENUE RECOGNITION
As of January 1, 1998, the Company adopted AICPA SOP 97-2, SOFTWARE REVENUE
RECOGNITION, which is effective for transactions that the Company entered
into during the three months ended March 31, 1998 and for transactions
which the Company will enter into in the future. Prior periods were not
restated. The most significant impact of SOP 97-2 on the Company's revenue
recognition accounting policies is that for licenses with multiple
elements, revenue is recognized later than under past practices.
5. RECLASSIFICATIONS
Certain prior period amounts have been reclassified to conform with the
current period presentation.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
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Global Med Technologies, Inc. (the "Company"), through its operating
division Wyndgate Technologies ("Wyndgate"), designs, develops, markets and
supports information management software products for blood banks,
hospitals, centralized transfusion centers and other healthcare related
facilities. Revenues for Wyndgate are derived from the licensing of
software, the provision of consulting and other value-added support
services and the resale of hardware and software obtained from vendors. On
December 15, 1997, the Company sold its DataMed International division
("DataMed") which is in the business of substance abuse testing management
services. The unaudited consolidated financial statements and related
footnotes herein reflect DataMed as discontinued operations.
On April 14, 1998, the Company entered into two debt financing agreements
which provided the Company up to $3 million in borrowings in exchange for
up to 12 million warrants exercisable at $.25 each into 12 million shares
of the Company's common stock. Should the Company not repay the financing
proceeds and accrued interest thereon on or before April 15, 1999, the
financing proceeds, including interest thereon, are convertible into
approximately 70 million shares of common stock at $0.05 per share. The
issuance of these warrants will result in significant, noncash charges to
the Company's statement of operations. Management has not completed its
assessment of the amounts to be charged to expense; however, based on
current valuations using the Black-Scholes pricing model, the amounts to be
charged to expense related to the seven million and five million warrants
range as high as approximately $7.42 million and $5.3 million, respectively.
See Note 2 to the unaudited consolidated financial statements herein for a
further discussion of these agreements.
The Company completed its initial public offering of securities in the
first quarter of 1997, from which it received net proceeds of approximately
$8.2 million from the sale of 1,456,988 Units, each of which consisted of
two shares of common stock and one Class A common stock purchase warrant
(the "February 1997 public offering"). Through March 31, 1998, the Company
has used all of the $8.2 million net proceeds from the February 1997 public
offering. The Company's use of the $8.2 million net proceeds was
principally to repay short-term debt, notes payable, accounts payable and
other accrued expenses; to fund Wyndgate's research and development of a
transfusion management information software product ("SAFETRACE TX(TM)");
to fund Wyndgate's sales and marketing efforts, as well as for general
working capital purposes. Delays in software license fee revenues, delays
in the implementation cycles and software development delays related to the
SAFETRACE TX(TM) software product which entered beta testing on April 6,
1998, also contributed to the Company's use of net proceeds it received
from the February 1997 public offering.
From inception to March 31, 1998, the Company incurred cumulative net
losses of approximately $17 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
SAFETRACE TX(TM) is established in its markets. 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 processes, the status
and timing of regulatory approval, 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.
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<PAGE>
The results of operations and cash flows for the three months ended March
31, 1998 are not necessarily indicative of the results of operations and
cash flows that may be expected for any other interim period of 1998 or for
the year ending December 31, 1998.
The following discussion of the Company's results of operations and of its
liquidity and capital resources is derived from and should be read in
conjunction with the unaudited consolidated financial statements and the
related notes herein.
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 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.
Results of Operations for the three months ended March 31, 1998 and 1997
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REVENUES. Revenues are comprised of software sales and consulting
revenues, and the resale of hardware and software obtained from vendors.
Revenues from software sales and consulting decreased by $232,000,
or 23%, for the three months ended March 31, 1998 compared to the same
three months in 1997. This decrease in software sales and consulting
revenue is primarily the result of substantially reduced SAFETRACE(R)
software revenue. Although the Company entered into three SAFETRACE(R)
license agreements during the three months ended March 31, 1998, the
Company was required to defer revenue recognition of these license fees
pursuant to the revenue recognition requirements of SOP 97-2. See Note 4
to the unaudited consolidated financial statements herein for a further
discussion of SOP 97-2. If management is successful in timely and
effectively addressing the revenue recognition requirements of SOP 97-2,
revenue related to these three license agreements could be accelerated.
Management is in the process of evaluating the revenue recognition
requirements of SOP 97-2 and currently expects that it will be successful
in its efforts to address these revenue recognition requirements during the
remainder of 1998. Failure to effectively address these revenue recognition
requirements and future revenue recognition guidance regarding the software
industry will continue to have a material adverse effect on the timing of
software license revenue recognition.
Revenues from the resale of hardware and software, obtained from
vendors decreased by $130,000, or 77%, for the three months ended March 31,
1998 compared to the same three months in 1997. 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.
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<PAGE>
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)
licenses are less than management anticipates; if future sales of
Wyndgate's SAFETRACE(R) licenses require Wyndgate to complete significant
customization upon delivery; if there are further delays in the currently
anticipated implementation schedules for Wyndgate's existing SAFETRACE(R)
customers; if there are delays in the currently anticipated beta testing
schedule, regulatory clearance timing and market acceptance for SAFETRACE
TX(TM) which is currently in beta testing, the Company's revenues, gross
margins, and liquidity may be materially and adversely affected.
COST OF REVENUE. Cost of revenue as a percentage of total revenues
was 63% and 38% for the three months ended March 31, 1998 and 1997,
respectively.
Cost of software sales and consulting as a percentage of the related
revenue was 61% and 30% for the three months ended March 31, 1998 and 1997,
respectively. This increase was primarily a result of decreased revenues
derived from sales of Wyndgate's SAFETRACE(R) software product licenses
discussed above and which are typically priced at higher
profit margins than revenues from consulting and implementation related
services. Additionally, relative increases in personnel and related
benefit and travel expenses incurred during the three months ended March
31, 1998 for the high number of SAFETRACE(R) implementations, customer
training and customer support services also contributed to the increase in
the cost of software sales and consulting.
Cost of hardware and software, obtained from vendors as a percentage
of the related revenue was 95% and 84% for the three months ended March 31,
1998 and 1997, respectively. Typically, revenues from the resale of
hardware and software, obtained from vendors are priced at lower profit
margins than revenues from software sales and consulting.
GROSS PROFIT. Gross profit as a percentage of total revenue was 37%
and 62% for the three months ended March 31, 1998 and 1997, respectively.
This decrease in gross profit was primarily a result of the decreased
revenues derived from sales of the higher margin SAFETRACE(R) software
products discussed above. Additionally, relative increases in revenues
derived from the provision of lower margin consulting, implementation and
customer support services also contributed to the decrease in gross profit
experienced by the Company during the three months ended March 31, 1998.
PAYROLL AND OTHER. Payroll and other decreased $191,000, or 39%, for the
three months ended March 31, 1998 compared to the same three months in
1997. The decrease in payroll and other was primarily due to decreased
administrative and other management personnel expenses as a result of less
administrative and management personnel deemed necessary by management for
the Company's remaining Wyndgate operations. During the remainder of 1998,
management does not anticipate substantial increases in the number of
administrative and management personnel.
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<PAGE>
GENERAL AND ADMINISTRATIVE. General and administrative expenses
decreased $74,000, or 31%, for the three months ended March 31, 1998
compared to the same three months in 1997. This decrease was attributable
primarily to decreases in outside contract services and other general and
administrative expenses. During the remainder of 1998, management does not
anticipate substantial increases in the Company's general and
administrative expenses.
SALES AND MARKETING. Sales and marketing expenses decreased $99,000, or
23%, for the three months ended March 31, 1998 compared to the same three
months in 1997. The decrease in sales and marketing expenses was primarily
due to $155,000 of expenses related to certain stock options granted to a
business advisory enterprise during the three months ended March 31, 1997
which were partially offset by increases in payroll related expenses for
sales and marketing personnel during the three months ended March 31, 1998.
Management anticipates there will be additional increases in sales and
marketing efforts if the Company is successful in timely completing
SAFETRACE TX(TM) beta testing and timely submitting for and receiving FDA
510(k) clearance for SAFETRACE TX(TM) during the next eighteen months.
RESEARCH AND DEVELOPMENT. Research and development expenses
increased $742,000, or 173%, for the three months ended March 31, 1998
compared to the same three months in 1997. The increase in research and
development expenses was primarily due to an increase in the number of
employees and contracted developers assigned to the development of
Wyndgate's SAFETRACE TX(TM) transfusion management information system
software product. Management anticipates research and development expenses
to continue to be a substantial portion of the Company's operating
expenses. Management's plans for Wyndgate's future software products and
services require continual research and development expenditures in order
to continue to capitalize on Wyndgate's existing technological base and its
existing software development talent.
PROVISION FOR DOUBTFUL ACCOUNTS. The provision for doubtful accounts
decreased $70,000 for the three months ended March 31, 1998 compared to the
same three months in 1997. This decrease was primarily due to anticipated
improved collectability of accounts receivable and unbilled revenue derived
from the sale of Wyndgate's products and services. Management does not
anticipate substantial increases in the provision for doubtful accounts
during the remainder of 1998 as management believes that its accounts
receivable collection efforts and SAFETRACE(R) implementation efforts will
continue to improve the collectability of accounts receivable and unbilled
revenues.
DEPRECIATION AND AMORTIZATION. Depreciation and amortization
increased $92,000 or 177%, for the three months ended March 31, 1998
compared to the same three months in 1997. The increase in depreciation
and amortization expense is due to increases in purchased fixed assets and
fixed assets underlying capital lease financing.
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<PAGE>
RESTRUCTURING CHARGES. Restructuring charges were $138,000 for the three
months ended March 31, 1998. During the three months ended March 31, 1998,
management proposed and the Company's board of directors approved a
substantial cost reduction program which initially resulted in a decrease of
over 30 full time employees in addition to a decrease in the number of
contracted developers. This cost reduction program is anticipated to assist
in the reduction of the Company's operating expenses. Restructuring charges
incurred during the three months ended March 31, 1998 are primarily
attributable to costs associated with future outlays related to individuals
no longer employed by the Company, fees related to restructuring Wyndgate's
office lease and other costs. Management currently believes the current and
anticipated employee base will be able to successfully service and market to
Wyndgate's existing and anticipated SAFETRACE(R) customers, complete beta
testing and receive 510(k) clearance for SAFETRACE TX(TM) within the next
eighteen months and successfully and timely implement a sales and marketing
program for SAFETRACE TX(TM). In addition, management believes the current
employee base will be able to continue to provide effective and market-driven
SAFETRACE(R)enhancements and upgrades to current and future customers.
However, there can be no assurance that the Company will be successful as a
result of the cost reduction program. During the remainder of 1998,
management does not anticipate substantial additional restructuring charges.
INTEREST INCOME. Interest income decreased $38,000 for the three months
ended March 31, 1998 compared to the same three months in 1997. This
decrease was primarily due to less interest income derived from the net
proceeds of the February 1997 public offering.
INTEREST EXPENSE. Interest expense decreased $14,000 for the three months
ended March 31, 1998 compared to the same three months in 1997. 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. Other expenses decreased $79,000 for the three months ended March
31, 1998 compared to the same three months in 1997. This decrease was
primarily due to $79,000 of expenses incurred during the three months ended
March 31, 1997 in conjunction with the issuance and registration of
warrants to two unrelated investors who provided the Company with
approximately $450,000 through the January 1997 issuance of certain 12%
notes. The 12% notes plus accrued interest thereon were repaid in full
from a portion of the net proceeds from the February 1997 public offering.
LOSS FROM CONTINUING OPERATIONS. The Company's loss from continuing
operations during the three months ended March 31, 1998 compared to the
same three months in 1997 increased $910,000. The increased loss
experienced during the three months ended March 31, 1998 was primarily
attributable to a substantial decrease in revenues derived from sales of
SAFETRACE(R), relative increases in revenue derived from the provision of
lower margin services, increased research and development expenses incurred
for SAFETRACE TX(TM) development, and increases in depreciation and
amortization and restructuring charges.
LOSS FROM DISCONTINUED OPERATIONS. The Company's loss from discontinued
operations during the three months ended March 31, 1997 was $544,000. See
Note 3 to the unaudited consolidated financial statements herein for a
further description of the sale of DataMed which occurred on December 15,
1997.
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Liquidity and Capital Resources
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The Company had cash and cash equivalents of $782,000 at March 31, 1998,
none of which is restricted.
The Company had working capital deficits of approximately $4.6 million and
$2.6 million at March 31, 1998 and December 31, 1997, respectively. The
change in working capital during the three months ended March 31, 1998 was
primarily due to a substantial increase in deferred revenue, which was
primarily the result of a deferral of revenue related to three license
agreements entered into during the three months ended March 31, 1998
pursuant to the requirements of SOP 97-2 and the Company's use of
approximately $1.6 million in cash during the same period. During April
1998 and in order to address the Company's anticipated liquidity and
working capital needs, the Company entered into financing agreements which
provide the Company up to approximately $3 million in borrowings.
Management currently anticipates that these borrowings will be sufficient
to satisfy the Company's liquidity and working capital requirements until
April 1999 although, it is anticipated, the Company will continue to incur
operating losses and negative cash flows during that period.
To the extent that the net borrowings provided by the April 1998 financing
agreements are insufficient to fund the Company's liquidity and
capital requirements in the short or long term, the Company may need to
raise additional capital through debt financings or through public or
private equity financings or the Company may be required to substantially
reduce its existing software development programs and other operating
expenses. The Company has no commitment for any such financings, and there
can be no assurance that any additional financing will be available when
needed, on reasonable terms, or at all.
The Company has historically financed its negative cash flows through
various forms of short-term debt financings, a number of equity private
placements and through the February 1997 public offering.
The Company used $1.5 million in net cash for operating activities
during the three months ended March 31, 1998, compared to $1.4 million of
net cash used for operating activities during the same period in 1997.
These amounts include $209,000 of net cash used for discontinued operations
during the three months ended March 31, 1998 and $921,000 of
net cash used by discontinued operations during the same period in 1997.
The cash used in continuing operations of $1.3 million during the three
months ended March 31, 1998 consisted primarily of the net loss from
continuing operations of approximately $1.96 million; the $200,000 increase
in capitalized software development costs; net changes in other
assets and various current liabilities; offset by depreciation and
amortization and a $732,000 increase in deferred revenue. Capitalized
software development costs increased as a result of an agreement the
Company entered into with one SAFETRACE(R)customer which provided the
Company the ability to market and sell a reporting system compatible with
SAFETRACE(R)which, management believes, will further the marketability and
client satisfaction of SAFETRACE(R). The substantial increase in deferred
revenue was attributable to the revenue recognition requirements discussed
above. Management expects that the Company will continue to experience
negative cash flows from operating activities until 1999 when, it is
anticipated, Wyndgate's SAFETRACE(R) software will become operational at an
increasing number of current and future SAFETRACE(R) customer locations and
Wyndgate's SAFETRACE TX(TM) software product will be established in its
markets.
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Net cash used in investing activities was $45,000 and $125,000 for the
three months ended March 31, 1998 and 1997, respectively. For both
periods, net cash used in investing activities for continuing operations
primarily consisted of purchases of equipment and fixtures for the
Company's Wyndgate operations. Additionally and during the three months
ended March 31, 1997, the Company incurred $48,000 in capital expenditures
for discontinued operations. During the remainder of 1998, management does
not expect capital expenditures to substantially increase from those
incurred during the year ended December 31, 1997.
Net cash used in financing activities was $60,000 during the three months
ended March 31, 1998 which consisted entirely of principal payments for
capital lease obligations. During the remainder of 1998 and as a result of
the Company's cost reduction program, management does not anticipate that
the Company will enter into substantial, additional capital and/or
operating lease agreements. Net cash provided by financing activities was
$7.3 million during the three months ended March 31, 1997. During the
three months ended March 31, 1997, the Company completed its initial public
offering and received approximately $8.2 million in net proceeds. In
addition, the Company received $450,000 in borrowings related to certain 12%
notes. The Company used a portion of these proceeds to repay $1.835 million
in short term debt and notes payable, and also to pay certain offering and
distribution costs related to the initial public offering. The Company
paid $39,000 in principal payments on capital lease obligations for
continuing operations and $57,000 in principal payments on capital lease
obligations for discontinued operations during the three months ended March
31, 1997.
The Company incurred a net loss of approximately $1.96 million during
the three months ended March 31, 1998. The Company expects to continue to
incur net losses until 1999, and possibly thereafter, until its software
products are better established in their respective markets. There can be
no assurance that the Company can generate sufficient revenues, earnings
and cash collections from software sales to satisfy its working capital
requirements. The Company's working capital requirements will depend on
numerous factors, including progress of the beta testing of SAFETRACE
TX(TM), the development of other new software products, as well as new
applications for its present core products, which include both SAFETRACE(R)
and SAFETRACE TX(TM). Additionally, the Company's working capital
requirements may depend upon its success in timely obtaining a FDA 510(k)
clearance letter for its SAFETRACE TX(TM) software product. Failure to
receive such clearance letter on a timely basis or at all may require the
Company to seek additional financing beyond the financing commitments it
obtained during April 1998. The Company may seek financing to meet its
working capital requirements through strategic alliances within the
Company's industry, through collaborative arrangements with other suppliers
to the Company's customers and/or through raising additional capital
through private placements of its common or preferred stock. There can be
no assurance, however, that additional funds, if required, will be
available from sources historically available to the Company or from other
sources on favorable terms, if at all. If the Company is unable to obtain
adequate financing when and if such financing is required, management will
be required to substantially reduce the Company's software development
programs and other 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 further increase the number of
shares of common stock outstanding, thus diluting ownership of the then
current shareholders of the Company.
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EFFECT OF INFLATION AND FOREIGN CURRENCY EXCHANGE FLUCTUATIONS
The Company has not experienced material unfavorable effects on its
results of operations, cash flows or financial position due to foreign
currency exchange fluctuations or due to domestic inflation. As the
Company plans to market Wyndgate's products and services internationally,
the effect of inflation and foreign currency exchange fluctuations could
have a material adverse affect on the Company's future liquidity, cash
flows, financial position and results of operations.
YEAR 2000 COMPLIANCE
Based upon information currently available, management does not
anticipate that the Company will incur substantial costs to update its
computer software programs and applications to be "Year 2000" compliant.
The "Year 2000" problem which is common to most corporations concerns the
inability of information systems, primarily computer software programs, to
properly recognize and process date sensitive information as the year 2000
approaches. Management has completed a Year 2000 compliance review of
SAFETRACE(R); SAFETRACE TX(TM), which is currently in beta testing; other
Wyndgate developed software and the Company's internal systems. As a
result, management has developed a plan to address the Company's Year 2000
compliance issues and is in the process of modifying and identifying
actions to address affected systems in time to minimize any detrimental
effects on sales of Wyndgate's software products and on the Company's
operations. Management anticipates that the costs to insure its software
products developed for sale and that the Company's internal systems are
Year 2000 compliant will not be material to the Company's results of
operations, liquidity, or financial position. In addition, the Company
relies on third party providers for some of its internal systems support.
To the extent that the Company will be relying on outside software vendors,
Year 2000 compliance matters will not be entirely within the Company's
direct control. In addition, the Company has relationships with vendors,
customers and other third parties that rely on computer software that may
not be Year 2000 compliant. There can be no assurance that Year 2000
compliance failures by such third parties will not have a material adverse
effect on the Company or that the Company will be successful in its own
Year 2000 Compliance efforts.
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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; NET WORKING CAPITAL DEFICIT; CUMULATIVE NET
LOSSES; NEGATIVE NET WORTH
For the three months ended March 31, 1998 and for the fiscal year ended
December 31, 1997, the Company incurred a net loss of approximately $1.96
million and $7.3 million, respectively. The net loss for the three months
ended March 31, 1998 was primarily due to decreases in revenues derived from
SAFETRACE(R) license sales and increases in research and development,
depreciation and amortization and restructuring charges. The increased net
loss for the fiscal year ended December 31, 1997 was primarily due to a
substantial decrease in SAFETRACE(R) license sales, relative increases in
revenues derived from lower margin SAFETRACE(R) related implementation and
customer support services, increases in sales and marketing expenses for
Wyndgate's current and future software products and services and a
substantial increase in research and development expenses incurred for the
software development of SAFETRACE TX(TM), which entered beta testing on
April 6, 1998. At March 31, 1998 and at December 31, 1997, the Company had
a net working capital deficit of approximately $4.6 million and $2.6
million, respectively. At March 31, 1998, the Company had cumulative net
losses of approximately $17 million and a negative net worth of
approximately $3.4 million. There can be no assurance that the Company
will be able to generate sufficient revenues to operate profitably in the
future or to pay its debts and liabilities as they become due.
ANTICIPATED NEGATIVE CASH FLOWS
Management anticipates that the Company will continue to generate
negative cash flows from operations and from investing activities until
1999 and possibly thereafter. Accordingly, the Company may be required to
substantially reduce its software development programs and/or substantially
reduce its other operating expenses to enable it to continue its planned
operations with available cash resources. No assurances can be given that
the Company will achieve profitability or positive cash flow. If the
Company is unable to substantially reduce its negative cash flows from
continuing operations during 1998 and generate positive cash flows
beginning in 1999 and beyond, management will be required to substantially
reduce the Company's software development programs and other operating
expenses.
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<PAGE>
REVENUE FLUCTUATIONS
The Company has experienced revenue fluctuations when SAFETRACE(R) has
been delivered. SAFETRACE(R) license fees have historically been
recognized as revenue upon delivery of the software if no significant
vendor obligations exist as of the delivery date, and therefore are subject
to delays of the delivery service and customer delayed delivery requests.
Revenue fluctuations could also be affected by the decision on whether or
not to recognize revenues based upon the length of time the licensees take
to implement SAFETRACE(R). The implementation cycle of Wyndgate's
SAFETRACE(R) software product is taking longer than originally anticipated.
Based on recent experience, management currently anticipates that the
average implementation cycle will typically take approximately 16 months.
The implementation cycles are dependent on various items, including the
blood center's size and the complexity of the blood center's standard
operating procedures. Further, special development projects required by
customers concurrent with the licensing of the Company's software products
and other significant obligations could result in revenue recognition
delays. As a result, the Company's operating results could fluctuate
significantly.
In October 1997, the AICPA issued Statement of Position 97-2 ("SOP 97-
2"), which changes the requirements for revenue recognition effective for
transactions that the Company will enter into beginning January 1, 1998.
Prior years are not required to be restated. Management's current plans to
address the revenue recognition requirements of SOP 97-2 include
substantial revisions to Wyndgate's current standard terms and conditions
included as part of Wyndgate's SAFETRACE(R) software license agreements and
establishing relationships with other businesses for the provision of
SAFETRACE(R) implementation and other support services. There can be no
assurance that management's plans to address the revenue recognition
requirements of SOP 97-2 will be successfully and timely implemented, that
substantial revisions to Wyndgate's existing standard terms and conditions
currently included as part of Wyndgate's SAFETRACE(R) software license
agreements will be accepted by potential SAFETRACE(R) licensees or that
changes to Wyndgate's provision of implementation and customer support
services will be accepted by potential SAFETRACE(R) licensees. Failure to
effectively address the revenue recognition requirements of SOP 97-2 and
future revenue recognition guidance regarding the software industry will
have a material adverse affect on the timing of revenue recognition, gross
margins and operating results. As a result, future capital raising efforts
may also be adversely affected.
LACK OF SIGNIFICANT OPERATING HISTORY AND DIFFICULTIES IN ANTICIPATING
REVENUES, EXPENSES AND NET CASH FLOWS
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. Currently, twelve of the twenty-four SAFETRACE(R) licensees have
SAFETRACE(R) in operation. There is no assurance that the additional
twelve SAFETRACE(R) licensees will ever become operational using
SAFETRACE(R), that the Company will be able to license SAFETRACE(R) 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 products may cause difficulties
in accurately anticipating implementation and development schedules, future
revenues, expenses, financial condition and net cash flows. 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 software products and
related services.
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POSSIBLE COMPLETE CHANGE IN MANAGEMENT AND CONTROL
In April 1998, the Company entered into financing arrangements with two
companies pursuant to which, among other things, the Company's Officers,
Directors and certain employees executed resignations, which are being held
in escrow by the lenders. Under the loan commitment documents, the lenders
have the right to cancel all management and employee contracts, and if the
Company defaults on the terms of the commitments, the resignations of the
Directors, Officers and employees will immediately be effective. The
lenders also have the right to appoint five members to the Company's Board
of Directors, which will then consist of a maximum of nine members. There
can be no assurance that the lenders will not invoke their right to
terminate such contracts, thus effecting an immediate change in the
management and control of the Company.
POSSIBLE SUBSTANTIAL DILUTION TO CURRENT SHAREHOLDERS
As consideration for the $1.5 million loan and $1.65 million line of
credit extended to the Company in April 1998 by two related parties which
were previously not affiliated with the Company, the Company has
agreed to issue warrants to purchase 7,000,000 shares of common stock,
exercisable over a ten year period at $.25 per share. An additional
5,000,000 warrants, exercisable on the same terms, will be issuable in the
event the Company draws down any amounts on the line of credit. If the
lenders exercise their warrants, the Company could issue an additional
7,000,000 to 12,000,000 shares of common stock. In addition, in the event
the Company were to default under the terms of the loan or line of credit,
the outstanding principal and any unpaid interest may be converted, at the
option of the lenders, into approximately 70 million shares of the
Company's common stock on the basis of one share of common stock for each
$.05 of debt. If the lenders were to exercise their warrants, or convert
any of the outstanding debt into common stock upon default, the ownership
of the present shareholders of the Company would be significantly diluted.
INCREASED NET LOSS RELATED TO ISSUANCE OF DISCOUNTED WARRANTS
In connection with the April 14, 1998 loan and line of credit commitments,
the Company has agreed to issue warrants to purchase a minimum of 7,000,000
shares exercisable at $.25 per share, which was substantially below the
market price for the Company's common stock on that date. Additionally, if
the Company draws on the $1.65 million line of credit, the lenders will
receive an additional 5,000,000 warrants exercisable under the same terms
as the $1.5 million loan. The issuance of these discounted warrants will
result in a significant noncash charge to the Company's 1998 statement of
operations which, based on a preliminary management assessment using the
Black-Scholes pricing model, could range as high as $7.42 million and $5.3
million for the 7,000,000 and 5,000,000 warrants, respectively.
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GOVERNMENT REGULATION
The Company's products and services are subject to regulations adopted
by governmental authorities, including the FDA, which governs blood center
computer software products regulated as medical devices. Compliance with
government regulations can be burdensome and may result in delays and
substantial costs incurred by the Company. In addition, modifications to
such regulations could materially and 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, since SAFETRACE TX(TM)
requires FDA clearance prior to the marketing of such product, the time
delay to market SAFETRACE TX(TM) could materially and adversely affect the
Company's business, financial condition and results of operations. 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 substantially depending
upon numerous factors, including demand for the Company's products; 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.
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 SAFETRACE(R)
to date. The Company currently markets SAFETRACE(R) through a small direct
sales force, both in the U.S. and internationally. Establishment of a
complete sales force capable of effectively commercializing SAFETRACE(R)
and SAFETRACE TX(TM) which entered beta testing on April 6, 1998, will
require substantial efforts and require substantial management and
financial resources. The Company also continues to evaluate various
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.
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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 research and development projects
and to develop future products, the Company believes that it must continue
to expand its operations, particularly in the areas of research and
development, sales and marketing and training. 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 other resources. To accommodate such growth and compete
effectively, the Company must continue to implement and improve its
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 its work force 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 developing technology to its maximum
advantage and to remain competitive in price and product performance. If
the Company is unable to acquire or maintain a technological advantage, 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 and materially affect the Company's available cash to fund
future operations and the Company's future profitability.
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<PAGE>
POSSIBLE LOSS OF SOFTWARE LICENSES DUE TO FAILURE TO MEET MAINTENANCE
SERVICE REQUIREMENTS
The Wyndgate software license agreements have license terms that vary,
but are typically multi-year licenses which are automatically renewable.
The software licenses may be terminated by customers if Wyndgate fails to
deliver various maintenance services consisting of product bug fixes,
continued regulatory compliance and product updates. Generally, Wyndgate
may terminate its software license agreements if customers fail to meet
contractual obligations, primarily the payment of usage fees. However,
there can be no assurance that the Company will be able to meet all of the
maintenance services and contractual commitments required to keep the
license agreements in force or that customers will continue to make usage
fee payments.
POSSIBLE SHRINKAGE OF MARKET DUE TO MULTIPLE SITE CONTRACTS AND DUE TO
FURTHER CONSOLIDATION WITHIN THE BLOOD BANK INDUSTRY
Presently, the Company has one specific contract which covers multiple
blood banks. The potential number of available SAFETRACE(R) licensees could
be 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) licensees have or are expected to merge to form two
SAFETRACE(R) licensees. There can be no assurance that further
consolidation throughout the domestic blood bank industry will not have a
material adverse affect on the Company's ability to successfully and timely
market its software products. Further, there can be no assurance that the
existing and future consolidation throughout the blood bank industry will
not cause substantial implementation cycle delays and delays in obtaining
new customer orders for Wyndgate's software products. Such delays due to
consolidation within the blood bank industry may cause additional and
unanticipated use of the Company's financial resources and may also have a
material and adverse affect on the Company's business, financial condition
and results of operations.
PENALTIES AND POTENTIAL LIMITATIONS OF MARKET SHARE DUE TO ITxM DEVELOPMENT
AGREEMENT
The Company has a software development agreement with ITxM which provides
for penalties to be paid by the Company to ITxM in the event that beta
testing of SAFETRACE TX(TM) is not completed by July 17, 1998. The
Agreement also contains certain potential limitations on the Company's
right to market its products, including, SAFETRACE TX(TM), within the blood
transfusion industry and grants ITxM the ability to use SAFETRACE TX(TM)
pursuant to a non-exclusive, perpetual license. The Company and ITxM have
recently commenced negotiations relating to these provisions, which the
Company believes will have a material and adverse affect on its business if
not satisfactorily resolved. There can be no assurance that the
negotiations will result in the penalty payments being eliminated and/or
the resolution of the Company's and ITxM's respective rights to market and
use SAFETRACE TX(TM).
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<PAGE>
PRODUCT AND REPORTING LIABILITY
As of the date hereof, twelve of the twenty-four SAFETRACE(R) licensees
have SAFETRACE(R) in operation. Currently, the Company has product
liability exposure for defects in SAFETRACE(R) which may become apparent
through widespread use of SAFETRACE(R). To date, no claims have been filed
against the Company involving SAFETRACE(R) and the Company is not aware of
any material problems involving SAFETRACE(R). 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
SAFETRACE(R) 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 three months ended March 31, 1998, four Wyndgate customers, The
Blood Center of Central Iowa, eight California based blood centers who
participated in the development of SAFETRACE(R) (the "Royalty Group"), Gulf
Coast Regional Blood Center and Haemonetics Corporation accounted for
approximately 13%, 11%, 34% and 14% of the Company's total revenues.
During the three months ended March 31, 1997, three Wyndgate customers,
Belle Bonfils Memorial Blood Center, Haemonetics Corporation and the Rhode
Island Blood Center accounted for approximately 14%, 46% and 12% of the
Company's total revenues from continuing operations. Accounts receivable
from the above customers was approximately $285,000 and $140,000 as of
March 31, 1998 and 1997, respectively. Unbilled revenues from the above
customers was approximately $480,000 as of March 31, 1997. In order to
attempt to reduce its credit risks, the Company generally requires
substantial down payments and progress payments during SAFETRACE(R)
implementations. Non-renewal or termination of the contractual arrangements
with these key and other Wyndgate customers could have a material adverse
affect on the Company. There can be no assurance that the Company will be
able to retain these or other customers or, if Wyndgate's 24 existing
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 has lost all of the revenues,
accounts receivable and unbilled revenue from that division's customers,
and the unaudited consolidated financial statements and related footnotes
herein reflect DataMed as discontinued operations.
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SUBSTANTIAL COMPETITION
There is substantial competition in all aspects of the blood bank and
hospital information management industry. Numerous companies are
developing technologies and marketing products and services in the
healthcare information management area. Many of these competitors have
been in business longer than the Company and have substantially greater
personnel and financial resources available to them than does 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 does not assure future
business expansion, profitability or long-term and sustainable success.
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 such products. The Company is currently not aware of any
claims or infringements of the Company's software products upon the rights
of others.
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 to finance growth.
-28-
<PAGE>
AUTHORIZED STOCK AVAILABLE FOR ISSUANCE BY THE COMPANY
The Company presently has 8,148,255 shares of common stock outstanding,
out of a total of 40,000,000 shares of common stock, and 10,000,000 shares
of preferred stock authorized for future issuance under the Company's
Articles of Incorporation. The amount of common stock outstanding,
however, does not include 1,456,988 shares issuable upon exercise of
publicly held Class A common stock purchase warrants, 1,759,118 shares
issuable upon exercise of other outstanding options and warrants, 1,457,802
shares issuable but not outstanding in connection with the Company's stock
option and stock compensation plans or warrants to purchase from 7,000,000
to 12,000,000 shares of common stock issued or issuable to the lenders of
the April 1998 financing agreements (see Note 2 to the unaudited
consolidated financial statements herein for a further description of these
financing agreements). The remaining shares of common stock and preferred
stock not issued or reserved for specific purposes may be issued without
any action or approval of the Company's shareholders. As part of the
Company's future capital raising efforts, the Company will likely be
required, if additional financing is required to be obtained, to issue or
reserve additional shares of its common stock and/or preferred stock.
Although there are no existing agreements involving the issuance of such
shares other than the April 1998 financing agreement discussed in Note 2 of
the unaudited consolidated financial statements herein, any such issuances
could be used as a method of discouraging, delaying or preventing a change
in control of the Company or could dilute the public ownership of the
Company. There can be no assurance that the Company will not undertake to
issue such shares if it deems it appropriate to do so.
LIMITED CAPITALIZATION
The Company has only limited capitalization available to it. The Company
anticipates it may need additional capital to pursue its intended business
plan; 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.
CONTROL BY OFFICERS AND DIRECTORS
The Company's officers and directors own approximately 33% of the
outstanding common stock of the Company and will be able to substantially
influence all matters requiring approval by the shareholders of the
Company, including the election of directors. The Company's Articles do
not provide for cumulative voting in the election of directors; hence,
shareholders should not expect to be able to elect any directors to the
Company's Board of Directors.
-29-
<PAGE>
POSSIBLE ANTI-TAKEOVER EFFECTS OF PREFERRED STOCK, SEVERANCE PAYMENTS AND
BELOW-MARKET WARRANTS
The Board of Directors of the Company may issue shares of preferred stock
without stockholder approval on such terms as the Board may determine. The
rights of the holders of common stock will be subject to, and may be
adversely affected by, the rights of the holders of any preferred stock
that may be issued in the future. In addition, certain of the Officers of
the Company have employment agreements with the Company which provide for
lump-sum payments to them of up to $2.5 million if the Company terminates
their employment for any reason other than cause or disability. Each of
these Officers have executed a release of their employment contract in
favor of the Company; however, until the releases are accepted by the
lenders, the employment contracts are still in effect. In addition, certain
lenders have a minimum of 7,000,000 warrants to purchase common stock,
exercisable at $.25 per share until April 14, 2008. The existence of the
severance payment provisions and the large number of outstanding low-priced
warrants increases the likelihood that a potential purchaser would seek to
negotiate directly with the holders of the warrants and/or the Board of
Directors in order to gain control of the Company or its assets rather than
approaching the Company's shareholders as a group. All of the foregoing
could have the effect of delaying, deferring or preventing a change in
control of the Company and could limit the price that certain investors
might be willing to pay in the future for shares of the Company's common
stock.
POSSIBLE VOLATILITY OF PRICE OF SHARES OF COMMON STOCK AND CLASS A WARRANTS
The shares of common stock and the Class A warrants are currently traded on
the OTC Electronic Bulletin Board. The prices of securities of publicly
traded corporations tend to fluctuate significantly. The trading price of
the common stock and Class A warrants could be subject to wide fluctuations
in response to quarterly variations in operating results, announcements of
technological developments, the Company's financial condition, as well as
other events or factors. Although a trading market for the Company's
common stock and the Class A warrants currently exists, there can be no
assurance that a market will be sustained.
RISKS RELATED TO LOW-PRICED STOCKS
The Company's common stock and Class A warrants are presently listed on
the OTC Bulletin Board. Since the Company's net tangible assets do not
exceed $2 million, and its common stock is trading for less than $5.00 per
share, the Company's common stock and class A warrants are each considered
a "penny stock" under federal securities law. Additional regulatory
requirements apply to trading by broker-dealers of penny stocks which,
oftentimes, deter broker-dealers from trading "penny stocks".
-30-
<PAGE>
WARRANTS TO REPRESENTATIVE
At the closing of the Company's February 1997 initial public offering,
the Company sold to RAF Financial Corporation (the "Representative") and
its designees, for $100, warrants to purchase up to 133,700 Units (the
"Representative's Warrants"), exercisable at $11.55 per Unit. The
Representative's Warrants are exercisable for a forty-nine month period,
which commenced January 14, 1998. The Representative will be given the
opportunity to profit from a rise in the market price of the Company's
common stock with a resulting dilution of the interest of stockholders.
Furthermore, the Company granted certain registration rights with regard to
the shares of common stock underlying the Representative's Warrants and
issuable upon exercise of the Warrants included in the Representative's
Warrants, and such registration could result in substantial expense to the
Company.
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 Asset Purchase Agreement
for the sale of DataMed provides that the Company will assign all of
DataMed's customer contracts to the purchaser, and if DataMed customers do
not consent to the assignment, the purchaser can require the Company to
terminate any non-consenting customers' contracts. The Company will not be
in the substance abuse testing business in the future. 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 customers' contracts with DataMed.
-31-
<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
securities, from which it received net proceeds of approximately $8.2
million from the sale of 1,456,988 Units (the "February 1997 Public
Offering"). Each Unit consisted of two shares of common stock and one
Class A common stock purchase warrant. On March 13, 1997, the common stock
and the Class A common stock purchase warrants began trading separately.
Through March 31, 1998, the Company has used all of the $8.2 million net
proceeds from the February 1997 public offering. The net proceeds to the
Company from the February 1997 public offering of approximately $8.2 million
were used as follows: approximately $3.01 million for research and development
costs, including approximately $481,000 in capital expenditures, incurred
primarily for the development of Wyndgate's SAFETRACE TX(TM) software,
which is currently in beta testing; $1.06 million for sales and marketing
expenses incurred for sales and marketing for Wyndgate's software products
and services; approximately $300,000 of other capital expenditures for
general operating purposes related to the increased number of employees
assigned to customer support, customer implementations, customer training
and general operating purposes for Wyndgate; approximately $ 1.874 million
for the principal repayment of certain short-term debt, approximately
$181,000 of which was paid, under the same terms and conditions as
nonaffilates, to certain significant owners, directors, officers and other
related parties of the Company, who held 10% notes; approximately $536,000
for general working capital requirements for the Company's continuing
operations; and approximately $1.42 million for the Company's DataMed
International division, which is reflected as discontinued operations in
the consolidated audited financial statements herein.
The Company expects it will continue to be able to finance its operations
until April 1999 as a result of the April 1998 financing agreements
discussed above which provided the Company net borrowings of up to
approximately $3 million.
-32-
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibit No. Description
----------- -----------
27.1 Financial Data Schedule for March 31, 1998
27.2 Restated Financial Data Schedule for March 31,
1997
(b) Reports on Form 8-K:
There were no reports on Form 8-K filed during the three months
ended March 31, 1998.
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 May 20, 1998 By /s/ MICHAEL I. RUXIN
-------------------- ---------------------------------
Michael I. Ruxin
Chief Executive Officer
Date May 20, 1998 By /s/ Gerald F. Willman, Jr.
-------------------- ---------------------------------
Gerald F. Willman, Jr.
Chief Financial Officer
-33-
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