<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For Quarter Ended June 30, 1996
Commission File Number 0-21177
NETSMART TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3680154
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
146 Nassau Avenue, Islip, NY 11751
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (516) 968-2000
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months, (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes___ No_X_
Number of shares of common stock outstanding
as of September 16, 1996: 5,786,253
=========
<PAGE>
Netsmart Techologies, Inc.
Index
Part I: - Financial Information:
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets - June 30, 1996
and December 31, 1995 1-3
Consolidated Statements of Operations-
Six Months Ended June 30, 1996 and June 30, 1995
and three months ended June 30, 1996 and 1995 4
Consolidated Statements of Cash Flows-
Six Months Ended June 30, 1996 and June 30, 1995. 5-6
Consolidated Statement of Stockholders' Equity-
Six Months Ended June 30, 1996. 7-8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10-14
<PAGE>
Netsmart Technologies, Inc.
Consolidated Balance Sheets
June 30, December 31,
1996 1995
Assets
Current Assets:
Cash $ 307
Accounts receivable- Net 2,756,493 $2,112,972
Costs and Estimated Profits in Excess
of Interim Billings 998,754 415,079
Other Current Assets 12,881 13,395
--------- ---------
Total current assets 3,768,435 2,541,446
--------- ---------
Property and Equipment - Net 318,163 347,239
--------- ---------
Other assets:
Capitalized Software Development
Costs 278,800
Deferred Public Offering Costs 188,373
Investment in Joint Venture at Equity 550,000
Customer Lists 3,285,814 3,441,814
Other Assets 63,125 60,603
--------- ---------
Total Other Assets 4,366,112 3,502,417
--------- ---------
Total Assets $8,452,710 $6,391,102
========= =========
See Notes to Financial Statements.
-1-
<PAGE>
Netsmart Technologies, Inc.
Consolidated Balance Sheets
June 30, December 31,
1996 1995
Liabilities and Stockholders' Equity:
Current Liabilities:
Cash Overdraft $ 127,119 $ 95,536
Notes Payable - Bank 79,000
Notes Payable - Other 1,543,101 1,002,301
Capitalized Lease Obligations 168,329 169,480
Accounts Payable 2,262,335 1,185,776
Accrued Expenses 1,454,417 1,323,249
Interim Billings in Excess of Costs
and Estimated
Profits 1,464,386 941,479
Due to Related Parties 111,735 167,000
Deferred Revenue 40,218 141,000
--------- ---------
Total Current Liabilities - Forward 7,171,640 5,104,821
--------- ---------
Capitalized Lease Obligations - Forward 24,763 33,060
--------- ---------
Subordinated Debt - Related Party - Forward 750,000 750,000
--------- ---------
Commitments and Contingencies - Forward
--------- ---------
Redeemable Preferred Stock:
Series B 6% Redeemable Preferred Stock;
80 Shares Authorized, Issued and Outstanding
[Liquidation Preference and Redemption
Price of $96,000] - Forward 96,000 96,000
--------- ---------
See Notes to Financial Statements.
-2-
<PAGE>
Netsmart Technologies, Inc.
Consolidated Balance Sheets
June 30, December 30,
1996 1995
Total Current Liabilities - Forward $7,171,640 $5,104,821
--------- ---------
Capitalized Lease Obligations - Forwarded 24,763 33,060
--------- ---------
Subordinated Debt - Related Party - Forwarded 750,000 750,000
--------- ---------
Commitments and Contingencies - Forwarded -- --
--------- ---------
Redeemable Preferred Stock - Forwarded 96,000 96,000
--------- ---------
Stockholders' Equity:
Preferred Stock, $.01 Par Value;
Authorized 3,000,000 Shares;
Authorized, Issued and Outstanding:
Series A 4% Convertible Redeemable
Preferred Stock-$.01 Par Value 400 Shares
Authorized, Issued and Outstanding
[Liquidation Preference of $40,000] 4 4
Series D 6% Redeemable Preferred Stock
- $.01 Par Value 3,000 Shares
Authorized, 1,210 and 2,210 Issued and
Outstanding [Liquidation Preference of
$1,210,000 and $2,210,000] at June 30,
1996 and December 31, 1995, respectively 12 23
Additional Paid-in Capital - Preferred Stock
[$39,996 - Series A; $1,209,498 - Series D
at June 30, 1996, $2,209,498 - Series D at
December 31, 1995 1,249,505 2,249,494
Common Stock - $.01 Par Value; Authorized
15,000,000 Shares; Issued and Outstanding
4,136,253 Shares at June 30, 1996,
3,011,253 Shares at December 31, 1995 41,363 30,113
Additional Paid-in Capital - Common Stock 6,501,787 3,273,968
Accumulated Deficit (7,382,364) (5,146,381)
--------- ---------
Total Stockholders' Equity 410,307 407,221
--------- ---------
Total Liabilities and Stockholders' Equity $8,452,710 $6,391,102
========= =========
See Notes to Financial Statements.
-3-
<PAGE>
Netsmart Technologies, Inc.
Consolidated Statements of Operations
Six months ended Three months ended
June 30, June 30,
-------- --------
1996 1995 1996 1995
---- ---- ----- ----
Revenues:
Software and Related
Systems and Services:
General $3,325,479 $1,971,988 $1,535,419 $1,217,577
Maintenance Contract
Services 572,832 512,518 283,604 260,252
--------- --------- --------- ---------
Total Software and Related
Systems and Services 3,898,311 2,484,506 1,819,023 1,477,829
Data Center Services 1,037,247 862,753 555,879 442,400
--------- --------- --------- ---------
Total Revenues 4,935,558 3,347,259 2,374,902 1,920,229
--------- --------- --------- ---------
Cost of Revenues:
Software and Related
Systems and Services:
General 2,768,293 1,675,219 1,299,160 964,876
Maintenance Contract
Services 285,275 356,620 141,110 164,737
--------- --------- --------- ---------
Total Software and Related
Systems and Services 3,053,568 2,031,839 1,440,270 1,129,613
Data Center Services 569,817 420,704 284,687 213,476
--------- --------- --------- ---------
Total Cost of Revenues 3,623,385 2,452,543 1,724,957 1,343,089
--------- --------- --------- ---------
Gross Profit 1,312,173 894,716 649,945 577,140
Selling, General and
Administrative Expenses 933,985 1,183,128 478,634 589,552
Related Party Administrative
Expenses 9,000 9,000 4,500 4,500
Compensation expense -
Warrants and Options Granted 2,230,069 -- 155,569 --
Minority interest in loss
of subsidiary 100,000 -- 100,000 --
Research and Development -- 335,187 -- 179,263
--------- --------- --------- ---------
Loss from Operations (1,960,881) (632,599) (88,758) (196,175)
Interest Expense 275,102 265,121 148,543 142,934
--------- --------- --------- ---------
Net Loss $(2,235,983) $ (897,720) $ (237,301) $(339,109)
========= ========= ========= =========
Weighted average number of
shares of common stock 4,821,528 4,821,528
Loss per share $( .46) $( .05)
========= ========= ========= =========
See Notes to Financial Statements.
-4-
<PAGE>
Netsmart Technologies, Inc.
Consolidated Statements of Cash Flows
Six months ended
June 30
1996 1995
---- ----
Operating Activities:
Net [Loss] $(2,235,983) $(898,000)
--------- ---------
Adjustments to Reconcile Net Income [Loss]
to Net Cash [Used for] Provided by
Operating Activities:
Depreciation and Amortization 220,096 265,000
Administrative Expenses 9,000 9,000
Compensation Expense -
Warrants and Options Granted 2,230,069
Equity in Net Loss of Joint Venture 100,000
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (643,521) 254,000
Costs and Estimated Profits in
Excess of Interim Billings (583,675) (313,000)
Other Current Assets 514 (16,000)
Other Assets (2,522) (1,000)
Increase [Decrease] in
Accounts Payable 1,076,559 325,000
Accrued Expenses 131,168
Interim Billings in Excess of
Costs and Estimated Profits 522,907 (136,000)
Due to Related Parties (55,265) 241,000
Deferred Revenue (100,782)
--------- ---------
Total Adjustments 2,904,548 628,000
--------- ---------
Net Cash - Operating Activities -
Forward 668,565 (270,000)
--------- ---------
Investing Activities:
Acquisition of Property and
Equipment (35,020) (31,000)
Software Development Costs (278,800)
Acquisition of Software (650,000)
--------- ---------
Net Cash - Investing Activities -
Forward $ (963,820) $ (31,000)
--------- ---------
See Notes to Financial Statements.
-5-
<PAGE>
Netsmart Technologies, Inc.
Consolidated Statements of Cash Flows
Six months ended
June 30
1996 1995
---- ----
Net Cash - Operating Activities -
Forwarded $ 668,565 $ (270,000)
--------- ---------
Net Cash - Investing Activities -
Forwarded (963,820) (31,000)
--------- ---------
Financing Activities:
Proceeds from Short-Term Notes 540,800 659,000
Payment of Short-Term Notes (67,000)
Payment of Bank Note Payable (79,000) (145,000)
Payment of Capitalized Lease
Obligations (9,448) (10,000)
Cash Overdraft 31,583 (39,000)
Deferred Public Offering Costs (188,373) (89,000)
--------- ---------
Net Cash - Financing Activities 295,562 309,000
--------- ---------
Net Increase [Decrease] in Cash 307 8,000
Cash - Beginning of Periods -- --
--------- ---------
Cash - End of Periods $ 307 $ 8,000
========= =========
Supplemental Disclosure of Cash Flow
Information Cash paid during the periods
for:
Interest $ 193,972 $ 137,000
========= =========
See Notes to Financial Statements.
-6-
<PAGE>
Netsmart Technologies, Inc.
Consolidated Statement of Stockholders' Equity
For the Six Months Ended June 30, 1996
Series A Preferred Stock at .01 Par Value: Shares Amount
------ ------
Beginning Balance 400 $ 4
========= =========
Ending 400 $ 4
========= =========
Series D Preferred Stock at .01 Par Value
Beginning Balance 1,210 $12
========= =========
Ending Balance 1,210 $12
========= =========
Additional Paid-In Capital Preferred Stock
Beginning Balance -- $ 2,249,505
Common Stock Issued in Exchange for Series D
Preferred Stock -- (1,000,000)
--------- ---------
Ending Balance -- $ 1,249,505
========= =========
Common Stock $.01 Par Value Authorized
15,000,000 Shares
Beginning Balance 3,011,253 $ 30,113
Common Stock Issued in Exchange for Series D
Preferred Stock 1,125,000 11,250
--------- ---------
Ending Balance 4,136,253 $ 41,363
========= =========
See Notes to Financial Statements.
-7-
<PAGE>
Netsmart Technologies, Inc.
Consolidated Statement of Stockholders' Equity
For the Six Months Ended June 30, 1996
Additional Paid-In Capital Common Stock Shares Amount
Beginning Balance -- $ 3,273,916
Common Stock Issued in Exchange for Series D
Preferred Stock -- 988,750
Allocated Related Party Administrative Expenses -- 9,000
Compensation from the Issuance of Warrants
and options -- 2,230,069
--------- ---------
Ending Balance -- $ 6,501,787
========= =========
Accumulated Deficit
Beginning Balance $(5,146,381)
Net Loss (2,235,983)
--------- ---------
Ending Balance -- $(7,382,364)
========= =========
Total Stockholders' Equity -- $ 410,307
========= =========
See Notes to Financial Statements.
-8-
<PAGE>
Netsmart Technologies, Inc.
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
(1) In the opinion of the Company, the accompanying unaudited financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position of the Company as
of June 30, 1996 and the results of its operations for the six months ended June
30, 1996 and 1995 and the changes in cash flows for the six months ended June
30, 1996 and 1995.
(2) The accounting policies followed by the Company are set forth in Notes 1 and
2 to the Company's consolidated financial statements as filed in its
Registration Statement on Form S-1, registration number 333-2550, which was
declared effective by the Securities and Exchange Commission on August 13, 1996.
During the second quarter ended June 30, 1996, the Company reassigned personnel
to work on the IBN contract and the development of SmartCard products. As a
result, their salaries and related expenses were included as costs of revenue
with respect to the work on the IBN contract and capitalized software
development costs with respect to their work in the SmartCard product. As a
result of such product development the Company incurred $279,000 in capitalized
software costs.
During 1996 the Company recognized its 50% share of its loss in its joint
venture corporation with respect to the purchase of SATC software. The amount of
such loss was $100,000. Such amount has reduced the original costs of the joint
venture.
(3) The results of operations for the six months ended June 30, 1996 and 1995
are not necessarily indicative of the results to be expected for the full year.
(4) Loss per share - Loss per share is computed by dividing the net loss for the
period by the weighted average number of common shares outstanding. For purposes
of computing weighted average number of shares of common stock outstanding the
Company has common stock equivalents. The common stock equivalents are assumed
converted to common stock, when dilutive. During periods of operations in which
losses were incurred, common stock equivalents were excluded from the weighted
average number of common shares outstanding because their inclusion would be
anti-dilutive.
(5) Subsequent events - On August 19, 1996 the Company closed on a public
offering whereby it sold 646,875 units at a price of $8 per unit for net
proceeds of $3.8 million. Each unit consisted of two shares of Common stock and
one Series A Redeemable Common Stock Purchase Warrant. On August 21, 1996
800,000 $2 warrants were exercised and the Company received $1,600,000 in gross
and net proceeds.
In August 1996 the Company redeemed its Series B Redeemable Preferred stock
in the amount of $96,000.
-9-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of operations
Six Months Ended June 30, 1996 and 1995
The Company's revenue for the six months ended June 30, 1996 (the "June 1996
period") was $4.9 million, an increase of $1.6 million, or 47% from the revenue
for the six months ended June 30, 1995(the "June 1995 period"), which was $3.3
million. Approximately $1,499,000 of the increase in revenue reflects revenue
generated pursuant to the Company's agreement with IBN. IBN represented the
Company's most significant customer for the June 1996 period, accounting for
approximately 32.3% of revenue for the half. Furthermore, through June 30, 1996
IBN has generated revenue of $2.1 million, or approximately 92.9% of the
Company's total revenue from the SmartCard Systems during the June 1996 period
and the year ended December 31, 1995, on a combined basis. The revenue generated
to date includes approximately $419,000 of guaranteed royalties. As of June 30,
1996 the contract was more than 75% complete. Following completion of the
contract, the Company anticipates that it will continue to receive royalty and
maintenance revenue from IBN. In addition, the Company is continuing to provide
professional services to IBN, although revenue from such services will decline
from the level in the June 1996 period. The Company intends to expand its
marketing effort for its CarteSmart System; however, at June 30, 1996, the
Company did not have any significant contracts for the CarteSmart System.
Revenue from the Company's health information systems continued to represent the
Company's principal source of revenue during the June 1996 period, accounting
for $3.3 million or 68% of revenue. However, as a result of the increase of
revenue from SmartCard systems, principally from IBN, revenue from health
information systems and services declined as a percentage of total revenue.
Except for revenue from the IBN contract, the largest component of revenue for
the June 1996 period was data center (service bureau) revenue which increased to
$1,037,000 in the June 1996 period from $863,000 in the June 1995 period,
reflecting an increase of 20%. The turnkey systems revenue decreased to $820,000
in the June 1996 period from $860,000 in the June 1995 period, reflecting a
decrease of 5%. Maintenance revenue increased to $573,000 in the June 1996
period from $513,000 in the June 1995 period, a 12% increase. Revenue from third
party hardware and software decreased to $663,000 in the June 1996 period from
$895,000 in the June 1995 period, a decrease of 26%. Sales of third party
hardware and software are made only in connection with the sales of turnkey
systems. License revenues increased to $240,000 in the June 1996 period from
$113,000 in the June 1995 period. License revenue is generated as part of a sale
of a turnkey system pursuant to a contract or purchase order that includes the
development of a turnkey system and maintenance. The Company believes that the
increase in installations at June 30, 1996 from the prior year should enable the
Company to increase the maintenance revenue in future periods.
Although revenue from contracts from government agencies represented 30% of
revenue for the six months ended June 30, 1996, a decrease from the 54% for the
year ended December 31, 1995, the Company believes that such contracts will
continue to represent an important part of its business, particularly its health
information systems business. During the six months ended June 30, 1996,
contracts from government agencies accounted for approximately 45% of its
revenue from health information systems. The ability of the Company to generate
revenue from both CarteSmart Systems and from its government contracts will
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
continue to have a material effect upon its ability to be profitable. The
Company believes that its CarteSmart System could be a source of additional
revenue from existing customers, including government agencies and entitlement
programs.
Gross profit increased to $1.3 million in the June 1996 period from $895,000 in
the June 1995 period, a 47% increase. The increase in the gross profit was a
result of the increased sales since the gross margins for both the June 1996
period and the June 1995 period remained constant at 27%.
Selling, general and administrative expenses were $934,000 for the June 1996
period, a decrease of 21% from the $1.2 million for the June 1995 period. The
decline reflected a reduction in executive compensation and a reduction in
staff. Amortization of customer lists was $156,000 in the June 1996 period
compared to $96,000 in the June 1995 period. At December 31, 1995 the Company
changed the amortization of customer lists from 20 years to twelve years. The
Company believes that the change in the life of the customer lists reflects
frequent changes which have occurred in the software industry and are likely to
occur in the future and which may affect the cash flow to be generated by the
customer lists purchased in connection with the acquisition of Creative
Socio-Medics ("CSM").
During the June 1996 period, the Company incurred non-cash compensation charges
of $2.2 million arising out of the issuance by the Company of warrants and
options having exercise prices which were less than the market value of the
Common Stock at the date of approval by the board of directors. The Company
believes that the principal reason for the loss for the June 1996 period was
such $2.2 million compensation expense.
During the June 1996 period the Company recognized its 50% share of its loss in
its joint venture corporation with respect to the purchase of SATC software. The
amount of such loss was $100,000.
During the June 1996 period, the Company did not incur any research and
development expenses, since the personnel who had been engaged in such
activities were reassigned to work on the IBN contract and the development of
SmartCard products. As a result, their salaries and related expenses were
included as costs of revenue with respect to the work on the IBN contract and
capitalized software development costs with respect to their work on the
SmartCard product. As a result of such product development the Company incurred
$279,000 in capitalized software costs. During the June 1995 period, the Company
incurred research and development expenses of $335,000.
Interest expense was $275,000 in the June 1996 period, an increase of $10,000,
or 4% from the interest expense for the June 1995 period. The most significant
component of the interest expense on an ongoing basis is the interest payable to
the Company's asset-based lender, on which it pays interest equal to the greater
of 18% per annum or prime plus 8% plus a fee of 1% of the face amount of the
invoice.
As a result of the foregoing factors, the Company incurred a net loss of $2.2
million, or $.46 per share for the June 1996 period, as compared with a loss of
$898,000, or $.64 per share for the June 1995 period.
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three Months Ended June 30, 1996 and 1995
The Company's revenue for the three months ended June 30, 1996 (the "June 1996"
quarter) was $2.4 million, an increase of $455,000, or 24% from the revenue for
the three months ended June 30, 1995(the "June 1995 quarter"), which was $1.9
million. Approximately $569,000 of the increase in revenue reflects revenue
generated pursuant to the Company's agreement with IBN. IBN represented the
Company's most significant customer for the June 1996 quarter, accounting for
approximately 27.8% of revenue for the quarter. The revenue generated this
quarter includes approximately $216,000 of guaranteed royalties. As of June 30,
1996 the contract was more than 75% complete. Following completion of the
contract, the Company anticipates that it will continue to receive royalty and
maintenance revenue from IBN. In addition, the Company is continuing to provide
professional services to IBN, although revenue from such services will decline
from the level in the June 1996 quarter. The Company intends to expand its
marketing effort for its CarteSmart System; however, at June 30, 1996, the
Company did not have any significant contracts for the CarteSmart System.
Revenue from the Company's health information systems continued to represent the
Company's principal source of revenue during the June 1996 quarter, accounting
for $1.7 million or 72% of revenue. However, as a result of the increase of
revenue from SmartCard systems, principally from IBN, revenue from health
information systems and services declined as a percentage of total revenue.
Except for revenue from the IBN contract, the largest component of revenue for
the June 1996 quarter was data center (service bureau) revenue which increased
to $556,000 in the June 1996 quarter from $442,000 in the June 1995 quarter,
reflecting an increase of 26%. The turnkey systems revenue decreased to $409,000
in the June 1996 quarter from $473,000 in the June 1995 quarter, reflecting a
decrease of 14%. Maintenance revenue increased to $284,000 in the June 1996
quarter from $261,000 in the June 1995 quarter, a 9% increase. Revenue from
third party hardware and software decreased to $394,000 in the June 1996 quarter
from $596,000 in the June 1995 quarter, a decrease of 34%. Sales of third party
hardware and software are made only in connection with the sales of turnkey
systems. License revenues increased to $72,000 in the June 1996 quarter from
$60,000 in the June 1995 quarter. License revenue is generated as part of a sale
of a turnkey system pursuant to a contract or purchase order that includes the
development of a turnkey system and maintenance. The Company believes that the
increase in installations at June 30, 1996 from the prior year should enable the
Company to increase the maintenance revenue in future quarters.
Although revenue from contracts from government agencies represented 30% of
revenue for the three months ended June 30, 1996, a decrease from the 54% for
the year ended December 31, 1995, the Company believes that such contracts will
continue to represent an important part of its business, particularly its health
information systems business. During the three months ended June 30, 1996,
contracts from government agencies accounted for approximately 42% of its
revenue from health information systems. The ability of the Company to generate
revenue from both CarteSmart Systems and from its government contracts will
continue to have a material effect upon its ability to be profitable. The
Company believes that its CarteSmart System could be a source of additional
revenue from existing customers, including government agencies and entitlement
programs.
-12-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Gross profit increased to $650,000 in the June 1996 quarter from $577,000 in
the June 1995 quarter, a 13% increase. Although the gross margin for the June
1996 quarter was 27% as compared to 30% for the June 1995 quarter the increase
in the gross profit was a result of the increased sales for the June 1996
quarter.
Selling, general and administrative expenses were $479,000 for the June 1996
quarter, a decrease of 19% from the $590,000 for the June 1995 quarter. The
decline reflected a reduction in executive compensation and a reduction in
staff. Amortization of customer lists was $78,000 in the June 1996 quarter
compared to $48,000 in the June 1995 quarter. At December 31, 1995 the Company
changed the amortization of customer lists from 20 years to twelve years. The
Company believes that the change in the life of the customer lists reflects
frequent changes which have occurred in the software industry and are likely to
occur in the future and which may affect the cash flow to be generated by the
customer lists purchased in connection with the acquisition of CSM.
During the June 1996 quarter, the Company incurred non-cash compensation charges
of $156,000 arising out of the issuance by the Company of options to employees
having exercise prices which were less than the market value of the Common Stock
at the date of approval by the board of directors.
During the June 1996 quarter the Company recognized its 50% share of its loss in
its joint venture corporation with respect to the purchase of SATC software. The
amount of such loss was $100,000.
During the June 1996 quarter, the Company did not incur any research and
development expenses, since the personnel who had been engaged in such
activities were reassigned to work on the IBN contract and the development of
SmartCard products. As a result, their salaries and related expenses were
included as costs of revenue with respect to the work on the IBN contract and
capitalized software development costs with respect to their work on the
SmartCard product. As a result of such product development the Company has
incurred $279,000 in capitalized software costs. During the June 1995 quarter,
the Company incurred research and development expenses of $179,000.
Interest expense was $148,000 in the June 1996 quarter, an increase of $6,000,
or 4% from the interest expense for the June 1995 quarter. The most significant
component of the interest expense on an ongoing basis is the interest payable to
the Company's asset-based lender, on which it pays interest equal to the greater
of 18% per annum or prime plus 8% plus a fee of 1% of the face amount of the
invoice.
As a result of the foregoing factors, the Company incurred a net loss of
$237,000, or $.05 per share for the June 1996 quarter, as compared with a loss
of $339,000, or $.24 per share for the June 1995 quarter.
Liquidity and Capital Resources
At June 30, 1996, the Company had a working capital deficiency of approximately
$3.4 million. The working capital deficit increased approximately $840,000 since
December 31, 1995. Since January 1, 1995, the Company's principal source of
funds other than revenue has been an accounts receivable financing agreement and
-13-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
interim loans from nonaffiliated accredited investors. In February 1995, the
Company entered into an accounts receivable financing agreement with an
asset-based lender pursuant to which it may borrow up to 75% of eligible
accounts receivable. In March 1996 the maximum borrowing under this agreement
was increased from $750,000 to $1.0 million and the percentage of eligible
receivables was increased from 75% to 80%. As of June 30, 1996 the outstanding
borrowings under this facility was $775,000.
In January 1996, the Company borrowed $500,000 from unaffiliated investors, and
issued its 8% note due the earlier of January 31, 1997 or five days after
completion of a public offering.
As a result of its working capital deficit, the Company was delinquent in
payments to its vendors. Accounts payable to vendors increased to $2.2 million
at June 30, 1996 from $1.2 million at December 31, 1995. The delinquency for
vendors deemed critical to the Company's operations is generally less than 60
days, and the delinquency for other vendors was in excess of 90 days. Although
vendors have demanded payment from the Company, the Company has sought to work
with the vendors by arranging payment schedules with extended terms.
At June 30, 1996, accounts receivable and costs and estimated profits in excess
of interim billings were approximately $3.8 million, representing approximately
79 days of revenue based on annualizing the revenue for the six month period,
although no assurance can be given that revenue will continue at the same level
as the six month period. At December 31, 1995, accounts receivable and costs and
estimated profits in excess of interim billings were approximately $2.5 million,
representing 88 days of revenue. Accounts receivable at June 30, 1996 increased
by $643,000 from $2,113,000 at December 31, 1995 to $2,756,000 at June 30, 1996.
At June 30, 1996 two customers accounted for more than ten percent each of the
total accounts receivable balance. One customer accounted for 17% and the other
customer accounted for 14%.
Pursuant to employment agreements with six officers of the Company, the Company
is paying for 1996 base salaries of approximately $500,000. In addition the
Company has an agreement to pay an affiliate, consulting fees of $180,000 per
annum.
On August 19, 1996 the Company closed on a public offering whereby it sold
646,875 units at a price of $8 per unit for a net proceeds of $3.8 million. Each
unit consisted of two shares of Common stock and one Series A Redeemable Stock
Purchase Warrant. On August 21, 1996 800,000 $2 warrants were exercised and the
Company received $1,600,000 in gross proceeds. The Company believes that these
receipts will be sufficient to enable it to operate without additional funding
for at least one year.
-14-
<PAGE>
Signatures
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NETSMART TECHNOLOGIES, INC.
/S/ Chairman of the Board September 25, 1996
- ------------------------- (Principal Executive
Lewis S. Schiller Officer)
/S/ Chief Financial Officer September 25, 1996
- ------------------------- (Principal Financial and
Anthony F. Grisanti Accounting Officer)
<PAGE>
Netsmart Technologies, Inc.
June 30, 1996
Exhibit 11.1 Calculation of Earnings per Share
- --------------------------------------------------------------------------------
Three months ended Six months ended
March 31, 1996 June 30, 1996
-------------- -------------
Net Loss ($237,301) ($2,235,983)
======= =========
Loss Per Share - Note 1 $(0.05) $(0.46)
==== ====
Loss Per Share - Note 2 $(0.05) $(0.40)
==== ====
Note 1: Computed by dividing net loss by the weighted average number of common
shares (4,136,253) for all periods presented and adjusting such amounts by items
(i) and (ii) below. This results in 4,821,528 shares for all periods presented.
(i) Assumes that 104,952 Stock Incentive Plan stock options, issued in December
1995 outstanding at June 30, 1996 were exercised at the beginning of the period
and that all proceeds were used to purchase treasury stock at $4.00 per common
share resulting in a net increase in outstanding stock of 95,900 shares for all
periods presented.
(ii) Assumes common stock warrants to purchase an aggregate of 1,178,750 common
shares were exercised at the beginning of the period and that all proceeds were
used to purchase treasury stock at $4.00 per common share resulting in a net
increase in outstanding common stock of 589,375 shares for all periods
presented.
Note 2: Computed by dividing net loss by the weighted average number of common
shares (4,136,253) for all periods presented and adjusting it by items (i) to
(v) below. This results in 5,632,981 shares for all period presented.
(i) Assumes that 104,952 Stock Incentive Plan stock options, issued in December
1995, outstanding at June 30, 1996 were exercised at beginning of the period and
that all proceeds were used to purchase treasury stock at $4.00 per common share
resulting in a net increase in outstanding stock of 95,900 shares for all
periods presented.
(ii) Assumes that 252,804 Stock Incentive Plan stock options, issued in January
1995, outstanding at June 30, 1996 were exercised at the beginning of the period
and that the proceeds were used to purchase treasury stock at $4.00 per common
share resulting in a net increase in outstanding of 238,142 shares for all
periods presented.
(iii) Assumes common stock warrants, issued at various times, to purchase
2,516,250 common shares were exercised at the beginning of the period and that
all proceeds were used to purchase treasury stock at $4.00 per common share
resulting in a net increase in outstanding stock of 1,258,125 shares of all
periods presented.
<PAGE>
Note 2 continued:
(iv) Assumes common stock warrants, issued at various times, to purchase 637,500
common shares were exercised at beginning of the period and that all proceeds
were used to purchase treasury stock at $4.00 per common share resulting in a
net decrease in outstanding stock of 159,375 shares for all periods presented.
(v) Assumes that the following convertible preferred shares were converted to
common stock at the beginning of the period as follows:
Preferred Shares Conversion Rate Common Shares
Series A Preferred 400 108.00 43,200
Series B Preferred 80 259.20 20,736
---------
63,936
=========
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS
FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> JUN-30-1996
<CASH> 307
<SECURITIES> 0
<RECEIVABLES> 2,756,493
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,768,435
<PP&E> 873,800
<DEPRECIATION> 555,637
<TOTAL-ASSETS> 8,452,710
<CURRENT-LIABILITIES> 7,171,640
<BONDS> 0
<COMMON> 41,363
0
27
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 368,917
<SALES> 4,935,558
<TOTAL-REVENUES> 4,935,558
<CGS> 3,623,385
<TOTAL-COSTS> 3,623,385
<OTHER-EXPENSES> 3,273,054
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 275,102
<INCOME-PRETAX> (2,235,983)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,235,983)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,235,983)
<EPS-PRIMARY> (.46)
<EPS-DILUTED> (.46)
</TABLE>
