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 March 31, 1998
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_X_ No__
Number of shares of common stock outstanding as of May 11, 1998: 8,333,996
=========
<PAGE>
Netsmart Technologies, Inc. and Subsidiary
Index
Part I: - Financial Information:
Item 1. Financial Statements: Page
Consolidated Balance Sheets - March 31, 1998
and December 31, 1997 1-2
Consolidated Statements of Operations-
Three Months Ended March 31, 1998 and March 31, 1997 3
Consolidated Statements of Cash Flows-
Three Months Ended March 31, 1998 and March 31, 1997 4-5
Consolidated Statement of Stockholders' Equity-
Three Months Ended March 31, 1998 6-7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-11
<PAGE>
Netsmart Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
March 31, December 31,
1998 1997
-------- -----------
Assets
Current Assets:
Cash $ 400,705 $ 854,979
Accounts receivable- Net 2,317,026 2,182,418
Costs and Estimated Profits in Excess
of Interim Billings 816,249 542,324
Other Current Assets 108,904 83,770
--------- ---------
Total current assets 3,642,884 3,663,491
--------- ---------
Property and Equipment - Net 303,754 308,583
--------- ---------
Other assets:
Software Development Costs 172,975 183,150
Customer Lists 2,984,355 3,067,676
Other Assets 119,701 116,903
--------- ---------
Total Other Assets 3,277,031 3,367,729
--------- ---------
Total Assets $ 7,223,669 $ 7,339,803
========= =========
See Notes to Financial Statements.
-4-
<PAGE>
Netsmart Technologies, Inc. and Subsidiary
Consolidated Balance Sheets
March 31, December 31,
1998 1997
-------- -----------
Liabilities and Stockholders' Equity:
Current Liabilities:
Note due to Asset Based Lender $ 1,209,835 $ 935,177
Capitalized Lease Obligations 17,452 23,331
Accounts Payable 1,164,415 1,131,692
Accrued Expenses 1,060,528 1,041,120
Interim Billings in Excess of Costs
and Estimated Profits 834,381 951,885
Deferred Revenue 72,264 117,080
--------- ---------
Total Current Liabilities 4,358,875 4,200,285
--------- ---------
Commitments and Contingencies --
--------- ---------
Stockholders' Equity:
Preferred Stock, $.01 Par Value; Authorized 3,000,000
Shares; Authorized, Issued and Outstanding:
Series D 6% Redeemable Preferred Stock - $.01 Par
Value 3,000 Shares Authorized, 1,210 Issued and
Outstanding [Liquidation Preference of $1,210] 12 12
Additional Paid-in Capital - Preferred Stock -
Series D 1,209,509 1,209,509
Common Stock - $.01 Par Value; Authorized
15,000,000 Shares; Issued and Outstanding
8,333,996 Shares 83,339 83,339
Additional Paid-in Capital - Common Stock 17,140,109 17,140,109
Accumulated Deficit (15,568,175) (15,293,451)
---------- ----------
Total Stockholders' Equity 2,864,794 3,139,518
---------- ---------
Total Liabilities and Stockholders' Equity $ 7,223,669 $ 7,339,803
========== =========
See Notes to Financial Statements.
-5-
<PAGE>
Netsmart Technologies, Inc. and Subsidiary
Consolidated Statements of Operations
Three months ended
March 31,
---------
1998 1997
---- ----
Revenues:
Software and Related
Systems and Services:
General $ 1,547,587 $ 763,517
Maintenance Contract
Services 313,921 323,773
--------- ---------
Total Software and Related
Systems and Services 1,861,508 1,087,290
Data Center Services 679,234 484,520
--------- ---------
Total Revenues 2,540,742 1,571,810
--------- ---------
Cost of Revenues:
Software and Related
Systems and Services:
General 1,133,620 840,963
Maintenance Contract
Services 267,035 233,575
--------- ---------
Total Software and Related
Systems and Services 1,400,655 1,074,538
Data Center Services 282,679 340,077
--------- ---------
Total Cost of Revenues 1,683,334 1,414,615
--------- ---------
Gross Profit 857,408 157,195
Selling, General and
Administrative Expenses 705,504 638,765
Research and Development 314,605 --
Related Party Administrative
Expenses 45,000 45,000
--------- ---------
Loss from Operations (207,701) (526,570)
Interest Expense 67,023 68,436
Equity in Net Loss of Joint Venture -- 58,307
--------- ---------
Net Loss $ (274,724) $ (653,313)
========== ===========
Net Loss Per Share of Common Stock $ (.03) $ (.10)
========== ===========
Weighted average number of
shares of common stock 8,333,996 6,798,203
See Notes to Financial Statements.
-6-
<PAGE>
Netsmart Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Three months ended
March 31
1998 1997
Operating Activities:
Net [Loss] $ (274,724) $ (653,313)
Adjustments to Reconcile Net [Loss]
to Net Cash [Used for]
Operating Activities:
Depreciation and Amortization 132,597 128,031
Equity in Net Loss of Joint Venture -- 58,307
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (134,608) 174,534
Costs and Estimated Profits in
Excess of Interim Billings (273,925) (52,289)
Other Current Assets (25,134) 2,887
Other Assets (2,798) --
Increase [Decrease] in
Accounts Payable 32,723 96,879
Accrued Expenses 19,408 (113,139)
Interim Billings in Excess of
Costs and Estimated Profits (117,504) (116,687)
Due to Related Parties -- (11,487)
Deferred Revenue (44,816) (20,304)
---------- ----------
Total Adjustments (414,057) 169,706
---------- ----------
Net Cash - Operating Activities - Forward (688,781) (483,607)
---------- ----------
Investing Activities:
Acquisition of Property and Equipment (34,272) (47,659)
Software Development Costs -- (258,500)
Investment in Joint Venture at Equity -- (148,462)
---------- ----------
Net Cash - Investing Activities -
Forward (34,272) (454,621)
---------- ----------
See Notes to Financial Statements.
-7-
<PAGE>
Netsmart Technologies, Inc. and Subsidiary
Consolidated Statements of Cash Flows
Three months ended
March 31
1998 1997
Net Cash - Operating Activities -
Forwarded $ (688,781) $ (483,607)
--------- ---------
Net Cash - Investing Activities -
Forwarded (34,272) (454,621)
--------- ---------
Financing Activities:
Proceeds from Note due to Asset Based Lender 274,658 5,836
Payment of Capitalized Lease
Obligations (5,879) (25,683)
--------- ---------
Net Cash - Financing Activities 268,779 (19,847)
--------- ---------
Net [Decrease] in Cash (454,274) (958,075)
Cash - Beginning of Periods 854,979 998,317
--------- ---------
Cash - End of Periods $ 400,705 $ 40,242
========= =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the periods for:
Interest $ 72,219 $ 90,722
Taxes $ 10,272 --
See Notes to Financial Statements.
-8-
<PAGE>
Netsmart Technologies, Inc. and Subsidiary
Consolidated Statement of Stockholders' Equity
For the Three Months Ended March 31, 1998
Series D Preferred Stock at .01 Par Value Shares Amount
------ ------
Beginning Balance 1,210 $ 12
------- --------
Ending Balance 1,210 $ 12
======= ========
Additional Paid-In Capital Preferred Stock
Beginning Balance $1,209,509
---------
Ending Balance $1,209,509
=========
Common Stock $.01 Par Value Authorized
15,000,000 Shares
Beginning Balance 8,333,996 $ 83,339
--------- ---------
Ending Balance 8,333,996 $ 83,339
========= =========
See Notes to Financial Statements.
-9-
<PAGE>
Netsmart Technologies, Inc. and Subsidiary
Consolidated Statement of Stockholders' Equity
For the Three Months Ended March 31, 1998
Additional Paid-In Capital Common Stock Amount
Beginning Balance $ 17,140,109
-----------
Ending Balance $ 17,140,109
===========
Accumulated Deficit
Beginning Balance $(15,293,451)
Net Loss (274,724)
----------
Ending Balance $(15,568,175)
==========
Total Stockholders' Equity $ 2,864,794
==========
See Notes to Financial Statements.
-10-
<PAGE>
Netsmart Technologies, Inc. and Subsidiary
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 March 31, 1998 and the results of its operations for the three months ended
March 31, 1998 and 1997 and the changes in cash flows for the three months
ended March 31, 1998 and 1997. The results of operations for the three months
ended March 31, 1998 and 1997 are not necessarily indicative of the results to
be expected for the full year.
(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
December 31, 1997 Form 10-K.
(3) Loss per share - Loss per share is computed by dividing the net loss for
the period by the weighted average number of shares of common stock. The Common
stock equivalents are assumed converted to common stock when dilutive. During
periods in which losses were incurred, common stock equivalents were excluded
from the weighted average number of shares of common stock because their
inclusion would be anti-dilutive.
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
Three Months Ended March 31, 1998 and 1997
During the quarter ended March 31, 1998, the Company evaluated its smart card
business and has determined that the cash requirements do not justify the
continued operations of the development of such business in the increasingly
competitive smart card market. As a result, the Company is discontinuing its
smart card operations and is only marketing smart card products in connection
with its behavioral health information systems ("BHIS") business. The Company
anticipates that it will either sell or terminate its smart card business
during the quarter ended June 30, 1998.
The Company's revenue for the three months ended March 31, 1998 (the "March
1998 period") was $2,541,000, an increase of $969,000, or 62% from the revenue
for the three months ended March 31, 1997 (the "March 1997 period") which was
$1,572,000.
Revenue from the Company's BHIS business represented all of its revenue for the
March 1998 period. During the March 1997 period, the Company's BHIS business
accounted for approximately $957,000, or 88.0% of revenue, and smart card sales
accounted for the remaining $130,000. Sales of smart card products represented
sales to one customer in the March 1997 period. The largest component of
revenue in the March 1998 period was data center (service bureau) revenue which
increased to $679,000 from $485,000 in the March 1997 period, reflecting a 40%
increase. This increase was substantially the result of a special project
performed for a client which may not continue at the existing rate for the
balance of the year. The turnkey systems labor revenue increased to $650,000 in
the March 1998 period from $351,000 in the March 1997 period, reflecting an
increase of 85%. This increase is substantially the result of growth in the
BHIS backlog and the ability of the Company to provide the staff necessary to
generate additional revenue. Maintenance revenue decreased to $314,000 in the
March 1998 period from $324,000 in the March 1997 period, reflecting a decrease
of 3%. Revenue from third party hardware and software increased to $308,000 in
the March 1998 period from $212,000 in the March 1997 period, an increase of
45%. Sales of third party hardware and software are made only in connection
with the sales of turnkey systems. License revenue increased to $360,000 in the
March 1998 period from $70,000 in the March 1997 period, an increase of 414%.
License revenue is generated as part of a sale of BHIS pursuant to a contract
or purchase order that includes delivery of the system and maintenance. Revenue
from the sales of the Company's methadone division totaled $229,000 in the
March 1998 period. There was no revenue for the methadone division in the March
1997 period.
Revenue from contracts from government agencies represented 31% of revenue for
the March 1998 period and 33% of revenue for the March 1997 period.
Gross profit increased to $857,000 in the March 1998 period from $157,000 in
the March 1997 period, a 445% increase. Losses associated with the Company's
Smart Card business amounted to $213,000 in the March 1998 period. The increase
in the gross profit was substantially the result of higher gross margin from
the increased BHIS revenue, particularly from the license revenue which
provides higher margins.
Selling, general and administrative expenses were $706,000 in the March 1998
period, an increase of 10% from the $639,000 in the March 1997 period. This
increase was the result of an increase in commissions and advertising and
promotion expenses which were partially offset by a decrease in personnel and
salaries in the administrative area.
-12-
<PAGE>
In the March 1997 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 $58,000. The Company discontinued development of
this software development in October 1997.
The Company incurred product development expense of $315,000 in the March 1998
period. These costs were related to the Company's BHIS products. There were no
such costs on the March 1997 period.
Interest expense was $67,000 in the March 1998 period, a decrease of $1,000, or
2% from the $68,000 in the March 1997 period . The most significant component
of the interest expense on an ongoing basis is the interest payable to the
Company's asset-based lender. The Company pays interest on such loans at a rate
equal to prime plus 8 1/2% plus a fee of 5/8% of the face amount of the
invoice.
Related party administrative expense was $45,000 in the March 1998 and March
1997 periods. These charges are pursuant to an agreement with the Company's
principal stockholder to provide general business, management and financial
consulting services for a monthly fee of $15,000.
As a result of the foregoing factors, the Company incurred a net loss of
$274,000, or $.03, per share in the March 1998 period, as compared with a net
loss of $653,000 , or $.10, per share in the March 1997 period.
Liquidity and Capital Resources
The Company had a working capital deficit of $716,000 at March 31, 1998 as
compared to a working capital deficit of $537,000 at December 31, 1997, and the
Company's cash position decreased from $855,000 at December 31, 1997 to
$401,000 at March 31, 1998. The decrease in working capital for the three
months ended March 31, 1998 was substantially due to the net loss incurred for
the three months ended March 31, 1998.
The Company's principal source of funds, other than revenue, is an accounts
receivable financing agreement with an asset based lender whereby it may borrow
up to 80% of eligible accounts receivable up to a maximum of $1,250,000. This
maximum will increase to $1.5 million effective August 1, 1998. As of March 31,
1998, the outstanding borrowings under this facility was $1,210,000. At March
31, 1998, the maximum amount available under this formula was $1,230,000.
During the quarter, with the consent of the asset-based lender, the Company
from time to time exceeded the maximum borrowing level provided in its
agreement with the asset-based lender.
At March 31, 1998, accounts receivable and costs and estimated profits in
excess of interim billings were approximately $3.1 million, representing
approximately 111 days of revenue based on annualizing the revenue for the
three months ended March 31, 1998, although no assurance can be given that
revenue will continue at the same level as the three month period. Accounts
receivable at March 31, 1998 increased by $135,000 from $2,182,000 at December
31, 1997 to $2,317,000 at March 31, 1998. A significant portion of the loss for
the March 1998 period reflected expenses relating to its smart card business.
Although the Company anticipates that such expenses will continue at a reduced
level during the second quarter of 1998, it does not foresee such expenses
continuing in any significant amount beyond May 31, 1998. The Company believes
that, with the elimination of expenses relating to the smart card business, the
Company's cash on hand, together with revenue from its BHIS business, will be
sufficient to enable it to continue to operate at least through the end of 1998
without additional funding. However, there can be no assurance that the Company
will not require significant additional funding prior to the end of 1998 or
that it will be able to obtain any required funding.
Forward Looking Statements
Statements in this Form 10-Q include forward-looking statements that are
subject to risks and uncertainties. Actual
-13-
<PAGE>
results could differ materially from those currently anticipated due to a
number of factors, including those identified in this Form 10-Q, the Company's
Annual Report on Form 10-K for the year ended December 31, 1997 and in other
documents filed by the Company with the Securities and Exchange Commission.
-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/ James L. Conway President, Chief Executive May 14, 1998
- -------------------------- Officer and Director (Principal
James L. Conway Executive Officer)
/S/ Anthony F. Grisanti Chief Financial Officer May 14, 1998
- -------------------------- (Principal Financial and
Anthony F. Grisanti Accounting Officer)
-15-
NETSMART TECHNOLOGIES, INC.
EXHIBIT 11.1 - CALCULATION OF EARNINGS PER SHARE
- ------------------------------------------------------------------------------
Three Months ended March 31,
1998 1997
Average shares outstanding 8,333,996 6,798,203
Dilutive effect of stock options
and warrants computed by use
of treasury stock method 0 0
Computation of Earnings Per
Share=Net Income/Average
common and common share
equivalent shares (274,724) (653,313)
outstanding 8,333,996 6,798,203
--------- ---------
Earnings Per Share $(.03) $(.10)
<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>
<CIK> 0001011028
<NAME> Netsmart Technologies, Inc.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-1-1998
<PERIOD-END> MAR-31-1998
<CASH> 400,705
<SECURITIES> 0
<RECEIVABLES> 2,317,026
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 3,642,884
<PP&E> 780,815
<DEPRECIATION> 477,061
<TOTAL-ASSETS> 7,223,669
<CURRENT-LIABILITIES> 4,358,875
<BONDS> 0
0
12
<COMMON> 83,339
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,223,669
<SALES> 2,540,742
<TOTAL-REVENUES> 2,540,742
<CGS> 1,683,334
<TOTAL-COSTS> 2,748,443
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67,023
<INCOME-PRETAX> (274,724)
<INCOME-TAX> 0
<INCOME-CONTINUING> 274,724
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (274,724)
<EPS-PRIMARY> (.03)
<EPS-DILUTED> (.03)
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