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, 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 August 5, 1998: 8,360,762
=========
<PAGE>
Netsmart Technologies, Inc.
Index
Part I: - Financial Information:
Item 1. Financial Statements: Page
----
Consolidated Balance Sheets - June 30, 1998
and December 31, 1997 1-2
Consolidated Statements of Operations-
Six Months Ended June 30, 1998 and 1997 and
three months ended June 30, 1998 and 1997 3
Consolidated Statements of Cash Flows-
Six Months Ended June 30, 1998 and 1997 4-5
Consolidated Statement of Stockholders' Equity-
Six Months Ended June 30, 1998 6-7
Notes to Consolidated Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9-12
<PAGE>
Netsmart Technologies, Inc.
Consolidated Balance Sheets
June 30, December 31,
1998 1997
------- -----------
Assets
Current Assets:
Cash $ 63,235 $ 854,979
Accounts receivable- Net 2,641,866 2,182,418
Costs and Estimated Profits in Excess
of Interim Billings 1,267,407 542,324
Other Current Assets 107,321 83,770
--------- ---------
Total Current Assets 4,079,829 3,663,491
--------- ---------
Property and Equipment - Net 301,276 308,583
--------- ---------
Other assets:
Software Development Costs 162,800 183,150
Customer Lists 2,901,034 3,067,676
Other Assets 106,064 116,903
--------- ---------
Total Other Assets 3,169,898 3,367,729
--------- ---------
Total Assets $ 7,551,003 $ 7,339,803
=========== ===========
See Notes to Financial Statements.
-1-
<PAGE>
Netsmart Technologies, Inc.
Consolidated Balance Sheets
June 30, December 31,
1998 1997
---- ----
Liabilities and Stockholders' Equity:
Current Liabilities:
Note due to Asset Based Lender $ 1,206,989 $ 935,177
Capitalized Lease Obligations 12,884 23,331
Accounts Payable 1,264,548 1,131,692
Accrued Expenses 1,007,127 1,041,120
Interim Billings in Excess of Costs
and Estimated Profits 1,237,700 951,885
Deferred Revenue 39,049 117,080
------------ -----------
Total Current Liabilities 4,768,297 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 (15,650,263) (15,293,451)
------------ -----------
Total Stockholders' Equity 2,782,706 3,139,518
------------ -----------
Total Liabilities and Stockholders' Equity $ 7,551,003 $ 7,339,803
============ ===========
See Notes to Financial Statements.
-2-
<PAGE>
Netsmart Technologies, Inc.
Consolidated Statements of Operations
<TABLE>
Six months ended Three months ended
June 30, June 30,
---------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Software and Related
Systems and Services:
General $3,503,762 $ 1,446,150 $1,956,175 $ 813,309
Maintenance Contract
Services 661,359 665,941 347,438 342,168
--------- --------- --------- ---------
Total Software and Related
Systems and Services 4,165,121 2,112,091 2,303,613 1,155,477
Data Center Services 1,175,790 1,019,286 496,556 534,766
--------- --------- --------- ---------
Total Revenues 5,340,911 3,131,377 2,800,169 1,690,243
--------- --------- --------- ---------
Cost of Revenues:
Software and Related
Systems and Services:
General 2,187,775 1,082,642 1,267,452 497,585
Maintenance Contract
Services 503,642 480,989 236,607 247,414
--------- --------- --------- ---------
Total Software and Related
Systems and Services 2,691,417 1,563,631 1,504,059 744,999
Data Center Services 553,287 739,276 270,608 399,199
--------- --------- --------- ---------
Total Cost of Revenues 3,244,704 2,302,907 1,774,667 1,144,198
--------- --------- --------- ---------
Gross Profit 2,096,207 828,470 1,025,502 546,045
Selling, General and
Administrative Expenses 1,376,286 1,317,297 670,782 678,532
Research and Development 539,593 -- 224,988 --
Interest Expense 148,901 150,533 81,878 82,097
--------- --------- --------- ---------
Related Party Administrative
Expenses 45,000 90,000 -- 45,000
--------- --------- --------- ---------
Income (Loss) from Continuing Operations (13,573) (729,360) 47,854 (259,584)
Loss from Operations of Discontinued
Operations 343,239 510,527 129,942 326,990
Net Loss $ (356,812) $(1,239,887) $ (82,088) $ (586,574)
========= ========== ========= =========
Weighted average number of
shares of common stock 8,333,996 6,800,032 8,333,996 6,800,032
Loss per share $ (.04) $ (.18) $ (.01) $ (.08)
========= ========== ========= =========
See Notes to Financial Statements.
-3-
</TABLE>
<PAGE>
Netsmart Technologies, Inc.
Consolidated Statements of Cash Flows
Six months ended
June 30,
--------
1998 1997
---- ----
Operating Activities:
Net [Loss] From Continuing Operations $ (13,573) $(729,360)
Adjustments to Reconcile Net [Loss]
to Net Cash [Used for] Provided by
Operating Activities:
Depreciation and Amortization 270,392 278,400
Equity in Net Loss of Joint Venture 104,339
Cash Used in Discontinued Operations (343,239) (510,527)
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (459,448) (147,122)
Costs and Estimated Profits in
Excess of Interim Billings (725,083) 153,772
Other Current Assets (23,551) 5,059
Other Assets 10,839 1,382
Increase [Decrease] in
Accounts Payable 132,856 502,446
Accrued Expenses (22,856) (104,823)
Interim Billings in Excess of
Costs and Estimated Profits 285,815 48,201
Due to Related Parties (11,137) 48,238
Deferred Revenue (78,031) (19,779)
--------- ---------
Total Adjustments (963,443) 359,586
--------- ---------
Net Cash - Operating Activities -
Forward (977,016) (369,774)
--------- ---------
Investing Activities:
Acquisition of Property and Equipment (76,093) 83,083
Software Development Costs -- (462,000)
Investment in Joint Venture at Equity -- (148,462)
--------- ---------
Net Cash - Investing Activities -
Forward (76,093) (693,545)
---------- ---------
See Notes to Financial Statements.
-4-
<PAGE>
Netsmart Technologies, Inc.
Consolidated Statements of Cash Flows
Six months ended
June 30,
--------
1998 1997
---- ----
Net Cash - Operating Activities -
Forwarded $ (977,016) $ (369,774)
---------- ----------
Net Cash - Investing Activities -
Forwarded (76,093) (693,545)
---------- ----------
Financing Activities:
(Payment) Proceeds from Note due to
Asset Based Lender 271,812 113,080
Payment of Capitalized Lease
Obligations (10,447) (25,683)
---------- ---------
Net Cash - Financing Activities 261,365 87,397
Net Increase [Decrease] in Cash 791,744 (975,922)
Cash - Beginning of Periods 854,979 998,317
---------- ---------
Cash - End of Periods $ 63,235 $ 22,395
========== =========
Supplemental Disclosure of Cash Flow Information
Cash paid during the periods for:
Interest $ 159,838 $ 178,357
========== =========
Taxes $ 14,238 $ --
========== =========
See Notes to Financial Statements.
-5-
<PAGE>
Netsmart Technologies, Inc.
Consolidated Statement of Stockholders' Equity
For the Six Months Ended June 30, 1998
Series D Preferred Stock, .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.
-6-
<PAGE>
Netsmart Technologies, Inc.
Consolidated Statement of Stockholders' Equity
For the Six Months Ended June 30, 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 (356,812)
-----------
Ending Balance $(15,650,263)
============
Total Stockholders' Equity $ 2,782,706
============
See Notes to Financial Statements.
-7-
<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 30,1998 and the results of its operations for the six months ended June
30,1998 and 1997 and the changes in cash flows for the six months ended June
30,1998 and 1997. The results of operations for the six months ended June 30,
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.
(4) During the quarter ended June 30, 1998, the Company discontinued its
CarteSmart division. On June 30, 1998, the Company sold this division to Granite
Technologies, Inc. ("Granite"), a corporation formed by the former management of
such division. Granite issued to the Company its $500,000 promissory note and an
equity interest in Granite. Granite also agreed to pay certain royalties to the
Company and granted the Company a license with respect to the CarteSmart
software.
As a result of the discontinuation of the SmartCarte division, the financial
statements for the six and three months ended June 30, 1997, have been restated
to reflect the net loss from such division as a loss from discontinued
operations.
Because Granite has no operating history and, at the time of the agreement, did
not have any significant capitalization, at June 30, 1998, the Company placed a
100% reserve against Granite's $500,000 note, and the note is not reflected as
an asset on the Company's June 30, 1998 balance sheet.
-8-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of operations
Six months ended June 30, 1998 and 1997
At June 30, 1998, the Company discontinued its smart card division. Therefore,
references to the Company's continued operations will relate to its behavioral
health information systems ("BHIS") business which accounts for the Company's
entire operations.
The Company's revenue for the six months ended June 30, 1998 (the "June 1998
period") was $5,341,000, an increase of $2,210,000, or 71% from the revenue for
the six months ended June 30, 1997 (the "June 1997 period") which was
$3,131,000.
The largest component of revenue in the June 1998 period was turnkey systems
labor revenue which increased to $1,333,000 from $812,000 in the June 1997
period, reflecting a 64% increase. 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. The data center (service bureau)
revenue increased to $1,176,000 in the June 1998 period from $1,019,000 in the
June 1997 period, reflecting an increase of 15%. This increase was substantially
the result of a special project. License revenue increased to $1,031,000 in the
June 1998 period from $145,000 in the June 1997 period, an increase of 611%.
This increase is the result of the sale of 9 new sytems in the June 1998 period
from 2 new systems in the June 1997 period. Additionally, the average costs per
license has increased substantially. Revenue from third party hardware and
software increased to $697,000 in the June 1998 period from $489,000 in the June
1997 period, an increase of 43%. Sales of third party hardware and software are
made in connection with the sales of turnkey systems. Maintenance revenue
decreased to $661,000 in the June 1998 period from $666,000 in the June 1997
period, reflecting a decrease of 1%. Revenue from the sales of the Company's
methadone division totaled $442,000 in the June 1998 period. There was no
revenue for the methadone division in the June 1997 period.
Revenue from contracts from government agencies represented 39% of revenue for
the June 1998 period and 32% of revenue for the June 1997 period.
Gross profit increased to $2,096,000 in the June 1998 period from $828,000 in
the June 1997 period, a 153% increase. The increase in the gross profit was
substantially the result of the increased license revenue which provides higher
margins.
Selling, general and administrative expenses were $1,376,000 in the June 1998
period, an increase of 4% from the $1,317,000 in the June 1997 period. This
increase was substantially the result of an increase in commissions expense
which was partially offset by a decrease in personnel and salaries in the
administrative area as well as other miscellaneous expenses.
The Company incurred product development expense of $540,000 in the June 1998
period. These costs were related to the Company's BHIS products. There were no
such costs in the June 1997 period.
Interest expense was $149,000 in the June 1998 period, a decrease of $2,000, or
1% from the $151,000 in the June 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.
-9-
<PAGE>
Related party administrative expense was $45,000 in the June 1998 period and
$90,000 in the June 1997 period. 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. This agreement was
considered terminated, effective April, 1 1998 after a change in control of the
Company's principal stockholder and a cessation of such management and
consulting services.
Loss from the Company's discontinued operations, the smart card division, was
$343,000 in the June 1998 period, a decrease of $167,000, or 33% from the
$510,000 in the June 1997 period.
As a result of the foregoing factors, the Company incurred a net loss of
$357,000, or $.04, per share in the June 1998 period, as compared with a net
loss of $1,240,000, or $.18, per share in the June 1997 period.
Three months ended June 30, 1998 and 1997
The Company's revenue for the three months ended June 30, 1998 (the "June 1998
quarter") was $2,800,000, an increase of $1,110,000, or 66% from the revenue for
the three months ended June 30, 1997 (the "June 1997 quarter") which was
$1,690,000.
The largest component of revenue in the June 1998 quarter was turnkey systems
labor revenue which increased to $683,000 from $462,000 in the June 1997
quarter, reflecting a 48% increase. 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. License revenue increased to $671,000
in the June 1998 quarter from $75,000 in the June 1997 quarter, an increase of
795%. This increase is the result of the sale of 4 new systems in the June 1998
quarter from no new systems in the June 1997 quarter. Additionally, the average
costs per license has increased substantially. The data center (service bureau)
revenue decreased to $497,000 in the June 1998 quarter from $534,000 in the June
1997 quarter, reflecting a decrease of 7%. This decrease was substantially the
result of a special project performed the June 1997 quarter. Revenue from third
party hardware and software increased to $389,000 in the June 1998 quarter from
$276,000 in the June 1997 quarter, an increase of 41%. Sales of third party
hardware and software are made in connection with the sales of turnkey systems.
Maintenance revenue increased to $347,000 in the June 1998 quarter from $342,000
in the June 1997 quarter, reflecting an increase of 2%. Revenue from the sales
of the Company's methadone division totaled $213,000 in the June 1998 quarter.
There was no revenue for the methadone division in the June 1997 quarter.
Revenue from contracts from government agencies represented 50% of revenue for
the June 1998 quarter and 33% of revenue for the June 1997 quarter.
Gross profit increased to $1,026,000 in the June 1998 quarter from $546,000 in
the June 1997 quarter, a 88% increase. The increase in the gross profit was
substantially the result of the increased license revenue which provides higher
margins.
Selling, general and administrative expenses were $671,000 in the June 1998
quarter, a decrease of 1% from the $679,000 in the June 1997 quarter. This
decrease was substantially the result of a decrease in miscellaneous general and
administrative expenses as well as advertising costs which were partially offset
by an increase in commission expense.
The Company incurred product development expense of $225,000 in the June 1998
quarter. These costs were related to the Company's BHIS products. There were no
such costs on the June 1997 quarter.
-10-
<PAGE>
Interest expense was $82,000 in each of the June 1998 and June 1997 quarters
respectively. 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.
There was no related party administrative expense in the June 1998 quarter and
$45,000 in the June 1997 quarter. 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. This agreement
was considered terminated, effective April, 1 1998 after a change in control of
the Company's principal stockholder and a cessation of such management and
consulting services.
Loss from the Company's discontinued operations, the smart card division, was
$130,000 in the June 1998 quarter, a decrease of $197,000, or 60% from the
$327,000 in the June 1997 quarter.
As a result of the foregoing factors, the Company incurred a net loss of
$82,000, or $.01, per share in the June 1998 quarter, as compared with a net
loss of $587,000, or $.08, per share in the June 1997 quarter.
Liquidity and Capital Resources
The Company had a working capital deficit of $688,000 at June 30, 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 $63,000
at June 30, 1998. The decrease in working capital for the six months ended June
30, 1998 was substantially due to the net loss incurred for the six months ended
June 30, 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 was increased to $1.5 million effective August 1, 1998. As of June 30,
1998, the outstanding borrowings under this facility was $1,207,000. At June 30,
1998, the maximum amount available under this formula was $1,353,000. 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 June 30, 1998, accounts receivable and costs and estimated profits in excess
of interim billings were approximately $3.9 million, representing approximately
132 days of revenue based on annualizing the revenue for the six months ended
June 30, 1998, although no assurance can be given that revenue will continue at
the same level as the six month period. Accounts receivable at June 30, 1998
increased by $460,000 from $2,182,000 at December 31, 1997 to $2,642,000 at June
30, 1998. Substantially all of the loss for the June 1998 period was from the
discontinued operations of the smart card business. 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 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 August 12, 1998
- ----------------------- Officer and Director (Principal
James L. Conway Executive Officer)
/s/ Anthony F. Grisanti Chief Financial Officer August 12, 1998
- ------------------------ (Principal Financial and
Anthony F. Grisanti Accounting Officer)
NETSMART TECHNOLOGIES, INC.
EXHIBIT 11.1 - CALCULATION OF EARNINGS PER SHARE
Six Months ended June 30,
1998 1997
---- ----
Average shares outstanding 8,333,996 6,800,032
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 (356,812) (1,239,887)
outstanding 8,333,996 6,800,032
--------- ---------
Earnings Per Share $(.04) $(.18)
<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-31-1998
<PERIOD-END> JUN-30-1998
<CASH> 63,235
<SECURITIES> 0
<RECEIVABLES> 2,641,866
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 4,079,829
<PP&E> 822,635
<DEPRECIATION> 521,359
<TOTAL-ASSETS> 7,551,003
<CURRENT-LIABILITIES> 4,768,297
<BONDS> 0
<COMMON> 83,339
0
12
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 7,551,003
<SALES> 5,340,911
<TOTAL-REVENUES> 5,340,911
<CGS> 3,244,704
<TOTAL-COSTS> 3,244,704
<OTHER-EXPENSES> 1,960,879
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 148,901
<INCOME-PRETAX> (13,663)
<INCOME-TAX> 0
<INCOME-CONTINUING> (13,663)
<DISCONTINUED> (343,239)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (356,812)
<EPS-PRIMARY> (0.4)
<EPS-DILUTED> (.04)
</TABLE>
