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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the period ended September 30, 1999
OR
[ ] Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
Commission file number: 333-73059
MEDICONSULT.COM, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 84-1341886
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1330 Avenue of the Americas, 17th Floor
New York, NY 10019
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(Address of principal executive offices, including zip code)
Registrant's Telephone No., including area code: (212) 841-7300
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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
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As of October 12, 1999, there were approximately 28,974,603 shares of the
Registrant's Common Stock outstanding.
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INDEX
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PART I. FINANCIAL INFORMATION PAGE
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Item 1. Financial statements
Unaudited Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 3
Unaudited Consolidated Statement of Operations - Three and Nine Months Ended
September 30, 1999 and 1998 4
Unaudited Consolidated Statement of Cash Flows - Nine Months Ended September 30, 1999 and 1998 5
Notes to Unaudited Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8
PART II. OTHER INFORMATION 19
Item 1. Pending Legal Proceedings 19
Item 2. Changes in Securities 19
Item 4. Submission of Matters to a Vote of Security Holders 19
Item 6. Exhibits and Reports Filed on Form 8-K 19
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PART I.
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Mediaconsult.com, Inc.
Unaudited Consolidated Balance Sheets - September 30, 1999 and December 31, 1998
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September 30 December 31
1999 1998
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ASSETS
Current assets
Cash and term deposits $ 33,947,811 $ 135,053
Accounts receivable 545,560 135,790
Work in progress 2,241,850 -
Prepaid expenses and other 905,720 -
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Total 37,640,941 270,843
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Non-current assets
Tangible fixed assets and software 1,185,947 52,790
Advance to Physicians' Online, Inc. 10,096,438 -
Goodwill 13,873,866 818,750
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Total 25,156,251 871,540
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Total assets $ 62,797,192 $ 1,142,383
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities 1,956,973 243,413
Advances from Stockholder - 513,589
Unearned revenue - 107,000
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Total liabilities 1,956,973 864,002
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Stockholders' equity
Preferred stock
Senior preferred stock 1,000,000 authorized, nil shares
outstanding at September 30, 1999 and December 31, 1998 - -
respectively.
Junior preferred stock 1,000,000 authorized, nil and 430,000
shares outstanding at September 30, 1999 and December
31, 1998, respectively. - 4,300,000
Common stock, $.001 par value, 50,000,000 shares
authorized, 28,721,163 and 18,519,950 shares
issued and outstanding at September 30, 1999
and December 31, 1998 respectively 28,721 18,520
Additional paid in capital 90,020,570 5,242,981
Deferred compensation (8,982,081) (884,109)
Accumulated deficit (20,226,991) (8,399,011)
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Total stockholders' equity 60,840,219 278,381
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Total liablities and stockholders' equity $ 62,797,192 $ 1,142,383
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</TABLE>
See accompanying notes.
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<TABLE>
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Mediconsult.com, Inc.
Unaudited Consolidated Statement of Operations for the Three and Nine Months Ended September 30, 1999 and 1998
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Three Months Ended Nine Months Ended
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September 30, September 30, September 30, September 30,
1999 1998 1999 1998
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Revenues $ 1,984,256 $ 238,203 $ 3,887,832 $ 658,972
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Operating Expenses
Product and content development 2,368,609 400,693 4,641,565 911,085
Marketing, sales and client services 2,764,441 234,153 4,338,948 914,289
General and administrative 1,225,084 183,969 2,546,874 491,957
Depreciation and amortization 885,339 44,504 1,392,204 209,920
Fair value of options granted to employees 1,120,057 26,097 1,695,425 95,406
Fair value of warrants granted to third parties - - 2,269,104 -
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Total 8,363,530 889,416 16,884,120 2,622,657
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Loss from operations (6,379,274) (651,213) (12,996,288) (1,963,685)
Interest income 592,272 - 1,168,308 -
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Net loss $ (5,787,002) $ (651,213) $(11,827,980) $ (1,963,685)
------------ ------------ ------------ ------------
Net loss per share - basic and fully diluted $ (0.20) $ (0.04) $ (0.48) $ (0.11)
Weighted average number of shares 28,559,488 18,097,400 24,882,258 17,763,525
</TABLE>
See accompanying notes.
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<TABLE>
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Mediaconsult.com, Inc.
Unaudited Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1999 and 1998
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Nine Months Ended
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September 30, September 30,
1999 1998
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Cash flows from operating activities
Net loss $ (11,827,980) $ (1,963,685)
Adjustment to reconcile net loss to net cash used in operating activities
Depreciation of tangible fixed assets and software 389,586 209,920
Amortization of goodwill 1,002,618 -
Fair value of options and warrants granted 3,964,529 -
Changes in assets and liabilities
Accounts receivable (278,000) (242,312)
Work in progress (2,241,850) -
Other current assets (905,720) -
Accounts payable and accrued liabilities 1,557,341 67,306
Unearned revenue (107,000) -
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Net cash used in operating activities (8,446,476) (1,928,771)
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Cash flows from investing activities
Fixed assets purchases (1,511,414) (30,225)
Acquisition of subsidiaries (7,619,614) -
Advance to Physicians' Online, Inc. (10,096,438) -
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Net cash used in investing activities (19,227,466) (30,225)
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Cash flows from financing activities
Advances from stockholder (513,589) (130,499)
Issuance of senior preferred stock - -
Issuance (redemption) of junior preferred stock (4,300,000) 1,800,000
Issuance of common stock 66,300,289 600
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Net cash provided by financing activities 61,486,700 1,670,101
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(Decrease) increase in cash 33,812,758 (288,895)
Cash - beginning of period 135,053 400,949
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Cash - end of period $ 33,947,811 $ 112,054
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</TABLE>
See accompanying notes.
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MEDICONSULT.COM, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCING STATEMENTS
(Unaudited)
Unless otherwise noted, references to "we," "our," and "us" refer to Mediconsult
and its subsidiaries.
1. ORGANIZATION
Mediconsult.com, Inc. (the "Company" or "Mediconsult") was originally
incorporated under the laws of the State of Colorado in October 1989. In April
1996, we purchased Mediconsult.com Limited, a Bermuda corporation ("MCL"),
through a merger in which MCL became a wholly-owned subsidiary, resulting in 90%
of the outstanding stock of Mediconsult being held by the former stockholders of
MCL, The Mediconsult Trust, controlled by Mr. Robert Jennings, and Michel
Bazinet. In December 1996, we consummated a reincorporation merger pursuant to
which Mediconsult became a Delaware corporation. We conduct business primarily
through MCL and two other operating subsidiaries, Mediconsult.com (US), Ltd. and
3542491 Canada Inc. d/b/a Mediconsult.com Canada.
Mediconsult is a provider of patient-oriented healthcare information and
services on the World Wide Web. Our sites provide a source of medical
information and are designed to empower consumers through increased consumer
education regarding medical conditions and treatment alternatives. These sites
also provide a destination on the Internet where visitors can interact with
others in communities centered around chronic medical conditions and other
health issues. We facilitate this environment through an array of complementary
services such as moderated on-line support groups and discussion forums.
2. BASIS OF PRESENTATION
These condensed consolidated financial statements are unaudited and reflect all
adjustments that, in our opinion, are necessary for a fair presentation of the
results for the interim period. The results of operations for the current
interim period are not necessarily indicative of results to be expected for the
current year or any other period. Certain amounts have been reclassified to
conform to the fiscal 1999 presentation.
These consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto included in our S-1
registration statement as filed with the Securities and Exchange Commission.
3. WORK IN PROGRESS
Work in progress represents the value of development work completed but not
billed at September 30, 1999.
4. ACQUISITIONS
On September 7, 1999, we entered into an agreement to purchase 100% of the
shares of privately held Physicians' Online, Inc. in exchange for the issuance
of 20 million shares of common stock of Mediconsult. The total transaction value
at the time of announcement was $180 million, including the assumption of debt.
It is expected that the transaction will be accounted for as a pooling of
interests and that it will close before December 31, 1999. The transaction is
subject to customary closing conditions. The stockholders of Physicians' Online,
Inc. and Mediconsult hold the votes required to approve the merger and have
agreed to vote in
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favor of the transaction. In the period ended September 30, 1999, we advanced
$10.1 million to Physicians' Online, Inc. This advance bears interest at rates
of between 12% and 14%.
Also, effective September 7, 1999, we entered into an agreement to acquire a 35%
interest in Pharma Marketing, LLC. a newly formed marketing company which will
conduct sales and marketing activities on behalf of the Company. Consideration
comprised cash of $2.9 million of which $1.65 was reinvested in Mediconsult in
exchange for the issuance of 200,000 shares. The intangible value arising from
this transaction, which comprises goodwill and acquisition costs, will be
amortized over a 53 month period ending December 2003.
5. STOCK OPTIONS
We have a 1996 Stock Option Plan (the "Plan") to provide incentives to
employees, directors and consultants. The maximum term of options granted under
the Plan is ten years. The Board of Directors has the exclusive power over the
granting of options and their vesting provisions. Stock options for common stock
comprise:
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1999
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# Weighted Avg.
Shares Exercise Price
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Outstanding - December 31, 1998 2,716,000 0.37
Granted during the period 1,044,800 10.13
Exercised during the period (201,900) 1.53
Cancelled during the period (49,400) 3.14
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Outstanding - September 30, 1999 3,509,500 3.15
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Exercisable - September 30, 1999 2,527,000 0.37
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During the three months ended September 30, 1999 and 1998 the fair values of the
options granted to employees were $1,120,057 and $26,097, respectively.
On August 1, 1998, we granted 400,000 warrants to Arnhold and S. Bleichroeder,
Inc., which were issuable upon meeting certain criteria related to investment
advisory fees and exercisable at $1.22 per share. These warrants expire on July
28, 2003 and have cash-less exercise provisions and anti-dilution provisions
comparable to the senior preferred stock warrants. These warrants vested or vest
in tranches as follows: 200,000 shares upon filing a registration statement on
form S-1; 100,000 shares on March 15, 2000; and 100,000 shares on September 15,
2000. The warrants vesting in 2000 are subject to continued performance of
financial advisory services by a particular individual on behalf of Arnhold and
S. Bleichroeder. As of September 30, 1999, the criteria required for exercise
of the warrants vesting in 2000 had not been met.
On February 26, 1999, we granted to Nazem & Company IV, L.P. Transatlantic Fund
C.V. and certain other individual investors, warrants exercisable for five years
to purchase 224,000 shares of Mediconsult's senior preferred stock. The warrants
are exercisable at $6.32 per share.
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6. RELATED PARTY TRANSACTIONS
During the three months ended September 30, 1999, we repaid net advances from
shareholders of $314,989 and an employee repaid an advance of $32,550 made in
June 1999 to fund the purchase of shares under our stock option plan.
During the three months ended September 30, 1999, we paid or accrued sales and
marketing expenses of $425,697 in respect of Pharma Marketing, LLC. (see Note 4
above), and advanced $10,096,438 to Physicians' Online, Inc.
7. SUBSEQUENT EVENTS
On October 27 , 1999 we completed the acquisition of Mood Sciences Inc., a
forward-looking company that specializes in mental health disease management
innovations in exchange for 200,000 shares of Mediconsult Common Stock. The
200,000 shares is subject to increase by 15,000 shares based upon the closing
price of our Common Stock for the 20 trading days ending February 1, 2000. The
goodwill arising from this transaction will be amortized over a five-year
period.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Unless otherwise noted, references to "we," "our," and "us" refer to Mediconsult
and its subsidiaries.
OVERVIEW
Mediconsult is a leading provider of patient-oriented healthcare information and
services on the World Wide Web. Our Web sites provide a trusted source of
comprehensive and easy to understand medical information and are designed to
empower consumers through increased education related to medical conditions and
treatment alternatives. The Web sites also provide a destination on the Internet
where visitors can interact with others in a community environment. We
facilitate this environment through a well-organized, easy to navigate format
and an array of complementary services, including moderated on-line support
groups and discussion forums. By fostering communities centered around over 60
prevalent chronic medical conditions and health issues, we believe that
Mediconsult creates significant opportunities for pharmaceutical and other
healthcare companies to reach a highly targeted consumer audience using
Internet-based marketing and advertising programs.
BACKGROUND
For the period from the inception of our operations in April 1996 through
January 1997, our operating activities related primarily to the initial
development of the mediconsult.com Web site and operating infrastructure, and
also the recruitment of employees. Since the launch of mediconsult.com in 1996,
we have focused on developing and organizing content in an easy to navigate
format, and improving the functionality of mediconsult.com. We have added new
sites through subsequent acquisitions including cyberdiet.com and heartinfo.com,
and new Internet-based healthcare tools through the acquisition of Mood
Sciences. We continue to refine our strategy of creating targeted on-line
marketing and advertising programs for large pharmaceutical and other healthcare
organizations. We continue to develop and implement these types of programs for
our clients. We structure our programs to provide advertisers with a measurable
return on their investment by tracking the level of interest and interactive
responses of visitors. Our programs utilize a
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broad range of on-line strategies and resources to deliver a message consistent
with the advertisers' global marketing strategy.
In the third quarter we expanded our focus on long term strategic relationships
with major pharmaceutical manufacturers to include other Internet-based
initiatives in addition to marketing programs. The initial relationship in this
new strategic direction was entered into with Bristol-Myers Squibb Company in
which we are working with Bristol-Myers to develop innovative new approaches to
electronic medical education.
REVENUE SOURCES
Our main source of revenue is through client services related to the development
and support of on-line marketing and advertising programs for pharmaceutical and
other healthcare companies. These services typically include the design,
development and management of customized Web sites relating to a particular
pharmaceutical or other health-related product. Client services also include
marketing research, focus group testing and on-line testing of visitors'
preferences. Revenue from client services is recognized over the period that the
services are performed. Revenue from support services, principally the
management of Web sites that we develop for our clients, is recognized ratably
over the management periods, generally on a monthly basis. Payments received
from clients prior to the performance of client services are recorded as
unearned revenue.
We also provide advertising services involving the sale of advertising space on
Web sites we own, manage or sponsor. These services can be provided separately
or as part of a more comprehensive suite of client services. Advertising
services include banner advertisements, polls, surveys, registration programs,
coupons and other interactive forms of advertising. Revenue from advertising
sales is recognized ratably over the period in which the advertisement is
displayed, if no significant obligations remain. In certain cases, advertising
revenue from the sale of advertising space is related to the delivery of
impressions or click-throughs from pages viewed by visitors to our Web sites. In
these cases, we may guarantee a minimum number of impressions or click-throughs
by visitors over a specific period of time. To the extent that revenue is
related to the number of impressions or click-throughs, we defer recognition of
this revenue until the required impressions or click-throughs are achieved.
Payments received from advertisers prior to displaying their advertisements are
recorded as deferred revenue. Mediconsult does not recognize revenue from barter
transactions with respect to its advertising services. We recently announced
that effective October 1, 1999 we will no longer sell banner advertising on our
consumer Web sites. As a result, this source of revenue may decline in future
periods even though we will continue to sell such advertising on our
professional sites such as Physicians' Online.
We also derive revenue from licensing our mediconsult.com content and providing
Web site support to healthcare and other organizations. These client
organizations make our content available to visitors to their Web sites or to
Web sites of their clients. Revenue from content licensing is recognized over
the period of the license. In certain cases, we design and develop these Web
sites. The portion of licensing revenue related to up-front customized design
work is recognized over the period that the work is performed. In certain cases,
we realize additional revenue from management of the Web site or its content.
Revenue from management services is recognized rateably over the period the
services are performed, generally on a monthly basis. We may also retain the
right to place advertising on a Web site that hosts our content.
Although we have certain electronic commerce alliances with merchants of
healthcare-oriented books and products, revenue from these revenue-sharing
arrangements has not been material. Revenue from our share of the proceeds from
electronic commerce partners' sales is recognized by Mediconsult upon
notification from our commerce partners of sales attributable to our Web sites.
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MARKETING AND SALES INITIATIVES
In late 1997, we initiated our first significant marketing and advertising
program. The Company was engaged by Novartis Consumer Health Canada to develop a
comprehensive on-line smoking cessation program for its Habitrol brand, focused
on Canadian consumers. We developed the Web site for this program during early
1998, for which we received payment as services were performed. We receive
revenue for maintaining and upgrading this program (beginning with its launch in
June 1998), and receive monthly advertising revenue for referring visitor
traffic to the Habitrol Web site. We are currently expanding the Habitrol
program to provide French and professional healthcare versions of the Web site.
We have also generated revenue from developing programs for a number of branded
pharmaceutical products for Novartis Pharma, the worldwide pharmaceutical
division of Novartis. We are developing the Web sites for these programs and
receiving payment as services are performed. We are developing a custom version
of an electronic medical education product for Bristol-Myers Squibb. In 1998,
revenue from Novartis and Bristol Myers Squibb represented $0.7 million or 65%
of the Company's total revenue. In the nine months ended September 30, 1999,
revenue from Novartis and Bristol Myers Squibb represented $3.4 million or 86%
of the Company's total revenue. We have also completed assessment programs for
Glaxo Wellcome and Astra Merck. The loss of Novartis or Bristol Myers Squibb as
a customer or any changes to the existing relationships that are less favorable
to us, or any significant reduction in traffic on or through the Web sites that
we manage, will materially and adversely affect our business, financial
condition and results of operations.
To date, our revenue has been generated primarily by our own internal sales
organization, Pharma Marketing, LLC. and, to a lesser extent, by third party
advertising representatives. As of September 30, 1999, we had an internal
marketing, sales and program design organization of 50 professionals, compared
to 28 at June 30, 1999. We believe that we need to further increase the size of
our internal marketing and sales organization in order for us to execute
successfully our growth strategy and, accordingly, we intend to hire additional
marketing and sales professionals in 1999.
To complement our direct sales force, in February 1999, we entered into a
memorandum of agreement outlining the principal terms of a 50/50 joint venture
with CommonHealth LLP, the leading healthcare advertising firm worldwide.
CommonHealth is an affiliate of Ogilvy & Mather and J. Walter Thompson.
In order to enhance our content licensing initiatives and generate additional
revenue, we have entered into marketing alliances with a number of companies and
organizations. These include the healthcare division of IBM, GeoAccess, a
software development company focused on the managed care sector, and the Ontario
Hospital Association, an association of approximately 185 not-for-profit
hospitals.
VISITOR TRAFFIC
To improve the depth and breadth of our medical content and to increase visitor
traffic, we recently completed strategic initiatives to purchase, manage or
sponsor the following Web sites:
. Heartinfo.org, a leading Web site that provides high quality content and
tools focused on heart disease and related areas that have attracted a
large and growing number of visitors to the www.heartinfo.com Web site.
We acquired Cyber-Tech, Inc., which operates Heartinfo.org for
consideration of $3.32 million and 267,000 shares of common stock. The
fair value of these shares of common stock was $3.75 million. Cyber-Tech,
Inc. had net tangible assets of $19,000 at
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the acquisition date. The intangible component of consideration, $7.1
million, was capitalized and will be amortized over five years.
. PharmInfo.com, a leading Web site providing information on pharmaceutical
products and clinical trials for pharmacists, physicians and consumers.
We acquired PharmInfo.com in December 1998, in exchange for 100,000
shares of our common stock. The fair value of these shares of common
stock was $0.8 million, which was capitalized and will be amortized over
three years.
. Cyberdiet.com, a Web site providing tailored nutritional information and
programs. In May 1999, we completed the acquisition of CyberDiet Inc., in
exchange for 400,000 shares of Mediconsult common stock. The fair value
of these shares of common stock was $3.2 million and CyberDiet Inc. had a
net tangible deficiency at the acquisition date of $63,000. The resulting
intangible value of $3.3 was capitalized and will be amortized over five
years.
. INCIID.org, a Web site providing information on infertility. In February
1999, we entered into an exclusive sponsorship agreement with the
InterNational Counsel of Infertility Information Dissemination, a
not-for-profit organization, relating to INCIID.org and granting us the
sole right to place advertisements on the Web site, to link traffic, and
to manage the content on the Web site. In connection with this agreement,
we have committed to pay INCIID $0.5 million per year beginning in 1999,
for three years in equal quarterly instalments, in cash or common stock
as we determine with respect to each quarter. We have paid $375,000 in
cash to September 30, 1999.
We believe that Mediconsult's Web sites together represent one of the most
highly trafficked consumer healthcare information sites on the Internet. During
the second quarter, our Web sites attracted 6.2 million visitors who viewed 35.4
million pages. On average, viewers spent 15 minutes per session on
Mediconsult.com's Web sites.
PENDING ACQUISITION
On September 7, 1999, we entered into an agreement to purchase 100% of the
shares of privately held Physicians' Online, Inc. in exchange for the issuance
of 20 million shares of common stock of Mediconsult. The total transaction value
at the time of announcement was $180 million, including the assumption of debt.
It is expected that the transaction will be accounted for as a pooling of
interests and that it will close before December 31, 1999. The transaction is
subject to customary closing conditions. The stockholders of Physicians' Online,
Inc. and Mediconsult hold the votes required to approve the merger and have
agreed to vote in favor of the transaction. In the period ended September 30,
1999, we advanced $10.1 million to Physicians' Online, Inc. This advance bears
interest at rates of between 12% and 14%.
STOCK OPTIONS AND WARRANTS
Stock options granted to consultants and employees are expensed over their
vesting period, based on their fair value at the date of grant, under Statement
of Financial Accounting Standards No. 123 "ACCOUNTING FOR STOCK-BASED
COMPENSATION." As more fully described below in "Results of Operations," we have
recorded compensation expense in connection with the vesting of stock options
during the nine month periods ended September 30, 1999 and 1998, as well as
deferred compensation expense for the value of options granted that were not
vested as of such dates. We recorded expense of $1.12 million and $0.03 million
regarding the fair value of stock options granted for the three months ended
September 30, 1999 and 1998 respectively. In the nine months ended September 30,
1999, we
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recorded an expense of $1.70 million, compared to $0.10 million for the
corresponding period in the prior year. We currently expect to amortize $2.65
million in 1999 and $2.55 million in 2000 as deferred compensation expense in
respect of options outstanding at September 30, 1999.
Pursuant to an agreement dated July 28, 1998 with Arnhold and S. Bleichroeder,
Inc. to provide us with investment advisory services, we have issued to this
firm 100,000 shares of our common stock and warrants to purchase an aggregate of
400,000 shares of common stock with an exercise price of $1.22 per share, which
was the closing price of our common stock on the contract date. Of this amount,
warrants for 200,000 shares of common stock were delivered upon initial filing
of a prospectus and warrants for 200,000 shares of common stock are deliverable
in 2000, if certain conditions are met. Delivery of the warrants on April 6,
1999 resulted in the recognition of an expense in the statement of operations
equal to the fair value of the warrants, which was estimated at $1.10 million.
In addition, we have recognized deferred expense of $1.10 million, representing
the value of warrants that had not vested as of September 30, 1999.
On February 26, 1999, the Company granted to Nazem & Company IV, L.P.
Transatlantic Fund C.V. and certain other individual investors, warrants
exercisable for five years to purchase 224,000 shares of the Company's senior
preferred stock. The warrants are exercisable at $6.32 per share. We have
recognized an expense in the statement of operations equal to the fair value of
the warrants which was estimated at $1.18 million.
RESULTS OF OPERATIONS
REVENUE. Revenue consists of fees received for the design, development and
implementation of on-line marketing and advertising programs, including Web site
development and implementation, advertising services, licensing our content and
Web site support. Revenue was $1.98 million for the quarter ended September 30,
1999 compared to $0.24 million for the quarter ended September 30, 1998. Revenue
was $3.89 million for the nine months ended September 30, 1999 and $0.66 million
for the nine months ended September 30, 1998. The period-to-period growth in
revenue was primarily attributable to an increase in (i) the number of visits to
our Web sites, (ii) the number of clients, (iii) the number of marketing and
advertising programs developed and implemented for those clients, and (iv) the
acquisition of the Pharminfo.com, CyberDiet.com and HeartInfo.org web sites.
PRODUCT AND CONTENT DEVELOPMENT. Product and content development costs include
expenses we incur to develop, enhance, manage, monitor and operate our Web
sites. These costs consist primarily of salaries and fees paid to employees and
consultants to develop and maintain the software and information contained on
the Mediconsult.com Web sites. For the quarter ended September 30, 1999, these
costs were $2.37 million and for the quarter ended September 30, 1998, these
costs were $0.40 million. These costs related primarily to the development of
healthcare content and interactive services. Product and content development was
$4.64 million for the nine months ended September 30, 1999 and $0.91 million for
the nine months ended September 30, 1998. The increase in 1999 expenses compared
to 1998 reflects increased staffing required to meet the expanding volume of
business that the Company has secured.
MARKETING, SALES AND CLIENT SERVICES. Marketing, sales and client services
costs include expenses we incur to obtain and maintain client relationships.
These costs include salaries and fees paid to employees and consultants, and
programming costs. For the quarter ended September 30, 1999, these costs were
$2.76 million, consisting primarily of costs associated with the development and
implementation of specific client marketing programs and of new prototype
marketing and advertising
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programs. For the quarter ended September 30, 1998, marketing, sales and client
services costs were $0.23 million. Marketing, sales and client services expense
was $4.34 million for the nine months ended September 30, 1999 and $0.91 million
for the nine months ended September 30, 1998. The increase in marketing, sales
and client services reflects an expansion of the Company's sales and marketing
activities including additional staff and new promotion and advertising
campaigns.
GENERAL AND ADMINISTRATIVE EXPENSES. General and administrative expenses
consist primarily of salaries and related costs for general corporate functions,
including finance, accounting and legal expenses, and fees for other
professional services. For the quarter ended September 30, 1999, general and
administrative expenses were $1.23 million and for the quarter ended September
30, 1998 these costs were $0.18 million. The increase in general and
administrative expenses was primarily attributable to increased salaries and
related expenses associated with hiring additional personnel to support the
growth of our operations. General and administrative expense was $2.55 million
for the nine months ended September 30, 1999 and $0.49 million for the nine
months ended September 30, 1998. General and administrative expenses increased
as the Company's operations grew. The increase in expense also reflects the
additional professional and reporting costs now that the Company is listed on
NASDAQ.
DEPRECIATION AND AMORTIZATION EXPENSE. Depreciation and amortization expense
reflects depreciation of tangible assets and software was $0.22 million and
amortization of intangible assets was $0.67 million, for the quarter ended
September 30, 1999, compared to $0.04 million and $nil respectively for the
corresponding period in 1998. Depreciation of tangible assets and software was
$0.39 million and amortization of intangible assets was $1.00 million for the
nine months ended September 30, 1999, compared to $0.21 million and $nil for the
nine months ended September 30, 1998.
The increase in depreciation expense reflects the increased investment in
capital assets as now we have expanded our office facilities and have installed
Web and network servers. The increase in amortization expense is due to the
acquisition of Pharminfo.Net in December 1998, the acquisition of Cyberdiet,
Cyber-Tech in May 1999 and June 1999 respectively and the acquisition of an
interest in Pharma Marketing, LLC in September 1999. Intangible value associated
with these transactions, represented by the excess of purchase price over net
tangible assets, is being amortized over three to five years.
FAIR VALUE OF OPTIONS GRANTED TO EMPLOYEES. We recorded compensation expense in
connection with the vesting of employee stock options of $1.12 million during
the quarter ended September 30, 1999, and $0.03 million during the quarter ended
September 30, 1998. Compensation expense for the fair value of employee options
was $1.70 million for the nine months ended September 30, 1999 and $0.10 million
for corresponding period in the prior year. Compensation expense represents the
amortization of deferred compensation, which is measured based on the fair value
of the options granted. These amounts are amortized over the vesting period of
the applicable options. We have recorded deferred compensation for the value of
options granted that are not yet vested of $8.98 million as of September 30,
1999.
FAIR VALUE OF OPTIONS GRANTED TO OTHERS. We recorded expense in connection with
the vesting of warrants to Arnhold & S. Bleichroeder Inc. and Nazem & Company
IV, L.P. Transatlantic Fund C.V. and certain other individual investors as
described above. Compensation expense was $2.27 million for the nine months
ended September 30, 1999. There was no corresponding expense in 1998.
INTEREST INCOME. During the quarter ended September 30, 1999, the company earned
interest income of $0.59 million as compared to $nil in the quarter ended
September 30, 1998. Interest income in
13
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the nine months ended September 30, 1999 was $1.17 million compared to $nil in
the corresponding period in the prior year. The increase in interest income over
the prior year reflects increased cash on hand as a result of the net proceeds
from the offering that was completed in April of this year.
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE
PROJECTED
The information and data contained in this quarterly report includes all
necessary adjustments, consisting only of normal recurring adjustments necessary
for fair presentation of this data. The results of operations for any quarter
are not necessarily indicative of the results of operations for any future
period.
We have a limited operating history upon which to evaluate our business and
predict revenue and planned operating expenses. Our quarterly operating results
may vary significantly in the foreseeable future due to a variety of factors,
many of which are outside of our control. The timing of advertising sales is one
of the most significant factors affecting quarterly results. The time between
the date of initial contact with a potential advertiser and the execution of a
contract with the advertiser typically ranges from six weeks for smaller
agreements to nine months for larger agreements. These contracts are also
subject to delays over which we have little or no control, including customers'
budgetary constraints, their internal acceptance reviews, whether or when
regulatory approval of their products is given by the FDA or other regulatory
authority, the possibility of cancellation or delay of projects by advertisers
and any post-approval actions taken by the FDA or other regulatory authority,
including product recalls. During the selling process, we may expend substantial
funds and management resources and yet not obtain adequate advertising revenue.
Once a contract is executed, a significant portion of our revenue is derived
from customized Web site development and implementation projects, rather than
from recurring fees. As a result, we cannot predict with certainty when we will
perform the work necessary to receive payment for these projects. In addition,
traffic levels on Web sites have typically fluctuated during the summer, and
during year-end and holiday periods, and we could experience a decrease in
visitor traffic to our Web sites during these periods.
LIQUIDITY AND CAPITAL RESOURCES
Since inception, we have financed our operations primarily through the placement
of equity securities and advances from our principal stockholder. In April 1999,
we received net proceeds of $58.1 million from a public offering of equity
securities. Issue costs associated with this offering, which have been offset
against the net proceeds of the offering, were $1.1 million. As of September 30,
1999, we had $33.9 million in cash and cash equivalents.
We have incurred substantial costs to design, develop and implement Internet-
based marketing and advertising programs for our clients, to build brand
awareness and to grow our business. As a result, we have incurred operating
losses and negative cash flows from operations in each quarter since we
commenced operations. As of September 30, 1999, we had an accumulated deficit of
$20.2 million. These losses have been partially funded through private and
public placements of equity securities.
To date, we have experienced negative cash flows from operating activities. For
the nine months ended September 30, 1999 and September 30, 1998, net cash used
in operating activities was $8.4 million and $1.8 million, respectively. Net
cash used reflected several factors, including (1) increased operating expenses
as our business volume increased; (2) a higher level of work in progress due to
growth of marketing and advertising program revenue; and (3) increases in
accounts payable and accrued expenses, which partially offset the increases.
14
<PAGE>
For the nine months ended September 30, 1999, the increase in net cash used in
operating activities was primarily attributable to our net operating loss of
$11.8 million. The net loss for the quarter was partially offset by certain non-
cash items of $5.4 million in the aggregate, comprised of deferred compensation
expense of $4.0 million related to stock options granted to employees and
warrants, and depreciation and amortization of $1.4 million.
For the nine months ended September 30, 1999, net cash used in investing
activities was $19.2 million compared to $0.3 million in the corresponding
period in 1998. In the first nine months of 1999, $1.5 million was used to
acquire capital assets, primarily the acquisition of computer equipment and
software, $7.6 million was used to acquire the issued capital stock of
Cyberdiet, Inc. and Cyber-Tech, Inc. and to make an equity investment in Pharma
Marketing, LLC and $10.1 million was advanced to Physicians' Online, Inc.
For the nine months ended September 30, 1999, net cash provided by financing
activities was $61.5 million. Net cash proceeds from financing activities for
the first nine months of the year were primarily attributable to the April
public offering of equity securities.
As of September 30, 1999, we had no material capital commitments outstanding,
although we expect to undertake further capital spending as we establish offices
and other facilities in the United States and Canada.
In connection with our joint venture with CommonHealth, we expect to advance
approximately $0.3 million to the joint venture as our share of its initial
capitalization. Under our agreement with CommonHealth, we may borrow this amount
from CommonHealth. If we do borrow this amount, we must repay it from 25% of our
portion of the net profits of the joint venture, if any, and in any event within
three years from the formation of the joint venture or sooner if the joint
venture is terminated.
In connection with our sponsorship and management of INCIID.org, we have
committed to pay INCIID.org $0.5 million per year for three years, beginning in
1999. The payments are made in equal quarterly instalments, in cash or common
stock as we determine with respect to each quarter. In the nine months ended
September 30, 1999 we had advanced $0.38 million to INCIID.
Our ability to generate significant revenue is uncertain. We incurred net losses
of approximately $5.8 million for the quarter ended September 30, 1999. We
expect losses from operations and negative cash flow to continue for the
foreseeable future, and at least through the year 2000, as a result of our
expansion plans and our expectation that operating expenses will increase
significantly in the next several years. The rate at which these losses will be
incurred may increase from current levels. Although we have experienced revenue
growth in recent periods, our revenue may not remain at its current level or
increase in the future. If our revenue does not increase and if our spending
levels are not adjusted accordingly, we may not generate sufficient revenue to
achieve profitability, which would have a material, adverse effect on our
business, financial condition and results of operations. Even if we achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis in the future.
Our working capital requirements depend on numerous factors. We have experienced
a substantial increase in our expenditures since inception, consistent with
growth in our operations and staffing, and anticipate that this will continue
for the foreseeable future. We anticipate incurring additional expenses to
increase our marketing and sales efforts, for content development and for
technology and infrastructure development. Additionally, we will continue to
evaluate possible investments in businesses, products and technologies, the
expansion of our marketing and sales programs and more aggressive brand
promotions.
15
<PAGE>
If we experience a shortfall in revenue in relation to expenses, or if our
expenses precede increased revenue, our business, financial condition and
results of operation and could be materially and adversely affected.
We currently anticipate that available cash resources combined with the net
proceeds from the April equity offering and revenue from client contracts will
be sufficient to meet our anticipated needs for working capital and capital
expenditures through December 31, 2000. We may need to raise additional funds,
however, in order to fund more rapid expansion, to develop new or enhance
existing services or products, to respond to competitive pressures or to acquire
complementary products, businesses or technologies. There can be no assurance
that any required additional financing will be available on terms favorable to
us, or at all. If additional funds are raised by the issuance of equity
securities, stockholders may experience dilution of their ownership interest and
these securities may have rights senior to those of the holders of the common
stock. If additional funds are raised by the issuance of debt, we may be subject
to certain limitations on our operations, including limitations on the payment
of dividends. If adequate funds are not available or are not available on
acceptable terms, we may be unable to fund our expansion, successfully promote
our brand name, take advantage of acquisition opportunities, develop or enhance
services or respond to competitive pressures, any of which could have a material
adverse effect on our business, financial condition and results of operations.
Although a significant portion of our revenue is derived from activities
conducted outside the United States, fees paid to us have been and are expected
to continue to be paid in U.S. dollars. However, a substantial portion of our
payroll is paid and it is expected that rent under leases of office facilities
outside the United States will be paid, in currencies other than U.S. dollars.
Because our financial results are reported in U.S. dollars, they are affected by
changes in the value of the various foreign currencies in which we make payments
in relation to the U.S. dollar. We do not cover known or anticipated currency
fluctuation exposures through foreign currency exchange option or forward
contracts. The primary currency for which we have foreign currency exchange rate
exposure is the Canadian dollar. Our financial instruments, including cash,
accounts receivable, accounts payable and accrued liabilities are carried at
cost which approximates their fair value because of the short-term maturity of
these instruments.
YEAR 2000
Some computers, software and other equipment include programming code in which
calendar year data is abbreviated to only two digits. As a result of this design
decision, some of these systems could fail to operate or fail to produce correct
results if "00" is interpreted to mean 1900, rather than 2000. These problems
are widely expected to increase in frequency and severity as the year 2000
approaches and are commonly referred to as the year 2000 problem. Significant
uncertainty exists in the software and Internet industries concerning the scope
and magnitude of problems associated with the year 2000 problem.
INTERNAL INFRASTRUCTURE. We believe that we have identified substantially all
of the major computers, software applications and related equipment used in
connection with our internal operations to determine if they will be year 2000
compliant. Based on our assessment to date, we presently believe that our
internal computer systems are year 2000 compliant. Nevertheless, we continue to
test our internal systems, on a system by system basis, as we complete our
ongoing compliance efforts with respect to non-information technology systems.
SYSTEMS OTHER THAN INFORMATION TECHNOLOGY SYSTEMS. In addition to computers and
related systems, the operation of our offices and facilities equipment, such as
fax machines, photocopiers, telephone switches, security systems, elevators and
other common devices may be affected by the year
16
<PAGE>
2000 problem. We have completed the assessment of the potential effect of, and
costs of remediating, any year 2000 problem related to this equipment and
estimate that our total cost of completing any required modifications, upgrades
or replacements of these internal systems will not be material.
SUPPLIERS. We have been gathering information from and have initiated
communications with our service and content providers to identify and, to the
extent possible, resolve issues involving the year 2000 problem. However, we
have limited or no control over the actions of our service and content
providers. Thus, while we expect that we will be able to resolve any significant
year 2000 problems with our systems, we cannot guarantee that our service and
content providers will resolve any or all year 2000 problems with their systems
before the occurrence of a material disruption to our business. Any failure of
these third parties to resolve year 2000 problems with their systems in a timely
manner could have a material adverse effect on our business, financial condition
and results of operations.
MOST LIKELY CONSEQUENCES OF YEAR 2000 PROBLEMS. We expect to identify and
resolve all year 2000 problems that could materially adversely affect our
business, financial condition or operating results. However, we believe that it
is not possible to determine with complete certainty that all year 2000 problems
affecting us have been identified or corrected. The number of devices that could
be affected and the interactions among these devices are simply too numerous. In
addition, we cannot accurately predict how many failures related to the year
2000 problem will occur or the severity, duration or financial consequences of
such failures. As a result, we could possibly suffer the following consequences:
. a significant number of operational inconveniences and inefficiencies for
us, our service and content providers and our visitors that may divert
our time and attention and financial and human resources from our
ordinary business activities; and
. a lesser number of serious system failures that may require significant
efforts by us, our service and content providers or our visitors to
prevent or alleviate material business disruptions.
In addition, there can be no assurance that governmental agencies, utility
companies, Internet access companies, third party service providers and others
outside of our control will be year 2000 compliant. The failure of these
entities to be year 2000 compliant could result in a systemic failure beyond our
control, such as a prolonged Internet, telecommunications or electrical failure,
which could also prevent us from operating our business, prevent visitors from
accessing our Web sites, or change the behavior of consumers accessing our Web
sites, which could have a material adverse effect on our business, financial
condition and results of operations.
CONTINGENCY PLANS. As discussed above, we are engaged in an ongoing year 2000
assessment. We have not yet developed any contingency plans. The results of our
year 2000 simulation testing and the responses received from third party vendors
and service providers will be taken into account in determining the nature and
extent of any needed contingency plans. To date, the costs of this ongoing
assessment have not been material.
17
<PAGE>
FORWARD LOOKING STATEMENTS
When used in this Quarterly Report on Form 10-Q, in documents incorporated
herein and elsewhere by us from time to time, the words "believes,"
"anticipates," "expects" and similar expressions are intended to identify
forward-looking statements concerning our business operations, economic
performance and financial condition, including in particular, our business
strategy and means to implement the strategy, our objectives, the amount of
future capital expenditures required, the likelihood of our success in
developing and introducing new products and expanding the business, and the
timing of the introduction of new and modified products or services. For those
statements, we claim the protection of the safe harbor for forward looking
statements contained in the Private Securities Litigation Reform Act of 1995.
These forward looking statements are based on a number of assumptions and
estimates which are inherently subject to significant risks and uncertainties,
many of which are beyond our control and reflect future business decisions which
are subject to change. A variety of factors could cause actual results to differ
materially from those anticipated in our forward-looking statements, including
the following factors: (a) those set forth in our Form 10-KSB/A for the period
ended December 31, 1998, incorporated herein by reference, and elsewhere herein;
and (b) those set forth from time to time in our press releases and reports and
other filings made with the Securities and Exchange Commission. We caution that
such factors are not exclusive. Consequently, all of the forward-looking
statements made in this document are qualified by these cautionary statements
and readers are cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date of this Quarterly Report on Form 10-
Q. We undertake no obligation to publicly release the results of any revisions
of such forward-looking statements that may be made to reflect events or
circumstances after the date hereof, or thereof, as the case may be, or to
reflect the occurrence of unanticipated events.
18
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. PENDING LEGAL PROCEEDINGS
There are no pending legal proceedings in which we are a party, and we are not
aware of any threatened legal proceedings involving it.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
There are no Exhibits filed with this current report on Form 10-Q.
On September 3, 1999, the Company amended its report on Form 8-K, pursuant to
Items 2 and 7, filed June 29, 1999 regarding its acquisition of Cyber-Tech, Inc.
On September 10, 1999, the Company filed a report on Form 8-K, pursuant to Item
5 of such Form, regarding its acquisition of Physicians' Online, Inc.
SIGNATURES
Mediconsult.com, Inc.
Date: November 15, 1999 Signature: /s/Robert A. Jennings
Robert A. Jennings
Chairman of the Board and Chief
Executive Officer
Date: November 15, 1999 Signature: /s/E. Michael Ingram
E. Michael Ingram
Chief Financial Officer
19
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