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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 June 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
incorporation or organization) Identification No.)
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 |_|
As of July 9, 1999, there were approximately 28,472,663 shares of the
Registrant's Common Stock outstanding.
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INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial statements
Unaudited Consolidated Balance Sheets - June 30, 1999 and
December 31, 1998 3
Unaudited Consolidated Statement of Operations - Three and Six
Months Ended June 30, 1999 and 1998 4
Unaudited Consolidated Statement of Cash Flows - Six Months Ended
June 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 9
PART II. OTHER INFORMATION 20
Item 1. Pending Legal Proceedings 20
Item 2. Changes in Securities 20
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 5. Other Information 20
Item 6. Exhibits and Reports Filed on Form 8-K 20
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Mediconsult.com, Inc.
Unaudited Consolidated Balance Sheets - June 30, 1999 and December 31, 1998
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<TABLE>
<CAPTION>
June 30 December 31
1999 1998
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<S> <C> <C>
ASSETS
Current assets
Cash and term deposits $ 51,127,257 $ 135,053
Accounts receivable 994,071 135,790
Work in progress 776,366 --
Prepaid expenses and other 667,535 --
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Total 53,565,229 270,843
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Non-current assets
Tangible fixed assets and software 1,028,882 52,790
Goodwill 10,838,598 818,750
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Total 11,867,480 871,540
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Total assets $ 65,432,709 $ 1,142,383
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities $ 1,371,351 $ 243,413
Advances from Stockholder 314,989 513,589
Unearned revenue -- 107,000
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Total liabilities 1,686,340 864,002
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Stockholders' equity
Preferred stock
Junior preferred stock authorized 1,000,000 shares
designated, nil and 430,000 shares issued and
outstanding at June 30, 1999 and December 31, 1998,
respectively -- 4,300,000
Common stock, $.001 par value, 50,000,000 shares
authorized, 28,446,263 and 18,519,950 shares issued
and outstanding at June 30, 1999 and December 31,
1998, respectively 28,446 18,520
Additional paid in capital 83,219,774 5,242,981
Deferred compensation (5,061,862) (884,109)
Retained deficit (14,439,989) (8,399,011)
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Total stockholders' equity 63,746,369 278,381
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Total liabilities and stockholders' equity $ 65,432,709 $ 1,142,383
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</TABLE>
See accompanying notes.
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Mediconsult.com, Inc.
Unaudited Consolidated Statement of Operations for the Three and Six Months
Ended June 30, 1999
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<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
------------------------------- -------------------------------
June 30, June 30, June 30, June 30,
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Revenues $ 1,203,216 $ 214,577 $ 1,903,576 $ 420,769
------------ ------------ ------------ ------------
Operating expenses
Product and content development 1,368,426 260,474 2,272,956 510,392
Marketing, sales and client services 836,902 491,355 1,574,507 680,136
General and administrative 649,473 136,629 1,321,790 307,988
Depreciation and amortization 387,748 126,466 506,865 165,416
Fair value of options granted to employees 384,118 30,002 575,368 69,309
Fair value of warrants granted to third parties 2,269,104 -- 2,269,104
------------ ------------ ------------ ------------
Total 5,895,771 1,044,926 8,520,590 1,733,241
------------ ------------ ------------ ------------
Loss from operations (4,692,555) (830,349) (6,617,014) (1,312,472)
Interest income 576,036 -- 576,036 --
------------ ------------ ------------ ------------
Net loss $ (4,116,519) $ (830,349) $ (6,040,978) $ (1,312,472)
------------ ------------ ------------ ------------
Net loss per share-basic and diluted $ (0.15) $ (0.05) $ (0.26) $ (0.07)
Weighted average number of shares-basic and diluted 27,446,133 17,889,048 23,013,169 17,593,820
</TABLE>
See accompanying notes.
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Mediconsult.com, Inc.
Unaudited Consolidated Statement of Cash Flows for the Six Months Ended June 30,
1999 and 1998
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<TABLE>
<CAPTION>
Six Months Ended
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June 30 June 30
1999 1998
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<S> <C> <C>
Cash flows from operating activities
Net loss $ (6,040,978) $ (1,312,472)
Adjustment to reconcile net loss to net cash used
in operating activities
Depreciation of tangible fixed assets and software 173,508 165,416
Amortization of goodwill 333,357 --
Fair value of options and warrants granted 2,844,472 --
Changes in assets and liabilities
Accounts receivable (726,511) (139,450)
Work in progress (776,366) --
Other current assets (667,535) --
Accounts payable and accrued liabilities 971,719 120,107
Unearned revenue (107,000) --
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Net cash used in operating activities (3,995,334) (1,166,399)
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Cash flows from investing activities
Fixed assets purchases (1,138,271) (210,961)
Acquisition of subsidiaries (3,915,085) --
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Net cash used in investing activities (5,053,356) (210,961)
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Cash flows from financing activities
Repayment of advances from stockholder (198,600) (51,841)
Issuance (redemption) of junior preferred stock (4,300,000) 1,900,000
Issuance of common stock 64,539,494 500,000
Redemption of promissory note -- (500,000)
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Net cash provided by financing activities 60,040,894 1,848,159
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Increase in cash 50,992,204 470,799
Cash - beginning of period 135,053 393,130
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Cash - end of period $ 51,127,257 $ 863,929
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</TABLE>
See accompanying notes.
5
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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.
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 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 cost, primarily salaries, of development work
completed but not billed at June 30, 1999.
4. ACQUISITIONS
On May 11, 1999, we completed the acquisition of CyberDiet Inc., the owner of
Cyberdiet.com, in exchange for 400,000 shares of Mediconsult common shares
issued to the former stockholders of CyberDiet Inc.
On June 14, 1999, we acquired all of the capital stock of Cyber-Tech, Inc.
("Cyber-Tech") pursuant to a Merger Agreement and Plan of Reorganization
("Agreement") effective as of June 1, 1999 among Mediconsult, Cyber-Tech and the
shareholders of Cyber-Tech (the "Cyber-Tech Transaction"). The merger
consideration paid in the Cyber-Tech Transaction consisted of $3,315,000 in cash
and 267,732
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shares of Mediconsult Common Stock (subject to a final purchase price adjustment
pursuant to the Agreement). The amount of merger consideration was determined by
arms-length negotiations among the parties. In addition, in connection with the
merger, Mediconsult.com (US), Ltd., one of our wholly-owned subsidiaries,
entered into employment, consulting, and non-competition agreements with the two
former shareholders of Cyber-Tech, and one key employee of Cyber-Tech.
Mediconsult and the shareholders of Cyber-Tech also entered into an Escrow
Agreement with respect to certain of the shares of Mediconsult Common Stock
issued to the former Cyber-Tech shareholders.
The intangible component of consideration for these transactions, which relates
to goodwill, technology purchased and consideration paid for non-compete
agreements, will be amortized on a straight line basis over five years.
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:
1999
---------------------------
Weighted
Avg.
# Exercise
Shares Price
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Outstanding - December 31, 1998 2,716,000 0.37
Granted during the period 415,000 10.06
Exercised during the period (122,500) 1.05
Forfeited during the period (18,000) 1.05
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Outstanding - June 30, 1999 2,990,500 1.68
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Exercisable - June 30, 1999 2,478,300 0.31
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During the three months ended June 30, 1999 and 1998 the fair values of the
options granted to employees were $384,118 and $30,002, 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. Of such 400,000 warrants,
warrants for 200,000 shares were delivered on February 26, 1999, upon filing a
registration statement on form S-1. A warrant for 100,000 shares is deliverable
on March 15, 2000, and a warrant for 100,000 shares is deliverable 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. During the three months ended June 30, 1999, we recognized an
expense in regard to the fair value of these warrants of $1.094 million.
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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, which is now
exercisable for all of such 224,000 shares of common stock. The warrants are
exercisable at $6.32 per share. During the three months ended June 30, 1999, we
recognized an expense in regard to the fair value of these warrants of $1.175
million.
6. RELATED PARTY TRANSACTIONS
During the three months ended June 30, 1999, we repaid net advances from
shareholders of $513,600.
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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 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.
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 broad range of on-line strategies
and resources to deliver a message consistent with the advertisers' global
marketing strategy. In April 1999, we received net proceeds of $58.1 million
from a public offering of equity securities. As of June 30, 1999, we had $51.1
million in cash and cash equivalents.
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. Such revenue is based upon our estimates of the
percentage of completion of various tasks and the actual results may differ from
the estimates. 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
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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 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.
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. In 1998, revenue from Novartis
represented $0.7 million or 65% of our total revenue. In the second quarter of
this year, revenue from Novartis represented $0.473 million, or 39% of our total
revenue. We have also completed assessment programs for Bristol Myers Squibb,
Glaxo Wellcome and Astra Merck. The loss of Novartis as a customer or any
changes to the existing relationship that are less favorable to us, or any
significant reduction in traffic on or through the Novartis 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 and, to a lesser extent, by third party advertising
representatives. As of June 30, 1999, we had an internal marketing, sales and
program design organization of 28 professionals. We believe that we need to
significantly increase the
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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:
o 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 $3.75 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 the acquisition date. The intangible component
of consideration, $7.5 million, was capitalized and will be
amortized over five years.
o 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.
o 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.
o 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 $250,000 in cash to June 30,
1999.
We believe that Mediconsult's Web sites together represent one of the most
highly trafficked consumer healthcare information sites on the Internet. In the
second quarter 1999, the Company's owned, managed and sponsored Web sites had
more than 6 million visitors viewing nearly 35 million pages of information.
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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 six month periods ended June 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 $0.4 million and $0.03 million regarding the
fair value of stock options granted for the three months ended June 30, 1999 and
1998 respectively. In the six months ended June 30, 1999, we recorded an expense
of $0.6 million, compared to $0.07 million in the corresponding period. We
currently expect to amortize $0.5 million in 1999 and $0.5 million in 2000 as
deferred compensation expense in respect of options outstanding at June 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 $1.1 million. In
addition, we have recognized deferred expense of $1.1 million, representing the
value of warrants that had not vested as of June 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 $1.2 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 $1.2 million for the quarter ended June 30, 1999
compared to $0.2 million for the quarter ended June 30, 1998. Revenue was $1.9
million for the six months ended June 30, 1999 and $0.4 million for the six
months ended June 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, or being 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 June 30, 1999, these costs
were $1.4 million and for the quarter ended June 30, 1998, these costs were $0.3
million. These costs related primarily to the development of healthcare content
and interactive services. Product and
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content development was $2.3 million for the six months ended June 30, 1999 and
$0.5 million for the six months ended June 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 June 30, 1999, these costs were $0.8
million, consisting primarily of costs associated with the development and
implementation of specific client marketing programs and of new prototype
marketing and advertising programs. For the quarter ended June 30, 1998,
marketing, sales and client services costs were $0.5 million. Marketing, sales
and client services expense was $1.6 million for the six months ended June 30,
1999 and $0.7 million for the six months ended June 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 June 30, 1999, general and
administrative expenses were $0.6 million and for the quarter ended June 30,
1998 these costs were $0.1 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 $1.3 million for the six
months ended June 30, 1999 and $0.3 million for the six months ended June 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 $0.1 million and
amortization of intangible assets was $0.3 million, for the quarter ended June
30, 1999, compared to $0.1 million and $nil respectively for the corresponding
period in 1998. Depreciation of tangible assets and software was $0.2 and
amortization of intangible assets was $0.3 million for the six months ended June
30, 1999, compared to $0.2 million and $nil for the six months ended June 30,
1998.
The increase in depreciation expense reflects the increased investment in
capital assets required as Mediconsult grows. Depreciation expense is expected
to increase significantly now we are expanding our office facilities and have
installed a network server. The increase in amortization expense is due to the
acquisition of Phamrinfo.Net in December 1998 and the acquisition of Cyberdiet
and Cyber-Tech in May 1999 and June 1999 respectively. 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 $0.4 million during the
quarter ended June 30, 1998, and $0.03 million during the quarter ended June 30,
1999. Compensation expense for the fair value of employee options was $0.6
million for the six months ended June 30, 1999 and $0.07 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 $5.1 million as of June 30, 1999.
13
<PAGE>
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 $2.3 million for the quarter and for
the six months ended June 30, 1999. There was no corresponding expense in 1998.
INTEREST INCOME. During the quarter and the six months ended June 30, 1999, we
earned interest income of $0.6 million as compared to $nil in the quarter and
six months ended June 30, 1998. The increase in interest income 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 June 30,
1999, we had $51.1 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 June 30, 1999, we had an accumulated deficit of
$14.4 million. These losses have been partially funded through private and
public placements of equity securities.
14
<PAGE>
To date, we have experienced negative cash flows from operating activities. For
the six months ended June 30, 1999 and June 30, 1998, net cash used in operating
activities was $4.0 million and $1.2 million, respectively, which was primarily
attributable to our net losses during these periods. 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. For the quarter
ended June 30, 1999, the increase in net cash used in operating activities was
primarily attributable to our net operating loss of $6.0 million. The net loss
for the quarter was partially offset by certain non-cash items of $3.3 million
in the aggregate. This amount was comprised of deferred compensation expense of
$2.8 million related to stock options granted to employees and warrants, and
depreciation and amortization of $0.5 million.
For the six months ended June 30, 1999, net cash used in investing activities
was $5.1 million compared to $0.2 million in the corresponding period in 1998.
In the first half of 1999, $1.1 million was used to acquire capital assets,
primarily the acquisition of computer equipment and software, and $4.0 million
was used to Cyberdiet, Inc. and Cyber-Tech, Inc.
For the six months ended June 30, 1999, net cash provided by financing
activities was $60.0 million. Net cash proceeds from financing activities in the
quarter were primarily attributable to the April public offering of equity
securities.
As of June 30, 1999, we had no material capital commitments outstanding,
although we expect to increase 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.
Our ability to generate significant revenue is uncertain. We incurred net losses
of approximately $6.0 million for the quarter ended June 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
15
<PAGE>
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. 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 will be sufficient to meet our
anticipated needs for working capital and capital expenditures through at least
the year 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 and advances from
a shareholder 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.
16
<PAGE>
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 2000 problem. We have completed
the assessment of the potential effect of, and costs of remediating, any year
2000 problem related to this equipment. We do not have extensive facilities and
office equipment at this time. We therefore 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:
o 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
o 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.
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
On May 11, 1999, we issued 400,000 shares of Mediconsult common stock in
relation to the acquisition of CyberDiet Inc., the owner of Cyberdiet.com.
On June 14, 1999, we issued 267,732 shares of Mediconsult common stock and
$3,315,000 in relation to the acquisition of all of the capital stock of
Cyber-Tech, Inc. ("Cyber-Tech") pursuant to a Merger Agreement and Plan of
Reorganization ("Agreement") effective as of June 1, 1999 among Mediconsult,
Cyber-Tech and the shareholders of Cyber-Tech.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's annual meeting of stockholders was held on June 15, 1999. At the
annual meeting, the stockholders of the Company approved the following items:
1. Elected a Board of five Directors to serve until the next annual
meeting of stockholders or until their successors are elected and
qualified;
2. Approved an amendment to the Company's 1996 Stock Option Plan to
authorize an additional 1,000,000 shares of Common Stock for
issuance thereunder; and
3. Ratified the appointment by the Board of Directors of
PricewaterhouseCoopers as the independent auditors of the Company to
examine and report on its financial statements for the fiscal year
beginning January 1, 1999.
ITEM 5. OTHER INFORMATION
Under SEC Rule 14a-4(c)1, if a proposal is to be submitted for a vote at the
Company's next annual meeting of stockholders and the proposal is not submitted
for inclusion in the Company's proxy statement and the proxy card in compliance
with the processes of SEC Rule 14a-8, then, if the Company does not have notice
of the proposal at least 45 days before the date on which the Company first
mailed its proxy materials for the prior year's annual meeting (or any earlier
or later date specified in any overriding advance notice provision in the
Company's certificate of incorporation or by-laws), proxies solicited by the
Company may confer discretionary authority to vote on the proposal. Based on the
foregoing, the date after which notice of such a proposal submitted outside the
processes of Rule 14a-8 will be considered untimely with respect to the
Company's annual meeting of Stockholders is March 12, 2000.
ITEM 6. EXHIBITS AND REPORTS FILED ON FORM 8-K
There are no Exhibits filed with this current report on Form 10-Q.
On June 29, 1999, the Company filed a report on Form 8-K, pursuant to Items 1, 2
and 7 of such Form, regarding its acquisition of Cyber-Tech, Inc.
19
<PAGE>
SIGNATURES
Mediconsult.com, Inc.
Date: August 16, 1999 Signature: /s/ Robert A. Jennings
Robert A. Jennings
Chairman of the Board and Chief Executive
Officer
Date: August 16, 1999 Signature: /s/ E. Michael Ingram
E. Michael Ingram
Chief Financial Officer
20
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