<PAGE>
U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
__X__ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Quarterly Period Ended September 30, 1998
____ Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Commission File Number. 0-21819
HealthDesk Corporation
(Exact name of Company as specified in charter)
California 94-3165144
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
2560 Ninth Street, Suite 220, Berkeley, California 94710
(Address of principal executive offices) (Zip Code)
(510) 883-2160
(Company's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 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 November 12, 1998, there were 5,792,845 shares of the Company's
Common Stock outstanding, 632 shares of the Company's Series B Preferred Stock
outstanding, and warrants to purchase 2,295,000 shares of Common Stock.
Transitional Small Business Disclosure Format Yes ____ No __X__
<PAGE>
INDEX
<TABLE>
<CAPTION>
Part I Page
<S> <C> <C>
Item 1 Financial Statements .......................................................................... 3
Item 2 Management's Discussion and Analysis of Financial Condition and Results of Operations.......... 3
Part II
Item 1 Legal Proceedings.............................................................................. 8
Item 2 Changes in Securities and Use of Proceeds...................................................... 8
Item 3 Defaults Upon Senior Securities................................................................ 8
Item 4 Submission of Matters to a Vote of Security Holders............................................ 8
Item 5 Other Information.............................................................................. 8
Item 6 Exhibits and Reports on Form 8-K............................................................... 8
</TABLE>
2
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Part I
Item 1. Financial Statements.
The following Financial Statements are filed with this report as pages F-1
through F-7 following the signature page:
Index to Interim Financial Statements
Condensed Balance Sheets
Condensed Statements of Operations
Condensed Statements of Cash Flows
Notes to Condensed Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.
The Company's operating performance each quarter is subject to various
risks and uncertainties as discussed in the Company's Form 10-KSB for the year
ended December 31, 1997. The following discussion should be read in conjunction
with the section entitled "Factors Affecting the Company's Business, Operating
Results and Financial Condition" in the Form 10-KSB.
The information set forth in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" below includes "forward-looking
statements" within the meaning of Section 21E of the Securities and Exchange Act
of 1934, as amended (the "Exchange Act"), and is subject to the safe harbor
created by such section. Readers are cautioned not to place undue reliance on
these forward-looking statements as they speak only as of the date hereof.
Overview
The Company was organized in August 1992 and is still in the development
stage. Since inception, the Company has been engaged primarily in product
development activities. The Company's initial product was introduced in early
1993 and the Company has not yet proven to be commercially viable.
The Company has not yet generated any meaningful revenues, and will not
generate any meaningful revenues until after the Company successfully completes
market testing and subsequent commercialization of CareTeam Connect and
HealthDesk OnLine for Diabetes and the commercialization of HealthDesk OnLine,
and then attracts and retains a significant number of subscribers for such
products. For the period August 28, 1992 (inception) to September 30, 1998, the
Company had incurred a cumulative net loss of approximately $12,284,401.
In May 1998, as a result of ongoing difficulties in marketing its CareTeam
Connect, HealthDesk OnLine for Diabetes and HealthDesk OnLine for Wellness
products, the Company announced a major restructuring of its operations. In
connection therewith, on August 18, 1998, the Company entered into a definitive
agreement to merge (the "Merger") with MC Informatics, Inc. ("MCIF"). The
pending Merger is still subject to a number of closing conditions, including the
approval of the Merger by the Company's shareholders. If the Merger closes, the
Company will merge with MCIF and assume its operations. MCIF is a healthcare
consulting firm that provides a wide range of information technology and
strategic and operations management consulting services to a broad cross-section
of healthcare industry participants and healthcare information system vendors.
If the Merger is consummated, HealthDesk would issue approximately five million
five hundred thousand (5,500,000) shares of Common Stock to the current
shareholders of MCIF, representing approximately 40% of the Company's total
outstanding shares following the Merger.
Also in connection with the restructuring of its operations, on September
29, 1998, the Company entered into a definitive agreement to sell substantially
all of its technology assets relating to its HealthDesk OnLine products (the
"Sale of Assets") to Patient Infosystems, Inc. ("PATI"). The pending Sale of
Assets is still subject to a number of closing conditions, including the
approval of the Sale of Assets by the Company's shareholders. If the Sale of
Assets closes, the Company will receive approximately $635,000. In addition,
PATI has agreed to assume and discharge liabilities and obligations but only to
the extent that such liabilities or obligations accrue on or after the closing
date.
3
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As a result of its restructuring, the Company's Chief Executive Officer,
Peter O'Donnell, and its Chief Financial Officer, Timothy Yamauchi, resigned
from the Company in May 1998. In addition, the Company eliminated seven other
positions. During the restructuring process, the Company has established an
Operating Committee, consisting of Messrs. Dunham, Brandt and Zieg, to manage
the Company's operations.
The statements below regarding the Company's future cash requirements are
forward looking statements that are subject to risks and uncertainties, which
could result in, the Company's inability to meet its funding requirements for
the time period indicated.
Software development costs (consisting primarily of salaries and related
expenses) incurred prior to establishing technological feasibility are expensed
in accordance with Financial Accounting Standards Board (FASB) Statement No. 86.
In accordance with FASB 86, the Company will capitalize software development
costs at such time as the technological feasibility of the product has been
established.
In June 1998, Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" and Statement of Financial Accounting Standards
No. 131 "Disclosures About Segments of An Enterprise and Related Information"
were issued and are also effective for the year ending December 31, 1998. The
Company believes the adoption of these pronouncements will not have a material
effect on its financial statements.
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position 97-2 (SOP 97-2), Software Revenue Recognition, which
delineates the accounting for software product and maintenance revenue. SOP 97-2
supersedes the Accounting Standards Executive Committee Statement of Position
91-1, Software Revenue Recognition, and is effective for transactions entered
into in fiscal years beginning after December 15, 1997. The Company anticipates
that SOP 97-2 will not have a material impact on its financial statements.
Results of Operations
Revenue, which consists primarily of software development and licensing
fees, decreased by 99.8% from $150,047 for the three months ended September 30,
1997 to $272 for the three months ended September 30, 1998, and decreased by
85.4% from $376,090 for the nine months ended September 30, 1997 to $56,458 for
the nine months ended September 30, 1998. The decrease was primarily
attributable to a decrease in development fee revenue associated with the
development of HealthDesk OnLine for Diabetes.
Product development costs decreased by 27.3% from $480,477 for the three
months ended September 30, 1997 to $349,276 for the three months ended September
30, 1998, and by 37.3% from $1,785,408 for the nine months ended September 30,
1997 to $1,119,503 for the nine months ended September 30, 1998. The decrease in
product development costs was principally related to the hiring of full-time
programming staff instead of using higher cost contractors. The decrease in
product development costs was also due to the Company's re-negotiation of an
existing content license agreement which resulted in reduced royalty costs of
approximately $95,000 and the elimination of certain engineering and programmer
positions as a result of the Company's restructuring that was announced in May
1998.
Sales and marketing costs decreased by 55.3% from $345,122 for the three
months ended September 30, 1997 to $154,177 for the three months ended September
30, 1998, and by 41.5% from $1,154,531 for the nine months ended September 30,
1997 to $675,668 for the nine months ended September 30, 1998. This decrease in
sales and marketing costs resulted primarily from the reduction in headcount in
connection with the Company's restructuring that was announced in May 1998.
General and administrative costs decreased by 70.6% from $100,078 for the
three months ended September 30, 1997 to $29,459 for the three months ended
September 30, 1998 and by 49.5% from $412,683 for the nine months ended
September 30, 1997 to $208,265 for the nine months ended September 30, 1998. The
decrease in general and administrative costs was primarily attributable to the
reversal of certain professional fees over accruals and the reduction in
personnel as a result of the Company's restructuring that was announced in May
1998. The non-recurring restructuring costs consisted principally of employee
termination severance packages of $220,697.
4
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Other income (including interest income) decreased from $34,024 for the
three months ended September 30, 1997 to $15,505 for the three months ended
September 30, 1998. Other income (expense), net (including interest expense,
interest income and amortization of discount and issuance costs) changed from
expense of ($47,580) for the nine months ended September 30, 1997 to income of
$49,563 for the nine months ended September 30, 1998. The change in other
expenses was primarily attributable to the non-recurring costs of $145,023
associated with the Company's initial public offering in January 1997.
As a result of the foregoing, the Company incurred a net loss of $517,335
and $2,118,712 for the three months and nine months ended September 30, 1998,
respectively, as compared to a net loss of $741,806 and $3,024,712 for the
comparable periods in 1997.
Liquidity and Capital Resources
On February 25, 1998, the Company completed an $800,000 private placement.
The placement consisted of the sale of 400,000 shares of Common Stock, at a
price of $2.00 per share, to two of the Company's existing shareholders.
As of September 30, 1998, the Company had 632 shares of Series B Preferred
Stock issued and outstanding as a result of the following private placements. On
March 31, 1998, two existing shareholders agreed to purchase an aggregate of 250
shares of the Company's Series B Preferred Stock for $500,000. On May 13, 1998,
the Company received the $500,000 proceeds. On June 30, 1998, three existing
shareholders purchased an aggregate of 175 shares of the Company's Series B
Preferred Stock for total proceeds of $350,000, of which the Company received
$300,000 on June 30, 1998 and $50,000 on July 8, 1998. On August 14 and
September 3, 17 and 25, 1998, the Company received aggregate proceeds of
$412,500 in connection with the private placement of additional shares of Series
B Preferred Stock to one existing shareholder and one new investor of the
Company. The outstanding shares of Series B Preferred Stock are convertible, at
any time, at the option of the holders into an aggregate of 2,525,000 shares of
the Company's Common Stock. The shares of Series B Preferred Stock are subject
to automatic conversion upon the closing of the contemplated Merger with MCIF or
five years from the date of their issuance at a conversion price of $0.50 per
share.
On April 13, 1998, the Company announced that with respect to its
outstanding publicly traded warrants, it was reducing (i) the exercise price
from $5.00 per share to $2.50 per share, and (ii) the call price for the
warrants from $7.50 to $3.75.
At September 30, 1998, the Company had cash and cash equivalents of
$715,264, as compared to $1,405,430 at December 31, 1997.
During the first nine months of 1998, the Company used $2,363,872 of cash
in operating activities, principally as a result of the $2,118,712 loss incurred
in the first nine months of 1998. The decrease in accounts payable and accrued
liabilities was attributable to the lower volume of payroll and vendor
activities as a result of the Company's May 1998 restructuring and the reversal
of certain professional fees over accruals. During the first nine months of
1997, the Company used $2,844,536 of cash in operating activities, principally
as a result of the $3,024,712 loss incurred in the first nine months of 1997.
The decrease in accounts payable, accrued liabilities and prepaid expenses,
offset by the non-cash discount associated with the Company's bridge financing
in October 1996, was attributable to the non-recurring costs associated with the
Company's initial public offering in January 1997. Working capital at September
30, 1998 was $1,024,086, as compared to $999,092 at December 31, 1997.
In the event the Company is unable to consummate the Sale of Assets with
PATI, the Company expects to incur significant expenses in connection with its
operations, including expenses associated with marketing and sales personnel and
the research and development of product lines. The Company believes that it has
working capital sufficient to meet its projected cash requirements only for the
next twelve months. The Company is actively seeking additional equity financing.
There can be no assurance that the Company will be able to obtain public or
5
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private third-party sources of financing or, if obtained, that favorable terms
for such financing would be obtained. In addition, given the trading history of
the Company's Common Stock and Warrants since the initial public offering, there
can be no assurance that the Company will be able to raise additional cash
through public or private offerings of its Common Stock. There also can be no
assurance that the Company's funding requirements will not increase
significantly as a result of unforeseen circumstances or that the Company's cash
used for operating activities will not increase. In the event the Company
completes the proposed Merger with MCIF, the Company anticipates that its
current operations will cease and it will assume the operations of MCIF.
The Company's capital requirements relating to the development and
commercialization of HealthDesk OnLine have been and will continue to be
significant. Other than as described in this Form 10-QSB, the Company has no
material commitments for capital expenditures. For the period August 28, 1992
(inception) to September 30, 1998, the Company had capital expenditures of
approximately $1,116,121 relating primarily to purchases of servers, PCs and
telecommunications equipment.
Year 2000
The Company is working to resolve the potential impact of the Year 2000 on
the ability of the Company's computerized information systems to accurately
process information that may be date-sensitive. Any of the Company's programs
that recognize a date using "00" as the Year 1900 rather than the Year 2000
could result in errors or system failures. The Company utilizes a number of
computer programs across its entire operation. The Company has not completed its
assessment, but currently believes that costs of addressing this issue will not
have a material adverse impact on the Company's financial position. However, if
the Company and third parties upon which it relies are unable to address this
issue in a timely manner, it could result in a material financial risk to the
Company. The Company currently expects that its internal-use software
application will be Year 2000 compliant by no later than January 1999. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and loss of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
The Company believes its current products are Year 2000 compliant; however,
since all customer situations cannot be anticipated, particularly those
involving third party products, the Company may see an increase in warranty and
other claims as a result of the Year 2000 transition. In addition, litigation
regarding Year 2000 compliance issues is expected to escalate. For these
reasons, the impact of customer claims could have a material adverse impact on
the Company's results of operations or financial condition.
The Company is also in the process of contacting its critical suppliers to
determine that the suppliers' operations and the products and services they
provide are Year 2000 compliant. Where practicable, the Company will attempt to
mitigate its risks with respect to the failure of suppliers to be Year 2000
ready. In the event that suppliers are not Year 200 compliant, the Company will
seek alternative sources of supplies. However, such failures remain a
possibility and could have an adverse impact on the Company's results of
operations or financial condition. Additionally, litigation may arise from
situations in which the Company has minimum purchase commitment contracts with
suppliers that are not Year 2000 compliant.
Factors that May Affect Future Operating Results
The Company's future operating results are dependent on a number of
factors, including those set forth below and in the Company's Form 10-KSB filed
with the Securities and Exchange Commission on March 10, 1998.
Transition of Company. The Company has announced that it intends to
consummate the Sale of Assets with PATI, and to merge its remaining operations
with MCIF, a healthcare consulting firm. Individually and in combination these
transactions represent a fundamental change in the nature of the Company's
business, assets and operations. Each of these proposed transactions is subject
to a number of conditions, including the approval of such transactions by the
Company's shareholders. There can be no assurance that either or both of the
transactions will be consummated, or that if they are consummated, the Company
will be able to successfully transition its business to become a healthcare
consulting firm. The Company's failure to transition its operations upon
6
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completion of these proposed transactions could have a material adverse effect
on the Company's business, financial condition and results of operations. In
addition, if the Company's proposed Sale of Assets to PATI or the merger with
MCIF are not completed, there can be no assurance that the Company will be able
to continue its current operations.
Possible Delisting of Securities from NASDAQ System; Disclosure Relating to
Low-Priced Stocks. The Common Stock and Warrants are currently quoted on NASDAQ
SmallCap Market ("NASDAQ"). As of September 30, 1998, the Company did not meet
the maintenance criteria for continued listing on NASDAQ because its total
assets are below $2,000,000. On August 28, 1998, the Company received a letter
from NASDAQ advising the Company that it had to submit a proposal for coming
into compliance with the maintenance criteria on or before September 11, 1998.
On September 10, 1998, the Company submitted its proposal, which assumed the
consummation of the Merger and the Sale of Assets. Because of its failure to
meet these maintenance criteria, the Company's securities may be delisted from
NASDAQ in which case trading, if any, in the Company's securities would
thereafter be conducted in the non-NASDAQ over-the-counter market. As a result
of such delisting, an investor may find it more difficult to dispose of, or to
obtain accurate quotations as to the market value of, the Company's securities.
In addition, if the Common Stock were delisted from trading on NASDAQ and the
trading price of the Common Stock was less than $5.00 per share, trading in the
Common Stock would also be subject to certain rules promulgated under the
Exchange Act, which require additional disclosure by broker-dealers in
connection with any trades involving a stock defined as a penny stock
(generally, any non-NASDAQ equity security that has a market price of less than
$5.00 per share, subject to certain exceptions). Such rules require the
delivery, prior to any penny stock transaction, of a disclosure schedule
explaining the penny stock market and the risks associated therewith, and impose
various sales practice requirements on broker-dealers who sell penny stock to
persons other than established customers and accredited investors (generally
institutions). For these types of transactions, the broker-dealer must make a
special suitability determination for the purchaser and have received the
purchaser's written consent to the transactions prior to sale. The additional
burdens imposed upon broker-dealers by such requirements may discourage
broker-dealers from effecting transactions in the Common Stock, which could
severely limit the market liquidity of the Common Stock and the ability of
purchasers in the offering to sell the Common Stock in the secondary market.
Working Capital Deficit; Negative Cash Flow; Need for Additional Financing.
The Company's capital requirements relating to the development and
commercialization of HealthDesk Online have been and, if the Sale of Assets is
not approved, will continue to be significant. In February 1998, the Company
received an aggregate of $800,000 in equity financing from two existing
shareholders. In addition, between March and September 1998, the Company sold an
aggregate of 632 shares of Series B Preferred Stock for an aggregate
consideration of $1,262,500. See "Managment's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources." Based on currently proposed plans and assumptions relating to its
operations, and assuming the consummation of the Sale of Assets and the Merger,
the Company believes that its current working capital position is sufficient to
address its contemplated cash requirements for operations over the next twelve
(12) months. The Company is currently seeking additional financing. However,
there can be no assurance that the Company will be able to secure additional
financing or that the proceeds of any financing will be sufficient to permit the
Company to successfully develop and commercialize HealthDesk Online or that any
assumptions relating to the Company's operations will prove to be accurate. To
the extent that the proceeds of any financing are not sufficient to enable the
Company to generate meaningful revenues or achieve profitable operations, the
inability to obtain additional financing will have a material adverse effect on
the Company, including possibly requiring the Company to significantly curtail
or cease its operations. In addition, if the Sale of Assets is not consummated,
the implementation of the Company's business plans will require proceeds greater
than the proceeds currently available to the Company. There can be no assurance
that any additional financing will be available to the Company on commercially
reasonable terms, or at all. Any additional financing involving the issuance of
equity securities could result in substantial dilution to the interests of the
Company's shareholders.
7
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Part II
Item 1. Legal Proceedings.
None.
Item 2. Changes in Securities and Use of Proceeds.
(c) Recent Sales of Unregistered Securities
On June 30 and July 8, 1998, the Company received aggregate proceeds of
$350,000 in connection with the private placement of shares of Series B
Preferred Stock to three existing shareholders of the Company. On August 14 and
September 3, 17 and 25, 1998, the Company received aggregate proceeds of
$412,500 in connection with the private placement of additional shares of Series
B Preferred Stock to one existing shareholder and one new investor of the
Company. The conversion price of the Series B Preferred Stock is $0.50 per
share. The Series B Preferred Stock will automatically convert into shares of
Common Stock on the fifth anniversary of the issuance of such shares, if they
have not been converted previously. The net proceeds to the Company from the
sale of the Series B Preferred Stock will be used for general working capital
purposes. The foregoing transactions were not registered under the Securities
Act of 1933, as amended (the "1933 Act") in reliance upon the exemptions
provided by Section 4(2) of the 1933 Act and/or Regulation D promulgated
thereunder as a transaction by an issuer not involving a public offering.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
The Company's proxy for its next Annual Meeting of Shareholders may confer
discretionary authority to vote on any proposal submitted by a shareholder if
written notice of such proposal is not delivered to the Company at its offices
at 2560 Ninth Street, Suite 220, Berkeley, California 94710, on or before March
22, 1999. Any proposals of shareholders to be included in the Company's proxy
statements for that meeting must be received by the Company at its offices not
later than January 4, 1999, and must satisfy the conditions established by the
Securities and Exchange Commission for shareholder proposals to be included in
the Company's proxy statement for that meeting.
Item 6. Exhibits and Reports on Form 8-K.
a) Exhibits:
10.12* Form of Convertible Securities Subscription Agreement
11.1 Statement Regarding Computation of Earnings per Share
27 Financial Data Schedule
* Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended June 30, 1998, filed with the Commission on August 14, 1998.
b.) On August 18 and 26, 1998, the Company filed current reports on Form 8-K
and Form 8-K/A, respectively, relating to the resignation of the Company's
certifying accountant, PricewaterhouseCoopers LLP.
8
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SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto authorized.
HealthDesk Corporation
By: /s/Joseph R. Dunham II Date: November 12, 1998
---------------------------------------
Joseph R. Dunham II
Director and member of the Operating Committee
/s/Terry M. Brandt Date: November 12, 1998
---------------------------------------
Terry M. Brandt
Chief Technology Officer
9
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HealthDesk Corporation
(A Development Stage Company)
CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Condensed Balance Sheets as of December 31, 1997 and September 30, 1998 (unaudited)..................... F-2
Condensed Statements of Operations for the three months and the nine months ended
September 30, 1997 and 1998, and period from inception to September 30, 1998
(unaudited) ......................................................................................... F-3
Condensed Statements of Cash Flows for the nine months ended September 30, 1997 and
1998, and period from inception to September 30, 1998 (unaudited).................................... F-4
Notes to Condensed Financial Statements................................................................. F-5
</TABLE>
F-1
<PAGE>
HealthDesk Corporation
(A Development Stage Company)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, September 30,
ASSETS 1997 1998
---- ----
(unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents.............................. $ 1,405,430 $ 715,264
Prepaid expenses and other assets...................... 78,724 99,755
Notes receivable....................................... --- 350,000
Other current assets................................... --- 42,122
------------------ ------------------
Total current assets................................ 1,484,154 1,207,141
------------------ ------------------
Property and equipment, net............................ 472,561 284,129
Other assets........................................... 15,850 109,249
------------------ ------------------
Total assets.................................... $ 1,972,565 $ 1,600,519
================== ==================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable....................................... $ 133,992 $ 101,974
Accrued liabilities.................................... 351,070 81,081
------------------ ------------------
Total liabilities............................... 485,062 183,055
------------------ ------------------
Shareholders' equity:
Convertible preferred stock, no par value; none at
December 31, 1997 and authorized 750 shares; issued
and outstanding, 632 shares at September 30, 1998... -- 1,248,673
Common stock, no par value; authorized 17,000,000 shares;
issued and outstanding, 5,392,845 and 5,792,845 at
December 31, 1997 and September 30, 1998, respectively
11,457,505 12,257,505
Warrants............................................... 195,687 195,687
Deficit accumulated during the development stage....... (10,165,689) (12,284,401)
------------------- -------------------
Total shareholders' equity.......................... 1,487,503 1,417,464
------------------ ------------------
Total liabilities and shareholders' equity...... $ 1,972,565 $ 1,600,519
================== ==================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
HealthDesk Corporation
(A Development Stage Company)
CONDENSED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
August 28,
1992
(Inception)
Three Months Ended September 30, Nine months Ended September 30, to
------------------------------- ------------------------------- September 30,
1997 1998 1997 1998 1998
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Revenue:
Software development and licensing........ $ 150,047 $ 262 $ 376,090 $ 55,038 $ 1,178,383
Other..................................... -- 10 -- 1,420 14,134
--------- ------------ ------------ ------------ ------------
Total revenue........................... 150,047 272 376,090 56,458 1,192,517
--------- ------------ ------------ ------------ ------------
Costs and expenses:
Product development....................... 480,477 349,276 1,785,408 1,119,503 6,077,638
Sales and marketing....................... 345,122 154,177 1,154,531 675,668 4,024,269
General and administrative................ 100,078 29,459 412,683 208,265 2,199,827
Non-recurring restructuring costs......... -- -- -- 220,697 220,697
--------- ------------ ------------ ------------ ------------
Total costs and expenses................ 925,677 532,912 3,352,622 2,224,133 12,522,431
--------- ------------ ------------ ------------ ------------
Loss from operations.................... (775,630) (532,640) (2,976,532) (2,167,675) (11,329,914)
Interest expense............................... -- -- (14,900) -- (127,232)
Interest income................................ 34,024 15,505 112,343 49,563 221,717
Amortization of discount and issuance cost
associated with bridge financing........... -- -- (145,023) -- (1,029,250)
Other expenses................................. -- -- -- -- (14,322)
--------- ------------ ------------ ------------ -------------
Loss before income taxes................ (741,606) (517,135) (3,024,112) (2,118,112) (12,279,001)
Provision for income taxes..................... 200 200 600 600 (5,400)
--------- ------------ ------------ ------------ -------------
Net loss................................ $ (741,806) $ (517,335) $ (3,024,712) $ (2,118,712) $(12,284,401)
========== ============= ============= ============= =============
Basic and diluted loss per share............... $ (0.14) $ (0.09) $ (0.59) $ (0.37)
========== ============ ============ ============
Weighted average number of shares of
common stock, basic and diluted............. 5,392,845 5,792,845 5,151,136 5,717,570
========= ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
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HealthDesk Corporation
(A Development Stage Company)
CONDENSED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
August 28, 1992
Nine months Ended September 30, (inception) to
1997 1998 September 30,1998
---- ---- -----------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss....................................... $ (3,024,712) $ (2,118,712) $ (12,284,401)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization................ 198,083 213,399 776,913
Amortization of non cash discount............ 145,023 -- 1,029,250
Other........................................ -- -- 28,800
Changes in assets and liabilities:
(Increase) decrease in prepaid expenses and
other current assets...................... 556,333 (63,153) (209,298)
(Increase) decrease in other assets........ 1,250 (93,399) (18,983)
Increase (decrease) in accounts payable.... (727,960) (32,018) 101,974
Increase (decrease) in accrued liabilities. 7,447 (269,989) 84,515
------------------ ------------------- ------------------
Net cash used in operating activities.... (2,844,536) (2,363,872) (10,491,230)
------------------- ------------------- -------------------
Cash flows from investing activities:
Additions to property and equipment............ (115,888) (24,967) (1,116,121)
Acquisition of short-term notes................ -- (350,000) (350,000)
------------------ ------------------- -------------------
Net cash used in investing activities.... (115,888) (374,967) (1,466,121)
------------------- ------------------- -------------------
Cash flows from financing activities:
Payments of short-term notes payable........... (2,000,000) -- (2,000,000)
Proceeds of short-term notes payable, net
accrued offering costs....................... -- -- 970,750
Repayment of convertible notes payable......... -- -- (500,000)
Proceeds from issuance of convertible notes
payable....................................... -- -- 1,800,000
Proceeds from issuance of common stock and
warrants, net of offering costs............... 7,018,788 800,000 8,858,965
Net proceeds from issuance of preferred stock.. -- 1,248,673 3,431,709
Proceeds from shareholders' loans.............. -- -- 118,164
Repayment of loans from shareholders........... -- -- (118,164)
Proceeds from the exercise of stock options.... 4,816 -- 111,191
------------------ ------------------ ------------------
Net cash provided by financing activities 5,023,604 2,048,673 12,672,615
------------------ ------------------ ------------------
Net increase (decrease) in cash and cash
equivalents............................. 2,063,180 (690,166) 715,264
Cash and cash equivalents at beginning of period.. 198,277 1,405,430 --
------------------ ------------------ ------------------
Cash and cash equivalents at end of period........ $ 2,261,457 $ 715,264 $ 715,264
================== ================== ==================
</TABLE>
The accompany notes are an integral part of these financial statements.
F-4
<PAGE>
HealthDesk Corporation
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
The interim financial data is unaudited; however, in the opinion of
management, the interim data includes all adjustments, consisting of all normal
recurring adjustments necessary for a fair statement of results for the interim
periods. The financial statements included herein have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the Company believes that the disclosures included herein
are adequate to make the information presented not misleading. Operating results
for the nine months ended September 30, 1998 are not necessarily indicative of
the results that may be expected for the year ending December 31, 1998.
The organization and the business of the Company, the accounting policies
followed by the Company and other information are contained in the notes to the
Company's consolidated financial statements filed as part of the Company's
annual report for the fiscal year ended December 31, 1997 on Form 10-KSB. This
quarterly report should be read in conjunction with such annual report.
1. Organization and Basis of Presentation:
In May 1998, as a result of ongoing difficulties in marketing its CareTeam
Connect, HealthDesk OnLine for Diabetes and HealthDesk OnLine for Wellness
products, the Company announced a major restructuring of its operations. In
connection therewith, on August 18, 1998, the Company entered into a definitive
agreement to merge with MCIF. The pending Merger is still subject to a number of
closing conditions, including the approval of the Merger by the Company's
shareholders. If the Merger closes, the Company will merge with MCIF and assume
its operations. MCIF is a healthcare consulting firm that provides a wide range
of information technology and strategic and operations management consulting
services to a broad cross-section of healthcare industry participants and
healthcare information system vendors. If the Merger is consummated, HealthDesk
would issue approximately five million and five hundred thousand (5,500,000)
shares of Common Stock to the current shareholders of MCIF, representing
approximately 40% of the Company's total outstanding shares following the
Merger.
Also in connection with the restructuring of its operations, on September
29, 1998, the Company entered into a definitive agreement to sell substantially
all of its technology assets relating to its HealthDesk OnLine products to PATI.
The pending Sale of Assets is still subject to a number of closing conditions,
including the approval of the Sale of Assets by the Company's shareholders. If
the Sale of Assets closes, the Company will receive approximately $635,000. In
addition, PATI has agreed to assume and discharge liabilities and obligations
but only to the extent that such liabilities or obligations accrue on or after
the closing date.
As a result of its restructuring, the Company's Chief Executive Officer,
Peter O'Donnell, and its Chief Financial Officer, Timothy Yamauchi, resigned
from the Company in May 1998. In addition, the Company eliminated seven other
positions. In connection with the restructuring, the Company recorded
non-recurring charges of $220,697 which consisted principally of employee
termination severance packages. During the restructuring process, the Company
has established an Operating Committee, consisting of Messrs.
Dunham, Brandt and Zieg, to manage the Company's operations.
2. Recently Issued Accounting Pronouncements:
In June 1998, Statement of Financial Accounting Standards No. 130
"Reporting Comprehensive Income" and Statement of Financial Accounting Standards
No. 131 "Disclosures About Segments of An Enterprise and Related Information"
were issued and are also effective for the year ending December 31, 1998. The
Company believes the adoption of these pronouncements will not have a material
effect on its financial statements.
F-5
<PAGE>
HealthDesk Corporation
(A Development Stage Company)
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
2. Recently Issued Accounting Pronouncements: -- (Continued)
In October 1997, the Accounting Standards Executive Committee issued
Statement of Position 97-2 (SOP 97-2), Software Revenue Recognition, which
delineates the accounting for software product and maintenance revenue. SOP 97-2
supersedes the Accounting Standards Executive Committee Statement of Position
91-1, Software Revenue Recognition, and is effective for transactions entered
into in fiscal years beginning after December 15, 1997. The Company anticipates
that SOP 97-2 will not have a material impact on its financial statements.
3. Concentrations of Credit Risk:
The Company places its temporary cash investments with one financial
institution. The Company performs ongoing credit evaluations of its customers
and generally does not require collateral. Two customers accounted for
approximately 95% of revenues in the nine months ended September 30, 1998.
4. Legal Proceedings:
The Company is subject to a complaint filed by a former employee with the
California Department of Fair Employment & Housing. The claim alleges wrongful
termination as a result of alleged denial of reasonable accommodation for a
wrist and neck injury. The Company intends to defend this matter vigorously.
There can be no assurance, however, that such matter will be resolved in a
manner favorable to the Company.
5. Notes receivable
On August 14 and September 14, 1998, the Company loaned $250,000 and
$100,000, respectively, to MCIF, pursuant to the terms of two promissory notes.
The interest rates on both notes are 8.50% and the notes are payable on demand
or if no demand is made, then they are due on August 14 and September 14, 1999,
respectively.
6. Net Loss Per Share:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards (SFAS) No. 128, Earnings Per Share, which
establishes standards for computing and presenting earnings (loss) per share.
Under the new standard, basic earnings per share is computed based on the
weighted average number of common shares outstanding and excludes any potential
dilution; diluted earnings per share reflects potential dilution from the
exercise or conversion of securities into common stock. SFAS No. 128 is
effective for financial statements issued for periods ending after December 15,
1997. The financial statements presented have been prepared in accordance with
SFAS No. 128 and loss per share data for the prior period presented has been
restated to conform with current year presentation. 632 shares of the Company's
Series B Preferred Stock with a conversion price of $0.50 per share were
outstanding as of September 30, 1998. Options to purchase 710,650 and 406,396
shares of Common Stock with exercise prices ranging from $1.04 to $5.00 and
$1.00 to $5.00, respectively, were outstanding as of September 30, 1997 and
1998. Both the Series B Preferred Stock and options to purchase Common Stock
were excluded from the loss per share calculation for the periods presented as
they have the effect of decreasing loss per share.
7. Convertible Preferred Stock:
As of September 30, 1998, the Company had a total of 632 shares of Series B
Preferred Stock issued and outstanding as a result of the following private
placements. On March 31, 1998, two existing shareholders agreed to purchase an
aggregate of 250 shares of the Company's Series B Preferred Stock for $500,000.
On May 13, 1998, the Company received the $500,000 proceeds. On June 30, 1998,
three existing shareholders purchased an aggregate of 175 shares of the
Company's Series B Preferred Stock for total proceeds of $350,000, of which the
Company received $300,000 on June 30, 1998 and $50,000 on July 8, 1998.
F-6
<PAGE>
NOTES TO CONDENSED FINANCIAL STATEMENTS
(unaudited)
7. Convertible Preferred Stock: -- (Continued)
On August 14 and September 3, 17 and 25, 1998, the Company received aggregate
proceeds of $412,500 in connection with the private placement of additional
shares of Series B Preferred Stock to two existing shareholders and one new
investor of the Company. The outstanding shares of Series B Preferred Stock are
convertible, at any time, at the option of the holders into an aggregate of
2,525,000 shares of the Company's Common Stock. The shares of Series B Preferred
Stock are subject to automatic conversion upon the closing of the contemplated
Merger with MCIF or five years from the date of their issuance at a conversion
price of $0.50 per share.
8. Re-pricing of Warrants:
On April 13, 1998, the Company announced that with respect to its
outstanding publicly traded warrants, it was reducing (i) the exercise price
from $5.00 per share to $2.50 per share, and (ii) the call price for the
warrants from $7.50 to $3.75.
9. Stock Options:
On May 26, 1998, the Company authorized a voluntary stock option repricing
program in which options exercisable for an aggregate of 250,850 shares of
Common Stock originally issued with exercise prices ranging from $3.13 to $3.75
per share, were reissued with an exercise price of $1.00 per share, the fair
market value of the Company's Common Stock on May 26, 1998.
10. Subsequent Events:
On October 28, 1998, the Company loaned $150,000 to MC Informatics, Inc.
pursuant to the terms of a promissory note. The interest rate on the loan is
8.50% and is payable on demand or October 28, 1999.
F-7
<PAGE>
Exhibit Index
Description
-----------
10.12* Form of Convertible Securities Subscription Agreement
11.1 Statement Regarding Computation of Earnings per Share
27 Financial Data Schedule
* Incorporated by reference to the Registrant's Form 10-QSB for the quarter
ended June 30, 1998, filed with the Commission on August 14, 1998.
<PAGE>
EXHIBIT 11.1
HealthDesk Corporation
Computation of Earnings per Share
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine months Ended September 30,
-------------------------------- -------------------------------
1997 1998 1997 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Weighted average number of common shares
outstanding used for both Basic and Diluted
calculations..................................... 5,392,845 5,792,845 5,151,136 5,717,570
---------- ---------- ----------- -----------
Net Loss......................................... $ (741,806) $ (517,335) $(3,024,712) $(2,118,712)
---------- ---------- ----------- -----------
Basic and diluted loss per share................. $ (0.14) $ (0.09) $ (0.59) $ (0.37)
---------- ---------- ----------- -----------
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0001023767
<NAME> HEALTHDESK CORPORATION
<MULTIPLIER> 1
<CURRENCY> U.S. DOLLARS
<S> <C>
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JUN-01-1998
<PERIOD-END> SEP-30-1998
<PERIOD-TYPE> 9-MOS
<EXCHANGE-RATE> 1
<CASH> 715,264
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1,207,141
<PP&E> 972,246
<DEPRECIATION> 688,117
<TOTAL-ASSETS> 1,600,519
<CURRENT-LIABILITIES> 183,055
<BONDS> 0
<COMMON> 12,257,505
0
1,248,673
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 1,417,464
<SALES> 56,458
<TOTAL-REVENUES> 56,458
<CGS> 0
<TOTAL-COSTS> 2,003,436
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (2,118,112)
<INCOME-TAX> 600
<INCOME-CONTINUING> (2,118,712)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,118,712)
<EPS-PRIMARY> (0.37)
<EPS-DILUTED> (0.37)
</TABLE>
