<PAGE>
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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] Quarterly report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 2000.
[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the transition period from to .
--------- ----------
Commission File Number 0-21819
------------------------------
MC INFORMATICS, INC.
(Exact name of small business issuer as specified in its charter)
CALIFORNIA 94-3165144
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
720 S. COLORADO BOULEVARD, SUITE 610 S
DENVER, COLORADO 80246
(Address of principal executive offices)
(303) 759-5511
(Company's telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year,
if changed since last report)
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 17, 2000, there were 15,589,291 shares of the Company's Common
Stock outstanding and warrants to purchase 4,095,000 shares of Common Stock
outstanding.
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<PAGE>
Part I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
MC INFORMATICS, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 2000
(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents $ 75,997
Accounts receivable, net 733,545
Prepaid expenses and other current assets 171,567
------------
Total current assets 981,109
Property and equipment, net 303,374
Goodwill, net 1,897,586
Other assets 56,493
------------
Total assets $ 3,238,562
============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Revolving lines of credit $ 692,478
Current obligations related to business acquisitions 744,983
Notes payable to related parties 1,481,865
Accounts payable 152,727
Accrued liabilities 243,895
Other current liabilities 45,634
------------
Total current liabilities 3,361,582
------------
Shareholders' equity:
Preferred Stock, no par value. Authorized 3,000,000
shares. Series C 6% Convertible Preferred Stock,
$.01 par value. Issued and outstanding 1,012,500
(aggregate liquidation preference of $2,025,000) 2,432,257
Common Stock, no par value. Authorized 40,000,000
shares; issued and outstanding 15,589,291 shares 4,357,976
Unearned compensation (73,348)
Accumulated deficit (6,839,905)
------------
Total shareholders' equity (123,020)
------------
Total liabilities and shareholders' equity $ 3,238,562
============
See accompanying notes to condensed consolidated financial statements.
2
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<TABLE>
MC INFORMATICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
----------------------------- -----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues $ 655,771 $ 2,471,756 $ 3,057,752 $ 6,665,751
Direct expenses 838,067 2,029,218 3,403,659 4,922,812
------------- ------------- ------------- -------------
Gross profit (loss) (182,296) 442,538 (345,907) 1,742,939
General and administrative expenses 516,225 1,079,289 2,165,678 2,973,363
------------- ------------- ------------- -------------
Loss from operations (698,521) (636,751) (2,511,585) (1,230,424)
Interest expense 111,535 23,364 203,243 152,005
------------- ------------- ------------- -------------
Loss before provision for income taxes (810,056) (660,115) (2,714,828) (1,382,429)
Provision for income taxes 400 400 2,630 1,200
------------- ------------- ------------- -------------
Net loss $ (810,456) $ (660,515) $ (2,717,458) $ (1,383,629)
============= ============= ============= =============
Net loss per share, basic and diluted $ (0.06) $ (0.04) $ (0.18) $ (0.11)
============= ============= ============= =============
Weighted average number of shares of Common Stock,
basic and diluted 15,589,291 15,224,291 15,589,291 13,066,530
============= ============= ============= =============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
3
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MC INFORMATICS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
2000 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (2,717,458) $ (1,383,629)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization 388,296 86,091
Amortization of unearned compensation for employee options 40,009 --
Non-cash financing cost associated with discounted Common Stock -- 131,250
Stock option issued as compensation -- 48,792
Changes in operating assets and liabilities:
Accounts receivable 1,100,057 (988,968)
Prepaid expenses and other current assets 170,893 (84,885)
Other assets ( 1,151) (33,324)
Accounts payable (505,277) 419,120
Accrued liabilities (85,265) (248,466)
Other current liabilities (73,514) --
------------- -------------
Net cash used in operating activities (1,683,410) (2,054,019)
------------- -------------
Cash flows from investing activities:
Purchases of property and equipment (4,057) (370,340)
Proceeds from disposal of equipment 42,249 --
Collection of notes receivable from related party -- 1,111,819
Cash received upon reverse acquisition -- 871,267
Advances to related parties -- (172,085)
Acquisition of Medical Systems Solutions -- (195,264)
------------- -------------
Net cash provided by investing activities 38,192 1,245,397
------------- -------------
Cash flows from financing activities:
Repayment of notes payable to the bank (518,689) (801,319)
Proceeds from notes payable to related parties 1,750,000 --
Repayment of notes payable and obligations to related parties (146,600) --
Collection of pre-merger subscription receivable -- 725,000
Net proceeds from note payable to bank -- 725,000
Proceeds from long term debt -- 142,211
------------- -------------
Net cash provided by financing activities 1,084,711 790,892
------------- -------------
Net increase (decrease) in cash and cash equivalents (560,507) 443,448
Cash and cash equivalents at beginning of period 636,504 17,730
------------- -------------
Cash and cash equivalents at end of period $ 75,997 $ --
============= =============
Supplemental disclosures of non-cash investing and financing activities:
Issuance of common stock upon conversion of acquisition
obligation $ 300,000 $ --
============= =============
Warrants issued in connection with issuance of
subordinated promissory notes $ 312,179 $ --
============= =============
See accompanying notes to condensed consolidated financial statements.
</TABLE>
4
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MC INFORMATICS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Basis of Presentation and Business
The accompanying unaudited condensed consolidated financial statements have
been prepared by the Company pursuant to the rules and regulations of the
Securities and Exchange Commission without audit. The unaudited condensed
consolidated financial statements include all adjustments, consisting of all
normal recurring adjustments, which are, in the opinion of management, necessary
to fairly state the financial position as of September 30, 2000 and the results
of operations and cash flows for the related interim periods ended September 30,
2000 and 1999. 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, 2000 are not necessarily indicative of
the results that may be expected for the year ending December 31, 2000 or any
other period.
The accounting policies followed by the Company and other information are
contained in the notes to the Company's consolidated financial statements filed
on April 17, 2000 as part of the Company's annual report on Form 10-KSB/A. This
quarterly report should be read in conjunction with such annual report.
During the quarter and nine months ended September 30, 2000, the Company
experienced a net loss totaling $810,456 and $2,717,458, respectively, and had
negative cash flows from operations for the nine months ended September 30, 2000
totaling $1.7 million. In addition, the Company had a working capital deficit
totaling $2.4 million and an accumulated deficit of $6.8 million at September
30, 2000. The Company will require additional sources of liquidity through debt
or equity financing. However, there can be no assurance that any additional
financing will be available to the Company on a timely basis or on acceptable
terms or at all. The inability to obtain such financing could have a material
adverse effect on the Company's business, financial condition and results of
operations.
2. Earnings (Loss) Per Common Share
Basic earnings (loss) per share are computed by dividing earnings available
to common shareholders by the weighted average number of common shares
outstanding during the period. Diluted earnings per share reflect per share
amounts that would have resulted from the dilutive potential effect of common
stock instruments. The net loss for the nine months ended September 30, 2000 has
been adjusted by $90,875 for dividends during such period on the Company's
Preferred Stock to arrive at the basic loss per share of Common Stock.
3. Revolving Lines of Credit
On May 28, 1999, the Company entered into an agreement with a bank for a
revolving line of credit of up to $1,700,000, which includes a $200,000
sub-facility for an equipment term loan and a $150,000 sub-limit for the
issuance of letters of credit. As of September 30, 2000, the Company had
$526,000 outstanding under the revolving line of credit and $122,000 outstanding
on the equipment term loan. No amounts are available under this revolving line
of credit at September 30, 2000.
The line of credit is collateralized by substantially all of the assets of
the Company and bears interest at the bank's prime rate plus 1.5%. The original
terms of the revolving line of credit provided for monthly payments of interest
only, with the unpaid principal balance and accrued interest originally due on
May 26, 2000. The equipment term loan is payable in monthly installments of
interest only at the bank's prime rate plus 1.5% through May 27, 2000, at which
time the outstanding balance was to be payable in equal monthly principal and
interest installments through May 26, 2003.
5
<PAGE>
The bank financing agreement contains a restrictive financial covenant. At
September 30, 2000, the Company was not in compliance with the restrictive
covenant.
On April 11, 2000, the Company entered into an agreement with the bank which
amended the bank financing agreement. Pursuant to this amendment, the bank
extended the maturity date to the earlier of (i) January 31, 2001, or (ii) the
date upon which the Company successfully raises $3,000,000 or more of debt or
equity financing, as defined in the amended agreement. In addition, the bank
waived all violations of the financial covenants included in the bank financing
agreement from inception up to and including March 31, 2000, and as of April 1,
2000, eliminated all previous financial covenants and added one new financial
covenant. As consideration for the amendment to the bank financing agreement,
the Company repaid the over-advances on its borrowings under the revolving line
of credit in the aggregate amount of approximately $504,000. Additionally, all
borrowings with the bank are now personally guaranteed by an individual who is a
member of the Board of Directors and a significant shareholder of the Company.
In connection with the amended bank financing agreement, all amounts due have
been presented under the caption revolving lines of credit in the accompanying
condensed consolidated balance sheet.
4. Notes Payable to Related Parties
Between March 2000 and September 2000, the Company received an aggregate of
$1,750,000 from certain members of the Company's Board of Directors and related
parties. Such advances have been exchanged for 10% convertible subordinated
secured promissory notes, pursuant to which interest accrues at a rate of 10%
per annum and is payable in semi-annual installments. All principal and accrued
but unpaid interest is due and payable in 2002. Included with such notes are
warrants to purchase 1,750,000 shares of the Company's Common Stock. The
warrants are exercisable at $1.00 to $0.28 per share and expire in 2005. The
Company has ascribed an estimated fair value to the warrants aggregating
$312,179 and, accordingly, has discounted the subordinated secured promissory
notes balance as of the date of issuance. Such discount is recognized as
additional interest expense over the two-year life of the notes.
5. Subsequent Event
Between October 2000 and November 2000, the Company received an aggregate of
$385,000 from certain members of the Company's Board of Directors and related
parties. It is the intent of the Company that such advances will be exchanged
for 10% convertible subordinated secured promissory notes, pursuant to which
interest will accrue at a rate of 10% per annum and will be payable in 2002, or
may be due and payable upon demand. The terms of these notes have not been
finalized.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following discussion and analysis should be read in conjunction with
the Company's condensed consolidated financial statements and notes thereto
included elsewhere in this quarterly report on Form 10-QSB. Except for the
historical information contained herein, the following discussion contains
certain forward-looking statements that involve risks and uncertainties, such as
statements of the Company's plans, objectives, expectations and intentions. The
cautionary statements made in this document should be read as being applicable
to all related forward-looking statements wherever they appear herein. The
Company's actual results may differ materially from those anticipated in these
forward-looking statements. The Company undertakes no obligation publicly to
update any forward-looking statements for any reason, even if new information
becomes available or other events occur in the future.
OVERVIEW
MC Informatics, Inc. (the "Company") is a provider of business-to-business
applications services, consulting services and information technology ("IT")
solutions to the healthcare industry. The Company was established in August 1992
under the name HealthDesk Corporation ("HealthDesk"). In 1998, HealthDesk
underwent a major change in its strategic direction through the implementation
of a plan to discontinue its then-current operations and to sell substantially
all of its assets, including its HealthDesk online operations and substantially
all of its intellectual property rights, inventories, certain office equipment
and packaged software to Patient Infosystems, Inc. ("PATI"). In August 1998,
HealthDesk entered into an Agreement and Plan of Reorganization with MC
Acquisition Corporation, a California corporation and a wholly owned subsidiary
of HealthDesk, MC Informatics, Inc., a California corporation ("MCII"), and
certain shareholders of MCII, pursuant to which, among other things, MCII merged
with and into MC Acquisition Corporation through the issuance of 5,645,230
shares of HealthDesk common stock in exchange for all of the outstanding shares
of MCII common stock. The HealthDesk shareholders approved the sale of assets to
PATI and the merger with MCII on February 26, 1999 and, contemporaneously with
the closing of the two transactions on March 2, 1999, HealthDesk changed its
name to MC Informatics, Inc. Although HealthDesk was the legal entity surviving
the HealthDesk/MCII merger, the merger has been accounted for as a reverse
acquisition whereby MCII has been identified as the acquiring corporation for
financial reporting purposes, as HealthDesk had no ongoing business or
operations at the time of the merger and the executive officers and members of
the Board of Directors of the post-merger entity were primarily comprised of
individuals previously associated with MCII. As a result of the foregoing, the
discussion below relates to the current business of MC Informatics, Inc. and,
solely for the purposes of financial reporting, periods prior to March 2, 1999
reflect the accounts of the pre-merger MCII entity. Unless otherwise indicated,
references herein to the Company refer to the merged HealthDesk/MCII entity.
The Company provides a broad spectrum of applications services, consulting
services, strategic and operations management services and IT solutions for the
healthcare industry. The Company's focus is to assist healthcare organizations
maximize the benefits of their information systems and enable technology to
serve their strategic objectives. As an applications service provider, or ASP,
the Company additionally offers proprietary Web-based software and
non-proprietary software applications to healthcare providers and payors. In
addition, the Company provides complete operational support for all IT
functions, including Internet services, e-mail, Web hosting, Web publishing and
business-to-business and business-to-consumer connectivity; distance learning
programs; network services; desktop services; secure Internet access to
application servers in compliance with the Health Insurance Portability and
Accountability Act; electronic medical record support; and related applications
services as may be required by a healthcare organization. Through its IT
consulting services, the Company provides healthcare entities with direction in
developing long-term IT strategy through the selection of technology and
products, system implementation, integration and management, and contract
negotiations.
7
<PAGE>
The Company serves a national client base across a broad cross-section of
the healthcare industry. The Company performs services for its clients
principally on a project-by-project basis through the development of a
custom-tailored solution for each client based upon the client's specific needs
and requirements. The Company believes that its in-depth institutional
knowledge, long-term relationships, extensive knowledge of its clients' needs
and its broad range of services provide it with significant advantages over its
competitors in marketing additional services and winning new engagements. The
Company's objective is to become a leading provider of applications services and
IT solutions in the healthcare industry.
RESULTS OF OPERATIONS
The following table sets forth, for the periods indicated, certain financial
data as a percentage of net sales:
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
---------------------------- ----------------------------
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Revenues.......................................... 100.0% 100.0% 100.0% 100.0%
Direct expenses................................... 127.8 82.1 111.3 73.9
------------- ------------- ------------- -------------
Gross profit (loss)............................... (27.8) 17.9 (11.3) 26.1
General and administrative expenses............... 78.7 43.7 70.8 44.6
------------- ------------- ------------- -------------
Loss from operations.............................. (106.5) (25.8) (82.1) (18.5)
Interest expense.................................. 17.0 .01 6.7 2.3
------------- ------------- ------------- -------------
Loss before provision for income taxes............ (123.5) (26.7) (88.8) (20.8)
Provision for income taxes........................ .1 -- -- --
------------- ------------- ------------- -------------
Net loss.......................................... (123.6)% (26.7)% (88.8)% (20.8)%
============= ============= ============= =============
</TABLE>
THREE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1999
REVENUES. The Company's revenues for the quarter ended September 30, 2000
were $ 655,771 as compared to $2.5 million for the quarter ended September 30,
1999, a decrease of $1.8 million or 276.9%. This decrease was primarily a result
of a reduction in the Company's overall business in the third quarter of 2000.
This reduction in business resulted from the completion of engagements with the
Company's four largest customers and not being able to replace these engagements
with new ones.
GROSS PROFIT (LOSS). The Company reported a gross loss of $182,296 for the
quarter ended September 30, 2000 as compared to a gross profit of $442,538 for
the same period in 1999. The decrease in gross profit was primarily due to the
reduction in the Company's overall business in the third quarter of 2000, which
resulted in many consultants not being billable for a period of time or being
laid off.
8
<PAGE>
GENERAL AND ADMINISTRATIVE EXPENSE. During the third quarter of 2000,
general and administrative expenses decreased by 109.1% to $516,225 from $1.1
million for the same period in 1999. This decrease was primarily due to a
reduction of employees, including the COO.
INTEREST EXPENSE. During the third quarter of 2000, interest expense
increased $88,171 to $111,535 from $23,364 for the same period in 1999. The
increase was primarily due to recognition of interest on related party notes
and amortization of the related warrant valuation.
INCOME TAXES. Income taxes were nominal as the Company is in a loss
carryforward position for federal income tax purposes. At September 30, 2000,
the components of the Company's deferred tax assets and liabilities were
comprised primarily of the future tax benefit of the Company's net operating
loss carryforwards of approximately $5.6 million.
The utilization of the net operating loss carryforwards could be limited due
to restrictions imposed under federal and state laws upon a change in ownership.
The amount of the limitation, if any, has not been determined at this time. A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. As a result of
the Company's continued losses and uncertainties surrounding the realization of
the net operating loss carryforwards, management has determined that the
realization of deferred tax assets is not more likely than not. Accordingly, a
valuation allowance equal to the net deferred tax asset amount has been recorded
as of September 30, 2000.
NET LOSS. Net loss for the quarter ended September 30, 2000 was $810,456 as
compared to a net loss of $660,515 for the same period in 1999. The net loss in
2000 was primarily attributable to the decrease in revenue during the third
quarter of 2000. This decline in business during the third quarter of 2000
resulted in an unusual number of Company consultants not being billable and/or
being laid off, which further resulted in the Company incurring significant
costs associated with the severance of these consultants.
NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1999
REVENUES. The Company's revenues for the nine months ended September 30,
2000 were $3.1 million as compared to $6.7 million for the nine months ended
September 30, 1999, a decrease of $3.6 million or 54.1%. This decrease was
primarily a result of the completion of engagements with the Company's four
largest customers and not being able to replace these engagements with new ones.
This reduction in business resulted in many consultants not being billable for a
period of time or being laid off.
GROSS PROFIT (LOSS). The Company reported a gross loss of $345,907 for the
nine months ended September 30, 2000 as compared to a gross profit of $1.7
million for the same period in 1999. The increase in gross loss was primarily
due to the establishment of a new ASP division which incurred significant
startup costs consisting principally of salary and travel expenses, and the
reduction in the Company's overall business in the first nine months of 2000.
This reduction in business during the first nine months of 2000 resulted in
several consultants not being billable for a period of time or being laid off.
GENERAL AND ADMINISTRATIVE EXPENSE. During the first nine months of 2000,
general and administrative expenses decreased by 27% to $2.2 million from $3.0
million for the same period in 1999. This decrease was primarily due to a
decrease in personnel, including the COO.
INTEREST EXPENSE. During the first nine months of 2000, interest expense
increased $52,238 to $204,243 from $152,005 for the same period in 1999. The
increase was primarily due to recognition of interest on related party notes
and amortization of the related warrant valuation.
9
<PAGE>
INCOME TAXES. Income taxes were nominal in both respective periods as the
Company is in a loss carryforward position for federal income tax purposes. At
September 30, 2000, the components of the Company's deferred tax assets and
liabilities were comprised primarily of the future tax benefit of the Company's
net operating loss carryforwards of approximately $5.6 million.
The utilization of the net operating loss carryforwards could be limited due
to restrictions imposed under federal and state laws upon a change in ownership.
The amount of the limitation, if any, has not been determined at this time. A
valuation allowance is provided when it is more likely than not that some
portion or all of the deferred tax assets will not be realized. As a result of
the Company's continued losses and uncertainties surrounding the realization of
the net operating loss carryforwards, management has determined that the
realization of deferred tax assets is not more likely than not. Accordingly, a
valuation allowance equal to the net deferred tax asset amount has been recorded
as of September 30, 2000.
NET LOSS. Net loss for the nine months ended September 30, 2000 was $2.7
million as compared to a net loss of $1.4 million for the same period in 1999.
The net loss in 2000 was primarily attributable to the establishment of a new
ASP division that incurred significant start-up expenses without realizing
significant revenues and the severe decrease in revenue during the first nine
months of 2000. This decline in business in 2000 resulted in an unusual number
of Company consultants not being billable and/or being laid off, which further
resulted in the Company incurring significant costs associated with the
severance of these consultants.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 2000, the Company had a working capital deficiency of
$2.4 million, an accumulated deficit of $6.8 million and $75,997 in cash.
Cash used in the Company's operating activities decreased to $1.7 million
during the period ended September 30, 2000 from $2.1 million in the same period
of 1999, primarily as a result of the net loss partially offset by a decrease in
accounts receivable.
Cash provided in the Company's investing activities totaled $38,000 for the
nine months ended September 30, 2000 as compared to cash provided by investing
activities of $1.2 million during the same period of 1999. During 1999, the
Company collected proceeds of $871,000 upon the merger with HealthDesk and
collected $1.1 million from a related party note receivable, which proceeds were
offset by $370,000 in capital expenditures and $172,000 in advances to
shareholders, and $195,000 used to acquire Medical Systems Solutions.
Cash provided by the Company's financing activities totaled $1.1 million for
the nine months ended September 30, 2000 and $791,000 for the same period in
1999. The amount in 2000 consisted of $519,000 repayment of notes payable to the
bank, $147,000 repayment of notes payable and obligations to related parties,
offset by $1.75 million of proceeds from notes payable from related parties. The
amount in 1999 consisted of $801,000 repayment of notes payable to a related
party, proceeds of $725,000 from the collection of a pre-merger subscription
receivable, and net proceeds of $867,000 from the bank.
In May 1999, the Company entered into an agreement with a financial
institution for a revolving line of credit of up to $1.7 million, which includes
a $200,000 sub-facility for an equipment term loan and a $122,000 sub-facility
for the issuance of letters of credit. The line of credit bears interest at the
bank's prime rate plus 1.5%. This line of credit is collateralized by
substantially all of the assets of the Company. At September 30, 2000, the
Company had $526,000 outstanding under the revolving line of credit and $122,000
outstanding under the equipment term loan. As of September 30, 2000, the Company
had no amounts available under the line of credit.
The bank financing agreement contains certain restrictive financial
covenants. On April 11, 2000, the Company entered into an agreement with the
bank which amended the bank financing agreement. The bank waived all violations
of the financial covenants included in the financing agreement from inception up
to and including March 31, 2000, and, as of April 1, 2000, eliminated all
previous financial covenants and added one new financial covenant. As
consideration for the amendment to the bank financing agreement, as of June 7,
2000, the Company had repaid the over-advances on its borrowings under the
revolving line of credit in the aggregate amount of approximately $504,000.
Additionally, all borrowings with the bank are now personally guaranteed by an
individual who is a member of the Board of Directors and a significant
shareholder of the Company. At September 30, 2000, the Company was not in
compliance with the restrictive financial covenant.
10
<PAGE>
The accompanying condensed consolidated financial statements contained
elsewhere in this report have been prepared assuming that the Company will
continue as a going concern. The Company has suffered recurring losses from
operations and negative cash flows from operations. In addition, as described
above, the Company had a working capital deficiency at September 30, 2000 and is
in default under the terms of its bank financing agreement and obligations
related to business acquisitions. These factors, among others, raise substantial
doubt about the Company's ability to continue as a going concern. As a result,
the Company's report from its independent auditors for its consolidated
financial statements as of and for the year ended December 31, 1999 contains an
explanatory paragraph that describes the uncertainty as to the Company's ability
to continue as a going concern. The consolidated financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
The Company believes that it will have to obtain additional funds to meet
its projected cash requirements and fund its operations for the next twelve
months. During early 2000, the Company took certain actions in an effort to
become profitable and improve cash flows from operations in the future.
Management implemented a cost reduction program and developed and continues to
implement plans to reduce existing cost structures, improve operating
efficiencies and strengthen the Company's operating infrastructure. The Company
is also implementing a corporate finance program designed to improve its working
capital structure by considering certain financing alternatives. Such
alternatives include a proposed private placement of certain debt and/or equity
securities during the fourth quarter of 2000. In addition, the Company has
amended its existing bank financing agreement. Although the Company has been
successful in obtaining working capital to fund operations to date, there can be
no assurances that the Company will be able to generate additional capital in
the future or secure additional financing with reasonable terms, if at all. In
addition, there can be no assurance that the Company's funding requirements or
cash used in operating activities will not increase significantly as a result of
unforeseen circumstances. The inability to obtain such financing could have a
material adverse effect on the business, financial condition and results of
operations of the Company.
In the event the Company exceeds its projected cash requirements, there can
be no assurance that the Company would be able to obtain public or private
third-party sources of financing or that favorable terms for such financing
would be available. In addition, given the trading history of the Company's
Common Stock and warrants to purchase Common Stock, there can be no assurance
that the Company will be able to raise additional cash through public or private
offerings of its Common Stock. If additional funds are raised by issuing equity
or convertible debt securities, options or warrants, further dilution to the
Company's existing shareholders may result.
YEAR 2000 ISSUES
The Company has not experienced any significant problems as a result of the
arrival of the Year 2000. Although no significant problems have materialized to
date, the Company will continue to monitor its systems throughout the Year 2000.
EFFECT OF INFLATION
The Company believes that inflation has not had a material effect on its net
sales or profitability in recent years.
RISK FACTORS
In addition to the other information contained elsewhere in this quarterly
report on Form 10-QSB, the following factors should be considered carefully in
evaluation the business and prospects of the Company:
LACK OF SUFFICIENT REVENUES; SIGNIFICANT AND CONTINUING LOSSES. The Company
has not achieved annual profitability and management cannot be certain that the
Company will realize sufficient revenues to achieve profitability. As of
September 30, 2000, the Company had an accumulated deficit of $6.8 million.
There can be no assurance that the Company will be able to generate meaningful
revenues or achieve profitable operations.
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GOING CONCERN. The Company received a report from its independent certified
public accountants for the Company's fiscal year ended December 31, 1999
containing an explanatory paragraph that describes the uncertainty related to
the substantial doubt about the Company's ability to continue as a going concern
due to, among other factors, the Company's recurring losses from operations,
negative cash flows from operations and its working capital deficiency at
December 31, 1999.
NEGATIVE CASH FLOW; NEED FOR ADDITIONAL FINANCING. The Company obtained a
$1.7 million revolving line of credit from a bank in May 1999. In October 1999,
the remaining amount available under the line of credit was utilized for the
acquisition of HSG Acquisitions, Inc., dba Inteck. In November and December
1999, the Company engaged in a private equity offering of shares of Series C 6%
Convertible Preferred Stock, resulting in net cash proceeds of $2.0 million.
Between March and September 2000, the Company received an aggregate of $1.75
million from certain members of its Board of Directors and related parties in
exchange for 10% Convertible Subordinated Secured Promissory Notes Due 2002 and
warrants to purchase up to 1,750,000 shares of the Company's Common Stock. The
Company's capital requirements are expected to continue to be significant and
the Company believes that it will have to obtain additional funds to meet its
projected cash requirements for the next twelve months. There can be no
assurance that the Company will be able to secure additional financing with
reasonable terms, if at all, or that the Company's funding requirements will not
increase significantly as a result of unforeseen circumstances or that the
Company's cash used in operating activities will not increase. In the event the
Company exceeds its projected cash requirements, there can be no assurance that
the Company would be able to obtain public or private third-party sources of
financing, or that favorable terms for such financing would be available. In
addition, given the trading history of the Company's Common Stock and warrants
to purchase Common Stock, there can be no assurance that the Company will be
able to raise additional cash through public or private offerings of its Common
Stock. Any of these developments could materially adversely affect the Company's
business, financial condition and results of operations.
ABILITY TO IMPLEMENT ASP STRATEGY. The Company only recently expanded its
business to include an ASP component. There can be no assurance that the Company
will be able to assess accurately the investment required to negotiate and
perform in a profitable manner any of its ASP contracts. The Company recorded a
net loss of $2.7 million for its first three quarters of 2000, which loss was
primarily attributable to the establishment of the Company's new ASP division.
During the first three quarters of 2000, the Company incurred significant
start-up expenses without realizing significant revenues with respect to its ASP
division.
In addition, if the Company is successful in implementing its ASP strategy,
the Company anticipates that competitors may increase their focus on this
market, which could adversely affect the Company's ability to obtain new
contracts as well as the profitability of any such contracts. In addition, any
failure by the Company to perform adequately under its ASP agreements may
adversely effect its ability to obtain future engagements from these or other
clients, which could have a material adverse affect on the Company's business,
financial condition and results of operations.
RETENTION AND RECRUITMENT OF PROFESSIONAL STAFF. The Company's business
involves the delivery of professional services and is labor-intensive. The
Company's success depends in large part upon its ability to attract, develop,
motivate and retain highly skilled consultants. There is significant competition
for employees with the skills required to perform the services offered by the
Company from other consulting firms, healthcare providers and other healthcare
industry participants, health information systems vendors, clients, systems
integrators and many other enterprises. There can be no assurance that the
Company will be able to attract and retain a sufficient number of highly skilled
employees in the future or that it will continue to be successful in training,
retaining and motivating employees. The loss of a significant number of
consultants and/or the Company's inability to hire a sufficient number of
qualified consultants would adversely affect the Company's ability to secure,
service and complete client engagements and could have a material adverse effect
on the Company's business, operating results and financial condition.
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CLIENT CONCENTRATION. The Company derives a significant portion of its
revenues from a relatively limited number of clients. Clients typically engage
the Company on an assignment-by-assignment basis, and a client is able generally
to terminate an assignment at any time without penalty. In addition, the level
of the Company's services required by any individual client can diminish over
the life of its relationship with the Company, and there can be no assurance
that the Company will be successful in establishing relationships with new
clients as this occurs. The loss of any significant client could have a material
adverse effect on the Company's business, financial condition and results of
operations.
STRUCTURE OF CLIENT ENGAGEMENTS. Due to the structure of client engagements,
the Company typically provides services to its clients on a project-by-project
basis. As a result, the amount of personnel required to meet the Company's
contractual obligations at a given time varies depending on client demands and
the contractual arrangements then in place. This volatility can result in
indefinite periods in which certain or all Company consultants may not be
billable. In 1999 and during the first nine months of 2000, the Company was
forced to lay off many of its consultants. There can be no assurance that the
Company will require the services of such individuals in the future, or, if the
Company does require their services, that such consultants will return to work
for the Company or will refrain from working for competitors. This uncertainty
may negatively impact relationships between the Company and its employees which,
in turn, could have a material adverse effect on the Company's business,
financial condition and results of operations.
PROJECT RISKS; LIMITED OUTSOURCING EXPERIENCE. Many of the Company's
engagements involve projects that are critical to the operations of its clients'
business and that provide benefits which may be difficult to quantify. The
Company's failure to meet a client's expectations in the performance of its
services could damage the Company's reputation and adversely affect its ability
to attract new business. In addition, the Company could incur substantial costs
and expend significant resources correcting errors in its work, and could
possibly become liable for damages caused by such errors. The Company has
assisted and expects to continue to assist clients in selecting and implementing
software applications for the clients' use in their business. While the Company
is not aware of any existing or potential claims, the Company could become
involved in disputes which could negatively impact client relationships and
which, in turn, could have a material adverse effect on the Company's business,
financial condition and results of operations, whether or not the Company bears
any responsibility, legal or otherwise.
COMPETITION. The market for the Company's services is highly fragmented,
highly competitive and subject to rapid change. The Company believes that it
will compete principally with ASPs, systems integration firms, national
consulting firms, including the consulting divisions of large accounting firms,
information system vendors, service groups of computer equipment companies,
facilities management companies, IT outsourcing companies, general management
consulting firms, and regional and specialty consulting firms. Many of the
Company's competitors have significantly greater financial, technical and
marketing resources than the Company, generate greater revenues and have greater
name recognition than the Company. Moreover, those competitors who sell or
license their own software may in the future attempt to limit or eliminate the
use of third-party consultants, such as the Company, to implement and/or
customize such software. In addition, vendors whose systems may enjoy wide
market acceptance and large market share could enter into exclusive or
restrictive agreements with other consulting firms, which could eliminate or
substantially reduce the Company's implementation work for those systems. There
are relatively low barriers to entry into the Company's markets, and the Company
faces and expects to face additional competition from new entrants into the
healthcare consulting industry. In addition, combinations and consolidations in
the consulting industry will give rise to large competitors whose relative
strengths are impossible to predict. The Company also competes with its clients'
internal resources, particularly where these resources represent a fixed cost to
the client. This internal client competition may heighten as consolidation of
healthcare providers creates organizations large enough to support more
sophisticated internal information management capabilities. There can be no
assurance that the Company will be able to compete effectively with current and
future competitors or that competitive pressures, including wage pressures as
the consultant labor market tightens, will not cause the Company's revenue or
operating margins to decline, or otherwise materially adversely affect its
business, financial condition and results of operations.
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DEPENDENCE ON VENDOR RELATIONSHIPS. The Company depends, and will continue
to depend, upon its licensing and business relationships with third-party
vendors. The Company's success relies in part upon its ability to maintain its
existing vendor relationships and to form new relationships with vendors in
order to enhance the Company's services and to remain competitive in providing
applications services to its clients. Despite the vendor licensing contacts
currently in place, there can be no assurance that the Company will be able to
maintain relationships with its vendors or establish relationships with new
vendors. In addition, client satisfaction of the Company's applications services
is dependent upon the use and reliability of the software, products and services
of the Company's application vendors. There can be no assurance that the
software, products or services of the Company's vendors will achieve market
acceptance or commercial success, or that the Company's existing or future
vendor relationships will result in sustained business partnerships or
successful Company product and service offerings.
DELISTING OF SECURITIES FROM NASDAQ SYSTEM; DISCLOSURE RELATING TO
LOW-PRICED STOCKS. On September 9, 1999, the Company was delisted from the
Nasdaq Small Cap Market. Following a hearing with Nasdaq in March 1999, Nasdaq
concluded that the merger of MC Informatics, Inc. with and into a wholly-owned
subsidiary of HealthDesk Corporation constituted a reverse merger with MC
Informatics, Inc. being the acquiring corporation. As a result, Nasdaq required
the Company to comply with the initial listing requirements to remain listed on
the Nasdaq Small Cap Market. Because the Company did not meet these initial
listing requirements, the Company was delisted. The trading of the Company's
securities is now conducted on the NASD OTC Electronic Bulletin Board.
Due to the 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, the trading of securities is 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
shareholders to sell their Common Stock in the tertiary market. There can be no
assurance that the Company's Common Stock will be listed on Nasdaq in the
foreseeable future.
CONTROL BY MANAGEMENT. As of September 30, 2000, the officers and directors
of the Company beneficially owned, in the aggregate, in excess of 50% of the
outstanding shares of Common Stock (assuming no exercise of outstanding warrants
to purchase Common Stock). Accordingly, such persons, acting together, are in a
position to control the election of all of the Company's directors and will thus
control the management, policies and business operations of the Company. Such
persons are also in a position to control the outcome of any matter submitted to
a vote of the Company's shareholders.
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NO DIVIDENDS. To date, the Company has not paid any cash dividends and
does not expect to declare or pay dividends on its Common Stock in the
foreseeable future.
AUTHORIZED PREFERRED STOCK. The Company has authorized 3,000,000 shares of
Preferred Stock, of which 2,500,000 shares are designated as Series C 6%
Convertible Preferred Stock. The Series C Convertible Preferred Stock has a
liquidation preference of $2.00 per share and each share is convertible into one
share of Common Stock. The holders of Series C Convertible Preferred Stock are
entitled to receive cumulative dividends at a rate of 6%, payable annually. The
rights of the holders of the Company's Common Stock will be subject to and may
be adversely affected by the rights of holders of the Series C Convertible
Preferred Stock and any other preferred stock that may be issued in the future.
The ability to issue preferred stock without shareholder approval could have the
effect of making it more difficult for a third party to acquire a majority of
the voting stock of the Company, thereby delaying, deferring or preventing a
change in control of the Company.
VOLATILITY OF STOCK AND WARRANTS PRICES. The trading price of the Company's
Common Stock and warrants to purchase Common Stock have experienced substantial
fluctuations and is subject to significant volatility due to factors impacting
the overall market which are unrelated to the Company's performance. The
historical results of operations and financial position of the Company are not
necessarily indicative of future financial performance. If revenues or earnings
fail to meet securities analysts' expectations, there could be an immediate and
significant adverse impact on the trading price of the Company's Common Stock.
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Part II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Recent Sales of Unregistered Securities.
In July 2000, the Company issued to one accredited investor warrants to
purchase up to 250,000 shares of the Company's Common Stock at an exercise price
of $0.63 per share, subject to adjustment.
In August 2000, the Company issued to one accredited investor warrants to
purchase up to 250,000 shares of the Company's Common Stock at an exercise price
of $0.28 per share, subject to adjustment.
Between April and September 2000, the Company issued 10% Convertible
Subordinated Secured Promissory Notes Due 2002 in the aggregate amount of
$1,750,000, which notes are convertible upon the issuance of equity securities
of the Company to one or more unrelated third parties in exchange for an
aggregate of $2,000,000 or more, and such notes are convertible into such number
of shares of equity securities offered in the financing as is equal to the
principal and accrued but unpaid interest then outstanding under the note
divided by the price per share of the equity securities offered in the equity
financing.
The issuances of securities of the Company in the above-referenced
transactions were effected in reliance upon the exemption from registration
under Section 4(2) of the Securities Act of 1933, as amended (the "Securities
Act"), as transactions not involving a public offering. Exemption from the
registration provisions of the Securities Act is claimed on the basis that such
transaction did not involve any public offering and the purchasers were
sophisticated with access to the kind of information registration would provide.
Dividends.
Pursuant to state laws, the Company may be restricted from paying dividends
to its shareholders as a result of its accumulated deficit as of September 30,
2000. In addition, the terms of the Company's bank financing agreement restrict
the Company's ability to pay dividends on the Company's capital stock. The terms
of the Company's 10% Convertible Subordinated Secured Promissory Notes Due 2002
also restrict the Company's ability to pay or set aside any amounts as dividends
on its Common Stock and redeem or repurchase any shares of its Common Stock.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
At September 30, 2000, the Company was not in compliance with certain
restrictive financial covenants under its bank financing agreement, and was in
default of certain other provisions of the agreement. The agreement provides for
a revolving line of credit of up to $1,700,000, which includes a $200,000
sub-facility for an equipment term loan and a $150,000 sub-limit for the
issuance of letters of credit. The line of credit is collateralized by
substantially all of the assets of the Company. As of September 30, 2000, the
Company had $526,000 outstanding under this revolving line of credit and
$122,000 outstanding on the equipment term loan.
On April 11, 2000, the Company entered into an agreement with the bank which
amended the bank financing agreement. The bank waived all violations of the
financial covenants included in the financing agreement from inception up to and
including March 31, 2000. As consideration for the amendment to the agreement,
the Company repaid the over-advances on its borrowings under the line of credit
in the aggregate amount of $504,000.
At September 30, 2000, the Company was in default of its payment obligation
related to the Company's acquisition of HSG Acquisitions, Inc., dba Inteck.
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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
ITEM 5. OTHER INFORMATION
Not applicable.
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits.
27.1 Financial Data Schedule
(b) Reports on Form 8-K.
The Company did not file any reports on Form 8-K during the
quarter ended September 30, 2000.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
MC INFORMATICS, INC.
Dated: November 20, 2000 By: /s/ DONALD JACOBS
----------------------------------
Donald Jacobs
Acting Chief Financial Officer and
Principal Accounting Officer
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EXHIBIT INDEX
Exhibit No. Description
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27.1 Financial Data Schedule
19
