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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER 0-28701
HEALTHGATE DATA CORP.
(Exact name of registrant as specified in its charter)
DELAWARE 04-3220927
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
25 CORPORATE DRIVE, SUITE 310, BURLINGTON, MASSACHUSETTS 01803
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (781) 685-4000
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days.
Yes X No
--- ---
The number of shares outstanding of the registrant's common stock as of
July 31, 2000 was 17,863,686.
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HEALTHGATE DATA CORP.
FORM 10-Q
FOR THE QUARTER ENDED JUNE 30, 2000
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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<S> <C>
Item 1. Financial Statements
Condensed Consolidated Balance Sheet at June 30, 2000 (unaudited)
and December 31, 1999 ..................................................... 3
Condensed Consolidated Statement of Operations for the three months
ended June 30, 2000 and 1999 (unaudited)................................... 4
Condensed Consolidated Statement of Operations for the six months
ended June 30, 2000 and 1999 (unaudited) .................................. 5
Condensed Consolidated Statement of Cash Flows for the six months
ended June 30, 2000 and 1999 (unaudited) .................................. 6
Notes to Condensed Consolidated Financial Statements....................... 7
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations ..................................................... 11
Item 3. Quantitative and Qualitative Disclosures about Market Risk................. 26
PART II. OTHER INFORMATION
Item 2. Changes in Securities and Use of Proceeds.................................. 27
Item 6. Exhibits and Reports on Form 8-K........................................... 27
Signatures ......................................................................... 28
</TABLE>
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
HEALTHGATE DATA CORP.
CONDENSED CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
JUNE 30, 2000 DECEMBER 31, 1999
------------- -----------------
<S> <C> <C>
ASSETS (unaudited)
Current assets:
Cash and cash equivalents $ 262,405 $ 578,560
Marketable securities 24,476,728 --
Accounts receivable, including receivables
from related parties of $452,187 and $49,125 at June 30, 2000
and December 31, 1999, respectively, and net of allowance for
doubtful accounts of $184,035 and $50,000 at June 30, 2000
and December 31, 1999, respectively 3,089,645 705,578
Unbilled accounts receivable 6,782 35,825
Prepaid advertising 8,530,599 4,500,000
Prepaid expenses and other current assets 991,845 318,514
----------- -----------
Total current assets 37,358,004 6,138,477
Long-term investments 3,487,219 --
Fixed assets, net 1,825,797 1,302,368
Marketing and distribution rights, net 10,500,000 17,535,000
Deferred offering costs -- 2,055,491
Other assets 699,329 131,586
----------- -----------
Total assets $53,870,349 $27,162,922
=========== ===========
LIABILITIES, REDEEMABLE CONVERTIBLE PREFERRED STOCK
AND COMMON STOCK AND OTHER STOCKHOLDERS' EQUITY
Current Liabilities:
Current portion of capital lease obligation $ 391,496 $ 442,668
Accounts payable 2,317,033 3,060,189
Customer deposits 418,532 558,066
Accrued payroll and other expenses 3,072,922 2,050,070
Deferred revenue 5,112,891 1,667,565
----------- -----------
Total current liabilities 11,312,874 7,778,558
Long-term portion of capital lease obligation 343,588 439,743
Long-term note payable -- 1,517,295
----------- -----------
Total liabilities 11,656,462 9,735,596
----------- -----------
Redeemable convertible preferred stock -- 15,626,726
----------- -----------
Common stock and other stockholders' equity:
Common stock, $.01 par value;
Authorized: 100,000,000 shares
Issued and outstanding: 17,863,686 and 5,219,251 shares
at June 30, 2000 and December 31, 1999, respectively 178,638 52,192
Additional paid-in capital 99,251,860 38,681,954
Accumulated deficit (56,816,113) (35,930,662)
Deferred compensation (400,498) (1,002,884)
----------- -----------
Total common stock and other stockholders' equity 42,213,887 1,800,600
----------- -----------
Commitments and contingencies (Note 6)
Total liabilities, redeemable convertible
preferred stock and common stock and other
stockholders' equity $53,870,349 $27,162,922
=========== ===========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE FINANCIAL STATEMENTS.
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HEALTHGATE DATA CORP.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Revenue, including revenue from related parties of
$206,805 and $180,938 in 2000 and 1999, respectively $ 3,424,819 $ 519,292
Costs and expenses:
Cost of revenue 1,357,406 512,763
Research and development (excluding stock based
compensation of $7,725 and $91,118 in 2000 and in 1999, respectively) 2,145,937 1,074,471
Sales and marketing (excluding stock based
compensation of $23,176 and $35,796 in 2000 and in 1999, respectively) 6,469,474 1,092,675
General and administrative (excluding stock based
compensation of $58,352 and $68,122 in 2000 and in 1999, respectively) 1,305,235 460,435
Marketing and distribution rights amortization 3,883,000 367,000
Stock based compensation 89,253 193,036
----------- ----------
Total costs and expenses 15,250,305 3,700,380
----------- ----------
Loss from operations (11,825,486) (3,181,088)
Interest and other income (expense), net 401,740 (66,819)
----------- ----------
Net loss (11,423,746) (3,247,907)
Preferred stock dividends and accretion of preferred stock
to redemption value -- 7,900,517
----------- ----------
Net loss attributable to common stockholders $(11,423,746) $(11,148,424)
============ ============
Basic and diluted net loss per share attributable to
common stockholders (0.64) (2.45)
Shares used in computing basic and diluted net loss per
share attributable to common stockholders 17,851,766 4,558,824
Unaudited proforma basic and diluted net loss per share -- (0.28)
Shares used in computing unaudited proforma basic and diluted
net loss per share -- 11,615,847
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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HEALTHGATE DATA CORP.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Revenue, including revenue from related parties of
$405,505 and $399,090 in 2000 and 1999, respectively $ 5,958,085 $ 1,052,097
Costs and expenses:
Cost of revenue 2,460,926 875,607
Research and development (excluding stock based
compensation of $21,631 and $158,318 in 2000 and in 1999, respectively) 3,747,601 1,826,931
Sales and marketing (excluding stock based
compensation of $49,785 and $59,797 in 2000 and in 1999, respectively) 10,110,190 1,645,091
General and administrative (excluding stock based
compensation of $125,793 and $97,880 in 2000 and in 1999, respectively) 2,066,647 746,708
Marketing and distribution rights amortization 8,278,000 367,000
Stock based compensation 197,209 315,995
------------ ------------
Total costs and expenses 26,860,573 5,777,332
------------ ------------
Loss from operations (20,902,488) (4,725,235)
Unamortized debt discount write off (475,821) --
Interest and other income (expense), net 599,046 (224,865)
------------ ------------
Net loss (20,779,263) (4,950,100)
Preferred stock dividends and accretion of preferred stock
to redemption value 106,186 8,049,224
------------ ------------
Net loss attributable to common stockholders $(20,885,449) $(12,999,324)
============ ============
Basic and diluted net loss per share attributable to
common stockholders (1.34) (2.85)
Shares used in computing basic and diluted net loss per
share attributable to common stockholders 15,615,656 4,553,717
Unaudited proforma basic and diluted net loss per share (1.23) (0.48)
Shares used in computing unaudited proforma basic and diluted
net loss per share 16,898,333 10,411,651
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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HEALTHGATE DATA CORP.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
(UNAUDITED)
<TABLE>
<CAPTION>
SIX MONTHS SIX MONTHS
ENDED ENDED
JUNE 30, 2000 JUNE 30, 1999
------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $(20,779,263) $4,950,100)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 10,573,410 2,019,598
Stock based compensation 197,209 315,895
Unamortized debt discount write off 475,821 --
Revenue associated with equity instruments (1,407,492) --
Other (net) 130,774 (4,886)
------------ ----------
Changes in assets and liabilities:
Accounts receivable (2,384,067) (77,256)
Unbilled accounts receivable 29,043 (31,903)
Prepaid advertising (5,964,599) (55,693)
Prepaid expenses and other current assets (817,351) --
Deferred offering costs 2,055,491 --
Other assets (567,743) 16,894
Accounts payable (743,156) (240,440)
Customer deposits (139,534) --
Accrued payroll and other expenses 1,022,852 167,315
Deferred revenue 4,852,818 (151,176)
------------ ----------
Net cash used in operating activities (13,465,787) (2,991,752)
------------ ----------
Cash flows from investing activities:
Purchases of marketable securities (28,631,865) (787,442)
Proceeds from sales and maturities of marketable securities 667,918 --
Purchases of fixed assets (793,578) (650,766)
------------ ----------
Net cash used in investing activities (28,757,525) (1,438,208)
------------ ----------
Cash flows from financing activities:
Payments of capital lease obligations (235,327) 191,658
Payment of long-term note payable (2,000,000) --
Payment of Series E preferred stock dividends (465,358) --
Proceeds from issuance of preferred and common stock,
net of issuance costs 44,607,842 5,847,957
------------ ----------
Net cash provided by (used in) financing activities 41,907,157 6,039,615
Net increase (decrease) in cash and cash equivalents (316,155) 1,609,655
Cash and cash equivalents, beginning of period 578,560 960,831
------------ ----------
Cash and cash equivalents, end of period $ 262,405 $ 2,570,486
============ ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest $ 97,000 $ 229,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
HealthGate entered into capital leases for certain computer equipment
totaling approximately $88,000 and $135,000 during the six months ended June 30,
2000 and 1999, respectively.
On January 1, 2000, the exercise price of a warrant issued to General
Electric Company was adjusted from $9.49 to $3.46 per share pursuant to the
terms of the warrant. As a result, the fair value of the warrant increased by
$1,243,000, which was recorded as marketing and distribution rights.
HEALTHGATE DATA CORP.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
HealthGate Data Corp. ("HealthGate") leverages the Internet to provide
the highest quality e-Health solutions to healthcare institutions, corporations
and websites by providing web technology that can supply up to date
comprehensive content that is reliable, objective, and credible for
professionals, patients, and consumers. The CHOICE-Registered Trademark-
e-Health platform is a dynamic integration of the information and technology
that helps transform each hospital's static web site into an interactive medical
resource for patients and physicians. It provides local hospitals with medical
content from an extensive array of health publishers--in the form of condition
related articles and topical Webzines--allowing each individual organization to
create "e-health communities" by developing closer relationships between its
patients, physicians and local health consumers. The CHOICE e-Health platform
supports the hospital's goal as the dominant brand and credible source of
healthcare information in the local community. The CHOICE e-Health platform
serves as a technology platform for future Web initiatives. HealthGate was
incorporated in the State of Delaware on February 8, 1994.
The accompanying unaudited condensed consolidated interim financial
statements do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial statements, and
should be read in conjunction with the audited financial statements included in
HealthGate's Form 10-K for the year ended December 31, 1999. However, in the
opinion of management, the accompanying interim financial statements have been
prepared on the same basis as the audited financial statements, and include all
adjustments, consisting only of normal recurring adjustments, necessary for a
fair presentation of the results of the interim periods presented. The operating
results for the interim periods presented are not necessarily indicative of the
results expected for the full fiscal years or any future period. Certain amounts
in the prior period condensed consolidated financial statements have been
reclassified to conform to the current period presentation.
2. INITIAL PUBLIC OFFERING AND USE OF PROCEEDS
In January 2000, HealthGate completed an initial public offering of its
common stock and a concurrent private placement of common stock, both at $11.00
per share. HealthGate sold 3,750,000 shares of common stock in the initial
public offering, and 795,454 shares of common stock in the private placement,
for aggregate net proceeds of approximately $44.5 million (after deducting the
public offering's underwriting commissions and the offering expenses). In
connection with the initial public offering, all outstanding shares of
redeemable convertible preferred stock converted into 7,530,556 shares of common
stock.
In February 2000, HealthGate repaid a $2,000,000 long-term note payable
with a portion of the net offering proceeds, and wrote off the remaining
unamortized debt discount of approximately $476,000. In connection with the
conversion of the outstanding preferred stock, HealthGate paid cash for accrued
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dividends on Series E preferred stock totaling $465,000. In addition, HealthGate
used a portion of the net offering proceeds to pay first year fees of $10.3
million under its agreement with Snap (Note 6).
3. ACTUAL AND UNAUDITED PROFORMA NET LOSS PER SHARE
Net loss per share is computed in accordance with Statement of Financial
Accounting Standards (SFAS) No. 128, "Earnings Per Share." Basic net loss per
share is computed by dividing net loss attributable to common stockholders by
the weighted average number of shares of common stock outstanding. Diluted net
loss per share does not differ from basic net loss per share since potential
common shares from conversion of preferred stock and exercise of stock options
and warrants are anti-dilutive for all periods presented. Unaudited proforma
basic and diluted net loss per share have been calculated assuming the
conversion of all outstanding preferred stock into common stock, as if the
shares had converted immediately upon their issuance.
4. REVENUE RECOGNITION
HealthGate derives revenue primarily from (1) Web site development and
hosting arrangements, including CHOICE-Registered Trademark- Web sites and
activePress-TM- services, (2) content syndication arrangements, (3) advertising
and sponsorships, and (4) user subscription and transaction based fees. Revenue
from Web site development and hosting arrangements and content syndication
arrangements is recognized ratably over the terms of the underlying agreement
between HealthGate, the customer, and if applicable, HealthGate's authorized
reseller, which generally ranges from one to three years. For any arrangement in
which HealthGate guarantees advertising commissions to the customer, HealthGate
records fees paid by the customer as a customer deposit, up to the amount of the
applicable guarantee. Payments made to customers under these guarantees are
recorded as reductions of the related customer deposit. The excess of the fee
paid by the customer to HealthGate over guaranteed advertising and sponsorship
commissions, if any, is recognized as revenue ratably over the term of the
underlying agreement. For those arrangements in which HealthGate guarantees
advertising and sponsorship commissions in excess of the fees paid by the
customer, the excess is recorded as expense upon signing the agreement. For
arrangements in which HealthGate sells through a reseller, HealthGate does not
recognize any revenue until an agreement has been finalized between HealthGate,
its customer, and its authorized reseller, and the Web site has been delivered.
Revenue is not recognized in any circumstances unless collectability is deemed
probable.
Advertising revenue is derived principally from short-term advertising
contracts, in which HealthGate typically guarantees a minimum number of
impressions to be delivered to users over a specified period of time for a fixed
fee. Advertising revenue is recognized in the period in which the advertisement
is displayed, at the lesser of the ratio of impressions delivered over total
guaranteed impressions or a straight-line basis over the term of the contract,
provided that no significant HealthGate obligations remain. To the extent that
minimum guaranteed impressions are not met, HealthGate defers recognition of the
corresponding revenue until the guaranteed impressions are delivered.
Sponsorship revenue is recognized ratably over the terms of the applicable
agreements, which generally range from one month to three years. Revenue from
user subscriptions is recognized ratably over the subscription period, and
revenue from transaction-based fees is recognized when the service is provided.
For multi-element service arrangements, each element is accounted for
separately over its respective service period, provided that there is objective
evidence of fair value. If the fair value of each element cannot be objectively
determined, the total value of the arrangement is recognized ratably over the
entire service period. However, for arrangements with multiple service periods
with escalating fees, fees for each service period are recognized ratably over
that period. For arrangements under which HealthGate receives equity instruments
in exchange for services, HealthGate determines the value of the
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arrangement based on the fair value of the equity received or the services
provided, whichever is more readily determinable.
5. LONG-TERM INVESTMENTS
In connection with an e-commerce/sponsorship agreement, HealthGate
received 996,348 shares of Series H preferred stock in Medical SelfCare, Inc.
(SelfCare), a privately held provider of health related products and services.
These shares had a value of approximately $3,487,000 when received, and resulted
in an ownership percentage of approximately 5%. HealthGate has recorded these
shares at cost, subject to periodic reviews for impairment.
6. COMMITMENTS AND CONTINGENCIES
HealthGate has entered into agreements to license content for its
services from various unrelated third parties. Future minimum license payments
under these agreements as of June 30, 2000 totaled approximately $3,061,000,
which includes $500,000 for a content development and distribution agreement
with The New England Journal of Medicine.
In July 1999, HealthGate received a letter alleging that HealthGate's Web
site induces users to infringe a patent held by a company (the "Holder"). In
lieu of pursuing a patent infringement claim against HealthGate, the Holder
offered to provide HealthGate with a license for unlimited use of the patent for
a one-time payment of between $50,000 and $150,000. There has been no recent
activity on this matter and at this time, HealthGate is unable to predict its
outcome.
In October 1999, we entered into a three-year strategic alliance
agreement with Snap! LLC and Xoom.com, Inc. Under this agreement, Snap (now
known as part of NBCi.com) will provide various services to us to promote our
name, our www.healthgate.com Web site, our enterprise-based CHOICE Web sites
and the products and services we offer. In exchange for the services provided
to us by Snap during the first year of the agreement, we paid Snap a minimum
fee of $10,000,000 plus a $250,000 production and content integration fee,
and in November 1999 issued to Snap 500,000 shares of our common stock. The
value of these shares was $4,500,000 at the time of issuance, which was
recorded as prepaid advertising. The value of 250,000 shares is being
amortized as sales and marketing expense on a straight-line basis over the
first year of the agreement, and the value of the other 250,000 shares is
being recognized based on the delivery of advertising impressions in the
first year of the agreement. We have agreed to pay Snap minimum fees of
$15,000,000 in cash in each of the second and third years of the agreement
for services provided to us by Snap in those years. We have also agreed to
pay Snap up to an additional $5,000,000 in the first year, $10,000,000 in the
second year, and $15,000,000 in the third year of the agreement if Snap
delivers more than certain minimum click-throughs to the co-branded
Snap/HealthGate Web site in the respective years. Either Snap or we may
terminate this agreement if the other party commits a material breach. If
Snap terminates the agreement based on material breach by us, including,
non-payment, insolvency, or failure to deliver or timely update content, we
have agreed to continue to pay Snap 55% of all fees payable by us under the
remaining term of the agreement. During the three months and six months ended
June 30, 2000, we recorded expense totaling $4,504,000 and $6,280,000,
respectively, related to this agreement, which includes $1,434,000 and
$1,934,000, respectively, of non-cash amortization expense related to the
stock issued.
Snap and Xoom.com are both wholly-owned by NBC Internet, Inc., which is
owned partially by National Broadcasting Company, a subsidiary of General
Electric Company. General Electric Company is a principal stockholder of
HealthGate.
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7. RELATED PARTY TRANSACTIONS
On January 1, 2000, the exercise price of a warrant issued to General
Electric Company for the purchase of 1,189,800 shares of HealthGate common stock
was adjusted from $9.49 to $3.46 per share. As a result of the exercise price
adjustment, the fair value of the warrant increased by $1,243,000. This increase
was calculated using the Black-Scholes option pricing model, based on an assumed
common stock fair value per share of $9.00, 100% volatility, a term of 4.5 years
and an interest rate of 5.94%. This incremental value was recorded as marketing
and distribution rights, and will be amortized over the remaining term of the
related development and distribution agreement. During the three months ended
June 30, 2000, HealthGate recorded non-cash amortization expense of $2,758,000
related to this warrant. During the six months ended June 30, 2000, HealthGate
recorded non-cash amortization expense of $6,028,000 related to this warrant.
8. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments
and Hedging Activities" (SFAS No. 133). The new standard establishes accounting
and reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS No. 133 is effective for all
fiscal quarters of fiscal years beginning after June 15, 2000. HealthGate does
not expect SFAS No. 133 to have a material effect on its financial position or
results of operations.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" (FIN 44). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. HealthGate
does not expect the application of FIN 44 to have a material impact on its
financial position or results of operations.
In March 2000, the Emerging Issues Task Force reached a final consensus
on Issue No. 00-02, "Accounting for Web Site Development Costs" (EITF 00-02),
which addresses how an entity should account for costs incurred to develop a web
site. In their final consensus, the Task Force concluded that the costs incurred
during the planning stage should be expensed; the costs incurred for activities
during the web application and infrastructure development stage should be
capitalized; and generally the costs incurred during the operation stage should
be expensed. With respect to graphics costs, the Task Force concluded the costs
incurred to create the initial graphics for the web site would be capitalized
and that any subsequent updates would be expensed as incurred, unless the
updates added additional functionality. EITF 00-02 is effective for Web site
development costs incurred for fiscal quarters beginning after June 30, 2000
(including costs incurred for projects in process as of the beginning of the
quarter). HealthGate is currently assessing the impact of EITF 00-02 on its
financial condition and results of operations.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEMENTS
This report on Form 10-Q contains certain statements that are
forward-looking and actual results may differ materially from those contemplated
by the forward-looking statements. These forward-looking statements reflect
management's current expectations, are based on many assumptions and are subject
to certain risks and uncertainties. Factors that might cause or contribute to
such differences are described further below and in the periodic reports and
registration statements we file from time to time with the Securities and
Exchange Commission, including HealthGate's most recent Form 10-K and most
recent registration statement on Form S-1. You are cautioned not to place undue
reliance on the forward-looking statements, which appear elsewhere in this
report on Form 10-Q. We do not intend to update or publicly release any
revisions to the forward-looking statements.
OVERVIEW
HealthGate Data Corp. ("HealthGate") leverages the Internet to provide
the highest quality e-Health solutions to healthcare institutions,
corporations and websites by providing web technology that can supply up to
date comprehensive content that is reliable, objective, and credible for
professionals, patients, and consumers. The CHOICE e-Health platform is a
dynamic integration of the information and technology that helps transform
each hospital's static web site into an interactive medical resource for
patients and physicians. It provides local hospitals with medical content
from an extensive array of health publishers--in the form of condition
related articles and topical Webzines--allowing each individual organization
to create "e-health communities" by developing closer relationships between
its patients, physicians and local health consumers. The CHOICE e-Health
platform supports the hospital's goal as the dominant brand and credible
source of healthcare information in the local community. The CHOICE e-Health
platform serves as a technology platform for future web initiatives.
We distribute our content through a network of proprietary and
affiliated Web sites that comprise the HealthGate Network. The HealthGate
Network includes (1) customized, co-branded CHOICE Web sites for
institutions, principally hospitals and businesses, which carry both
HealthGate's and an enterprise client's name, are designed as a seamless
component of an enterprise client's Web site and, for certain institutions
and businesses, complement the healthcare information, products and services
they already offer or sell through their own Web sites; (2) other third party
co-branded Web sites to which we provide our proprietary and licensed
content; and (3) our own Web sites, www.healthgate.com in the United States
and www.healthgate.co.uk in the United Kingdom. We commercially introduced
our CHOICE Web site product in early 1999 and as of June 30, 2000 had
delivered 220 CHOICE Web sites to hospitals and other enterprise clients,
which includes 127 CHOICE Web sites delivered to HCA-The Healthcare Company
(HCA) formerly known as Columbia/HCA Healthcare Corporation.
Our business model is still in an emerging stage, and revenue and income
potential from our business is unproven. Our limited operating history makes an
evaluation of our business and our prospects difficult. Investors should not use
our past results as a basis to predict future performance. We have incurred net
losses since inception and had an accumulated deficit of approximately $56.8
million as of June 30, 2000. We intend to significantly increase our sales and
marketing efforts and expenditures. We also intend to continue to invest in
content development and licensing and advertising and brand promotion. As a
result, we expect to incur additional losses for the foreseeable future, and we
cannot assure investors that we will ever achieve significant revenue or
profitability or, if either significant revenue or profitability is achieved,
that we will be able to sustain them.
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In October 1999, we entered into a three-year strategic alliance
agreement with Snap! LLC and Xoom.com, Inc. Under this agreement, Snap (now
known as part of NBCi.com) will provide various services to us to promote our
name, our www.healthgate.com Web site, our enterprise-based CHOICE Web sites
and the products and services we offer. In exchange for the services provided
to us by Snap during the first year of the agreement, we paid Snap a minimum
fee of $10,000,000 plus a $250,000 production and content integration fee,
and in November 1999 issued to Snap 500,000 shares of our common stock. The
value of these shares was $4,500,000 million at the time of issuance, which
was recorded as prepaid advertising. The value of 250,000 shares is being
amortized as sales and marketing expense on a straight-line basis over the
first year of the agreement, and the value of the other 250,000 shares is
being recognized based on the delivery of advertising impressions in the
first year of the agreement. We have agreed to pay Snap minimum fees of
$15,000,000 in cash in each of the second and third years of the agreement
for services provided to us by Snap in those years. We have also agreed to
pay Snap up to an additional $5,000,000 in the first year, $10,000,000 in the
second year, and $15,000,000 in the third year of the agreement if Snap
delivers more than certain minimum click-throughs to the co-branded
Snap/HealthGate Web site in the respective years. Either Snap or we may
terminate this agreement if the other party commits a material breach. If
Snap terminates the agreement based on material breach by us, including,
non-payment, insolvency, or failure to deliver or timely update content, we
have agreed to continue to pay Snap 55% of all fees payable by us under the
remaining term of the agreement. During the three months and six months ended
June 30, 2000, we recorded expense totaling $4,504,000 and $6,280,000,
respectively, related to this agreement, which includes $1,434,000 and
$1,934,000, respectively, of non-cash amortization expense related to the
stock issued.
OVERVIEW
We recorded deferred compensation of $2,307,000 in the six months ended
June 30, 1999, representing the difference between the exercise price of stock
options granted and the fair market value of the underlying common stock at the
date of grants. The difference is recorded as a reduction of stockholders'
equity and is being amortized over the vesting period of the applicable options,
typically three years. Of the total deferred compensation amount, $89,000 and
$193,000 was amortized during the three months ended June 30, 2000 and June 30,
1999, respectively and $197,000 and $316,000 was amortized during the six months
ended June 30, 2000 and 1999, respectively. These amounts were recorded as stock
based compensation. We currently expect to amortize the remaining amounts of
deferred compensation as of June 30, 2000 as follows:
July 1, 2000 - December 31, 2000 ...................... $127,000
January 1, 2001 - December 31, 2001 ................... $253,000
January 1, 2002 - June 30, 2002 ....................... $20,000
On January 1, 2000, the exercise price of a warrant issued to General
Electric Company was adjusted from $9.49 to $3.46 per share, pursuant to the
terms of the warrant. As a result of this exercise price adjustment, the fair
value of the warrant increased by $1,243,000. This incremental value was
recorded as marketing and distribution rights, and will be amortized over the
remaining term of the related development and distribution agreement. During
the three months and six months ended June 30, 2000, we recorded amortization
expense of $2,758,000 and $6,028,000 respectively related to this warrant.
During the three months ended June 30 1999, we recorded amortization expense
of $367,000 related to this warrant.
During the three months and six months ended June 30, 2000, we also
recorded amortization expense of $1,125,000 and $2,250,000, respectively,
related to a warrant for the purchase of 1,941,035 shares of our common
stock, which was issued to HCA in 1999 in connection with a marketing and
reseller agreement.
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RESULTS OF OPERATIONS
During the three months and six months ended June 30, 2000 and 1999, we
experienced growth in our business and introduced new services. Therefore, while
comparisons are drawn below, in many instances meaningful conclusions cannot be
drawn from them.
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COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2000 WITH THE THREE MONTHS ENDED
JUNE 30, 1999
REVENUE
Total revenue was $3,425,000 for the three months ended June 30, 2000
compared to $519,000 for the three months ended June 30, 1999, an increase of
$2,906,000 or 560%. Services revenue for the three months ended June 30, 2000
increased to $1,875,000 from $353,000 for the three months ended June 30,
1999, due primarily to an increase in the revenue derived from CHOICE Web
site development, implementation and hosting, including revenue of $875,000
during the quarter ended June 30, 2000 related to our arrangement with HCA,
formerly known as Columbia/HCA Healthcare Corporation. Advertising,
sponsorship and e-commerce revenue increased to $1,550,000 in the three
months ended June 30, 2000 from $166,000 in the three months ended June 30,
1999. This increase was due primarily to sponsorship revenue of $1,111,000 in
the three months ended June 30, 2000, which includes $956,000 related to our
arrangement with Medical SelfCare, Inc. (SelfCare), a privately held provider
of health related products and services. This increase was partially offset
by a decrease in advertising revenue to $54,000 in the three months ended
June 30, 2000 from $78,000 in the three months ended June 30, 1999. In the
three months ended June 30, 2000, three customers represented (63%) of total
revenue, SelfCare (31%), HCA (26%), and Blackwell Science (6%). In the three
months ended June 30, 1999, three customers represented 56% of total revenue,
Blackwell Science (35%), WebMD (14%) and Greenberg News Networks (7%).
COSTS AND EXPENSES
COST OF REVENUE. Cost of revenue consists primarily of costs involved
with providing our Web services, royalties associated with licensed content, and
related equipment and software costs. Cost of revenue increased to $1,357,000 in
the three months ended June 30, 2000 from $513,000 in the three months ended
June 30, 1999, due primarily to higher royalty expenses for licensed content and
depreciation on new equipment purchases. We expect that these expenses will
continue to increase in absolute dollars for the foreseeable future as we
continue to make additional investments in content development and licensing and
new equipment.
RESEARCH AND DEVELOPMENT. Research and development expenses consist
primarily of salaries and related costs associated with the development and
support of our Web-based service offerings. Research and development expenses
increased to $2,146,000 in the three months ended June 30, 2000 from $1,074,000
in the three months ended June 30, 1999, due primarily to salaries and related
costs from the addition of technical and development personnel and consultants.
We expect that research and development expenses will continue to increase in
absolute dollars for the foreseeable future as we hire additional personnel and
increase expenditures to support our Web-based service offerings.
SALES AND MARKETING. Sales and marketing expenses consist primarily of
salaries, commissions, and related costs for sales and marketing personnel, as
well as the cost of advertising, marketing and promotional activities. Sales and
marketing expenses increased to $6,469,000 in the three months ended June 30,
2000 from $1,093,000 in the three months ended June 30, 1999. This increase was
primarily due to expenses associated with the Snap agreement of $4,504,000 in
the three months ended June 30, 2000, which includes $1,434,000 of non-cash
amortization charges associated with the shares of our common stock issued to
Snap. This increase was also due to higher salaries and related costs associated
with newly hired sales and marketing personnel. We expect that our sales and
marketing expenses will continue to increase in absolute dollars as we hire
additional sales and marketing personnel and increase expenditures for
advertising, brand promotion, public relations, and other marketing activities.
GENERAL AND ADMINISTRATIVE. General and administrative expense consists
primarily of salaries and related costs for executive and administrative
personnel, as well as legal, accounting and insurance
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costs. General and administrative expenses increased to $1,305,000 in the three
months ended June 30, 2000 from $460,000 in the three months ended June 30,
1999. This increase was due primarily to salaries and related costs for newly
hired administrative personnel, higher salaries and related costs for existing
personnel, increased professional service fees, and costs associated with being
a public company. We expect that we will incur increased general and
administrative expenses as we continue to hire additional personnel and incur
incremental costs related to the growth of the business, including additional
costs associated with public company obligations.
MARKETING AND DISTRIBUTION RIGHTS AMORTIZATION. During the three months
ended June 30, 2000, non-cash amortization expense of $2,758,000 and $1,125,000
was recorded in connection with the warrants issued to General Electric Company
and HCA, respectively. During the three months ended June 30, 1999, non-cash
amortization expense of $367,000 was recorded related to HCA.
STOCK BASED COMPENSATION. During the three months ended June 30, 2000 and
1999, we recorded stock based compensation expense totaling $89,000 and
$193,000, respectively. The remaining deferred compensation balance at June 30,
2000 is being amortized over the vesting period of the individual options. See
further discussion under "Overview," above.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net, includes interest income of
$440,000 and $41,000 and interest expense of ($38,000) and ($108,000) for the
three months ended June 30, 2000 and 1999, respectively. The increase in
interest income was primarily due to interest earned on investments made with
the net proceeds from our January 2000 initial public offering and concurrent
private placement. The decrease in interest expense was due primarily to the
repayment of a $2,000,000 long-term note payable in February 2000. Interest
expense for the three months ended June 30, 1999 included debt discount and
issuance cost amortization totaling $17,000 related to the long-term note
payable.
INCOME TAXES
We have incurred significant losses for all periods from inception
through June 30, 2000. A valuation allowance has been recorded for the entire
deferred tax asset as a result of uncertainties regarding the utilization of the
asset due to our lack of earnings history.
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COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2000 WITH THE SIX MONTHS ENDED
JUNE 30, 1999
REVENUE
Total revenue was $5,958,000 for the six months ended June 30, 2000
compared to $1,052,000 for the six months ended June 30, 1999, an increase of
$4,906,000 or 466%. Services revenue for the six months ended June 30, 2000
increased to $3,456,000 from $740,000 for the six months ended June 30, 1999,
due primarily to an increase in the revenue derived from CHOICE Web site
development, implementation and hosting, including revenue of $1,750,000 in 2000
related to our arrangement with HCA. Advertising, sponsorship and e-commerce
revenue increased to $2,502,000 in six months ended June 30, 2000 from $312,000
in the six months ended June 30, 1999. This increase during 2000 was due
primarily to sponsorship revenue of $1,739,000, which includes $1,407,000
related to our arrangement with SelfCare. This increase was also due to an
increase in advertising revenue to $659,000 in six months ended June 30, 2000
from $124,000 in the six months ended June 30, 1999. In the six months ended
June 30, 2000, three customers represented 64% of total revenue, HCA (29%),
SelfCare (28%), and Blackwell Science (7%). In the six months ended June 30,
1999, three customers represented 58% of total revenue, Blackwell Science (38%),
WebMD (13%) and Greenberg News Network (7%).
COSTS AND EXPENSES
COST OF REVENUE. Cost of revenue increased to $2,461,000 in the six
months ended June 30, 2000 from $876,000 in the six months ended June 30, 1999,
due primarily to higher royalty expenses for licensed content and depreciation
on new equipment purchases.
RESEARCH AND DEVELOPMENT. Research and development expenses increased to
$3,748,000 in the six months ended June 30, 2000 from $1,827,000 in the six
months ended June 30, 1999, due primarily to salaries and related costs from the
addition of technical and development personnel and consultants.
SALES AND MARKETING. Sales and marketing expenses increased to
$10,110,000 in the six months ended June 30, 2000 from $1,645,000 in the six
months ended June 30, 1999. This increase was primarily due to expenses
associated with the Snap agreement of $6,280,000 in 2000, which includes
$1,934,000 of non-cash amortization charges associated with the shares of our
common stock issued to Snap. This increase was also due to higher salaries and
related costs associated with newly hired sales and marketing personnel.
GENERAL AND ADMINISTRATIVE. General and administrative expenses increased
to $2,067,000 in the six months ended June 30, 2000 from $747,000 in the six
months ended June 30, 1999. This increase was due primarily to salaries and
related costs for newly hired administrative personnel, higher salaries and
related costs for existing personnel, increased professional service fees, and
costs associated with being a public company.
MARKETING AND DISTRIBUTION RIGHTS AMORTIZATION. During the six months
ended June 30, 2000, non-cash amortization expense of $6,028,000 and $2,250,000
was recorded in connection with the warrants issued to General Electric Company
and HCA, respectively. During the six months ended June 30, 1999, non-cash
amortization expense of $367,000 was recorded related to General Electric
Company.
STOCK BASED COMPENSATION. During the six months ended June 30, 2000 and
1999, we recorded stock based compensation expense totaling $197,000 and
$316,000 respectively. The remaining deferred compensation balance at June 30,
2000 is being amortized over the vesting period of the individual options. See
further discussion under "Overview," above.
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UNAMORTIZED DEBT DISCOUNT WRITE OFF
In February 2000, HealthGate repaid its $2,000,000 long-term note
payable, and wrote off the remaining unamortized debt discount of approximately
$476,000.
INTEREST AND OTHER INCOME (EXPENSE), NET
Interest and other income (expense), net includes interest income of
$706,000 and $45,000 and interest expense of ($107,000) and ($270,000) for the
six months ended June 30, 2000 and 1999, respectively. The increase in interest
income was primarily due to interest earned on investments made with the net
proceeds from our January 2000 initial public offering and concurrent private
placement. The decrease in interest expense was due primarily to the repayment
of a $2,000,000 long-term note payable in February 2000. Interest expense for
the six months ended June 30, 1999 also included debt discount and issuance cost
amortization totaling $42,000 related to the long-term note payable.
INCOME TAXES
We have incurred significant losses for all periods from inception
through June 30, 2000. A valuation allowance has been recorded for the entire
deferred tax asset as a result of uncertainties regarding the utilization of the
asset due to our lack of earnings history.
LIQUIDITY AND CAPITAL RESOURCES
Since inception and prior to our January 2000 initial public offering and
concurrent private sale of common stock, we have financed our operations
primarily by the private placement of debt and equity securities. In January
2000, we completed the initial public offering of our common stock and a
concurrent private placement of common stock and realized net proceeds of
approximately $44.5 million. In addition, in connection with the conversion of
then outstanding preferred stock, we paid cash for accrued dividends on Series E
preferred stock totaling $465,000. We have generally financed computer and
related hardware needs through equipment lease financing arrangements. In
January 2000 in connection with our initial public offering, all outstanding
preferred stock was converted into 7,530,556 shares of common stock. A portion
of our net proceeds was used to repay a $2,000,000 long-term note payable, which
was secured by substantially all of our tangible and intangible assets. We
entered into capital leases for computer equipment totaling $88,000 and $135,000
during the six months ended June 30, 2000 and 1999, respectively. As of June 30,
2000, we had approximately $262,000 of cash and cash equivalents and $24,477,000
in marketable securities.
For the six months ended June 30, 2000, the cash used in operations
was $13,466,000. Cash used during this period was primarily due to the net
loss of $20,779,000, offset partially by depreciation and amortization of
$10,573,000, non-cash stock-based compensation expense of $197,000, write off
of unamortized debt discount of $476,000 related to the repayment of a
long-term note payable, revenue associated with equity instruments of
$1,407,000, an increase of $2,384,000 in accounts receivable, a decrease of
$29,000 in unbilled accounts receivable, an increase of $5,965,000 in prepaid
advertising, an increase of $817,000 in prepaid expenses and other current
assets, a decrease of $2,055,000 in deferred offering costs related to our
initial public offering, an increase of $568,000 in other assets, a decrease
of $743,000 in accounts payable, a decrease of $140,000 in customer deposits
for CHOICE Web sites, an increase of $1,023,000 in accrued payroll and
accrued expenses and an increase of $4,853,000 in deferred revenue.
For the six months ended June 30, 1999, the cash used in operations was
$2,992,000. Cash used during this period was primarily due to the net loss of
$4,950,000, offset partially by depreciation and
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amortization of $2,020,000, non-cash stock based compensation expense of
$316,000, an increase of $77,000 in accounts receivable, an increase of $32,000
in unbilled accounts receivable, an increase of $56,000 in prepaid expenses and
other current assets, a decrease in other assets of $17,000, a decrease of
$240,000 in accounts payable, an increase of $167,000 in accrued payroll and
other expenses and a decrease of $151,000 in deferred revenue. Increases in
operating assets and liabilities were primarily due to the growth of business
and operations during the first six months of 2000 and 1999.
Cash used for investing activities consisted primarily of marketable
securities purchases of $28,632,000 in the six months ended June 30, 2000,
proceeds from sales and maturities of marketable securities of $668,000 in the
six months ended June 30, 2000, and property and equipment purchases of $794,000
and $651,000 in the six months ended June 30, 2000 and 1999, respectively.
During six months ended June 30, 2000 and 1999, we also entered into capital
leases for computer equipment totaling $88,000 and $135,000, respectively.
At June 30, 2000, we had outstanding commitments under capital leases of
$880,000 and under operating leases for equipment and office space of
$4,664,000. In addition, future minimum payments under content license
agreements totaled $3,061,000 at June 30, 2000. We expect our commitments under
content licensing to increase as we expand our content libraries.
In October 1999, we entered into a three-year strategic alliance
agreement with Snap! LLC and Xoom.com Inc. In connection with this agreement,
in November 1999 we issued 500,000 shares of our common stock to Snap (now
known as part of NBCi.com), and in February 2000 we paid cash of $10,250,000
related to the first year fees due under the arrangement. We have agreed to
pay Snap minimum fees of $15,000,000 in each of the second and third years of
the agreement for the services provided to us by Snap in those years. We have
also agreed to pay Snap up to an additional $5,000,000 in the first year,
$10,000,000 in the second year and $15,000,000 in the third year of the
agreement if Snap delivers more than certain minimum click-throughs to the
co-branded Snap/HealthGate Web site in the respective years. See further
discussion under "Overview," above.
Our future liquidity and capital requirements will depend upon
numerous factors, including the success of our existing and new application
and service offerings and competing technological and market developments. We
may need to raise additional funds to support expansion, develop new or
enhanced applications and services, respond to competitive pressures, acquire
complementary businesses or technologies or take advantage of unanticipated
opportunities. We may be required to raise additional funds through public or
private financing, strategic relationships or other arrangements. There can
be no assurance that additional funding, if needed, will be available on
terms acceptable to us, or at all.
YEAR 2000 COMPLIANCE READINESS DISCLOSURE
In late 1999, we completed our planning and testing of systems to become
Year 2000 ready. We have not experienced any significant disruptions in critical
information technology and non-information technology systems or any significant
Year 2000 related problems. To date, we have not incurred any material costs in
identifying or evaluating Year 2000 compliance issues, planning or testing. We
presently do not anticipate that future expenditures will be material. We are
not aware of any material problems resulting from Year 2000 issues, either with
our products, our internal systems, or the products and services of third
parties. We will continue to monitor our products and systems and those of our
suppliers and vendors throughout the Year 2000 for any latent Year 2000 matters
that may arise.
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RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No.
133). The new standard establishes accounting and reporting standards for
derivative instruments, including certain derivative instruments embedded in
other contracts (collectively referred to as derivatives), and for hedging
activities. SFAS No. 133 is effective for all fiscal quarters of fiscal years
beginning after June 15, 2000. We do not expect SFAS No. 133 to have a material
effect on our financial position or results of operations.
In March 2000, the Financial Accounting Standard Board issued FASB
Interpretation No. 44, "Accounting for Certain Transactions Involving Stock
Compensation - an interpretation of APB Opinion No. 25" (FIN 44). FIN 44
clarifies the application of APB Opinion No. 25 and among other issues clarifies
the following: the definition of an employee for purposes of applying APB
Opinion No. 25; the criteria for determining whether a plan qualifies as a
non-compensatory plan; the accounting consequence of various modifications to
the terms of previously fixed stock options or awards; and the accounting for an
exchange of stock compensation awards in a business combination. FIN 44 is
effective July 1, 2000, but certain conclusions in FIN 44 cover specific events
that occurred after either December 15, 1998 or January 12, 2000. We do not
expect the application of FIN 44 to have a material impact on our financial
position or results of operations.
In March 2000, the Emerging Issues Task Force reached a final consensus
on Issue No. 00-02, "Accounting for Web Site Development Costs" (EITF 00-02),
which addresses how an entity should account for costs incurred to develop a web
site. In their final consensus, the Task Force concluded that the costs incurred
during the planning stage should be expensed; the costs incurred for activities
during the web application and infrastructure development stage should be
capitalized; and generally the costs incurred during the operation stage should
be expensed. With respect to graphics costs, the Task Force concluded the costs
incurred to create the initial graphics for the web site would be capitalized
and that any subsequent updates would be expensed as incurred, unless the
updates added additional functionality. EITF 00-02 is effective for Web site
development costs incurred for fiscal quarters beginning after June 30, 2000
(including costs incurred for projects in process as of the beginning of the
quarter). We are currently assessing the impact of EITF 00-02 on our financial
condition and results of operations.
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RISKS RELATED TO OUR BUSINESS
HealthGate operates in a highly competitive and rapidly evolving Internet
industry. The risks and uncertainties described below are some of those that we
currently believe may affect our company.
OUR QUARTERLY OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY, WHICH MAY
AFFECT THE MARKET PRICE OF OUR COMMON STOCK IN A MANNER UNRELATED TO OUR
LONG-TERM PERFORMANCE. We expect our quarterly revenue, expenses and operating
results to fluctuate significantly in the future, which could affect the market
price of our common stock in a manner unrelated to our long-term operating
performance. Quarterly fluctuations could result from a number of factors,
including:
- The amount and timing of costs to expand our operations;
- Addition of new content providers or changes in our relationships with
our most important content providers, which may require more expenditures
in the early stages of these relationships;
- The level of usage of the HealthGate Network which could impact, among
other things, recognition of revenue in connection with advertising and
sponsorship sales that are tied to the number of times advertisement or
sponsorship banners are displayed to users;
- Seasonality of spending by the advertising industry, which is generally
lower in the first and third calendar quarters; and
- The amount and timing of expenses required to integrate operations and
technologies from acquisitions, joint ventures or other business
combinations or investments.
We expect to increase the level of activity and spending in our
operations, particularly in sales and marketing and research and development. We
base our expense levels in part upon our expectations concerning future revenue
and these expense levels are predominantly fixed in the short-term. If we have
lower revenue than expected, we may not be able to reduce our spending in the
short-term in response. Any shortfall in revenue would have a direct impact on
our results of operations. In this event, the price of our common stock may
fall.
OUR BUSINESS PROSPECTS WILL SUFFER IF WE ARE NOT ABLE TO SUCCESSFULLY
BUILD RECOGNITION FOR THE HEALTHGATE BRAND. We believe that increasing
awareness of the HealthGate brand is important to our ability to attract
additional users, customers, advertisers, sponsors and strategic partners. We
believe the importance of brand recognition will increase in the future as
the number of Web sites providing healthcare information products and
services increases. We plan to allocate significant resources to develop and
build brand recognition by expanding the reach of the HealthGate Network,
primarily through increasing the number of CHOICE Web sites, promoting these
CHOICE Web sites and our own Web sites and through our alliance with Snap and
Xoom.com (both now part of NBCi.com). However, we cannot assure you that our
efforts to build brand awareness will be successful.
WE FACE INTENSE COMPETITION IN PROVIDING OUR INTERNET-BASED HEALTHCARE
INFORMATION PRODUCTS AND SERVICES AND WE MAY NOT BE ABLE TO COMPETE EFFECTIVELY.
The market for Internet services and products is relatively new, intensely
competitive and rapidly changing. Since the Internet's commercialization in the
early 1990s, the number of Web sites on the Internet competing for users'
attention has proliferated with no substantial barriers to entry. There are more
than 15,000 Web sites offering users healthcare content, products and services,
and we expect that competition will continue to grow. With low barriers to entry
in a relatively new and rapidly evolving industry, the types of entities against
which we compete, directly and indirectly, for subscribers, consumers, content
and service providers, advertisers, sponsors and
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acquisition candidates ranges from traditional healthcare print publishers and
distributors, to health focused and general Web sites, to large healthcare
information companies.
Many of our competitors enjoy significant competitive advantages
including: greater resources that can be devoted to the development, promotion
and sale of their products and services, longer operating histories, greater
brand recognition, and larger customer bases.
We also compete with other Web sites, traditional print media and other
sources of healthcare information for a share of total advertising budgets. If
advertisers perceive the Internet or the HealthGate Network to be limited or
ineffective advertising media, they may be reluctant to devote a portion of
their advertising budget to Internet advertising or to advertising on the
HealthGate Network.
THE SUCCESS OF OUR BUSINESS WILL DEPEND ON OUR ABILITY TO SELL A
SUBSTANTIAL NUMBER OF CO-BRANDED CHOICE WEB SITES. A key element of our strategy
is to expand the HealthGate Network by establishing co-branded CHOICE Web sites.
We commercially introduced our CHOICE Web site product in early 1999 and as of
June 30, 2000 had delivered 220 CHOICE Web sites to enterprise clients,
including 127 to HCA.
Our CHOICE product is relatively new and unproven and we cannot assure
you that we will be able to sell additional CHOICE products without lowering
the price of the product. Our CHOICE product is an important part of our
business model and if we are unable to sell a substantial number of CHOICE
Web sites, our business prospects, results of operations and the market price
of our common stock could be materially adversely affected. We cannot
guarantee that we will be successful in selling advertising or sponsorship on
these or additional sites in the future.
OUR BUSINESS IS EXPANDING RAPIDLY AND OUR BUSINESS PROSPECTS MAY
SUFFER IF WE ARE NOT ABLE TO EFFECTIVELY MANAGE THE GROWTH OF OUR OPERATIONS
AND SUCCESSFULLY ATTRACT AND RETAIN KEY PERSONNEL. Since we began our
business in 1994, we have significantly expanded our operations over a short
period of time. We have grown from three employees at the end of 1994 to 106
full-time employees as of June 30, 2000, and we expect to add a significant
number of additional personnel in the near future. During the second quarter
of 2000, Mark Israel, our Chief Technology Officer, and Mary Miller, our
Chief Financial Officer, resigned from HealthGate to pursue other interests.
Ronald Rinaldi, a 20-year software industry veteran and our Vice President of
Product Development, will assume some of the Chief Technology Officer's
responsibilities and Mark Conlon, a licensed Certified Public Accountant, who
has been a consultant to our finance department, will on an interim basis, be
our Accounting Officer overseeing the company's financial operations. We have
initiated a search to identify, evaluate, and select a new CFO. Several
members of our senior management joined us in 2000, including, John DeMeo,
Vice President of Product Management and Business Development, Joel Baron,
Vice President of Publishing, and Gary Abrahams, Vice President of Marketing.
We believe the successful integration of our senior management will be
critical to our ability to effectively manage our growth. Our rapid growth
has placed a substantial strain on our management, operational and financial
resources and systems. Our future success will depend in large part on our
ability to implement, improve and effectively utilize our operational,
management, marketing and financial resources and systems and train and
manage our employees. We cannot guarantee that our management team will be
able to effectively manage the growth of our operations or that our systems,
procedures and controls will be adequate to support our expanding operations.
Our future success also depends on our ability to identify, attract,
hire, train, retain and motivate highly skilled technical, managerial,
editorial, marketing and customer service personnel. Competition for highly
skilled personnel is intense. In particular, skilled technical employees are
highly sought after in the Boston area, and we cannot guarantee that we will
be able to attract or retain these employees.
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WE MAY NOT BE ABLE TO SUCCESSFULLY IMPLEMENT OUR GROWTH AND ACQUISITION
STRATEGY. Key elements of our growth strategy include making acquisitions of, or
significant investments in, complementary companies, products or technologies to
increase our content libraries, technological capabilities and customer base and
entering into other strategic affiliations. To date, we have not made any major
acquisitions or investments. For our acquisition strategy to be successful, we
will need to identify content sources, technologies and businesses that are
complementary to ours, integrate disparate technologies and corporate cultures
and possibly manage a geographically dispersed company. We may also lose key
employees while integrating any new companies. For these reasons, we may not be
successful in integrating any acquired businesses or technologies and may not
achieve anticipated revenue and cost benefits. Simultaneously pursuing
acquisitions, strategic affiliations and other elements of our growth strategy
could be expensive, time consuming and may strain our resources. If we are not
successful in implementing our growth and acquisition strategy, our business,
results of operations and the market price of our common stock could be
adversely affected.
In addition, we may be required to amortize significant amounts of
goodwill and other intangible assets in connection with future acquisitions,
which could adversely affect our results of operations and the market price
of our common stock.
THE SUCCESS OF OUR BUSINESS WILL DEPEND ON OUR ABILITY TO SELL
ADVERTISING ON THE HEALTHGATE NETWORK. We derived approximately 40% of our
revenue in the six months ended June 30, 2000 from the sale of general and
targeted banner advertising and sponsorships of discrete topic areas on the
HealthGate Network. Under our sponsorship arrangements, a sponsor's name or a
message selected by the sponsor is included on each page of the topic area
together with a click-through link to the sponsor's Web site.
Our future success depends on our ability to generate and increase
revenue from advertising and sponsorship, which will depend on a number of
factors, including:
- The development of the Internet as an advertising medium;
- The amount of traffic on the HealthGate Network and the number of
registered and unique users of our content; and
- Our ability to achieve and demonstrate registered and unique user
demographic characteristics that are attractive to sponsors and
advertisers.
THE PERFORMANCE OF OUR WEB SITES AND COMPUTER SYSTEMS IS CRITICAL TO OUR
BUSINESS AND OUR BUSINESS WILL SUFFER IF WE EXPERIENCE SYSTEM FAILURES. The
performance of our Web sites and computer systems is critical to our reputation
and ability to attract and retain users, customers, advertisers and subscribers.
We provide products and services based on sophisticated computer and
telecommunications software and systems, which often experience development
delays and may contain undetected errors or failures when introduced into our
existing systems. Although we have only experienced one minor unscheduled
service interruption of approximately four hours since the beginning of 1998, we
cannot guarantee that we will not experience more significant service
interruptions in the future. We are also dependent upon Web browsers and
Internet service providers to provide Internet users access to our Web sites.
Many of them have experienced significant outages in the past and could
experience outages, delays and other difficulties in the future due to system
failures. We also depend on certain information providers to deliver information
and data feeds to us on a timely basis. Our Web sites could experience
disruptions or interruptions in service due to the failure or delay in the
transmission or receipt of this information. System errors or failures that
cause a significant interruption in the availability of our content or an
increase in response time on our Web sites could cause us to lose potential or
existing users, customers, advertisers or subscribers and could result in damage
to our reputation and brand name or a decline in our stock price.
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We have an Internet Data Center Services Agreement with Exodus
Communications, Inc. to house all of our central computer facility servers at
Exodus's Internet Data Center in Waltham, Massachusetts. We do not presently
maintain fully redundant systems at separate locations, so our operations
depend on Exodus's ability to protect the systems in its data center against
damage from fire, power loss, water damage, telecommunications failure,
vandalism and similar events. Although Exodus provides comprehensive
facilities management services, including human and technical monitoring of
all production servers, Exodus does not guarantee that our Internet access
will be uninterrupted, error-free or secure. We have also developed a
disaster recovery plan to respond to system failures. We cannot guarantee
that our disaster recovery plan is capable of being implemented successfully.
We cannot guarantee that our insurance will be adequate to compensate us for
all losses that may occur as a result of any system failure.
WE RETAIN CONFIDENTIAL CUSTOMER INFORMATION IN OUR DATABASE AND IF WE
FAIL TO PROTECT THIS INFORMATION AGAINST SECURITY BREACHES WE MAY LOSE
CUSTOMERS. We retain confidential customer information in our database.
Therefore, it is critical that our facilities and infrastructure remain secure
and that they are perceived by consumers to be secure. Despite the
implementation of security measures, our infrastructure may be vulnerable to
physical break-ins, computer viruses, programming errors or similar disruptive
problems. A material security breach could damage our reputation or result in
liability to us. We believe that maintaining the trust of our customers is
important for us to be able to grow our business and, therefore, we believe that
any damage to our reputation or liability arising from one or more security
breaches could adversely affect our business, results of operations and the
market price of our common stock.
OUR BUSINESS PROSPECTS MAY SUFFER IF WE ARE NOT ABLE TO KEEP UP WITH THE
RAPID TECHNOLOGICAL DEVELOPMENTS IN THE INTERNET INDUSTRY. The Internet industry
is characterized by rapid technological developments, evolving industry
standards, changes in user and customer requirements and frequent new service
and product introductions and enhancements. The introduction of new technology
or the emergence of new industry standards and practices could render our
systems and, in turn, our products and services, obsolete and unmarketable or
require us to make significant unanticipated investments in research and
development to upgrade our systems in order to maintain the marketability of our
products. To be successful, we must continue to license or develop leading
technology, enhance our existing products and services and respond to emerging
industry standards and practices on a timely and cost-effective basis. If we are
unable to successfully respond to these developments, particularly in light of
the rapid technological changes in the Internet industry generally and the
highly competitive market in which we operate, our business, results of
operations and the market price of our common stock could be adversely affected.
WE MAY BE SUBJECT TO LIABILITY FOR INFORMATION RETRIEVED FROM OUR WEB
SITE. As a publisher and distributor of online information, we may be subject to
third party claims for defamation, negligence, copyright or trademark
infringement or other theories based on the nature and content of information
supplied on our Web sites. We could also become liable if confidential
information is disclosed inappropriately. These types of claims have been
brought, sometimes successfully, against online service providers in the past.
We could be subject to liability with respect to content that may be accessible
through our Web sites or third party Web sites linked from our Web sites. For
example, claims could be made against us if material deemed inappropriate for
viewing by children could be accessed through our Web sites or if a
professional, patient or consumer relies on healthcare information accessed
through our Web sites to their detriment. Even if any of the kinds of claims
described above do not result in liability to us, we could incur significant
costs in investigating and defending against them and in implementing measures
to reduce our exposure to this kind of liability. Our insurance may not cover
potential claims of this type or may not be adequate to cover all costs incurred
in defense of potential claims or to indemnify us for all liability that may be
imposed.
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WE DEPEND ON OUR CONTENT PROVIDERS, AS THE SUCCESS OF OUR BUSINESS
DEPENDS ON OUR ABILITY TO PROVIDE A COMPREHENSIVE LIBRARY OF HEALTHCARE
INFORMATION. With the exception of our Healthy Living series of Webzines, we
license all of our content from third parties. With a few exceptions, these
licenses are generally non-exclusive, have an initial term of one year and
are renewable. In addition, a significant number of these licenses permit
cancellation by the content provider upon 30 to 90 days notice. We cannot
guarantee that we will be able to continue to license our present content or
sufficient additional content to provide a diverse and comprehensive library.
In the future, we may not be able to license content at reasonable cost. In
addition, one or more of our publishers or other content providers may grant
one of our competitors an exclusive arrangement with respect to a significant
database or periodical, or elect to compete directly against us by making its
content exclusively available through its own Web site. Presently, we believe
it would be difficult to replace the "WEEKLY BRIEFINGS" FROM THE NEW ENGLAND
JOURNAL OF MEDICINE and the journals made available by Blackwell Science with
other journals of the same reputation. These sources are committed to us
through April 2002 and December 2001, respectively, but if either of them
chooses not to renew the agreements they have with us, our business could be
adversely affected because the quality of our content is important in
attracting online users, advertisers and CHOICE customers.
THE MAJORITY OF OUR REVENUE HAS HISTORICALLY BEEN DERIVED FROM A FEW
CUSTOMERS AND THE LOSS OF ANY OF THESE CUSTOMERS COULD ADVERSELY AFFECT OUR
BUSINESS. Historically, we have generated a substantial portion of our revenue
from a few customers. For the six months ended June 30, 2000, three customers,
HCA (one of our warrant holders), SelfCare, and Blackwell Science (also a
stockholder), accounted for 29%, 28%, and 7%, respectively, of our total
revenue. We expect to continue to generate a substantial portion of our revenue
in the near future from these customers and the loss of any of them could
adversely affect our business.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE ARE NOT ABLE TO EFFECTIVELY
PROTECT OUR INTELLECTUAL PROPERTY RIGHTS. We regard our trademarks, service
marks, copyrights, trade secrets and similar intellectual property as important
to our business, and we rely upon trademark and copyright law, trade secret
protection and confidentiality and/or license agreements with our employees,
customers, strategic partners and others to protect our rights in this property.
We have registered our "HealthGate," "HealthGate Data," "CHOICE," "MedGate,"
"ReADER" and our HealthGate logo trademarks in the U.S. and we have pending a
U.S. application for our "activePress" trademark. Effective trademark, copyright
and trade secret protection may not be available in every country in which our
products and services are distributed or made available through the Internet.
Therefore, we cannot guarantee that the steps we have taken to protect our
proprietary rights will be adequate to prevent infringement or misappropriation
by third parties or will be adequate under the laws of some foreign countries,
which may not protect HealthGate's proprietary rights to the same extent, as do
the laws of the United States.
Although we believe that our proprietary rights do not infringe on the
intellectual property rights of others, other parties may assert infringement
claims against us or claim that we have violated a patent or infringed a
copyright, trademark or other proprietary rights belonging to them. These
claims, even if they are without merit, could result in our spending a
significant amount of time and money to dispose of them. In July 1999, we
received a letter from TechSearch L.L.C. claiming ownership of a patent that
claims exclusive rights to all electronic methods of on-demand remote
retrieval of graphic and audiovisual information. The letter asserted that
the use of our Web site, www.healthgate.com, infringes the patent. In the
letter, TechSearch offered to license the patent perpetually and
retroactively to us for a one-time fee of between $50,000 and $150,000
depending upon the number of "hits" per day on our web site. There has been
no recent activity on this matter and at this time, we are unable to predict
its outcome.
OUR BUSINESS MAY BE ADVERSELY AFFECTED IF WE ARE UNABLE TO CONTINUE TO
LICENSE SOFTWARE THAT IS NECESSARY FOR THE DEVELOPMENT OF PRODUCT AND SERVICE
ENHANCEMENTS. We rely on a variety of technologies
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that are licensed from third parties, including our database software and
Internet server software, which is used in our Web sites to perform key
functions. These third party licenses may not be available to us on commercially
reasonable terms in the future. The loss of or inability to maintain any of
these licenses could delay the introduction of software enhancements,
interactive tools and other features until equivalent technology could be
licensed or developed.
OUR BUSINESS PROSPECTS ARE UNCERTAIN, AS THE MARKET FOR ONLINE HEALTHCARE
INFORMATION AND SERVICES IS STILL DEVELOPING. The online healthcare information
market is in the early stages of development, is rapidly evolving and is
characterized by an increasing number of market entrants who have introduced
competing products and services. As is typical in the case of a new and rapidly
evolving industry, demand and market acceptance for recently introduced products
and services are subject to a high level of uncertainty and risk. Therefore, it
is difficult to predict with any assurance the size of the market for online
healthcare information or its growth rate. We cannot guarantee that physicians,
hospitals and other healthcare providers and consumers will view obtaining
healthcare information through the Internet as an acceptable way to address
their healthcare information needs.
OUR BUSINESS PROSPECTS DEPEND ON THE USE OF THE INTERNET AS AN
ADVERTISING MEDIUM. Most potential advertisers and their advertising agencies
have only limited experience with the Internet as an advertising medium and have
not devoted a significant portion of their advertising expenditures to
Internet-based advertising. Therefore, it is too early to know whether
advertisers or advertising agencies will be persuaded to allocate portions of
their budgets to Internet-based advertising or, if so persuaded, whether they
will find Internet-based advertising to be an effective means of promoting their
products and services relative to traditional print and broadcast media.
Acceptance of the Internet among advertisers and advertising agencies will
depend, to a large extent, on the level of use of the Internet by consumers and
upon growth in the commercial use of the Internet, neither of which has yet been
proven. Additionally, there is intense competition for advertising revenue on
high-traffic Web sites, which has resulted in significant price competition.
GOVERNMENT REGULATION OF THE INTERNET MAY RESULT IN INCREASED COSTS OF
USING THE INTERNET, WHICH COULD ADVERSELY AFFECT OUR BUSINESS. Currently, there
are a number of laws that regulate communications or commerce on the Internet.
Several telecommunications carriers have petitioned the Federal Communications
Commission to regulate Internet service providers and online service providers
in a manner similar to long distance telephone carriers and to impose access
fees on these providers. Regulation of this type, if imposed, could
substantially increase the cost of communicating on the Internet and adversely
affect our business, results of operations and the market price of our common
stock.
PRIVACY-RELATED REGULATION OF THE INTERNET COULD ADVERSELY AFFECT OUR
BUSINESS. Internet user privacy has become an issue both in the United States
and abroad. The Federal Trade Commission and government agencies in some states
and countries have been investigating certain Internet companies regarding their
use of personal information. Any regulations imposed to protect the privacy of
Internet users may affect the way in which we currently collect and use personal
information.
The European Union (EU) has adopted a directive that imposes restrictions
on the collection and use of personal data, guaranteeing citizens of EU member
states certain rights, including the right of access to their data, the right to
know where the data originated and the right to recourse in the event of
unlawful processing. We cannot assure you that this directive will not adversely
affect our activities in EU member states.
As is typical with most Web sites, our Web sites place certain
information (cookies) on a user's hard drive without the user's knowledge or
consent. Although we do not currently do so, this technology enables Web site
operators to target specific users with a particular advertisement and to limit
the frequency with which a user is shown a particular advertisement. Some
currently available Internet
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browsers allow users to modify their browser settings to remove cookies at any
time or to prevent cookies from being stored on their hard drives. In addition,
some Internet commentators, privacy advocates and governmental bodies have
suggested limiting or eliminating the use of cookies. If this technology is
reduced or limited, the Internet may become less attractive to advertisers and
sponsors.
A feature of our own Web sites includes the retention of personal
information about our users. We have a stringent privacy policy covering this
information. However, if third parties were able to penetrate our network
security and gain access to, or otherwise misappropriate, our users' personal
information, we could be subject to liability. Such liability could include
claims for misuses of personal information, such as for unauthorized marketing
purposes or unauthorized use of credit cards. These claims could result in
litigation, our involvement in which, regardless of the outcome, could require
us to expend significant financial resources. We could incur additional expenses
if new regulations regarding the use of personal information are introduced or
if any regulator chooses to investigate our privacy practices.
TAX TREATMENT OF COMPANIES ENGAGED IN INTERNET COMMERCE MAY ADVERSELY
AFFECT THE INTERNET INDUSTRY AND OUR COMPANY. Tax authorities on the federal,
state, and local levels are currently reviewing the appropriate tax treatment of
companies engaged in Internet commerce. New state tax regulations may subject us
to additional state sales, income and other taxes. A recently passed federal law
places a temporary moratorium on certain types of taxation on Internet commerce.
We cannot predict the effect of current attempts at taxing or regulating
commerce over the Internet. It is also possible that the governments of other
states and foreign countries also might attempt to regulate our transmission of
content on our Web sites and throughout the rest of the HealthGate Network. Any
new legislation, regulation or application or interpretation of existing laws
would likely increase our cost of doing business and may adversely affect our
results of operations and the market price of our common stock.
WE MAY BE SUBJECT TO LIABILITY FOR CLAIMS THAT THE DISTRIBUTION OF
MEDICAL INFORMATION TO CONSUMERS CONSTITUTES PRACTICING MEDICINE OVER THE
INTERNET. States and other licensing and accrediting authorities prohibit the
unlicensed practice of medicine. We do not believe that our publication and
distribution of healthcare information online constitutes practicing medicine.
However, we cannot guarantee that one or more states or other governmental
bodies will not assert claims contrary to our belief. Any claims of this nature
could result in our spending a significant amount of time and money to defend
and dispose of them.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
HealthGate is not subject to any meaningful market risks related to
currency, commodity prices or similar matters. We are sensitive to short-term
interest rate fluctuations to the extent that such fluctuations impact the
interest income we receive from our investments. To minimize this risk, we
maintain our portfolio of cash equivalents and short-term investments in a
variety of securities, including commercial paper, other short-term debt
securities and money market funds. In general, money market funds are not
subject to market-risk because the interest paid on such funds fluctuates with
the prevailing interest rate. In addition, we invest in relatively short-term
securities. HealthGate does not use derivative financial instruments in its
investment portfolio. We limit our default risk by purchasing only investment
grade securities. As of June 30, 2000, all our investments were in money market
funds and interest bearing investment grade securities with an average maturity
of less than 6 months. Cash, cash equivalents, and marketable securities were
approximately $24,739,000 at June 30, 2000.
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PART II
OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On January 31, 2000, we closed our initial public offering of 3,750,000
shares of its common stock. The initial public offering price was $11.00 per
share and the aggregate initial public offering proceeds were $41,250,000. After
deducting the underwriting discounts and commissions and the offering expenses,
the net proceeds to HealthGate from the initial public offering were
approximately $35.8 million.
The funds from the initial public offering have been the principal source
of liquidity for us during the six months ended June 30, 2000 and were used to
fund operating losses and make capital expenditures as described in the
financial statements included with this report. Other proceeds from the offering
have been invested in interest bearing, investment grade securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
The following exhibits are included:
11.1 Loss per share
27.1 Financial Data Schedule
(b) REPORTS ON FORM 8-K
No reports on Form 8-K were filed by HealthGate during the three months
ended June 30, 2000.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Report to be signed on its behalf by the
undersigned, thereunto duly authorized.
HEALTHGATE DATA CORP.
Dated: August 14, 2000 By: /s/ William S. Reece
--------------------------------------
William S. Reece
Chairman of the Board of Directors and
Chief Executive Officer
Dated: August 14, 2000 By: /s/ Mark E. Conlon
--------------------------------------
Mark E. Conlon
Accounting Officer
(Principal Accounting Officer)
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