U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
Quarterly-report under Section 13 or 15 (d) of the Securities Exchange Act of
1934. For the quarterly period ended December 31, 1996.
Commission file number 0-11476
HEALTHWATCH, INC.,
Exact Name of Small Business Issuer as Specified in Its Charter
Minnesota 84-0916792
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
2445 Cades Way, Vista California 92083
(Address of Principal Executive Offices)
(619) 598-4333
(Issuer's Telephone Number, Including Area Code)
- - -------------------------------------------------------------------------------
(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_____
Number of registrant's common shares outstanding at
January 31, 1997: 2,576,745.
Traditional Small Business Issuer (check one)
Yes __X__ No ____
PART 1. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED BALANCE SHEET
(Unaudited)
December 31, June 30,
ASSETS 1996 1996
------------ ------------
<S> <C> <C>
Current assets:
Cash $ 92,323 $ 79,083
Accounts receivable, net of allowance for doubtful accounts
of $9,193 and $11,567, respectively 184,683 229,543
Inventory (Note 4) 783,899 818,935
Subscription receivable (Note 5) -0- 104,568
Other current assets (Note 6) 70,397 27,134
------------ ------------
Total current assets 1,131,302 1,259,263
Property and equipment, net 59,690 72,086
Intangible assets, net 1,045,801 1,169,232
Other assets 113,428 117,971
------------ ------------
Total assets $ 2,350,221 $ 2,618,552
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 149,668 $ 215,804
Accrued compensation and payroll taxes 217,490 235,241
Other accrued expenses - related parties 13 34,154
Other accrued expenses - unrelated parties 159,479 298,304
Deferred revenue 143,171 171,202
------------ ------------
Total current liabilities 669,821 954,705
Debentures payable - related parties 15,000 15,000
Debentures payable - unrelated parties 565,000 565,000
------------ ------------
Total liabilities 1,249,821 1,534,705
------------ ------------
Shareholders' equity:
Cumulative preferred stock, $.07 par value; 1,428,571 shares
authorized, 200,000 and 200,000 shares issued and
outstanding, respectively (Note 7) 450,000 14,000
Common stock, $.07 par value; 14,285,714 shares authorized,
1,970,747 and 1,624,581 issued and outstanding,
respectively (Notes 6 & 8) 137,952 113,720
Additional paid-in capital 13,479,005 12,958,348
Accumulated deficit (12,931,798) (11,963,662)
Equity adjustment from foreign currency translation (34,759) (38,559)
------------ ------------
Total shareholders' equity 1,100,400 1,083,847
------------ ------------
Total liabilities and shareholders' equity $ 2,350,221 $ 2,618,552
============ ============
</TABLE>
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
THREE MONTHS SIX MONTHS
1996 1995 1996 1995
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Product sales $ 486,558 $ 418,683 $ 996,780 $ 996,718
Product cost of sales 424,361 359,654 847,734 759,237
----------- ----------- ----------- -----------
Gross profit 62,197 59,029 149,046 237,481
Operating costs and expenses:
Selling, general and administrative 356,874 329,585 747,706 666,380
Depreciation and amortization 58,405 87,198 145,603 174,398
Research and development 89,185 109,890 190,146 197,809
----------- ----------- ----------- -----------
Total operating costs and expenses 504,464 526,673 1,083,455 1,038,587
----------- ----------- ----------- -----------
Loss from continuing operations (442,267) (467,644) (934,409) (801,106)
Other income (expense):
Interest income -0- 3,803 -0- 7,200
Interest expense (17,142) (17,275) (33,727) (35,624)
Miscellaneous -0- 880 -0- 10,102
----------- ----------- ----------- -----------
Total other income (expense) (17,142) (12,592) (33,727) (18,322)
----------- ----------- ----------- -----------
Net loss $ (459,409) $ (480,236) $ (968,136) $ (819,428)
=========== =========== =========== ===========
Net loss per share $ (0.23) $ (0.42) $ (0.51) $ (0.73)
----------- ----------- ----------- -----------
Weighted average number of shares outstanding 1,958,620 1,156,673 1,901,193 1,120,347
=========== =========== =========== ===========
</TABLE>
<TABLE>
<CAPTION>
HEALTHWATCH, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
THREE MONTHS SIX MONTHS
1996 1995 1996 1995
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(459,409) $(480,236) $(968,136) $(819,428)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Stock issued as payment of expenses 89,463 34,929 117,939 97,436
Depreciation and amortization 58,405 87,198 145,603 174,398
Gain on Extinguishment of Debt -0- (880) -0- (10,102)
Decrease (increase) in assets:
Accounts receivable 3,206 44,714 44,860 133,209
Inventory (9,114) (69,665) 35,036 (145,051)
Other current assets 10,928 27,850 (17,013) 102,266
Other assets 2,282 (5,066) 4,543 (1,820)
Increase (decrease) in liabilities:
Accounts payable (46,475) 34,107 (66,136) (94,766)
Accrued expense - related parties (36,504) 16,771 (51,892) 4,946
Accrued expenses - unrelated parties (19,151) (126,032) (24,225) (219,378)
Deferred revenue 2,518 (38,457) (28,031) (38,837)
--------- --------- --------- ---------
Net cash used in operating activities $(403,851) $(474,767) $(807,452) $(817,127)
--------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property & equipment (9,776) (8,461) (9,776) (8,461)
--------- --------- --------- ---------
Net cash provided by investing activities (9,776) (8,461) (9,776) (8,461)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (repayment) of note payable -0- -0- -0- (285,000)
Repayment of long-term debt -0- (1,077) -0- (2,130)
Net proceeds (costs) of issuance of common stock 25,909 129,829 272,100 530,777
Payments received on stock subscriptions 450,000 -0- 554,568 -0-
--------- --------- --------- ---------
Net cash provided by (used in) financing
activities 475,909 128,752 826,668 243,647
--------- --------- --------- ---------
Effect of exchange rate changes on cash 4,160 (15,090) 3,800 (25,112)
--------- --------- --------- ---------
Increase (decrease) in cash 66,442 (369,566) 13,240 (607,053)
Cash - beginning of period 25,881 505,494 79,083 742,981
--------- --------- --------- ---------
Cash - end of period $ 92,323 $ 135,928 $ 92,323 $ 135,928
========= ========= ========= =========
</TABLE>
HEALTHWATCH, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE MONTHS AND SIX MONTHS ENDED DECEMBER 31, 1996 AND 1995
(UNAUDITED)
Note 1: Principles of Presentation
The accompanying unaudited financial statements reflect all adjustments which in
the opinion of management are necessary for a fair presentation of the Company's
financial position as of December 31, 1996, and it's results of operations and
cash flows for the three months and six months ended December 31, 1996 and 1995.
This report should be read in conjunction with the Company's Financial
Statements and Notes thereto contained in the Company's Annual Report on Form
10-KSB for the year ended June 30, 1996.
Note 2: Management's Operating Plans
As a result of recurring losses and negative cash flow from operations,
management has reviewed its operational and financial plans relative to the
Company's ability to continue in existence. Management's plans in this regard,
include the completion of development of the Company's new proprietary product
to be used in the intravenous ("IV") drug infusion industry.
Note 3: Net Income (Loss) per Share
The net income (loss) per share in the fiscal 1996 and 1995 periods were
computed based on the weighted average number of shares outstanding during the
periods without taking into effect outstanding options as their effect would be
either anti-dilutive or dilutive by less than 3%.
Note 4: Inventory
Inventory consisted of the following at December 31, 1996
and June 30, 1996:
12/31/96 6/30/96
-------- --------
Raw materials $646,114 $728,852
Work in process 117,585 81,894
Finished goods 20,200 8,189
-------- --------
$783,899 $818,935
-------- --------
Note 5: In September 1996, options to purchase 7,000 shares of Common Stock were
exercised and the corresponding shares issued in exchange for a $14,700
receivable. The receivable was paid to the Company in October 1996.
Note 6: Supplemental schedule of non-cash operating, investing and financing
activities during the three months and six months ended December 31, 1996.
The Company issued an aggregate of 28,195 shares and 77,581 shares valued at
$76,338 and $258,789 during the three and six month periods ended December 31,
1996, respectively. Of this amount, 30,000 shares valued at $114,600 were
included in accrued liabilities - unrelated parties as of June 1996, 15,000
shares valued at $52,500 were issued in exchange for certain investment banking
services of which $26,250 remains in prepaid expense as of December 31, 1996,
26,781 shares valued at $64,738 were issued for other consulting services and
5,800 shares valued at $11,600 were issued as employee stock bonuses.
Note 7: Preferred Stock/Warrants
In May 1995, as settlement of a dispute with certain common stockholders, the
Company contractually committed to convert 57,143 shares of the Company's Common
Stock purchased for $600,000 into 400,000 shares of the Company's Series A,
$1.50 stated value, 10% cumulative and Convertible Preferred Stock. In June
1996, 200,000 shares of Preferred Stock were converted to 171,428 shares of
Common Stock in accordance with the conversion option. In August 1996, the
remaining 200,000 shares of Preferred Stock were converted to 157,192 shares of
Common Stock in accordance with the agreement's conversion option. Accrued and
unpaid dividends of $7,500 at June 30, 1996 were paid in August 1996.
On November 14, 1996, the Company agreed to issue 200,000 Units of its
securities, for a purchase price of $2.25 per Unit ($450,000 in the aggregate).
Each Unit consists of one share of Series B and three Warrants, each Warrant
representing the right to acquire one share of the Company's Common Stock at
$2.00 per share. Each share of Preferred Stock is convertible into three shares
of the Company's Common Stock. The agreement for the issuance of the Units
contemplates that 150,000 additional Units ($337,500 aggregate purchase price)
will be purchased on the same terms as those subscribed for on November 14,
1996, on each of January 15 and March 15, 1997.
During the three and six months ended December 31, 1996, the Company issued
200,000 of the Units. As of January 21, 1997, 200,000 shares of Series B
Convertible Preferred Stock had been converted into 600,000 shares of the
Company's Common Stock. Subsequent to the end of the second quarter of fiscal
1997, an additional 166,666 Units of the Company's securities have been issued
for a purchase price of $2.25 per Unit ($375,000 in the aggregate). The
agreement for the issuance of the Units contemplates that 133,333 additional
Units ($300,000 aggregate purchase price) will be purchased on March 15, 1997.
The Note 8: Common Stock
During the three months and six months ended December 31, 1996, the Company
issued an aggregate of 10,338 shares and 110,810 shares of Common Stock for
$$25,909 and $272,100, respectively, as the result of option and warrant
exercises.
HEALTHWATCH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
In recent years, the markets in which the Company participates have
experienced significant changes and a period of uncertainty due to proposed
changes in health-care administration in the United States and efforts by
health-care organizations to reduce their operating costs and the cost of
health-care in general. As a result, the Company has focused its products in the
hospital marketplace in anticipation of lower sales directly to physicians. The
Company believes that the major changes which have been introduced to the
health-care industry will place greater emphasis on lower-cost products. While
medical standards for safety and effectiveness are expected to remain strong,
costs are expected to be a deciding factor on health-care purchases.
HealthWatch has incurred losses from operations in each of its last
three fiscal years. Due to the significantly better margins anticipated for its
IV products than for its diagnostic products, the Company's primary focus is on
the development of its IV business.
RESULTS OF OPERATIONS
Revenues for the 1997 periods have not changed materially from the
similar periods in 1996. The Company believes that product sales continue to be
depressed as a result of the Company's lack of adequate working capital which
has adversely affected its level of sales as the Company has not been able to
support both the development of its new IV product and selling efforts and
enhancements to its existing products. In addition, the Company believes that
uncertainty in the medical community regarding the reimbursement effects of
health-care reforms; consolidations of hospital and other health-care
institutions resulting in fewer customers for the Company's diagnostic products
and delays in making purchase commitments by institutions engaged in merger or
consolidation discussions; and competitive pressure on product prices also
contribute to depressed sales.
Gross margins were 13% and 15% for the 1997 quarter and 6-month
periods, respectively, compared to 14% and 24% for the similar 1996 periods. The
lower gross margins in 1997 were due primarily to increased cost of parts and
materials and increased salary and travel expenses.
Selling, general and administrative expenses as a percent of sales were
73% and 75% for the 1997 quarter and 6-month periods, respectively, compared to
79% and 67% for the similar 1996 periods. The increase in the 1997 6-month
period was due primarily to planned expenditures associated with the
introduction of the new IV product and increased promotional expenses. The
decrease in net loss per share in the 1997 periods is due to the increase in the
number of outstanding shares.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1996, the Company had $277,006 of cash and accounts
receivable. Due to the Company's operating losses, it has been required to raise
additional debt and equity capital to fund its operations. Capital expenditures
during this period have been limited to routine capital purchases. During the
first 6-months of fiscal 1997, the Company raised $475,909 of additional working
capital primarily through the issuance of 200,000 Units of its securities as
described in Note 7 to the financial statements.
The Company believes that with the proceeds from the sale of the
200,000 Units during November 1996, and the scheduled sale of an aggregate of
300,000 additional Units in January and March of 1997 (166,666 of which have
been sold as of the date of this report), it will have sufficient working
capital to fund operations through the balance of fiscal 1997. However, the
Company believes that it should raise approximately $1,200,000 of additional
capital to better fund the sales and marketing expenses for the rollout of the
new IV product, to continue the development of additional IV products and for
general working capital purposes during the next twelve months.
SAFE HARBOR STATEMENT
Information and statements in this report, other than historical
information, should be considered forward looking and reflect management's
current views of future events and financial performance that involve a number
of risks and uncertainties. The factors that could cause actual results to
differ materially include, but are not limited to, the items discussed under
Item 1 "BUSINESS-Risk Factors" in the Company's Annual Report, Form 10-KSB, for
the fiscal year ended June 30, 1996.
PART II. OTHER INFORMATION
Items 1 and 3 through 5.
Item 2. During the second quarter of fiscal 1997, the Company sold in private
transactions an aggregate of 200,000 Units of its securities. For further
information regarding these sales, see Note 7 of Notes to financial statements.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits:
Exhibit 27 - Financial Data Schedule
The Company was not required to file a report on form 8-K during the quarter
ended December 31, 1996.
SIGNATURES
In accordance with the Exchange Act, the registrant caused this report to be
signed by the undersigned, thereunto duly authorized.
Date: February 14, 1997
HealthWatch, Inc.
BY_______________________________
Lindley S. Branson
(President & Chief
Executive Officer)
BY_______________________________
Annette Agner
(Chief Accounting Officer)
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> DEC-31-1996
<CASH> 92,323
<SECURITIES> 0
<RECEIVABLES> 193,876
<ALLOWANCES> (9,193)
<INVENTORY> 783,899
<CURRENT-ASSETS> 1,131,302
<PP&E> 898,097
<DEPRECIATION> (838,407)
<TOTAL-ASSETS> 2,350,221
<CURRENT-LIABILITIES> 669,821
<BONDS> 580,000
0
450,000
<COMMON> 13,616,957
<OTHER-SE> (12,966,557)
<TOTAL-LIABILITY-AND-EQUITY> 2,350,221
<SALES> 996,780
<TOTAL-REVENUES> 996,780
<CGS> 847,734
<TOTAL-COSTS> 847,734
<OTHER-EXPENSES> 1,083,455
<LOSS-PROVISION> (4,504)
<INTEREST-EXPENSE> 33,727
<INCOME-PRETAX> (968,136)
<INCOME-TAX> 0
<INCOME-CONTINUING> (968,136)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (968,136)
<EPS-PRIMARY> (0.51)
<EPS-DILUTED> (0.51)
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