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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
COMMISSION FILE NUMBER: 0-23607
APPLIED VOICE RECOGNITION, INC.
(EXACT NAME OF SMALL BUSINESS ISSUER AS SPECIFIED IN ITS CHARTER)
DELAWARE 76-0513154
(STATE OR OTHER JURISDICTION OF (IRS EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
1770 ST. JAMES PLACE, SUITE 116, HOUSTON, TX 77056
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
(713) 621-3131
(ISSUER'S TELEPHONE NUMBER, INCLUDING AREA CODE)
Check whether the issuer: (1) has 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 SHARES OF COMMON STOCK OUTSTANDING AS OF October 31, 2000: 49,120,547
TRANSITIONAL SMALL BUSINESS DISCLOSURE FORMAT (CHECK ONE): YES [ ] NO [X]
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APPLIED VOICE RECOGNITION, INC.
DBA E-DOCS.NET
TABLE OF CONTENTS
Page
----
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets .......................................... 4
Consolidated Statements of Operations ................................ 5
Consolidated Statements of Cash Flows................................. 6
Notes to Unaudited Consolidated Financial Statements.................. 7
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ............................................ 10
PART II OTHER INFORMATION
Item 1. Legal Proceedings................................................. 14
Item 2. Changes in Securities............................................. 14
Item 5. Other Information................................................. 14
Item 6. Exhibits and Reports on Form 8-K.................................. 15
Signatures................................................................ 16
2
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PART I.
FINANCIAL INFORMATION
This report includes "forward looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. All statements other than
statements of historical fact included in this report are forward looking
statements. Such forward looking statements include, without limitation,
statements as to estimates, expectations, beliefs, plans, and objectives
concerning the Company's future financial and operating performance, and as
included in "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" regarding the
Company's estimate of sufficiency of existing capital resources and its
ability to raise additional capital to fund cash requirements for future
operations. The forward looking statements are subject to
assumptions and beliefs based on current information known to the Company and
factors that are subject to uncertainties, risks and other influences, which
are outside the Company's control, and could yield results differing
materially from those anticipated. The ability to achieve the Company's
expectations is contingent upon a number of factors, which include (i)
availability of sufficient capital and capital market conditions, (ii) the
Company's ability to produce and market its products in the healthcare
transcription industry, (iii) effect of any current or future competitive
products, (iv) the ability of the Company to successfully market its e-DOCS
Physician Network ("EPN") and the adoption of electronic medical record
technology by physicians; (v) ongoing cost of research and development
activities, and (vi) the retention of key personnel. "e-DOCS.net(TM)" is our
trademark.
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ITEM 1. FINANCIAL STATEMENTS
APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
DBA E-DOCS.NET
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
<TABLE>
<CAPTION>
September 30, 2000 December 31, 1999
ASSETS ------------------ -----------------
<S> <C> <C>
Current Assets
Cash and cash equivalents $ 1,323,583 $ 53,529
Accounts receivable, net of allowance of $71,600
and $74,900, respectively 468,560 258,668
Other receivable - 747,137
Deposits and prepaid expenses 35,386 6,074
Deferred expense 14,625 -
------------ ------------
TOTAL CURRENT ASSETS 1,842,154 1,065,408
PROPERTY AND EQUIPMENT, NET 600,965 858,492
OTHER ASSETS
Prepaid software rights 360,900 970,900
EPN development costs 399,580 -
Other intangibles, net 410,598 447,310
Goodwill, net 479,741 504,899
------------ ------------
TOTAL OTHER ASSETS 1,650,819 1,923,109
------------ ------------
TOTAL ASSETS $ 4,093,938 $ 3,847,009
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Trade payables $ 254,093 $ 365,639
Accrued expenses 724,258 1,167,416
Stock dividends payable 12,875 246,774
Current portion of preferred stock payables 473,543 474,000
Note payable to related party 250,000 250,000
Convertible notes payable 480,000 -
Current portion of capital lease obligations 82,564 64,354
Current portion of long term debt 58,333 65,977
------------ ------------
TOTAL CURRENT LIABILITIES 2,335,666 2,634,160
Preferred stock payables, net of current portion 353,247 683,460
Capital lease liability, net of current portion 217,355 279,670
Long-term debt, net of current portion 58,334 141,091
------------ ------------
TOTAL LIABILITIES 2,964,602 3,738,381
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value, 2,000,000
shares authorized
Series B, 0 and 1,680 shares issued
and outstanding, respectively - 168
Series 2, 2,978 and 500 shares issued
and outstanding, respectively 297 50
Common stock, $.001 par value, 50,000,000 shares authorized,
47,251,697 and 35,269,794 issued and outstanding, respectively 47,252 35,269
Paid-in capital 21,511,726 18,199,066
Accumulated deficit (20,429,939) (18,125,925)
------------ ------------
TOTAL STOCKHOLDERS' EQUITY 1,129,336 108,628
------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 4,093,938 $ 3,847,009
============ ============
See Notes to Unaudited Consolidated Financial Statements.
</TABLE>
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APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
DBA E-DOCS.NET
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<TABLE>
<CAPTION>
Three Months Ended September 30, Nine Months Ended September 30,
-------------------------------- -------------------------------
2000 1999 2000 1999
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenue:
Medical Transcription $ 644,892 $ 1,455,195 $ 1,866,283 $ 3,336,105
Hardware, software and related - - - 469,949
----------- ----------- ----------- -----------
TOTAL REVENUE 644,892 1,455,195 1,866,283 3,806,054
Cost of Sales:
Medical Transcription 470,201 1,104,624 1,408,711 2,400,539
Consulting, hardware, software and related - - - 52,567
----------- ----------- ----------- -----------
GROSS MARGIN 174,691 350,571 457,572 1,352,948
Operating expenses:
Marketing and sales 10,700 131,849 30,136 480,891
General and administrative 693,823 1,423,852 1,924,034 5,363,371
Write-down of prepaid software rights 610,000 - 610,000 -
Research and development - 188,549 13,172 684,414
----------- ----------- ----------- -----------
OPERATING LOSS (1,139,832) (1,393,679) (2,119,770) (5,175,728)
Other income (expense):
Other income (expense) - (40,450) - (98,849)
Interest income 4,964 13,229 20,412 34,063
Interest expense (60,789) (304,081) (191,781) (593,937)
----------- ----------- ----------- -----------
TOTAL OTHER INCOME (EXPENSE) (55,825) (331,302) (171,369) (658,723)
----------- ----------- ----------- -----------
NET LOSS $(1,195,657) $(1,724,981) $(2,291,139) $(5,834,451)
=========== =========== =========== ===========
Basic and diluted loss per share $ (0.03) $ (0.12) $ (.06) $ (0.39)
=========== =========== =========== ===========
</TABLE>
See Notes to Unaudited Consolidated Financial Statements.
5
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APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
DBA E-DOCS.NET
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------
2000 1999
----------- -----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,291,139) $(5,834,451)
Adjustments to reconcile net loss
to net cash used in operating activities:
Accretion of preferred stock obligations and
warrant amortization 92,873 472,593
Depreciation and amortization 242,265 493,765
Stock issued for compensation and services 245,874 38,445
Write-down of prepaid software rights 610,000 -
Changes in operating assets and liabilities:
Accounts receivable (209,892) (819,061)
Other receivable 747,137 -
Accounts payable and accruals (17,068) 207,154
Other, net (43,937) 207,426
----------- -----------
Net cash used in operating activities (623,887) (5,234,129)
CASH FLOW FROM INVESTING ACTIVITIES:
Cash paid for acquisitions - (736,857)
Purchase of property and equipment (49,277) (1,019,698)
Capitalized development costs (244,580) -
----------- -----------
Net cash used in investing activities (293,857) (1,756,555)
CASH FLOW FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock and warrants - 4,670,000
Proceeds from issuance of common stock 1,000,000 -
Proceeds from issuance of debt and warrants 480,000 2,154,965
Proceeds from the exercise of common stock options
and warrants 842,304 10,000
Debt and capital lease repayments (134,506) (780,161)
----------- -----------
Net cash provided by financing activities 2,187,798 6,054,804
NET INCREASE (DECREASE) IN CASH 1,270,054 (935,880)
CASH AND CASH EQUIVALENTS:
Beginning of period 53,529 1,377,913
----------- -----------
End of period $ 1,323,583 $ 442,033
=========== ===========
</TABLE>
6
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APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
dba e-DOCS.net
Notes to Consolidated Financial Statements
September 30, 2000
(unaudited)
1. BASIS OF PRESENTATION
The accompanying unaudited interim financial statements of Applied Voice
Recognition, Inc., a Delaware corporation (the "Company"), have been prepared in
accordance with generally accepted accounting principles and the rules of the
Securities and Exchange Commission (the "SEC"), and should be read in
conjunction with the audited financial statements and notes thereto contained in
the Company's latest Annual Report filed with the SEC on Form 10-KSB. All
significant intercompany accounts and transactions have been eliminated. In the
opinion of management, all adjustments, consisting of normal recurring
adjustments, necessary for a fair presentation of the Company's financial
position and the results of operations for the interim periods presented have
been reflected herein. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year. Notes to
the financial statements which would substantially duplicate the disclosure
contained in the audited financial statements for the most recent fiscal year,
1999, as reported in the Form 10-KSB, have been omitted.
The Company has incurred significant losses and cash deficits since inception.
The Company has been dependent upon outside financing to develop its software
products and to provide working capital. These conditions raise substantial
doubt about the Company's ability to continue as a going concern.
Beginning in the fourth quarter of 1999, the Company suspended its acquisitions
program and focused on restructuring the core operations of the transcription
companies acquired. As of December 31, 1999, the Company had reduced its
corporate head count from 35 to 7 and had sold its operations in Manila, New
York, New Jersey and a portion of its Houston operations. These actions reduced
the monthly losses by approximately $300,000, while reducing revenue by $250,000
per month.
Since the Company's announcement of its restructuring on January 7, 2000,
liquidity has significantly improved. Gross revenues averaging approximately
$200,000 per month have been achieved, warrants and options were exercised
resulting in net proceeds to the Company of approximately $840,000 and common
stock and convertible notes payable were sold in Private Placements for net
proceeds of approximately $1.5 million. Management believes current resources
and additional financing commitments are adequate to fund the development costs
of the e-DOCS Physician's Network (EPN) as well as the Company's working capital
needs through January 2001.
It will be necessary for the Company to raise additional capital for the
continued implementation and marketing of the EPN during 2001. There are no
assurances that the necessary capital will be obtained.
Certain reclassifications have been made to prior year balances in order to be
consistent with current year presentation.
2. E-DOCS PHYSICIAN NETWORK (EPN)
The e-DOCS Physician Network (EPN) is designed to provide a secure, browser-
based document handling solution directed at the independent transcription
company and the nation's 637,000 physicians. The EPN will provide an efficient
Internet-based delivery system for medical transcription documents and an
infrastructure for capturing, organizing, storing and
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APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
dba e-DOCS.net
Notes to Consolidated Financial Statements
(unaudited)
retrieving medical information. The services may include medical transcription
and storage, training, legacy system integration, and the electronic storage and
retrieval of the physician's hand written notes of a patient encounter. The EPN
is designed to simplify how physicians interact with medical information,
without attempting to change their current practice methodology. In addition, we
believe the EPN will provide a streamlined, more efficient medical billing and
accounts receivable management process for physicians.
Coding on the initial version of the EPN has been completed, testing is in
process and the launch of the EPN is scheduled during the fourth quarter of
2000. The Company has completed several contracts with national service
providers to the medical community including contracts with VERISIGN to provide
internet trust services for secure e-commerce; PROFESSIONAL MEDICAL Insurance
Services (PMIS), which would allow EPN members to receive discounts of up to 25%
on their malpractice insurance; MEDCAREERS.COM, which features the largest
online database of healthcare jobs on the Internet; FIRST BANK OF BEVERLY HILLS
to provide an array of services to secure and protect EPN transactions; as well
as MAPQUEST and ACCUWEATHER.
3. STOCKHOLDERS' EQUITY
On February 23, 2000, the Company issued 1,902 shares of Series 2 Preferred
Stock as planned deferred purchase price payments for transcription company
acquisitions. A total of 1,258 of these shares were subsequently converted into
82,822 shares of common stock.
On February 28, 2000, the Company issued 1,054,852 shares of common stock in
lieu of cash salaries, expense reimbursements, and severance pay to an officer
of the Company and to two former officers.
During the month of February 2000, the Series B Preferred Stockholders converted
760 shares of Series B Preferred Stock in exchange for 991,888 shares of the
Company's Common Stock. In connection with these conversions, the Company issued
119,366 shares of accrued Common Stock dividends. Effective as of March 11,
2000, the remaining 920 shares of Series B Preferred Stock and related accrued
dividends of $96,759 were automatically converted into 560,766 shares of Common
Stock.
In March 2000, 500 shares of Series 2 Preferred Stock, previously issued as a
planned deferred purchase price payment for the acquisition of Linda R. Willhite
Transcription, were converted into 32,953 shares of common stock.
During March and April 2000, certain employees and several third party
individuals exercised stock options and stock warrants to purchase common
stock. As the result of this, the Company issued 685,378 shares of common stock.
In May 2000, the Company issued 163,583 shares of common stock as required by
the Forebearance Agreement between the Company and the previous owners of
Cornell Transcription, Inc.
In May 2000, the Company issued and held in escrow 2,333 shares of Series 2
Preferred Stock. The shares were part of the planned deferred payments for the
acquisition of A Word Above, Inc.
In May 2000, the Company issued 572,132 shares of common stock to Lonestar
Medical Transcription USA, Inc. in a cashless exercise of a warrant to purchase
800,000 shares of the Company's common stock.
8
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APPLIED VOICE RECOGNITION, INC. AND SUBSIDIARIES
dba e-DOCS.net
Notes to Consolidated Financial Statements
(unaudited)
In May 2000, the Company issued 58,000 shares of common stock as contingent
purchase price for the acquisition of PRN Transcription, Inc.
In July 2000 the Company issued 500,000 shares of common stock as payment for
software development efforts with a value of $ 125,000. Also in July and August
2000 the Company issued 356,500 shares of common stock to officers, employees
and consultants in lieu of cash payments of $89,125. These shares were issued
pursuant to the Company's 1997 Incentive Plan.
In August 2000, the Company issued 109,307 shares of common stock as payment for
penalty interest of $114,663. The interest related to the inability of the
Company to register shares issued in the acquisition of Cornell Transcription,
Inc. prior to December 31, 2000.
In a Private Placement transaction in September 2000, the Company issued
6,666,666 shares of the Company's common stock for a total of $1,000,000. In
addition, a warrant to purchase 1,000,000 shares at $.15 per share was issued to
the placement agent as compensation for assistance in arranging the transaction.
In September 2000, the Company issued six convertible notes in the aggregate
amount of $480,000. The Notes are convertible into a number of shares of common
stock equal to the principal amount of the promissory notes, plus accrued and
unpaid interest, divided by the lesser of $.15 or the lowest per share price
that we have sold shares of common stock between September 1, 2000 and the
conversion date.
We currently do not have sufficient authorized common stock for issuance upon
conversion of the notes described above or certain other convertible securities;
however upon adoption of an amendment to our certificate of incorporation to
increase our authorized common stock, the convertible notes will automatically
convert into the number of shares of common stock computed as per the agreements
as described above. A proposal to increase our authorized capital stock to 85
million will be considered and voted on at our 2000 annual meeting of
stockholders, which is anticipated to be held in December 2000.
4. COMMITMENTS AND CONTINGENCIES
A Registration Statement on Form SB-2 became effective on August 12, 2000,
registering for resale 21,210,176 shares of the Company's common stock. This
included the shares required to be registered pursuant to various agreements,
including an extension agreement with Cornell Transcription, Inc.
5. PREPAID SOFTWARE RIGHTS
During 1999, the Company shifted its business focus away from voice recognition
technology, discontinuing development of VoiceCommander99(TM). Effective
December 20, 1999, in connection with the sale of certain transcription
operations, the Company granted to Lonestar Medical Transcription USA, Inc.
(`Lonestar') the non-exclusive rights to the VoiceCommander99(TM) code. In
exchange for these rights, the Company received the rights to produce and resell
3,254 copies of Lonestar voice recognition software. During the third quarter of
2000, the Company contracted to market and sell the licenses and management
estimates the re-sale value of the asset, less disposal costs, to be
approximately $361,000. As a result, the Company recorded a writedown of
$610,000.
6. EARNINGS PER SHARE
Basic earnings per common share is based on the weighted average number of
common shares outstanding during the period, while diluted earnings per common
share considers all potentially dilutive securities that were outstanding during
the period. The Company has potentially dilutive securities outstanding
including stock options, warrants, convertible debt and convertible preferred
stock. Both basic and diluted earnings per common share are the same for each of
the periods presented as inclusion of such potentially dilutive securities was
antidilutive.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
e-DOCS' revenue is derived from the out-sourced medical transcription of
patient records for physicians, clinics and hospitals through our wholly owned
subsidiary e-DOCS Health Care Information Services, Inc. Our customer base
includes approximately 1,600 physicians in four states.
After ten months of use by physicians, we recognized that the voice recognition
component of our previous product, VoiceCOMMANDER99(TM), was not generating the
cost and labor savings previously believed possible. However, the market clearly
indicated a preference for a browser-oriented tool for Internet- based
transcription and medical records storage services. Utilizing the experience
gained from our first Internet-based service, VoiceCOMMANDER99(TM), we have
developed the next generation browser-based service, which we call the e-DOCS
Physician Network.
While we continue to provide medical transcription services, we are developing
the EPN, through our wholly-owned subsidiary, e-DOCS Physician Network, Inc., as
a medically centric, business-to-business application service provider. The EPN
is designed to provide a secure, browser-based document handling solution
directed at the independent transcription company and the nation's 637,000
physicians, a majority of whom practice in groups of five or less. We have used
our experience in previously acquiring eight independent transcription companies
to provide a common technology platform to these independent, capital-deficient
businesses.
We are attempting to design the EPN to become the standard technology platform
for independent transcription, billing, and coding companies and the individual
practicing physician. It is being developed in response to a need identified by
our existing customer base for a simple, secure document handling solution to
the daily needs of the medical services community.
The EPN is being designed to provide an efficient Internet-based delivery system
for medical transcription documents and an infrastructure for capturing,
organizing, storing and retrieving medical information. The services may include
medical transcription and storage, training, legacy system integration, and the
electronic storage and retrieval of the physician's hand-written notes of a
patient encounter. The EPN is designed to simplify how physicians interact with
medical information, without attempting to change their current practice
methodology. In addition, we believe the EPN will provide a streamlined, more
efficient medical billing and accounts receivable management process for
physicians.
We intend to provide the services of the EPN on a monthly subscription basis.
The transcription company can deliver its medically transcribed documents
through the EPN browser, allowing physicians to review their transcription
online and digitally sign the document. It will be available all of the time
from any location upon authorization of the user.
The basic browser based service will be provided to the physician at no cost.
The EPN will offer secure, long-term, Health Insurance Portability and
Accountability Act (HIPAA) - compliant document storage for a monthly
subscription fee. Other services anticipated to be provided include a basic
online medical record, including the capture of the physician's handwritten
patient notes without scanning. Our study of 42 practices throughout Texas and
Colorado showed that only one in 14 physicians currently use an electronic
medical record entry system. The remainder rely on handwritten patient notes.
Our research indicates many physicians prefer a simple document solution that
does not alter the way the physician practices medicine. We believe that use of
the EPN will not disrupt the physicians' normal operating
10
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procedures. Additionally, cost reductions in medicine demand an approach based
on use, rather than large, up-front investments.
We believe that the important competitive advantage of the EPN will be its
presentation of information to the physician rather than requiring the physician
to search the Internet to find information and services. A medical search engine
button will always be available adjacent to the patient record, allowing the
physician instant access to this resource at all times. In addition, we plan to
provide medical billing and receivable financing through our strategic partners.
We further intend to enter into strategic relationships with well-known
providers of other services, such as banking, travel and professional liability
insurance, and an upgraded path to a more sophisticated medical record, if
desired by the physician. The EPN will also provide access to the sale and
distribution of pharmaceuticals through our site.
Furthermore, the EPN will provide enabling infrastructure and services for
secure, online medical transactions. It will provide an integrated service
solution designed specifically for healthcare that will include roaming user
credentials, complete audit trail, fraud detection and directed delegation of
authority to medical records. Thus, the EPN is being designed to be a secure
facility with "state of the art" protection.
RESULTS OF OPERATIONS
Due to the evolution of our business strategy, we believe that our historical
results of operations for the periods presented may not be directly comparable.
The Company's Revenue is derived primarily from its wholly owned subsidiary e-
Docs Health Care Information Services, Inc.
REVENUE
Our primary source of revenue was from the sale of transcription services. Net
transcription service revenue decreased to $644,892 for the three months ended
September 30, 2000 and $1,866,283 for the nine months ended September 30, 2000,
a decrease of $810,303 and $1,469,822 respectively from the comparable periods
in 1999. The decrease is primarily attributable to the sale of the net assets
and contracts of certain of the Company's medical transcription services
effective December 20, 1999. During the nine months ended September 30, 1999, we
also generated $469,949 in revenue from the sale of bundled products comprised
of software and hardware. There were no sales of bundled products in the three
months ended September 30, 1999 or in the three and nine months ended September
30, 2000.
COST OF SALES
Cost of sales for medical transcription consists primarily of labor costs. Cost
of sales for medical transcription decreased $634,423 and $991,828 for the three
and nine-month periods ending September 30, 2000, respectively as compared to
the same periods in 1999, as a result of the reduced transcription revenues.
Related gross margin on medical transcription services for the three and nine
months ending September 30, 2000 was $174,691 and $457,572, resulting in a gross
margin on transcription services of 27% and 25%, compared to 24% and 28% for the
comparative periods in 1999. The decreased gross margin for the nine months
ending September 30, 2000 primarily reflects increases in labor costs beginning
in the third quarter 1999 resulting from a shortage in skilled medical
transcriptionists.
Cost of sales for bundled products for the nine months ended September 30, 1999
was $52,567 and related gross margin was $417,382.
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MARKETING AND SALES EXPENSE
Marketing and sales expense consists primarily of marketing and sales salaries
and commissions and advertising/promotional expenditures. Marketing and sales
expense decreased to $10,700 and $30,136 for the three and nine months ended
September 30, 2000, down approximately $120,000 and $450,000 for the comparative
periods in 1999. The decrease is the direct result of our increased focus on the
transcription business. The transcription industry does not require significant
marketing efforts.
GENERAL AND ADMINISTRATIVE EXPENSE
General and administrative expense is comprised primarily of compensation and
related expenditures for administrative and executive personnel, professional
fees associated with legal, consulting, and accounting services, and general
corporate overhead. General and administrative expense decreased for the three
and nine months ended September 30, 2000 to $693,823 and $1,924,034, a decrease
of approximately $730,000 and $3,440,000 from the same periods in 1999. The
decrease was primarily attributable to decreases in compensation, legal &
accounting fees, travel and consulting in 2000 related to the decreased level of
operations, and reflecting in 1999 a high level of acquisition related
activities.
Compensation for the three and nine months ended September 30, 2000 decreased by
approximately $670,000 and $1,500,000 from the same periods in 1999. The
decrease reflected the headcount decreases for disposed operations, as well as a
reduction in corporate office staff from 35 to eight.
Legal and accounting fees for the nine months ending September 30, 2000
decreased by approximately $500,000 as compared to the same period in 1999. The
first six months of 1999 reflected significant professional fees as a result of
ongoing acquisition activities. The company has curtailed its acquisition policy
with an emphasis on internal growth of its transcription business and
development of the EPN. Legal and accounting fees increased by approximately
$50,000 during the three months ending September 30, 2000 as compared to the
same period in 1999, reflecting costs associated with registering prior
issuances of common stock, and legal costs, primarily for contracts, associated
with the EPN.
Consulting fees for the three and nine months ended September 30, 2000 decreased
by approximately $80,000 and $410,000 compared to the same periods in 1999. The
Company utilized consultants heavily in the acquisition process during 1999,
including the assimilation of acquired companies. The company has curtailed its
acquisition policy with an emphasis on internal growth, its transcription
business and development of the EPN.
Travel related costs decreased approximately $130,000 and $280,000 for the three
and nine months ended September 30, 2000 to the comparative periods in 1999.
Significant acquisition activities and a larger network of transcription
companies in 1999 were the primary reasons for the decrease.
PREPAID SOFTWARE RIGHTS
During 1999, the Company shifted its business focus away from voice recognition
technology, discontinuing development of VoiceCommander99(TM). Effective
December 20, 1999, in connection with the sale of certain transcription
operations, the Company granted to Lonestar Medical Transcription USA, Inc.
('Lonestar') the non-exclusive rights to the VoiceCommander99(TM) code. In
exchange for these rights, the Company received the rights to produce and resell
3,254 copies of Lonestar voice recognition software. During the third quarter of
2000, the Company contracted to market and sell the licenses and management
estimates the re-sale value of the asset, less disposal costs, to be
approximately $361,000. As a result, the Company recorded a writedown of
$610,000.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development expense consists primarily of personnel costs including
salaries, benefits and consultant costs related to the research and preliminary
development efforts on new software products. Research and development expense
decreased to $0 and $13,172 for the three and nine months ended September 30,
2000, down approximately $190,000 and $670,000 from the comparative periods in
1999. The decrease in research and development costs is attributable to our
change in business focus from software development to a transcription service
provider. During 2000 the Company capitalized approximately $400,000 in
development costs related to the e-DOCS Physicians Network (EPN). In 1999 no
development costs were capitalized.
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Through the period ended September 30, 2000, we have incurred operating losses,
since our inception, of approximately $23.7 million. To date, our operations
have not been profitable and there is no assurance that they will become
profitable in the future. Significant acquisitions and dispositions in 1999
distort the comparability between periods and as to future operations.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2000 the Company had cash and cash equivalents of $1,323,583
and a working capital deficiency of approximately $494,000. This compares to
cash and cash equivalents of $53,529 and a working capital deficiency of
approximately $1,569,000 at December 31, 1999. The increase in working capital
of approximately $1,075,000 is attributable to: cash received from exercise of
stock options and warrants of approximately $840,000; common stock sold in
Private Placements for $1,000,000; common stock issued for software development
costs, compensation and services of $215,000, and approximately $370,000 from
issuance of common stock reflected as a liability in the December 31, 1999
financial statements. These increases to working capital were offset by current
year operating losses.
We believe our cash position, less known commitments and contingencies, plus
cash generated from operations should be adequate to fund our on-going
operations and fund the development of the EPN through January 31, 2001. We will
still require substantial additional capital during fiscal 2001 to implement and
market the EPN.
Our capital requirements will depend on many factors, including, cash flow from
operations, additional working capital requirements, additional product
development expenses and capital expenditures. To the extent that existing
resources are insufficient to fund our operations in the short- or long-term, we
will need to raise additional funds through public or private financings. We may
not be able to raise additional financing on terms favorable to us or to our
stockholders without substantial dilution of their ownership and rights. If we
are unable to raise sufficient funds to satisfy either short- or long-term
requirements, there would be substantial doubt as to our ability to continue as
a going concern. We may be required to significantly curtail our operations,
sell our transcription operations, significantly alter our business strategy,
forego market opportunities or obtain funds through arrangements with strategic
partners or others that may require us to relinquish material rights to certain
of our technologies or potential markets.
RECENT ACCOUNTING PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin 101, "Revenue
Recognition in Financial Statements" which provides guidance related to revenue
recognition based on interpretations and practices followed by the SEC. We
believe that our revenue recognition policy is in compliance with SAB 101 and do
not believe that adoption of this Staff Accounting Bulletin has had a material
impact on our financial position or results of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting of Derivative Financial
Instruments and for Hedging Activities," which will be effective for fiscal year
2001. This statement was amended by SFAS No. 138 in June 2000 to further clarify
SFAS No. 133. These statements establish accounting and reporting standards
requiring that every derivative instrument, including derivative instruments
embedded in other contracts, be recorded in the balance sheet as either an asset
or liability measured at its fair value. These statements also require that
changes in the derivative's fair value be recognized in earnings unless specific
hedge accounting criteria are met. SFAS 133 and SFAS 138 are not anticipated to
have a significant impact on our financial position or results of operations
when adopted, since we currently do not engage in hedging activities.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There are no material legal proceedings to which e-DOCS is a party or of which
any of its property is the subject other than ordinary, routine claims
incidental to e-DOCS' business.
ITEM 2. CHANGES IN SECURITIES
RECENT SALES OF UNREGISTERED SECURITIES
The following sales of unregistered securities occurred during the nine months
ended September 30, 2000, and through November 14, 2000 (the date of this
filing), in private transactions, which e-DOCS relied on the exemption from
registration available under Section 4(2) of the Securities Act of 1933, as
amended (the "Securities Act"), unless otherwise indicated:
During September 2000, we completed several private placements with accredited
investors. We relied upon the exemptions from registration under Section 4(2)
and Rule 506 of the Securities Act. We received net proceeds from these
private placements of approximately $1.5 million. In connection with these
private placements we also entered into registration rights agreements with the
investors. These transactions are discussed below.
On September 1, 2000, we issued six convertible promissory notes in the
aggregate principal amount of $480,000. One promissory note, in the principal
amount of $100,000, was issued to Daniel Dornier, a member of our board of
directors. The promissory notes will be automatically converted into at least
3,200,000 shares of common stock when our certificate of incorporation is
amended to increase the authorized capital to permit the issuance of common
stock upon the conversion of the promissory notes.
Additionally, in September 2000, we issued 6,666,666 shares of our common stock
at a price of $0.15 per share, and issued a warrant to the placement agent to
acquire 1,000,000 shares of our common stock at an exercise price of $0.15 per
share.
ITEM 5. OTHER INFORMATION
On May 3, 2000, the Company entered into a Forbearance Agreement with each of
Hillel Bronstein, Stuart Szpicek, and Yaniv Dagan relating to the issuance of
575 shares of the Company's convertible Series 1 Preferred Stock to Cornell
Transcription, Inc. as part of the purchase price under the terms of the Asset
Purchase Agreement between the AVRI Health Care Information Services, Inc., a
Delaware corporation and wholly-owned subsidiary of the Company, and Cornell
Transcription, Inc., a New York
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corporation of which Mr. Bronstein, Mr. Szpicek, and Mr. Dagan are shareholders.
The terms of the Forbearance Agreements require Mr. Bronstein, Mr. Szpicek, and
Mr. Dagan to not exercise any enforcement rights or remedies under, or with
respect to, the Asset Purchase Agreement resulting from the Company's inability
to register the shares of the Company's common stock underlying the Series 1
Preferred Stock until the earlier of when the common stock is registered or
August 15, 2000. The affected shares were registered on August 11, 2000.
As consideration for the forbearance, the Company granted Mr. Bronstein
warrants to purchase 118,750 shares of common stock, granted Mr. Szpicek
warrants to purchase 118,750 shares of common stock, and granted Mr. Dagan
warrants to purchase 12,500 shares of common stock, for which the Company
estimated and recorded $70,000 as additional cost. The Company also paid in
stock interest to each of Mr. Bronstein, Mr. Szpicek and Mr. Dagan at a rate of
1% per month on the cash value of the shares of common stock held by, and owed
to under the Forbearance Agreements, Mr. Bronstein, Mr. Szpicek and Mr. Dagan
through the expiration of the forbearance period. In addition, the Company paid
the legal fees of Mr. Bronstein and Mr. Szpicek totaling $40,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS.
EXHIBIT DESCRIPTION OF EXHIBIT
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10.1 Form of Lock-up Agreements (Exhibit 4.13 to the Company's registration
statement number 333-48948 on Form SB-2 as filed with the Commission on
October 30, 2000, is incorporated herein by reference).
10.2 Form of Option and Warrant Forfeiture Agreement (Exhibit 4.14 to the
Company's registration statement number 333-48948 on Form SB-2 as filed
with the Commission on October 30, 2000, is incorporated herein by
reference).
10.3 Form of Warrant to Purchase Common Stock of Applied Voice Recognition,
Inc. d/b/a e-DOCS.net (Exhibit 4.1 to the Company's Current Report on
Form 8-K as filed with the Commission on October 5, 2000, is
incorporated herein by reference).
10.4 Form of Convertible Promissory Note (Exhibit 4.2 to the Company's
Current Report on Form 8-K as filed with the Commission on October 5,
2000, is incorporated herein by reference).
10.5 Form of Registration Rights Agreement--Placement Agent (Exhibit 4.3 to
the Company's Current Report on Form 8-K as filed with the Commission on
October 5, 2000, is incorporated herein by reference).
10.6 Form of Registration Rights Agreement--(Common Stock) (Exhibit 4.4 to
the Company's Current Report on Form 8-K as filed with the Commission on
October 5, 2000, is incorporated herein by reference).
10.7 Form of Registration Rights Agreement--(Convertible Promissory Note)
(Exhibit 4.5 to the Company's Current Report on Form 8-K as filed with
the Commission on October 5, 2000, is incorporated herein by reference).
10.8 Form of Subscription Agreement (Exhibit 4.20 to the Company's
registration statement number 333-48948 on Form SB-2 as filed with the
Commission on October 30, 2000, is incorporated herein by reference).
10.9 Non-qualified Stock Option Agreement between the Company and J. William
Boyar dated as of October , 2000 (Exhibit 10.41 to the Company's
registration statement number 333-48948 on Form SB-2 as filed with the
Commission on October 30, 2000, is incorporated herein by reference).
10.10 Qualified Stock Option Agreement between the Company and James
Springfield dated as of October , 2000 (Exhibit 10.42 to the Company's
registration statement number 333-48948 on Form SB-2 as filed with the
Commission on October 30, 2000, is incorporated herein by reference).
10.11 Agreement between the Company and Wilson, Lombard, & Partner, Inc. dated
as of October , 2000 (Exhibit 10.43 to the Company's registration
statement number 333-48948 on Form SB-2 as filed with the Commission on
October 30, 2000 is incorporated herein by reference).
10.12 Agreement between the Company and FinMap Corporation dated as of October
, 2000 (Exhibit 10.44 to the Company's registration statement number
333-48948 on Form SB-2 as filed with the Commission on October 30, 2000,
is incorporated herein by reference).
10.13 Employment Agreement between the Company and James Springfield dated as
of August 29, 2000 (Exhibit 10.45 to the Company's registration
statement number 333-48948 on Form SB-2 as filed with the Commission on
October 30, 2000, is incorporated herein by reference).
*27.1 Financial Data Schedule.
_____________
* Filed herewith.
(b) REPORTS ON FORM 8-K.
There were no reports on Form 8-K filed during the three months ended
September 30, 2000. A report on Form 8-K was filed on October 5, 2000 to report
the following Item 5. events: private
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placements of common stock aggregating 6,666,666 shares for $1,000,000; issuance
of convertible promissory notes with an aggregate principal amount of $480,000;
issuance of a warrant to purchase 1,000,000 shares of common stock at an
exercise price of $0.15; and changes in management.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on behalf by the undersigned, thereunto duly authorized
on this 14th day of November 2000.
APPLIED VOICE RECOGNITION, INC.
/s/ Jackson Nash
----------------
Jackson Nash
Chief Financial Officer and Secretary
(on behalf of the registrant)
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