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U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended December 31, 1999
Commission File Number: 1-15587
E-MEDSOFT.COM
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(Exact name of small business issuer as specified in its charter)
Nevada 84-1037630
- ---------------------------- ---------------------------------
(State of other jurisdiction of (IRS Employer Identification No.)
incorporation or organization)
1300 Marsh Landing Parkway, Suite 106, Jacksonville, Florida 32250
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(Address of principal executive offices including zip code)
(904) 543-1001
--------------------------
(Issuer's telephone number)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act 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 the past 90 days.
Yes X No___
As of February 14, 2000, 68,229,893 shares of common stock, $.001 par value
per share, were outstanding.
Transitional Small Business Disclosure Format (check one): Yes__ No X
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INDEX
Page No.
PART I. FINANCIAL STATEMENTS .............................. 3
Consolidated Balance Sheets at December 31, 1999
(unaudited) and March 31, 1999 ........................ 3
Consolidated Statements of Operations (unaudited)
for the Three Months and Nine Months ended
December 31, 1999 .................................... 4
Consolidated Statements of Cash Flows (unaudited)
for the Nine Months ended December 31, 1999 ........... 5
Notes to the Consolidated Financial Statements at
December 31, 1999 (unaudited) ......................... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS .... 11
PART II. OTHER INFORMATION ................................ 17
ITEM 1. LEGAL PROCEEDINGS ............................ 17
ITEM 2. CHANGES IN SECURITIES ........................ 17
ITEM 3. DEFAULTS UPON SENIOR SECURITIES .............. 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS ............................. 18
ITEM 5. OTHER INFORMATION ............................ 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K ............. 18
SIGNATURES ................................................. 19
2
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e-MedSoft.com
Consolidated Balance Sheets
December 31, March 31,
1999 1999
(unaudited)
ASSETS
Current Assets:
Cash $ 6,392,110 $ 51,712
Restricted cash 14,460 138,435
Accounts receivable, net 6,904,285 4,181,285
Other receivables 337,184 1,062,133
Inventory 1,436,503 713,002
Related party receivables 297,903 193,263
Prepayments and other 481,156 381,591
Deferred taxes 96,399 14,555
----------- -----------
15,960,000 6,735,976
Long-Term Assets:
Property and Equipment, net 1,862,773 1,308,863
Goodwill, net of amortization 7,477,447 8,054,630
Software system investment 7,325,106 -
Deferred financing, net of amortization - 1,363,439
Other 70,092 -
----------- -----------
16,735,418 10,726,932
----------- -----------
TOTAL ASSETS $32,695,418 $17,462,908
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Line of credit $ 806,184 $ 967,425
Accounts payable 9,859,970 6,017,183
Accrued liabilities 1,836,154 412,405
Taxes payable - 165,280
Related party debt 138,782 -
Current maturities of bridge financing 3,900,000 650,623
Current maturities of capitalized leases 346,307 165,275
----------- -----------
16,887,397 8,378,191
Long-Term Liabilities:
Capital leases 783,987 416,409
Bridge financing 288,932 1,361,877
Other long-term liabilities 1,193,581 1,193,581
----------- -----------
2,266,500 2,971,867
Minority Interest in Consolidated Subsidiary 54,454 -
Shareholders' Equity:
Common shares 57,871 51,816
Paid in capital 20,962,359 6,951,312
Accumulated deficit (7,535,800) (904,617)
Accumulated other comprehensive income 2,637 14,339
----------- -----------
13,487,067 6,112,850
----------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS'
EQUITY $32,695,418 $17,462,908
=========== ===========
3
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e-MedSoft.com
Consolidated Statements of Operations
(Unaudited)
Three Months Nine Months
Ended 12/31/99 Ended 12/31/99
NET SALES $12,633,046 $25,944,826
COST OF SALES 9,868,282 20,276,340
----------- -----------
GROSS PROFIT 2,764,764 5,668,486
OPERATING EXPENSES:
Research and development 454,533 1,341,095
Sales and marketing 1,056,466 2,703,805
General and administrative 1,834,164 4,847,599
Non cash compensation 850,021 1,103,337
Depreciation and amortization 397,646 1,104,153
----------- -----------
Total Operating Expenses 4,592,830 11,099,989
----------- -----------
OPERATING LOSS (1,828,066) (5,431,503)
OTHER INCOME (EXPENSE):
Interest expense (211,399) (1,713,766)
Other income (1,458) 1,439
----------- -----------
LOSS BEFORE INCOME TAXES AND
EXTRAORDINARY INCOME (2,040,923) (7,143,830)
EXTRAORDINARY INCOME - 357,152
----------- -----------
LOSS BEFORE INCOME TAXES AND MINORITY
INTEREST (2,040,923) (6,786,678)
TAX BENEFIT (EXPENSE) (157,924) 146,875
Minority Interest, Net of Tax 8,620 8,620
----------- -----------
NET LOSS $(2,190,227) $(6,631,183)
=========== ===========
BASIC AND DILUTED LOSS PER SHARE $ (.04) $ (.12)
=========== ===========
AVERAGE WEIGHTED SHARES OUTSTANDING 54,678,902 53,202,779
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e-MedSoft.com
Consolidated Statement of Cash Flows
Nine Months Ended December 31, 1999
(Unaudited)
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss $(6,631,183)
Adjustments to reconcile net loss to net
cash used in operating activities:
Gain on exchange of debt for warrants (357,152)
Non-cash equity compensation 1,103,340
Deferred income taxes (81,844)
Depreciation 494,664
Amortization of goodwill 609,489
Amortization of deferred financing 1,243,440
(Increase)decrease in current assets:
Accounts receivable (2,723,000)
Inventory (723,501)
Prepayments and other receivables 574,627
Increase (decrease)in current liabilities:
Accounts payable and accrued liabilities 5,291,392
Income taxes (165,280)
-----------
Cash Used in Operating Activities (1,365,008)
-----------
CASH FLOW FROM INVESTING ACTIVITIES:
Investment in software (2,856,944)
Additions to property and equipment (247,406)
Business acquisition (31,526)
-----------
Cash Used in Investing Activities (3,135,876)
-----------
CASH FLOW FROM FINANCING ACTIVITIES:
Net proceeds from interim bridge financing 3,327,714
Payments on financing leases (264,707)
Net change to credit facility (161,590)
Funds from equity financing 7,939,865
-----------
Cash Provided by Financing Activities 10,841,282
-----------
INCREASE IN CASH 6,340,398
CASH AT THE BEGINNING OF THE PERIOD 51,712
-----------
CASH AT THE END OF THE PERIOD $ 6,392,110
===========
NON-CASH TRANSACTIONS
Issuance of warrants for payment of debt $ 505,738
Issuance of shares for acquisition of software 4,468,162
Property and equipment purchased through capital leases 812,594
-----------
$ 5,786,494
===========
5
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e-MedSoft.com
Notes to Consolidated Financial Statements
December 31, 1999
(Unaudited)
1) CONDENSED FINANCIAL STATEMENTS
The financial statements included herein have been prepared by e-MedSoft.com
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and footnote disclosures normally
included in the financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted as allowed by
such rules and regulations, and e-MedSoft.com believes that the disclosures
are adequate to make the information presented not misleading. Operating
results for the three and nine months ended December 31, 1999, are not
necessarily indicative of the results that may be expected for the year ending
March 31, 2000. While management believes the procedures followed in
preparing these financial statements are reasonable, the accuracy of the
amounts are in some respects dependent upon the facts that will exist, and
procedures that will be accomplished by e-MedSoft.com later in the year.
These financial statements should be read in conjunction with the March 31,
1999 audited financial statements and the accompanying notes thereto, and the
Forms 8-K filed by the Company on March 19, 1999 and September 1, 1999.
The management of e-MedSoft.com believes that the accompanying unaudited
condensed financial statements contain all adjustments (including normal
recurring adjustments) necessary to present fairly the financial position of
e-MedSoft.com and subsidiaries at December 31, 1999 and the results of their
operations and their cash flows for the periods presented.
2) BUSINESS COMBINATIONS
On March 19, 1999, the Company completed the acquisition of all issued and
outstanding stock of e-Net Technology Ltd. ("e-Net", formerly Palm Technology
Holdings Ltd), a UK based company. This acquisition has been accounted for
under the purchase method and therefore, the financial statements presented
herein include the operations of e-Net from the acquisition date. The
following information presents pro forma information for the prior three and
nine month periods ended December 31, 1998 of e-Net as if such transaction had
occurred at the beginning of the period (unaudited):
Three Months Nine Months
------------ -----------
Net Sales $ 4,297,998 $14,400,256
Cost of Sales 3,326,190 11,145,343
Gross Margin 971,808 3,254,913
Operating Expenses 1,065,648 3,342,968
Amortization of Goodwill 202,222 606,666
Interest Expense 66,737 214,419
Loss Before Income Taxes $ (362,799) $ (909,140)
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In May 1999, the Company's UK subsidiary acquired a small Internet financial
services business. This transaction was accounted for under the purchase
method. The goodwill realized in this acquisition was approximately $32,000
and is being amortized over a 5 year period.
During the nine months ended December 31, 1999, the Company acquired a 60%
interest in an Australian company to distribute certain e-MedSoft products in
various territories including Australia and Asia. The Company paid one
Australian dollar for the shares and has entered into a software marketing and
license agreement with the subsidiary whereby the Company will receive
$250,000 and royalty payments in return for an exclusive non-transferable
right to use, reproduce and exploit certain of the Company's software,
including the right to grant sublicenses, in the defined territories. The
financial statements of the subsidiary have been consolidated as of December
31, 1999 and consist of minor expenses, cash and minority interests. As of
December 31, 1999 the subsidiary had not yet commenced the distribution of
product and therefore, no revenues have been generated to date.
3) COMPANY FUNDING
During the third quarter ended December 31, 1999, the Company raised
approximately $7.1 million in gross funds through the sale of 3,568,000
restricted shares of its common stock and warrants to purchase an additional
3,568,000 restricted shares of common stock. The warrants carry an exercise
price of $4.00. The gross proceeds from these sales were reduced by
approximately $684,000 in private placement commissions and expenses. In
addition to the fees received, the private placement agent received warrants
to purchase 350,000 restricted shares of e-Med's stock at $5.00 per share and
warrants to purchase 1,300,000 restricted shares of e-MedSoft stock at $.01 per
share. TSI Technologies Holding, LLC, (formerly Sanga e-Health, LLC) a major
shareholder of the Company, has agreed to contribute 1,300,000 restricted
shares of the Company's stock for the exercise of the 1,300,000 warrants. In
a separate transaction the Company entered into a stock subscription agreement
and received $600,000 for the issuance of 300,000 shares of its common stock
and agreed to issue another 750,000 shares of its common stock for no
additional consideration upon the completion and acceptance of software being
developed for the Company.
During the nine months ended December 31, 1999 the Company received
approximately $1,277,000 from National Trust Properties, Inc. ("NTP"), a
related party as described below, as interim funding of its operations. In
consideration for approximately $888,000 of the funding provided by NTP to the
Company, the Company agreed to issue shares of its common stock based on the
trading price of the stock at the dates the funds were received. As of
December 31, 1999, the Company has an obligation to issue 287,021 shares to
NTP. The remaining balance of the funds received through December 31, 1999,
of $389,000, was recorded as related party debt. During December 1999 the
Company repaid $250,000 of this debt leaving a balance at December 31, 1999 of
approximately $139,000. This debt bears interest at prime plus 1% and is due
within one year from the funding date.
During the second quarter, the Company entered into a financing arrangement
with a strategic partner to fund the Company's operations in an amount not to
exceed $5,500,000. The obligation, which is secured by the Company's assets,
bears interest at prime plus 1% and is due one year from the draw date or on
the date the Company successfully obtains refinancing for the amounts loaned
under the financing arrangement, whichever is the earlier date. The Company
had borrowed $3,500,000 through December 31, 1999.
7
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4) SOFTWARE ACQUISITION
On September 1, 1999, the Company acquired from University Affiliates IPA
("UA," an affiliate of University of Southern California School of Medicine) a
managed care computer software technology for approximately $6,500,000,
including a cash payment of $2,000,000 and the issuance of 1,721,973 shares of
the Company's common stock with an approximate value of $4,500,000. In
addition, the Company entered into a ten-year contract with UA for exclusive
access to UA's network of more than 2,500 physicians. The agreement includes
revenue sharing of UA's network and exclusive use of the technology in
connection with UA's expansion of its physician network. In addition, the
Company has agreed to finance certain costs to further develop the software.
5) DEFERRED SOFTWARE DEVELOPMENT COSTS
During the nine months ended December 31, 1999, the Company incurred
approximately $2.2 million in development costs. In accordance with SOP 98-1
the Company capitalized approximately $857,000 of these costs in the third
quarter. Such deferred costs along with acquired software costs will be
amortized over a three to five year life once the related products are in
service.
6) WARRANTS AND STOCK OPTIONS
During the third quarter ended December 31, 1999, the Company granted 249,000
options to its employees to purchase 249,000 shares of the Company's stock at
prices ranging from $2.06 to $6.25. These options were granted in accordance
with the Company's stock option plan with exercise prices based on the market
price of the Company's stock at time of grant.
During the nine months ended December 31, 1999, the Company agreed to issue
50,000 warrants and 302,500 options to purchase 352,500 shares of its common
stock. The value of these warrants and options was approximately $619,400 and
will be amortized over the vesting periods of twelve to eighteen months. The
Company expensed approximately $104,000 and $129,000 for the three and nine
months ended December 31, 1999.
7) BASIC AND FULLY DILUTED LOSS PER SHARE
In accordance with SFAS No. 128, "Computation of Earnings Per Share," basic
earnings per share is computed by dividing the net earnings available to
common stockholders for the period by the weighted average number of common
shares outstanding during the period. Diluted earnings per share is computed
by dividing the net earnings for the period by the weighted average number of
common and common equivalent shares outstanding during the period.
Common equivalent shares, consisting of incremental common shares issuable
upon the exercise of stock options and warrants are excluded from the diluted
earnings per share calculation if their effect is anti-dilutive.
A summary of the shares used to compute net loss per share is as follows:
8
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Three Months Nine Months Ended
Ended 12/31/99 12/31/99
-------------- -----------------
Weighted average common shares
used to compute basic net loss
per share.............................. 54,678,902 53,202,779
Effect of dilutive securities........... -- --
---------- ----------
Weighted average common shares
used to compute diluted net
loss per share......................... 54,678,902 53,202,779
========== ==========
As of December 31, 1999, options and warrants to purchase 7,659,429 shares of
common stock were outstanding. These common stock equivalents were excluded
from the computation of diluted loss per share for the three and nine months
ended December 31, 1999 as such options and warrants were anti-dilutive.
8) SEGMENT INFORMATION
e-MedSoft.com derives its net sales from two operating segments: (1)
transaction and information services, primarily healthcare, delivered over the
Internet, private intranets or other networks and consulting contracts related
to these services and (2) the sale and installation of hardware and software
products. During the three and nine month periods ended December 31, 1999, the
Company derived primarily all of its net sales from its operations in the
United Kingdom, primarily from computer hardware and software sales.
The accounting policies of the segments are the same as those for financial
reporting purposes and the Company evaluates performance based on operating
earnings of the respective business segments.
The Company's net sales from external customers for the three and nine month
periods ended December 31, 1999 and the long-lived assets at December 31,
1999, classified by geographic area, were as follows (in thousands):
United United
States Kingdom Total
------ ------- -----
Net Sales:
Three months ended 12/31/99...... $ 150 $12,483 $12,633
Nine months ended 12/31/99....... 183 25,762 25,945
Long-lived assets at 12/31/99..... 14,961 1,774 16,735
The Company's U.K. subsidiary, e-Net, had three customers who's sales
represented over 5% of its net sales each for an aggregate of 37.2% for the
nine month period ended December 31, 1999.
9
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9) RELATED PARTY TRANSACTIONS
During the nine month period ended December 31, 1999, the Company received
funding from National Trust Properties, Inc. for the issuance of shares and
debt as described above. The Company's board member and a beneficial
shareholder, Mitchell J. Stein, is also an officer and director (but not
owner) of NTP.
10) COMMITMENTS AND CONTINGENCIES
The Company has national and international operations which, occasionally,
result in litigation which the Company does not view as material and arising
in the ordinary course of business. Because of the significant value of the
Company's technologies, it may occasionally be appropriate for the Company to
initiate litigation of its own to protect those technologies. Whether brought
by the Company or defended against by the Company, the litigation is often
immaterial and at this time the Company is unaware of any material litigation
involving any of its national or international operations. An example of an
immaterial matter is the pending litigation that involves a lawsuit brought
against 16 defendants, including the Company, by Icon Capital Corporation in
the Superior Court of the State of California for the County of Los Angeles,
which is a dispute between a small minority shareholder of Sanga
International, Inc. and a shareholder of the Company over stock in the
Company. After evaluating the matter with the Company's legal counsel,
management is of the opinion that the litigation creates no material or
significant risk of exposure to the Company. Icon was a small minority
shareholder in the now defunct Sanga International, Inc. ("Sanga"), and Sanga
was one of the two entities that initially were involved in developing the
health care system prior to the Company's acquisition of that system. In
essence, Icon is attempting to overturn a settlement agreement entered into
during July 1999 among Sanga and certain shareholders, officers and directors
of Sanga which provides how certain assets of Sanga, including the 9,000,000
shares of the Company's common stock that Sanga perfected under the settlement
agreement, will be treated as between the creditors and shareholders of Sanga.
The Company believes that the creditors and shareholders of Sanga disagree
with Icon's position. In fact, a motion has been brought to hold Icon and its
owner J. Bradley Hall in contempt of court for their actions. A motion to
dismiss has also been brought against Icon and Hall. The Company has also
sued Hall and Icon for breach of contract, and Hall and Icon defaulted and
failed to file an answer to the complaint. The Company is confident it will
obtain judgment against Hall and Icon."
11) SUBSEQUENT EVENT
Subsequent to quarter end, the Company entered into a seven year Preferred
Provider Agreement with National Century Financial Enterprises to provide its
services and software solutions with respect to all electronic needs of NCFE
and to have exclusive marketing access to all of NCFE's current clients for
the provision of e-Med's products. In addition, the agreement provides for a
proprietary Master Portal wherein all of NCFE's and e-Med's products and
services shall be able to be marketed and sold to all of NCFE's and e-Med's
customers. e-Med will receive fees for its services based on agreed upon fee
schedules and negotiated project fees. E-MedSoft will issue 9.5 million
shares to NCFE in consideration for NCFE 1) entering into the agreement, 2)
converting $4.7 million of e-Med's debt to equity, 3) providing $1 million of
equity financing and 4) providing an additional $4 million in financing that
will convert into equity upon the ability of NCFE to sell $4 million worth of
e-Med stock at a share price in excess of $9.50 per share. The Company is
also required to file a registration statement to register these shares. The
effect of this transaction will be accounted for in the fourth quarter of
2000.
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ITEM 2
e-MedSoft.com
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Statements in this Report that relate to management's expectations,
intentions or beliefs concerning future plans, expectations, events and
performance are "forward-looking" within the meaning of the federal securities
laws. These forward-looking statements include assumptions, beliefs and
opinions relating to the Company's business and growth strategy based upon
management's interpretation and analysis of its own contractual and legal
rights, of management's ability to satisfy industry and consumer needs with
its technologies, of healthcare industry trends, and of management's ability
to successfully develop, implement, market and/or sell its network transaction
processing services, software programs, clinical and financial transaction
services, and e-commerce systems to its clientele. Management's
forward-looking statements further assume that the Company will be able to
successfully develop and execute on its strategic relationships. Actual
results or events could differ materially from those anticipated in the
forward-looking statements due to a variety of factors, in addition to those
set out above, including, without limitation, acceptance by customers of the
Company's products, changing technology, competition in the health-care
market, government regulation of health care, the Company's limited operating
history, general economic conditions, availability of capital and other
factors.
GENERAL HISTORY
e-MedSoft.com (the "Company") was initially organized in Nevada on August
25, 1986, in order to evaluate, structure and complete a merger with, or
acquisition of, prospects consisting of private companies, partnerships or
sole proprietorships.
On January 7, 1999, the Company acquired from TSI Technologies and
Holding, LLC ("TSI") formerly Sanga e-Health, LLC, the rights to a JAVA-based,
on-line health care management system in exchange for 41,417,176 restricted
shares (post-split) of the Company's common stock. In connection with this
transaction, the Company completed a 5 for 1 forward stock split having a
record date of January 4, 1999. In addition, as consideration for finder's
fees and services, the Company issued 2,553,144 restricted shares of the
Company's common stock and 1,035,429 warrants to purchase restricted shares of
the Company's common stock exercisable at $.25 per share over five years.
On March 19, 1999, the Company acquired all of the issued and outstanding
stock of e-Net Technology Ltd. ("e-Net"), formerly Palm Technology Holdings
Ltd., a UK based company. e-Net is a diversified Web Technology company,
providing consulting services, training, technical support, computer software
and computer hardware to a broad range of customers. This acquisition was
accounted for under the purchase method.
The results of operations presented herein reflect the net sales and
expenses of e-Net and the costs of development and marketing the Company's
Software product acquired on January 7, 1999 (see above). Prior to the
acquisition of the on-line health care management system on January 7, 1999,
and the acquisition of e-Net on March 19, 1999, the Company's operating
expenses, interest income and expense were minimal. Therefore, the financial
statements included herein only present the historical information for the
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three months and nine months ended December 31, 1999. The following analysis
compares the operating results for the three and nine months ended December
31, 1999 to pro forma information for the three and nine months ended December
31, 1998, which gives effect to the acquisition of e-Net as if such
transaction had occurred at the beginning of that period (in
thousands)(unaudited):
12/31/99 12/31/98
Pro forma
3 months 9 months 3 months 9 months
-------- -------- -------- --------
Net Sales $12,633 $25,945 $4,298 $14,400
Cost of Sales 9,868 20,276 3,326 11,145
Gross Margin 2,765 5,669 972 3,255
Operating Expenses 4,593 11,100 1,268 3,950
Operating loss (1,828) (5,431) (296) (695)
NET SALES
Net sales for the three and nine months ended December 31, 1999 were
$12.6 million and $25.9 million, respectively, compared to pro forma revenues
for the three and nine months ended December 31, 1998 of $4.3 million and
$14.4 million. Orders in process for delivery of hardware and software at
December 31, 1999 and 1998 of approximately $5.0 million and $1.7 million,
respectively, were not included in revenues. The increase in reported net
sales was approximately $8.3 million and $11.5 million for the three and nine
months ended December 31, 1999. These increases are mainly the result of the
Company's U.K. subsidiary's ("e-Net") strong relationship with Sun
Microsystems ("Sun"). At the beginning of the year, e-Net obtained a higher
preferred vendor status with Sun and thereby increased its market share for
the sale and distribution of Sun hardware. In addition, as a result of e-Net's
focus on the internet marketplace, during the quarter ended December 31, 1999,
e-Net successfully sold and implemented its new enterprise java beans
e-commerce product ("esparto"). e-Net has now finalized 14 new contracts for
esparto, of which seven have been implemented. e-Net is also Sun's first UK
Applications Service Provider ("ASP"), which allows the Company to provide
complete end to end e-business solutions to its clients. The Company
currently has 11 clients using this ASP service. These clients represent
workwear apparel, wholesale businesses, laboratory products, fashion,
education and scientific supply procurement.
COST OF SALES
Cost of sales for the three and nine months ended December 31, 1999 were
$9.9 million and $20.3 million compared to pro forma cost of sales of $3.3 and
$11.1 million for the comparable prior year periods. The increase in cost of
sales was mainly due to the higher sales and distribution of Sun hardware.
Cost of sales as a percent of revenues increased slightly from 77.4% for the
pro forma nine month period ended December 31, 1998 to 78.1% for the nine
months ended December 31, 1999. This slight increase reflects the decrease in
hardware margins, as the Company has increased its market via its teaming with
Sun and Oracle to compete with other major hardware and software distributors
such as MicroSoft.
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OPERATING COSTS
RESEARCH AND DEVELOPMENT
Research and development costs of approximately $455,000 and $1,341,000
for the three and nine months ended December 31, 1999 consist of salaries,
professional fees and equipment costs of the internal development of new
e-commerce software products in the UK and the continuing development of new
internet products in the U.S. During the three and nine months ended December
31, 1999 e-Net incurred approximately $353,000 and $924,000, respectively, in
development costs. In addition, the Company's U.S. operations incurred
approximately $102,000 and $417,000 during the three and nine months ended
December 31, 1999, respectively, for the development of new Internet products
to be integrated with its existing Internet based health care management
system.
SALES AND MARKETING
Sales and marketing costs of approximately $1,056,000 and $2,704,000 for
the three and nine months ended December 31, 1999, mainly consist of costs for
salaries, travel, advertising, marketing literature and seminars. These costs
reflect the Company's business plan to increase markets and customers
throughout the United States and United Kingdom. Sales and marketing costs
for the nine months ended December 31, 1999 were approximately $2,294,000 in
the U.K. which reflected an increase of approximately $1,079,000 compared to
December 31, 1998 U.K. pro forma amounts. This is the result of increasing its
sales force to implement e-Net's planned market penetration into the internet
market as well as for the sale of hardware and software. In addition, the U.S.
operations incurred approximately $410,000 in sales and marketing costs for
the nine month period ended December 31, 1999 as a result of the marketing of
its web based health care management system and related sales force.
GENERAL AND ADMINISTRATIVE/NON CASH COMPENSATION
General and administrative costs of approximately $1,834,000 and
$4,848,000 for the three and nine months ended December 31, 1999 mainly
consist of salaries, facility costs and professional fees. Non cash
compensation costs of approximately $850,000 and $1,103,000 for the three and
nine months ended December 31, 1999 represent compensation paid to employees
and consultants through the issuance of shares, warrants and options.
Approximately $4.2 million of the above combined costs for the nine months
ended December 31, 1999 related to the Company's reorganization and
infrastructure development of its U.S. operations in accordance with its
business plans. These costs, which include legal fees, accountancy fees and
other consulting fees, also represent the efforts of the Company to broaden
its financial and investment market visibility and obtain funding for its
operations and planned expansion.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization of approximately $398,000 and $1,104,000
for the three and nine months ended December 31, 1999 include amortization of
goodwill of $204,000 and $609,000 for the respective periods. The Company is
amortizing goodwill over a five- to ten-year period.
13
<PAGE>
FINANCE COSTS
Finance costs of approximately $1,714,000 for the nine months ended
December 31, 1999 include approximately $1,243,000 of amortization of deferred
financing costs incurred as a result of the bridge financing obtained for the
acquisition of e-Net. As of June 30, 1999 all deferred financing costs had
been amortized. In addition, finance costs include approximately $211,000 and
$471,000 of interest expense on the Company's bridge debt and e-Net's credit
facility for the three and nine month periods ended December 31, 1999,
respectively.
EXTRAORDINARY GAIN
The extraordinary gain of approximately $357,000 is due to the
recognition of the gain associated with the exchange of bridge debt and its
related origination fees and interest payable for the issuance of warrants.
INCOME TAXES
Income tax benefit of approximately $147,000 for the nine months ended
December 31, 1999 reflect an estimated tax benefit for the U.K. operations
that the Company projects will be used by the end of the year. The Company
has estimated the effective U.K. tax rate at 31% after related tax
adjustments.
LIQUIDITY
The operating costs of the Company have been funded by its operations,
sale of equity, its credit facility, and through loans from private investors.
As of December 31, 1999, the Company had negative working capital of
approximately $927,000, including cash of $6,392,000 and restricted cash of
$14,000. The negative working capital includes current liabilities of
approximately $806,000 and $3.9 million for the Company's credit facility and
bridge financing, respectively. It is anticipated that the credit facility
will continue to renew and not be payable within a year. In addition,
subsequent to the quarter end, approximately $3.9 million of the bridge
financing included in current liabilities was converted into equity.
During the quarter ended December 31, 1999, the Company raised
approximately $7.1 million in net proceeds from the sale of its common stock.
These funds were used to reduce the bridge financing and related party loans
by approximately $550,000, as discussed below. The remainder of the funds
will be used to fund the Company's operations and continued development of its
internet software.
During the quarter ended June 30, 1999, the Company renegotiated the
financing terms on the debt obtained in connection with the e-Net acquisition.
As a result, $750,000 of the debt was exchanged for warrants to acquire
150,000 shares of the Company's common stock at $.01, and the remaining debt
was extended 24 months to May 19, 2001. In December 1999, the Company made a
principal payment of $300,000 per the extension agreement.
During the nine months ended December 31, 1999 the Company received
approximately $1,277,000 from National Trust Properties, Inc. ("NTP"), a
related party as described herein, as interim funding of its operations. In
consideration for approximately $888,000 of the funding provided by NTP to the
Company, the Company agreed to issue shares of its common stock based on the
trading price of the stock at the dates the funds were received. As of
December 31, 1999, the Company has issued 287,021 shares to NTP. The
remaining balance of the funds received through December 31, 1999, of
14
<PAGE>
$389,000, was recorded as related party debt. During December, 1999 the
Company repaid $250,000 of this debt leaving a balance at December 31, 1999 of
approximately $139,000. This debt bears interest at prime plus 1% and is due
within one year from the funding date.
During the quarter ended September 30, 1999, the Company entered into a
financing arrangement with a strategic partner to fund the Company's
operations and acquisition of managed care computer software technology in an
amount not to exceed $5,500,000. The obligation bears interest at prime plus
1%, is secured by the Company's assets and is due one year from the draw date
or if the Company successfully obtains refinancing for the amounts loaned
under the financing arrangement, whichever is the earlier date. At December
31, 1999, the Company has borrowed $3,500,000 on this commitment, of which
$2,000,000 was used to fund the purchase of managed care software technology.
Subsequent to the December 1999 quarter end, the debt under this commitment
has been converted into equity. The remaining balance on the commitment has
been canceled and replaced with an agreement to fund the Company another $5
million in equity financing.
As of December 31, 1999, the Company's U.K. subsidiary, e-Net, had a
credit facility for 900,000 pounds with an expiration date of July 31, 2000.
Subsequent to the end of the quarter, the bank has increased e-Net's facility
to 1,500,000 pounds.
The Company believes that its current funds raised through the sale of
its stock and funds available through the $5,000,000 financing commitment and
its 1.5 million pound credit facility are sufficient to meet the working
capital needs of its U.S. and U.K. operations through at least mid year fiscal
2001. It is management's belief that the long range operations (post mid year
fiscal 2001) of the Company are dependent upon the ability of the Company to
obtain additional debt or equity funding to support the 1) implementation and
roll-out of its healthcare management systems to customers under contract, 2)
to expand its customer base and 3) develop, acquire or enhance new
applications and services. The Company is actively pursuing additional
financing and equity arrangements to accomplish these goals, however, there
can be no assurance that funding will be available on terms acceptable to the
Company, or at all.
YEAR 2000 COMPLIANCE
The Company is aware of the issues associated with the programming code
in existing computer systems as the year 2000 approaches. The Company has
reviewed its proprietary health care management software systems that were
acquired in January 1999 and which the Company has started marketing to
customers. The Company believes that these systems and applications, which the
Company has continued to develop, are designed to be Year 2000 compliant. In
addition, the Company has reviewed the software system acquired from
University Affiliates in September 1999. University Affiliates provided
documentation certifying the year 2000 compliance of the acquired systems.
Accordingly, the Company did not incur any costs or reflect any expenses
during the period for implementation of Year 2000 programming code corrections
and does not anticipate any such costs in the future.
e-Net has implemented programs to identify and correct year 2000
problems. This program was initiated in the early part of 1997 and a
company-wide program was carried out and steps were taken to re-write software
and take other actions necessary to ensure that the Company's software and
hardware is year 2000 compliant. The risk analysis also considered the impact
on the business of year 2000 related failures by the Company's significant
suppliers and customers. The predominant supplier, Sun Microsystems provided
15
<PAGE>
the Company with a formal confirmation that they are fully year 2000
compliant. The Company has been in communication with its other significant
suppliers and customers to ensure that any potential problems are rectified.
However, given the complexity of the issue, it is the Company's belief that
they cannot guarantee that no year 2000 problems will remain. e-Net's
management believes that it has achieved an acceptable state of readiness and
it also has the appropriate resources available to deal promptly with
significant subsequent failures or issues that might arise.
The Company is just starting to work with some of its customers of the
health care management system and one of the items, which will be addressed,
is whether the customers' existing computer systems are year 2000 compliant.
Management expects that many of the companies it will be selling to in the
health care industry are not year 2000 compliant. Until the Company learns
more about the specific facts of its customers, it is not able to determine
what the impact will be on the Company if these customers are not year 2000
compliant. However, the Company shall have no liability for any failure of
customers' or third party's software, hardware, applications, databases or
other systems to be year 2000 compliant or any year 2000 issues not solely
caused by the Company's system.
The Company may be vulnerable to the failure of various third party
vendors and suppliers to be year 2000 compliant. Its business will be
dependent on the operation of numerous systems that could potentially be
impacted by year 2000 related problems. Those systems include hardware and
software systems used by the Company to deliver services to its customers;
communications networks such as the Internet and private intranets, which the
Company will depend on to provide electronic transactions to its customers;
the internal systems of the customers; and non-information technology systems
and services used by the Company in its business, such as telephone systems
and building systems. The Company has completed an assessment of all third-
party hardware and software that it uses to provide service of any kind to its
customers, and management has concluded that all aspects are Year 2000
compliant. In addition, the Company has requested and received Year 2000
compliance documentation from vendors of third-party products on which it is
reliant, including Sun Microsystems and IBM. The Company has a formal
contingency plan that includes, but is not limited to, resetting the system
date on the service systems and rerouting all of its network traffic through
dedicated lease lines in the event of an outage at its telecommunications
provider.
Although the Company cannot guarantee that no 2000 problems will occur,
management believes that it has the appropriate resources to mitigate the risk
to the Company of any year 2000 problems. As of February 13, 2000, the
Company has not incurred any year 2000 related computer problems or failures.
16
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
The Company has national and international operations which,
occasionally, result in litigation which the Company does not view as material
arising in the ordinary course of business. Because of the significant value
of the Company's technologies, it may occasionally be appropriate for the
Company to initiate litigation of its own to protect those technologies.
Whether brought by the Company or defended against by the Company, the
litigation is often immaterial and at this time the Company is unaware of any
material litigation involving any of its national or international operations.
An example of an immaterial matter is the pending litigation that involves a
lawsuit brought against 16 defendants, including the Company, by Icon Capital
Corporation in the Superior Court of the State of California for the County of
Los Angeles, which is a dispute between a small minority shareholder of Sanga
International, Inc. and a shareholder of the Company over stock in the
Company. After evaluating the matter with the Company's legal counsel,
management is of the opinion that the litigation creates no material or
significant risk of exposure to the Company. Icon was a small minority
shareholder in the now defunct Sanga International, Inc. ("Sanga"), and Sanga
was one of the two entities that initially were involved in developing the
health care system prior to the Company's acquisition of that system. In
essence, Icon is attempting to overturn a settlement agreement entered into
during July 1999 among Sanga and certain shareholders, officers and directors
of Sanga which provides how certain assets of Sanga, including the 9,000,000
shares of the Company's common stock that Sanga perfected under the settlement
agreement, will be treated as between the creditors and shareholders of Sanga.
The Company believes that the creditors and shareholders of Sanga disagree
with Icon's position. In fact, a motion has been brought to hold Icon and its
owner J. Bradley Hall in contempt of court for their actions. A motion to
dismiss has also been brought against Icon and Hall. The Company has also
sued Hall and Icon for breach of contract, and Hall and Icon defaulted and
failed to file an answer to the complaint. The Company is confident it will
obtain judgment against Hall and Icon."
ITEM 2. CHANGES IN SECURITIES.
SALES OF RESTRICTED SECURITIES. During the three months ended December
31, 1999, the Company sold 3,568,000 Units, each Unit consisting of one share
of Common Stock and one Warrant to purchase Common Stock, to approximately 103
accredited investors at a purchase price of $2.00 per Unit. Each Warrant is
exercisable to purchase one share of Common Stock at $4.00 per share until
December 31, 2004. In connection with such sales the Company paid to Sutro &
Company, Inc. a 7% cash commission and Sutro was reimbursed $184,615 for
expenses.
With respect to these sales, the Company relied on Section 4(2) of the
Act, and Rule 506 of Regulation D promulgated thereunder. The investors were
given a copy of a Private Placement Memorandum containing information
concerning the Company, a Form D was filed with the SEC and the Company
complied with the other applicable requirements of Rule 506. All investors
signed subscription agreements in which they represented that they were
purchasing the units for investment only and not for the purpose of resale and
distribution. The appropriate restrictive legends were placed on the
certificates and stop transfer orders were issued to the transfer agent.
17
<PAGE>
In November 1999, the Company also sold 300,000 shares of its Common
Stock to StartNest, LLC in exchange for $600,000 in cash. With respect to
this sale, the Company relied on Section 4(2) of the Act. The investor was
given access to complete information concerning the Company. The appropriate
restrictive legend was placed on the certificate and stop transfer orders were
issued to the transfer agent.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
ITEM 5. OTHER INFORMATION.
Subsequent to quarter end, the Company entered into a seven year
Preferred Provider Agreement with National Century Financial Enterprises to
provide its services and software solutions with respect to all electronic
needs of NCFE and to have exclusive marketing access to all of NCFE's current
clients for the provision of e-Med's products. In addition, the agreement
provides for the establishment of a proprietary Master Portal wherein all of
NCFE's and e-Med's products and services will be able to be marketed and sold
to all of NCFE's and e-Med's customers. e-Med will receive fees for its
services based on agreed to fee schedules and negotiated project fees. e-
MedSoft will issue 9.5 million shares to NCFE in consideration for NCFE 1)
entering into the agreement, 2) converting $4.7 million of e-Med's debt to
equity, 3) providing $1 million of equity financing and 4) providing an
additional $4 million in financing that will convert into equity upon the
ability of NCFE to sell $4 million worth of e-Med stock at a share price in
excess of $9.50 per share. The Company is also required to immediately begin
preparation of a registration statement to be filed with the Securities and
Exchange Commission covering the sale of the shares issued to NCFE, and NCFE
has agreed that any sales of the Company's Common Stock made pursuant to this
registration statement will be subject to the volume limitations of Rule 144.
The Company still maintains a Sale and Subservicing Agreement with NCFE
involving the provision by NCFE of a securitization line for certain potential
segments of the Company's ongoing operations.
The Company regularly enters into contracts and relationships in the
ordinary course of its business, and occasionally these contracts or
relationships could be terminated by the Company or the other party or both.
Therefore, as in the case of most contracts and undertakings, there can be no
assurance that any contract that is entered into will not be terminated by
either party before the completion of the contractual terms.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
27 Financial Data Schedule Filed herewith
electronically
(b) REPORTS ON FORM 8-K. None.
18
<PAGE>
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.
e-MedSoft.com
Date: February 14, 2000 By: /s/ Margaret A. Harris
Margaret A. Harris, Chief
Financial Officer
19
<PAGE>
EXHIBIT METHOD OF FILING
- ------- -----------------------------
27. FINANCIAL DATA SCHEDULE Filed herewith electronically
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
balance sheet and statements of operations found on pages 3 and 4 of the
Company's Form 10-QSB for the year to date, and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 6,392,110
<SECURITIES> 0
<RECEIVABLES> 7,241,469
<ALLOWANCES> 0
<INVENTORY> 1,436,503
<CURRENT-ASSETS> 15,960,000
<PP&E> 1,862,773
<DEPRECIATION> 0
<TOTAL-ASSETS> 32,695,418
<CURRENT-LIABILITIES> 16,887,397
<BONDS> 0
0
0
<COMMON> 57,871
<OTHER-SE> 13,426,559
<TOTAL-LIABILITY-AND-EQUITY> 32,695,418
<SALES> 25,944,826
<TOTAL-REVENUES> 25,944,826
<CGS> 20,276,340
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 11,099,989
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,713,766
<INCOME-PRETAX> (6,786,678)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,631,183)
<EPS-BASIC> (.12)
<EPS-DILUTED> (.12)
</TABLE>
