<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For The Quarterly Period Ended June 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the transition period from to
---------------- ---------------------
Commission File Number: 0-25530
LIFERATE SYSTEMS, INC.
(Exact name of small business issuer as specified in its charter)
MINNESOTA 41-1682994
(State or other jurisdiction (I.R.S. employer
of incorporation or organization) identification No.)
7210 METRO BOULEVARD
EDINA, MINNESOTA 55439
(Address of principal executive offices)
(612) 844-0599
(Issuer's telephone number)
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 as the issuer 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 August 1, 1996, the issuer had 3,811,639 shares of Common Stock
outstanding.
Transitional Small Business Disclosure Format (check one): Yes No X
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LIFERATE SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Condensed Balance Sheets -
December 31, 1995 and June 30, 1996 2
Condensed Statements of Operations -
Three Months Ended June 30, 1995 and 1996 and
Six Months Ended June 30, 1995 and 1996
and Date of Inception to June 30, 1996 3
Statements of Cash Flow -
Six Months Ended June 30, 1995 and 1996
and Date of Inception to June 30, 1996 4
Notes to Condensed Financial Statements 5
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 6
1
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LIFERATE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31 JUNE 30
1995 1996
-------- --------
(NOTE) (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 7,750,500 $5,678,800
Accounts receivable, less allowance
of $7,500 at December 31, 1995 and
$4,100 at June 30, 1996 104,400 199,800
Prepaid expenses and other current assets 61,000 169,600
--------- ---------
Total current assets 7,915,900 6,048,200
Furniture and fixtures 56,200 61,800
Computer equipment 355,800 785,500
Telephone equipment -- 48,500
--------- ---------
412,000 895,800
Less accumulated depreciation 87,300 119,100
--------- ---------
324,700 776,700
Software development costs, net of
amortization of $0 at December 31, 1995 and
$50,400 at June 30, 1996 151,300 100,900
Other assets 11,800 --
-- --
--------- ---------
Total Assets $8,403,700 $6,925,800
--------- ---------
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 1,128,300 $ 640,900
Current portion of notes payable-related
parties 6,500 --
Current portion of notes payable 9,900 18,500
Current portion of capitalized lease
obligations 11,500 7,000
--------- ---------
Total current liabilities 1,156,200 666,400
Notes payable 12,600 --
Capitalized lease obligation 1,000 --
Deferred rent 28,700 22,700
Deferred revenue 60,900 338,500
Shareholders' equity:
Preferred stock, no par value:
Authorized shares -- 1,000,000
Issued and outstanding shares -- none in
1995 and 1996
Common stock, no par value:
Authorized shares -- 10,000,000
Issued and outstanding shares -- 3,474,428
at December 31, 1995 and 3,811,639 at
June 30, 1996 14,384,100 16,293,000
Deficit accumulated during the development
stage (7,234,800) (10,389,800)
---------- -----------
7,149,300 5,903,200
Less stock subscriptions receivable 5,000 5,000
--------- ---------
Total shareholders' equity 7,144,300 5,898,200
--------- ---------
Total liabilities and shareholders' equity $ 8,403,700 $ 6,925,800
--------- ---------
--------- ---------
</TABLE>
Note: The balance sheet at December 31, 1995 has been derived from the
audited financial statements at that date.
2
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LIFERATE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
July 18, 1990
Three months Six Months (Date of
Ended June 30, Ended June 30, Inception) to
------------------- ------------------- June 30,
1995 1996 1995 1996 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net revenues $ 69,400 $ 150,100 $ 134,400 $ 259,300 $ 833,900
Cost of revenues -- 35,900 -- 79,800 122,800
------- -------- ------- -------- ---------
Gross profit 69,400 114,200 134,400 179,500 711,100
Operating expenses:
Sales and marketing 880,500 617,800 1,182,500 1,236,700 4,148,500
Research and development 96,100 560,400 142,600 1,052,300 3,754,000
General and administrative 219,300 727,500 484,600 1,210,900 3,430,100
------- ------- ------- --------- ---------
Loss from operations (1,126,500) (1,791,500) (1,675,300) (3,320,400) (10,621,500)
Interest income 49,000 77,000 56,300 168,100 265,100
Interest expenses -- 1,400 -- 2,700 33,400
--------- -------- --------- --------- ---------
Net loss $ (1,077,500) $(1,715,900) $ (1,619,000) $(3,155,000) $(10,389,800)
------------ ----------- ------------ ----------- ------------
------------ ----------- ------------ ----------- ------------
Net loss per share $ (0.46) $ (0.45) $ (0.85) $ (0.84) $ (9.08)
------------ ----------- ------------ ----------- ------------
------------ ----------- ------------ ----------- ------------
Weighted average number of
common shares outstanding 2,318,241 3,804,973 1,900,422 3,762,955 1,144,876
------------ ----------- ------------ ----------- ------------
------------ ----------- ------------ ----------- ------------
</TABLE>
3
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LIFERATE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
July 18, 1990
(date of
inception) to
Six Months Ended June 30, June 30,
-------------------------------
1995 1996 1996
---- ---- ----
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Loss $(1,619,000) $(3,155,000) $(10,389,800)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization 14,600 82,200 169,500
Writedown of software development costs
to net realizable value 22,900 0 599,600
Stock issued for services 79,500 0 187,500
Changes in operating assets and liabilities:
Accounts receivable (85,700) (95,400) (199,800)
Advances to agent 108,000 0 0
Prepaid and other current assets (25,100) (108,600) (169,600)
Other assets (134,700) 11,800 0
Accounts payable and other accrued
liabilities (98,500) (487,400) 640,900
Deferred revenue (5,400) 277,600 338,500
Deferred rent (10,000) (6,000) 22,700
---------- ---------- ----------
Net cash used in operating activities (1,753,400) (3,480,800) (8,800,500)
Investing activities
Software development costs (470,400) 0 (750,900)
Purchase of furniture and equipment (210,000) (483,800) (895,800)
---------- ---------- ----------
Net cash used in investing activities (680,400) (483,800) (1,646,700)
FINANCING ACTIVITIES
Payments on notes payable and capital lease
obligations (24,000) (16,000) (264,700)
Stock subscription received 117,200 0 (5,000)
Proceeds from issuance of notes payable 30,000 0 290,200
Proceeds from issuance of common stock 4,263,700 1,908,900 16,105,500
---------- ---------- ----------
Net cash provided by financing activities 4,386,900 1,892,900 16,126,000
---------- ---------- ----------
Increase in cash and cash equivalents 1,953,100 (2,071,700) 5,678,800
Cash and cash equivalents at beginning
of period 613,200 7,750,500 -
---------- ---------- ----------
Cash and cash equivalents at end of period $2,566,300 $5,678,800 $5,678,800
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
4
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LIFERATE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
JUNE 30, 1996
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
LifeRate Systems, Inc. is a development stage enterprise engaged in
marketing proprietary clinical systems and related software to health care
providers and payors to produce information to measure and quantify the
quality and cost of health care.
2. BASIS OF PRESENTATION
The financial information presented as of June 30, 1995 and June 30, 1996
has been prepared from the books and records without audit. Financial
information as of December 31, 1995 is based on audited financial
statements of LifeRate Systems, Inc. but does not include all disclosures
required by generally accepted accounting principles. In the opinion of
management, all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial information
for the periods indicated have been included. For further information
regarding the Company's accounting policies, refer to the financial
statements and related notes included in the Company's Form 10-KSB for the
fiscal year ended December 31, 1995, as filed with the Securities and
Exchange Commission.
5
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MANAGEMENT'S DISCUSSION AND ANALYSIS
INTRODUCTION
The Company's activities during the second quarter of 1996 consisted of
marketing the outpatient module of LifeRate Cardiovascular, developing the
cardiac catheterization laboratory ("Cath Lab") and operating room modules of
LifeRate Cardiovascular, continuing to build its National Cardiology Database
and installing the system at cardiology practice groups. To date, the Company
has entered into agreements for the sale and installation of LifeRate
Cardiovascular with five cardiovascular practice groups. The initial Cath Lab
module was completed in May 1996 for Beta test site installation, and the
operating room module is expected to be available for commercial release in
August 1996.
In April 1996, the Company made key management changes and made two new
significant appointments. David D. Koentopf was elected Chairman of the Board.
Mr. Koentopf, a Twin Cities-based private investor and business consultant, has
been a member of the Board of Directors of the Company since 1993. The Board
also elected William W. Chorske as President and Chief Executive Officer and a
member of the Board. Prior to joining the Company, Mr. Chorske had been
employed by Medtronic, Inc. since 1987 in a variety of capacities, including
Senior Vice President and Chief Financial Officer from 1987 to 1991 and most
recently as President, Medtronic Europe.
RESULTS OF OPERATIONS
Revenues of $150,100 for the three months ended June 30, 1996, reflect the
installation of LifeRate Cardiovascular at three sites. These installations
began late in the first quarter of 1996. Installation and non-recurring fees
associated with these installations contributed 44.4% of the revenues recognized
in the second quarter of 1996. The remaining revenue consisted primarily of
development fees and recurring license fees. Revenues in the second quarter of
1995 of $69,400 consisted of $15,000 of recurring license fees associated with
the Company's first cardiology outpatient installation with the remainder
consisting mainly of one time development fees.
Revenues of $259,300 for the six months ended June 30, 1996, are $124,900
greater than those generated for the same period in 1995. Current year revenues
reflect the increased installation of LifeRate Cardiovascular in 1996 as it has
been installed at five practice groups through June 30, 1996, versus only one
initial site through June 30, 1995. The Company anticipates that installations
and conversion fees, as well as ongoing license fees, will continue to grow as a
percentage of sales.
The cost of revenues recorded for the second quarter of 1996 included
$8,600 of costs incurred for installation of LifeRate Cardiovascular that
generated the majority of the second quarter revenues. It also includes $25,200
of amortization of capitalized software costs. Cost of revenues of the six
month period ended June 30, 1996 include $50,400 of amortization of capitalized
software costs, the $8,600 incurred in the second quarter for LifeRate
Cardiovascular installations, and $18,700 of development expense recorded in the
first quarter against a development contract which produced the majority of
revenue in that period. There were no costs of revenues recorded during the
three and six month periods ended June 30, 1995. Future periods will also be
affected by royalty payments as the Company is obligated to pay royalties to
third parties based on revenues. The Company is currently obligated to pay
royalties to one third party equal to 10% of the sales
6
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of LifeRate Cardiovascular and to another third party equal to 7.5% of sales of
LifeRate's system. The Company is also obligated to pay royalties to a third
party equal to 2% of database sales from August 1, 1996 through July 30, 2001.
Sales and marketing expenses were $617,800 for the three months ended
June 30, 1996, which is a $262,700 (29.8%) decrease from the same period last
year. For the six month period ended June 30, 1996, sales and marketing expenses
were $1,236,700, compared to $1,182,500 for the prior year, a $54,200 (4.6%)
increase. Sales and marketing expenses increased during the first quarter of
1996 as the Company was developing the organization to support the intensified
marketing following the December 1995 commercial release of LifeRate
Cardiovascular. During 1995, Clinical Sales & Service, Inc. ("CSSI") provided
substantially all of the Company's sales, marketing and clinical support
functions. Effective January 1, 1996, the employees of CSSI became employees of
the Company. Since that time, the Company has directly employed its sales,
marketing and clinical support personnel. The sales and marketing expense has
slowed in the second quarter as hiring and training of employees has been
completed and other expenses previously recorded as sales and marketing expenses
are now billed to the customer.
Expenses for research and development have increased significantly from
1995 to 1996. Research and development expenses were $560,400 for the second
quarter of 1996, a $464,300 increase from the same period last year. For the
six month period ended June 30, 1996, research and development expenses were
$1,052,000, $909,400 greater than the comparable period of 1995. These
increases reflect the intensified development efforts for the Cath Lab and
operating room modules of LifeRate Cardiovascular, the addition of a software
quality assurance function, as well as a number of one-time costs associated
with the recruitment and relocation of key staff members and the costs
associated with accommodating the increased staff size. The Company plans to
continue to invest the resources needed to develop the product capabilities
being demanded by its customer base.
The Company incurred general and administrative expenses in the second
quarter 1996 of $727,500, compared to $219,300 in the prior year, an increase of
$508,200. General and administrative expenses for the six months ended June 30,
1996 increased $726,300 over the same period of 1995 to $1,210,900. The
increase reflects $181,000 incurred in the second quarter of 1996 to cancel a
lease for new office facilities and the added costs needed to support the
overall higher level of activity of the Company due to the commercialization of
its first product.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1996, the Company's cash and cash equivalents were $5,678,800,
a decrease of $2,071,700 from December 31, 1995. In January 1996, the Company
closed on a private placement of 295,546 shares of Common Stock at a price of
$6.50 per share, which provided net proceeds of $1,683,300 to the Company.
During the first two quarters of 1996, the Company used approximately $3,481,000
to fund operations and $483,800 for the purchase of equipment. While the
Company does not have significant commitments to purchase additional equipment,
it does plan to continue to fund such purchases as required to support product
and market development needs. The Company anticipates that the purchase of
equipment will be less in the last half of 1996 compared to the level of the
first six months.
The Company believes that cash and cash equivalent balances at June 30,
1996 are sufficient to fund the Company's operations through the end of 1996.
Thereafter, the Company may require
7
<PAGE>
additional capital to continue operations. There is no assurance that the
Company will be able to obtain additional financing or that, if available, terms
of any such financing will be satisfactory to the Company.
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On May 28, 1996, the Company held its Annual Meeting of Shareholders (the
"Meeting"). At the Meeting, the following individuals were elected to serve one
year terms as directors of the Company as indicated: William W. Chorske
(3,168,250 votes for, 2,050 votes abstaining), David D. Koentopf (3,168,450
votes for, 1,850 votes abstaining), Stanley R. Cowle (3,164,950 votes for, 5,350
votes abstaining), William D. Knopf, M.D. (3,168,300 votes for, 2,000 votes
abstaining), Daniel A. Pelak (3,168,450 votes for, 1,850 votes abstaining),
Kevin L. Roberg (3,168,450 votes for, 1,850 votes abstaining), Carl J. Schramm
(3,165,450 votes for, 4,850 votes abstaining), Donald C. Wegmiller (3,165,450
votes for, 4,850 votes abstaining). In addition, the following matters were
submitted to the shareholders for their vote and approved as indicated: (i) a
proposal to approve the Company's Employee Stock Purchase Plan (2,490,023 votes
for, 41,850 against, and 74,477 votes abstaining); (ii) a proposal to amend the
Company's 1993 Stock Option Plan to increase the number of shares of Common
Stock available for issuance thereunder to 750,000 shares (1,937,187 votes for,
593,236 against, and 11,477 votes abstaining); and (iii) a proposal to ratify
the selection of Ernst & Young LLP as independent auditors of the Company for
the fiscal year ending December 31, 1996 (3,161,577 votes for, 4,300 against,
and 4,423 votes abstaining).
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS.
Item No. Item Method of Filing
-------- ---- ----------------
27.1 Financial Data Schedule Filed herewith.
(b) REPORTS ON FORM 8-K.
None.
8
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this report to be signed on its behalf by the undersigned, thereunder
duly authorized.
Dated: August 14, 1996 LifeRate Systems, Inc.
By:/s/ William W. Chorske
-------------------------------------
William W. Chorske
President and Chief Executive Officer
(Principal Executive Officer)
By:/s/ Bruce T. Klein
-------------------------------------
Bruce T. Klein
Chief Financial Officer
(Principal Financial and
Accounting Officer)
9
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LIFERATE SYSTEMS, INC.
EXHIBIT INDEX TO QUARTERLY
REPORT ON FORM 10-QSB
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1996
Item No. Item Method of Filing
-------- ---- ----------------
27.1 Financial Data Schedule......................Filed herewith.
10
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENT OF EARNINGS AND THE BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> JUN-30-1996
<CASH> 5,679
<SECURITIES> 0
<RECEIVABLES> 204
<ALLOWANCES> 4
<INVENTORY> 0
<CURRENT-ASSETS> 6,048
<PP&E> 896
<DEPRECIATION> 119
<TOTAL-ASSETS> 6,926
<CURRENT-LIABILITIES> 666
<BONDS> 0
0
0
<COMMON> 16,293
<OTHER-SE> (10,390)
<TOTAL-LIABILITY-AND-EQUITY> 6,926
<SALES> 150
<TOTAL-REVENUES> 150
<CGS> 36
<TOTAL-COSTS> 1,906
<OTHER-EXPENSES> (77)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1
<INCOME-PRETAX> (1,716)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,716)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,716)
<EPS-PRIMARY> (.45)
<EPS-DILUTED> (.45)
</TABLE>
