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 September 30, 1997
[ ] 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 Registrant as specified in its charter)
Minnesota 41-1682994
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
7210 Metro Boulevard
Edina, Minnesota 55439
(Address of principal executive offices, including zip code.)
(612) 844-0599
(Registrant's telephone number)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of October 29, 1997, there were 3,824,755 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
<PAGE>
LIFERATE SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
-----------------------------
<TABLE>
<CAPTION>
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Condensed Balance Sheets - 3
September 30, 1997 and December 31, 1996
Condensed Statements of Operations - 4
Three Months Ended September 30, 1997 and 1996 and nine months ended
September 30, 1997 and 1996 and Date of Inception to September 30, 1997.
Statements of Cash Flow - 5
Nine Months Ended September 30, 1997 and 1996
and Date of Inception to September 30, 1997.
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 7
</TABLE>
<PAGE>
LIFERATE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30, December 31,
ASSETS 1997 1996
(UNAUDITED) (NOTE)
------------ ------------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 81,200 $ 2,072,000
Accounts receivable, less allowance of $22,900 at September 30,
1997 and $60,400 at December 31, 1996 193,700 142,400
Prepaid expenses and other current assets 151,700 122,700
------------ ------------
Total current assets 426,600 2,337,100
Furniture and fixtures 206,100 177,400
Computer equipment 840,600 837,200
------------ ------------
1,046,700 1,014,600
Less accumulated depreciation 547,000 325,900
------------ ------------
499,700 688,700
Software development costs, net of amortization of $151,300 at
September 30, 1997 and $100,800 at December 31, 1996 -- 50,500
------------ ------------
Total Assets $ 926,300 $ 3,076,300
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued liabilities $ 485,200 $ 417,800
Accrued interest 56,200 --
Other current liabilities 15,600 73,900
Current portion of convertible notes payable-related parties 1,104,000 --
Current portion of notes payable 504,500 10,800
Current portion of capitalized lease obligations 8,700 1,000
------------ ------------
Total current liabilities 2,174,200 503,500
Convertible subordinated note 2,250,000 2,250,000
Accrued interest 104,600 --
Notes payable -- 1,800
Capitalized lease obligation 5,000 --
Deferred rent 7,900 16,800
Deferred revenue 248,500 151,800
Shareholders' equity (deficit):
Preferred stock, no par value: Authorized shares - 1,000,000
Issued and outstanding shares-none in 1997 and 1996
Common stock, no par value: Authorized shares - 20,000,000
Issued and outstanding shares - 3,824,755 at September 30, 1997
and 3,811,639 at December 31, 1996 17,299,900 17,260,700
Deficit accumulated during the development stage (21,163,800) (17,108,300)
------------ ------------
Total shareholders' equity (deficit) (3,863,900) 152,400
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 926,300 $ 3,076,300
============ ============
</TABLE>
Note: The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date.
<PAGE>
LIFERATE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
July 18, 1990
Three Months Nine Months (Date of
Ended September 30 Ended September 30 Inception) to
------------------------------ -----------------------------
1997 1996 1997 1996 September 30 1997
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 122,500 $ 49,200 $ 366,100 $ 308,500 $ 1,556,400
Cost of revenues 134,600 220,000 508,400 711,200 1,562,000
------------ ------------ ------------ ------------ ------------
Gross profit (12,100) (170,800) (142,300) (402,700) (5,600)
Operating expenses:
Sales and marketing 281,600 443,500 1,020,600 1,268,800 5,671,000
Research and development 244,500 564,900 1,038,000 1,617,200 9,049,600
General and administrative 432,700 700,200 1,695,300 1,911,100 6,600,200
------------ ------------ ------------ ------------ ------------
Loss from operations (970,900) (1,879,400) (3,896,200) (5,199,800) (21,326,400)
Interest income 4,100 60,200 26,000 228,300 384,900
Interest expense 113,600 2,300 185,300 5,000 222,300
------------ ------------ ------------ ------------ ------------
Net loss $ (1,080,400) $ (1,821,500) $ (4,055,500) $ (4,976,500) $(21,163,800)
Net loss per share $ (0.28) $ (0.48) $ (1.06) $ (1.27)
============ ============ ============ ============
Weighted average number of common
shares outstanding 3,824,755 3,811,639 3,821,390 3,931,561
============ ============ ============ ============
</TABLE>
See accompanying notes
<PAGE>
LIFERATE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
JULY 18, 1990
(DATE OF
NINE MONTHS ENDED INCEPTION) TO
SEPTEMBER 30 SEPTEMBER 30
------------------------------
1997 1996 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (4,055,500) $ (4,976,500) $(21,163,800)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization 292,900 125,700 720,200
Writedown of software development costs to net realizable value -- -- 599,600
Stock issued for services -- -- 187,500
Value of stock options granted for services rendered 8,300 -- 982,300
Convertible subordinated note issued for services rendered -- -- 2,250,000
Changes in operating assets and liabilities:
Accounts receivable (51,300) (72,600) (193,700)
Prepaid and other current assets 16,300 (53,100) (106,400)
Other assets -- 11,800 --
Accounts payable and other accrued liabilities 9,100 (288,500) 836,600
Accrued interest 160,800 -- 160,800
Deferred revenue 96,700 258,100 248,500
Deferred rent (8,900) (8,900) 7,900
------------ ------------ ------------
Net cash used in operating activities (3,531,600) (5,004,000) (15,470,500)
INVESTING ACTIVITIES
Software development costs -- -- (750,900)
Purchase of furniture and equipment (32,100) (523,900) (1,004,500)
------------ ------------ ------------
Net cash used in investing activities (32,100) (523,900) (1,755,400)
FINANCING ACTIVITIES
Payments on notes payable and capital lease obligations (12,900) (22,200) (174,300)
Stock subscription received -- 5,000 5,000
Proceeds from issuance of notes payable and capital lease obligations 1,554,900 -- 1,845,100
Proceeds from issuance of common stock 30,900 1,908,900 15,631,300
------------ ------------ ------------
Net cash provided by financing activities 1,572,900 1,891,700 17,307,100
------------ ------------ ------------
Increase (Decrease) in cash and cash equivalents (1,990,800) (3,636,200) 81,200
Cash and cash equivalents at beginning of period 2,072,000 7,750,500 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 81,200 $ 4,114,300 $ 81,200
============ ============ ============
</TABLE>
See accompanying notes
<PAGE>
LIFERATE SYSTEMS, INC.
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
1. Organization and Description of Business
LifeRate Systems, Inc. is a development stage enterprise engaged in
marketing proprietary clinical software systems to health care
providers to produce information to measure and quantify the quality
and cost of health care.
2. Basis of Presentation
The financial information presented as of September 30, 1997 and 1996
has been prepared from the books and records without audit. Financial
information as of December 31, 1996 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 attached notes included in the
Company's Form 10-KSB for the fiscal year ended December 31, 1996 as
filed with the Securities and Exchange Commission.
3. Net Loss Per Share
Net loss per share is computed using the weighted average number of
common shares outstanding during the period. Common equivalent shares
from stock options and warrants are excluded from the computation as
their effect is antidilutive. In February 1997, the Financial
Accounting Standards Board (FASB) issued FASB Statement No. 128,
"EARNINGS PER SHARE." This Statement replaces the presentation of
primary earnings per share (EPS) with basic EPS and also requires dual
representation of basic and diluted EPS for entities with complex
capital structures. This Statement is effective for the fiscal year
ended December 31, 1997. For the three and nine month periods ended
September 30, 1997, there is no difference between basic earnings per
share under Statement No. 128 and primary net loss per share as
reported.
4. Reclassified
Prior year amounts have been reclassified to match the current year
presentation.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Introduction
During the third quarter of 1997, the Company's focus was on completion of a new
release of the LifeRate Clinical Information System. This release provided
performance improvements and enhanced functionality. Development of the
Company's Cath Lab product continued during the third quarter, with a targeted
release date in the first quarter of 1998.
In June 1997, the Company signed an agreement to install the LifeRate System at
Washington Hospital Center in Washington, D.C. and expects to install the system
during the fourth quarter of 1997. The Company signed an agreement in July 1997
with Red Oak Cardiovascular Center in Houston, Texas and has completed the
installation of a LifeRate System. In September 1997, St. Mary's Regional Heart
Center in Huntington, West Virginia entered into an agreement for installation
of a LifeRate System in the fourth quarter of 1997. At the end of the third
quarter, the Company has installed the LifeRate System at eight cardiovascular
practice groups and three asthma and allergy practices. In January 1997, the
Company entered into an agreement with National Jewish Medical and Research
Center to develop a computerized patient record to expand their disease
management programs in respiratory medicine and immunology.
Results of Operations
The Company generated revenues of $122,500 for the three months ended September
30, 1997. Revenues consisted of development fees of $67,500, installation fees
of $25,000 and $30,000 of recurring license fees for the quarter. This compares
to $49,200 of revenues generated for the three months ended September 30, 1996.
Recurring license fees were $25,000 during the third quarter of 1996 with the
remainder consisting of development and other non-recurring fees. Revenues of
$366,100 for the nine months ended September 30, 1997 include $217,500 of
development fees, installation fees of $25,000 and $123,600 of recurring license
fees. This compares to $308,500 in revenues for the nine months ended September
30, 1996, which consisted of $220,500 of development fees, $50,000 of
installation fees and $38,000 of recurring license fees. Revenues from recurring
license fees have increased during 1997 as the Company has increased the number
of installations of its system.
Costs of revenues were $134,600 and $220,000 for the three months ended
September 30, 1997 and 1996, respectively. Amortization of capitalized software
costs was $24,800 for the three months ended September 30, 1996. Costs of
revenues were $508,400 and $611,400 for the nine months ended September 30, 1997
and 1996, respectively. Amortization of capitalized software costs was $50,500
for the nine months ended September 30, 1997 and $75,600 for the same period in
1996. The balance of the cost of revenues reflect the costs of customer support
and royalty expense. Customer support expenses have declined from a year ago due
to lower payroll and travel expenses. During 1996, customer support personnel
and expenses increased in anticipation of revenue growth that was not achieved
and in 1997 customer support personnel was reduced from 1996 levels. During the
first quarter of 1997, the Company incurred royalty expense, which is included
in cost of revenues, of $14,900 under an agreement with Anthony Furnary, M.D., a
director of the Company. In March 1997, the Company and Dr. Furnary modified
this agreement, which now provides for LifeRate to pay Dr. Furnary royalties at
3% of all gross revenues beginning in 1999. No royalty expense was recorded in
the second and third quarters of 1997 or for the comparable periods of 1996.
<PAGE>
Sales and marketing expenses were $281,600 and $1,020,600 for the three and nine
months ended September 30, 1997, respectively, compared to $443,500 and
$1,268,800 for the three and nine months ended September 30, 1996, respectively.
During 1995, Clinical Sales & Service ("CSSI") provided substantially all of the
Company's sales, marketing and clinical support functions. During the first
quarter of 1996, the employees of CSSI became employees of the Company. Expenses
for the three and nine months ended September 30, 1997 are lower than those in
the comparable period of 1996 due to lower payroll expense in 1997 as a result
of fewer employees and one time costs associated with the integration of CSSI in
1996. The Company also implemented a cost containment program in the first
quarter of 1997, which has decreased sales and marketing expenses.
Research and development expenses for the three months ended September 30, 1997
were $244,500, a decrease of $320,400, or 56.7%, from the three months ended
September 30, 1996. For the nine months ended September 30, 1997, research and
development expenses were $1,038,000, a $579,200, or 35.8%, decrease from the
nine months ended September 30, 1996. These decreases reflect lower payroll
expense in 1997 as a result of fewer employees, results of a cost containment
program implemented in the first quarter of 1997 and a number of one time
expenses incurred in 1996 related to the recruitment and relocation of key staff
members. The Company plans to continue to invest the resources needed to develop
the product capabilities being demanded by its customer base.
General and administrative expenses of $432,700 were incurred in the three
months ended September 30, 1997. These expenses are $267,500 lower than the
$700,200 of general and administrative expenses incurred in the three months
ended September 30, 1996. The third quarter of 1996 includes $190,000 to settle
a lawsuit brought by a former officer of the Company. The remainder of the
decrease, $77,500, is due to the effects of the cost containment program
implemented in the first quarter of 1997. General and administrative expenses
decreased from $1,911,100 for the nine months ended September 30, 1996 to
$1,695,300 for the nine months ended September 30, 1997. The nine months ended
September 30, 1996 included non-recurring expenses for the $190,000 lawsuit
settlement and lease cancelation charges of $181,000. The nine months ended
September 30, 1997 include increased depreciation expense of $171,000 related to
equipment purchased in 1996, accrual for a $100,000 milestone payment to Dr.
Furnary, and increased legal expenses of $93,900 related to the renegotiated
agreements with Dr. Furnary and the Atlanta Cardiology Group P.C. (ACG). These
increases were offset by lower payroll expense resulting from the change in
management that occurred in the second quarter of 1996 and expense reductions
due to the cost containment program implemented in the first quarter of 1997.
Interest income decreased from $60,200 and $228,300 in the three and nine months
ended September 30, 1996, respectively, to $4,100 and $26,000 for the same
periods in 1997. These decreases reflect the lower overall cash position in 1997
compared to 1996.
Prior to the second quarter of 1997, interest expense had not been a significant
expense to the Company. However, the Company incurred interest expense of
$113,600 and $185,300 in the three and nine month periods ended September 30,
1997 under the instruments described below. In April 1997, interest began to
accrue on a $2,250,000 convertible subordinated note payable. This note was
issued in connection with the cancellation of a royalty agreement with ACG. The
note bears interest at 10%. Interest will be paid at a rate of 5%, with the
remaining 5% accruing until the end of the note term in 2002. In addition, the
Company issued convertible promissory notes in the aggregate amounts of
$1,000,000 in May 1997 and $500,000 in July 1997. These notes bear interest at
the prime rate and are described in more detail below under the heading
"Liquidity and Capital Resources". If the November 1997 equity offering
described below is completed, the Company will no longer be required to make
interest payments on the above notes. The Company will continue to incur
interest expense in future periods due to amortization of discount on the ACG
note and the convertible promissory note for $1,000,000.
<PAGE>
The net loss for the quarters ended September 30, 1997 and 1996 was $1,080,400
and $1,821,500, respectively. For the nine months ended September 30, 1997 and
1996, the net loss was $4,055,500 and $4,976,500, respectively. Net losses have
declined in 1997 due to lower payroll expense as a result of fewer employees,
the cost containment program implemented in the first quarter of 1997 and the
one time charges in 1996 related to the lawsuit settlement, the lease
cancellation and the integration of CSSI employees into LifeRate.
Liquidity and Capital Resources
The Company has financed its operations since inception primarily through
private and public placement of common stock. In May 1997, the Company issued a
convertible promissory note in the principal amount of $1,000,000 to Medtronic,
Inc., a principal shareholder of the Company with a representative that serves
on the Company's Board of Directors. This note bears interest at the prime rate.
The Company also granted Medtronic a warrant to purchase a number of shares of
common stock equal to 10% of the principal amount of the note. If the planned
November 1997 equity offering described below is completed: the note will become
non-interest bearing and will be payable in 2002; the conversion price on the
convertible note will be set at $1.50 per share; and the warrant exercise price
will be set at $.50 per share. In July 1997, the Company issued additional notes
in the aggregate principal amount of $500,000 and warrants to certain private
investors. If the planned November 1997 equity offering is completed: these
notes will be converted to common stock before December 31,1997 at the rate of
$2.00 per share and warrants issued to holders of the notes will be exercisable
at $2.00 per share. In September, October and November 1997, bridge loans
totaling $304,200 were obtained to fund operations while the company attempted
to complete an equity offering. The bridge loans will be repaid from proceeds
from the equity offering or converted into common stock in connection with the
planned equity offering.
At September 30, 1997, the Company had $81,200 in cash and cash equivalents, a
$1,990,800 decrease from December 31, 1996. The primary use of this cash was to
fund operations. The company does not have significant capital equipment
purchase commitments but does plan to continue to fund software development
efforts.
The Company is currently negotiating an equity financing of approximately
$4,500,000. As currently proposed, the first closing of approximately $2,250,000
would occur in November 1997, and the second closing of approximately $2,250,000
would occur in January 1998 if the Company achieved certain sales and product
development milestones. The Company will require the proceeds of the planned
November 1997 equity offering in order to continue operations. There is no
assurance that the Company will be able to complete the planned financing.
Without additional financing the Company will be forced to cease operations.
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
ITEM NUMBER ITEM METHOD OF FILING
27.1 Financial Data Schedule Filed herewith
(b) Reports of Form 8-K
None
<PAGE>
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: November 14, 1997
LifeRate Systems, Inc.
By:/S/David J. Chinsky
---------------------------------
David J. Chinsky
Principal Executive, Financial and
Accounting Officer
<PAGE>
LIFERATE SYSTEMS, INC.
EXHIBIT INDEX TO QUARTERLY
REPORT ON FORM 10-QSB
for the quarterly Period ended September 30, 1997
ITEM NUMBER ITEM METHOD OF FILING
27.1 Financial Data Schedule Filed herewith
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
STATEMENTS 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<CASH> 81
<SECURITIES> 0
<RECEIVABLES> 217
<ALLOWANCES> 23
<INVENTORY> 0
<CURRENT-ASSETS> 427
<PP&E> 1,047
<DEPRECIATION> 547
<TOTAL-ASSETS> 926
<CURRENT-LIABILITIES> 2,174
<BONDS> 0
0
0
<COMMON> 17,300
<OTHER-SE> (21,164)
<TOTAL-LIABILITY-AND-EQUITY> 926
<SALES> 123
<TOTAL-REVENUES> 123
<CGS> 135
<TOTAL-COSTS> 959
<OTHER-EXPENSES> (4)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 114
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,080)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,080)
<EPS-PRIMARY> (.28)
<EPS-DILUTED> (.28)
</TABLE>
