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 March 31, 1998
[ ] 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 April 30, 1998, there were 12,485,000 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes ___ No __X__
<PAGE>
LIFERATE SYSTEMS, INC.
INDEX TO FINANCIAL STATEMENTS
PAGE
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets - 3
March 31, 1998 and December 31, 1997
Statements of Operations - 4
Three Months Ended March 31, 1998 and 1997
and Date of Inception to March 31, 1998.
Condensed Statements of Cash Flow - 5
Three Months Ended March 31, 1998 and 1997
and Date of Inception to March 31, 1998.
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 7
<PAGE>
LIFERATE SYSTEMS, INC.
(A Development Stage Company)
Condensed Balance Sheets
<TABLE>
<CAPTION>
MARCH 31, December 31,
1998 1997
---- ----
ASSETS (UNAUDITED) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,936,700 $ 764,200
Accounts receivable, less allowance of $70,350
at March 31, 1998 and $62,850 at December 31, 1997 478,900 278,200
Prepaid expenses and other current assets 31,900 59,800
------------ ------------
Total current assets 2,447,500 1,102,200
Furniture and fixtures 177,600 177,600
Computer equipment 840,400 872,000
------------ ------------
1,018,000 1,049,600
Less accumulated depreciation 677,500 635,600
------------ ------------
340,500 414,000
Software development costs, net of amortization
of $5,900 at March 31, 1998 114,900 28,600
------------ ------------
Total Assets $ 2,902,900 $ 1,544,800
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and other accrued liabilities $ 340,700 $ 299,600
Other current liabilities 5,200 3,200
Current portion of long-term debt
and capitalized lease obligations 10,400 12,300
------------ ------------
Total current liabilities 356,300 315,100
Long-term debt and capital lease obligations 2,078,000 2,020,600
Deferred rent 2,000 4,900
Deferred revenue 185,400 172,300
Shareholders' equity (deficit):
Preferred stock, no par value:
Authorized shares - 1,000,000
Issued and outstanding shares-none in 1998 and 1997 - -
Common stock, no par value:
Authorized shares - 75,000,000
Issued and outstanding shares - 12,485,000 at March 31, 1998 and
8,485,000 at December 31, 1997 21,975,800 20,016,400
Deficit accumulated during the development stage (21,694,600) (20,984,500)
------------ ------------
Total shareholders' equity (deficit) 281,200 (968,100)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 2,902,900 $ 1,544,800
============ ============
</TABLE>
Note: The balance sheet at December 31, 1997 has been derived from the audited
financial statements at that date.
<PAGE>
LIFERATE SYSTEMS, INC.
(A Development Stage Company)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
JULY 18, 1990
THREE MONTHS (DATE OF
ENDED MARCH 31, INCEPTION) TO
1998 1997 MARCH 31, 1998
------------ ------------ --------------
<S> <C> <C> <C>
Net revenues $ 273,900 $ 198,800 $ 2,084,500
Cost of revenues 222,400 263,300 2,212,200
------------ ------------ ------------
Gross profit 51,500 (64,500) (127,700)
Operating expenses:
Sales and marketing 202,800 398,600 6,166,100
Research and development 221,500 396,700 9,034,700
General and administrative 300,700 488,300 7,680,700
------------ ------------ ------------
Total operating expenses 725,000 1,283,600 22,881,500
------------ ------------ ------------
Loss from operations (673,500) (1,348,100) (23,009,200)
Interest income and other income, net 25,000 15,000 426,600
Interest expense 61,600 300 424,800
------------ ------------ ------------
Net loss before extraordinary item (710,100) (1,333,400) (23,007,400)
Extraordinary item - debt restructuring - - 1,312,800
------------ ------------ ------------
Net loss $ (710,100) $ (1,333,400) $(21,694,600)
============ ============ ============
Net loss per share - basic and diluted $ (0.06) $ (0.35) $ (10.18)
============ ============ ============
Weighted average number of common shares
outstanding 11,151,667 3,819,708 2,131,920
============ ============ ============
</TABLE>
See accompanying notes
<PAGE>
LIFERATE SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
JULY 18, 1990
(DATE OF
THREE MONTHS INCEPTION) TO
ENDED MARCH 31, MARCH 31,
1998 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (710,100) $ (1,333,400) $(21,694,600)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 75,000 75,100 711,200
Amortization of software development costs 5,900 25,300 157,200
Amortization of discounts on long-term debt 60,300 - 136,600
Value of stock options granted for services rendered - - 1,001,500
Value of warrants issued to note holders - - 204,500
Convertible subordinated note issued for services rendered - - 2,250,000
Extraordinary item - discount on notes payable - - (1,273,800)
Writedown of software development costs to net realizable value - - 599,600
Stock issued for services - - 187,500
Changes in operating assets and liabilities:
Accounts receivable (200,700) (13,800) (478,900)
Prepaid and other current assets 27,900 17,000 (26,600)
Accounts payable and other accrued liabilities 43,100 104,000 681,700
Deferred revenue 13,100 (7,500) 185,400
Deferred rent (2,900) (2,900) 2,000
------------ ------------ ------------
Net cash used in operating activities (688,400) (1,136,200) (17,356,700)
INVESTING ACTIVITIES
Software development costs (92,200) - (871,700)
Purchase of furniture and equipment (2,400) (32,300) (994,900)
Proceeds from equipment sales 900 - 900
------------ ------------ ------------
Net cash used in investing activities (93,700) (32,300) (1,865,700)
FINANCING ACTIVITIES
Payments on notes payable and capital lease obligations (4,800) (3,700) (431,200)
Stock subscription received - - 5,000
Proceeds from issuance of notes payable - 17,500 2,027,700
Proceeds from issuance of common stock 1,959,400 22,300 19,557,600
------------ ------------ ------------
Net cash provided by financing activities 1,954,600 36,100 21,159,100
------------ ------------ ------------
Increase in cash and cash equivalents 1,172,500 (1,132,400) 1,936,700
Cash and cash equivalents at beginning of period 764,200 2,072,000 -
------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,936,700 $ 939,600 $ 1,936,700
============ ============ ============
</TABLE>
See accompanying notes
<PAGE>
LIFERATE SYSTEMS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
March 31, 1998
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 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 March 31, 1998 and 1997 has
been prepared from the books and records without audit. Financial
information as of December 31, 1997 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, 1997 as
filed with the Securities and Exchange Commission.
3. Significant Accounting Policies
In October 1997, the American Institute of Certified Public Accountants
approved Statement of Position 97-2, "Software Revenue Recognition"
("SOP 97-2"), which supersedes Statement of Position 91-1, "Software
Revenue Recognition". SOP 97-2 was effective for transactions entered
into in the first quarter of 1998. The adoption of the standards in SOP
97-2 did not have a significant impact on the Company's financial
statements.
4. Reclassified
Certain prior year amounts have been reclassified to conform to the
current year presentation.
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Introduction
In January 1998, the Company completed the final phase of equity financing under
the securities purchase agreement the Company entered into in November 1997. See
"Liquidity and Capital Resources".
The Company released for commercial sale in January 1998 its LifeRate CLE
product, an entry-level product for the cardiac catheterization laboratory. In
March, this product was certified by the American College of Cardiology National
Cardiovascular Data Registry(TM) as being in compliance with the requirements
for data collection in order to participate in the data registry.
Results of Operations
The Company reported revenues of $273,900 for the three months ended March
31,1998. Revenues consisted of installation and interface development fees of
$229,300 and $44,600 of recurring license fees for the quarter. Revenues for the
current quarter increased $75,100, or 37.8%, over the $198,000 in revenues for
the three months ended March 31,1997. Revenues for the first quarter of 1997
consisted of $150,000 related to development fees under contractual agreement
and $48,000 of recurring license fees.
During the first quarter of 1997, the Company implemented a cost reduction
program to reduce levels of expenditures and conserve cash funds. As part of
this cost reduction program, the Company reduced employee head count during 1997
in order to more effectively match expenses with revenues.
Cost of revenues was $222,400 and $263,300 for the three months ended March
31,1998 and 1997, respectively. Amortization of capitalized software development
costs included in cost of revenues was $5,900 and $25,200 for the three months
ended March 31, 1998 and 1997, respectively. Royalty expense included in cost of
revenues was $0 and $14,900 for the three months ended March 31, 1998 and 1997,
respectively.
Sales and marketing expense was $202,800 for the three months ended March
31,1998, this is a decrease of $195,800, or 49.1%, from the three months ended
March 31, 1997. Expenses for the three months ended March 31, 1998 have declined
compared to the same period in 1997 due to the cost reduction program mentioned
above which resulted in reductions in payroll expenses, travel expenses and
other sales and marketing expenses.
Research and development expenses for the three months ended March 31,1998, net
of capitalized development costs, totaled $221,500 compared to $396,700 for the
same period in 1997. The Company capitalizes software development costs after
technological feasibility is achieved on new products and enhancements to
existing products. In the first quarter of 1998 the Company capitalized $92,200
of research and development expenses. No software development costs were
capitalized in the first quarter of 1997 as development efforts were focused on
enhancements that were released to customers when technological feasibility was
obtained. Research and development expenses have decreased from one year ago due
to the cost reduction program mentioned above. The cost reduction program
resulted in reductions in payroll expenses, travel expenses and other
development expenses. These decreases have been partially offset in the three
months ended March 31,1998 by increased recruiting expenses and consulting
expenses related to new product development. The Company plans to continue to
invest the resources needed to develop the product capabilities demanded by the
market place.
General and administrative expenses for the three months ended March 31,1998
totaled $300,700, a decrease of $187,600 or 38.4%, from expenses of $488,300 for
the same period in 1997. The three month period ended March 31, 1997 included
$93,900 in legal and professional fees related to the renegotiations of certain
royalty agreements and $53,900 in recruiting fees for a new chief executive
officer. The balance
<PAGE>
of the decrease is due to the cost reduction program started in the first
quarter of 1997, which resulted in reduced payroll expenses through lower head
count and reductions in other expenses.
Interest income and other income and expenses were $25,000 and $15,000 for the
three months ended March 31, 1998 and 1997, respectively. Changes in interest
income are due to fluctuations in the Company's cash balances. The Company
completed a significant equity financing in January 1998.
Interest expense for the three months ended March 31, 1998 was $61,600, an
increase of $61,300 over the prior year. This increase is due to amortization of
the discount recorded in 1997 on the Company's outstanding non-interest bearing
convertible promissory notes.
Liquidity and Capital Resources
The Company has financed its operations since inception primarily through
private and public placement of Common Stock, and, secondarily from revenues.
In January 1998, the Company sold 4,000,000 shares of Common Stock at prices
ranging from $.50 to $.56 per share and warrants to purchase 4,000,000 shares of
Common Stock at an exercise price of $1.50 per share. The sale resulted in net
proceeds to the Company of $1,959,400. This sale of Common Stock completed the
final phase of the November 1997 securities purchase agreement whereby the
Company agreed to sell up to 9,000,000 shares of Common Stock and warrants.
At March 31, 1998 the Company had $1,936,700 in cash and cash equivalents, an
increase of $1,172,500 from December 31,1997. The increase was due to the sale
of Common Stock. During the first quarter of 1998 the Company used $688,400 of
cash to fund operations, $1,500 to purchase equipment and $92,200 to fund
capitalized software development costs. The Company does not have significant
capital equipment purchase commitments but does plan to continue to fund
software development efforts.
The Company estimates that its current cash balances will not be sufficient to
fund operations of the Company through the end of 1998 and that additional
operating capital will be needed during the fourth quarter of 1998. There can be
no assurance that the Company will be able to obtain additional financing on
satisfactory terms, or at all. If the Company is unable to obtain additional
financing it will be forced to cease operations.
<PAGE>
PART II - OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
See "Management's Discussion and Analysis - Liquidity and Capital Resources" for
a description of unregistered securities sold in the quarter ended March 31,
1998. Such sales were made to various private investors pursuant to Regulation D
under the Securities Act of 1933, as amended. The Company paid the selling agent
commissions of $84,000, a non-accountable expense allowance of $8,400 and
reimbursed the selling agent for certain expenses in connection with the sale of
such securities.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On January 28, 1998, the Company held a Special Meeting of Shareholders (the
"meeting"). At the meeting, shareholders approved an amendment to the Company's
amended and restated Articles of Incorporation to increase the number of
authorized shares of common stock from 20,000,000 shares to 75,000,000 shares.
There were 5,709,751 votes for, 102,540 votes against and 16,850 votes
abstained.
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 on Form 8-K
The Company filed a Current Report on Form 8-K, dated January 30, 1998 to report
under "Item 1. Change in Control of Registrant" the final closing of the sale of
common stock and warants pursuant to a securities purchase agreement dated
November 14, 1997.
The Company filed a Current Report on Form 8-K, dated February 27, 1998 to
report under "Item 5. Other Events" that a shareholder had filed a lawsuit
naming the Company and certain other parties as defendants. The lawsuit contains
causes of action against the Company alleging fraud, deceit, negligent
misrepresentation and other wrong doings in connection with a private placement
of common stock conducted by the Company in December 1995 and January 1996. The
Company believes the claim to be without merit and plans to vigorously defend
this action.
<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: May 12, 1998
LIFERATE SYSTEMS, INC.
By:/s/David J. Chinsky
David J. Chinsky
Chief Executive Officer,
President and Director
(Principal Executive Officer)
By:/s/Kenneth G. Tarr
Chief Financial Officer
(Principal Financial and Accounting
Officer)
<PAGE>
LIFERATE SYSTEMS, INC.
EXHIBIT INDEX TO QUARTERLY
REPORT ON FORM 10-QSB
for the Quarterly Period ended March 31, 1998
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
STATEMENT OF OPERATIONS AND THE BALANCE SHEET AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 1,937
<SECURITIES> 0
<RECEIVABLES> 549
<ALLOWANCES> 70
<INVENTORY> 0
<CURRENT-ASSETS> 2,447
<PP&E> 1,018
<DEPRECIATION> 678
<TOTAL-ASSETS> 2,903
<CURRENT-LIABILITIES> 356
<BONDS> 2,078
0
0
<COMMON> 21,976
<OTHER-SE> (21,695)
<TOTAL-LIABILITY-AND-EQUITY> 2,903
<SALES> 274
<TOTAL-REVENUES> 274
<CGS> 222
<TOTAL-COSTS> 725
<OTHER-EXPENSES> (25)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 62
<INCOME-PRETAX> (710)
<INCOME-TAX> 0
<INCOME-CONTINUING> (710)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (710)
<EPS-PRIMARY> (.06)
<EPS-DILUTED> (.06)
</TABLE>
