UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-QSB/A
AMENDMENT NO. 1
(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, 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 July 31, 1998, there were 12,487,000 shares of Common Stock outstanding.
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
<PAGE>
LIFERATE SYSTEMS, INC.
INDEX
PART I
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets - 3
June 30, 1998 and December 31, 1997
Statements of Operations - 4
Three Months Ended June 30, 1998 and 1997 and
Six Months Ended June 30, 1998 and 1997 and
Date of Inception to June 30, 1998.
Condensed Statements of Cash Flow - 5
Six Months Ended June 30, 1998 and 1997 and
Date of Inception to June 30, 1998.
Notes to Condensed Financial Statements 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS 7
PART II
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 10
2
<PAGE>
LIFERATE SYSTEMS, INC.
(A Development Stage Company)
Condensed Balance Sheets
<TABLE>
<CAPTION>
JUNE 30, December 31,
1998 1997
Restated Restated
------------ ------------
ASSETS (Unaudited) (Note)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,251,400 $ 764,200
Accounts receivable, less allowance of $62,500,
at June 30, 1998 and $62,850 at December 31, 1997 163,600 278,200
Prepaid expenses and other current assets 58,100 59,800
------------ ------------
Total current assets 1,473,100 1,102,200
Furniture and fixtures 177,600 177,600
Computer equipment 861,800 872,000
------------ ------------
1,039,400 1,049,600
Less accumulated depreciation 743,900 635,600
------------ ------------
295,500 414,000
Software development costs, net of amortization
of $16,200 at June 30, 1998 97,000 28,600
------------ ------------
Total Assets $ 1,865,600 $ 1,544,800
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and other accrued liabilities $ 396,200 $ 299,600
Other current liabilities 3,400 3,200
Current portion of long-term debt
and capitalized lease obligations 7,900 12,300
------------ ------------
Total current liabilities 407,500 315,100
Long-term debt and capital lease obligations 3,120,300 3,106,500
Deferred rent -- 4,900
Deferred revenue 130,300 172,300
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 - 12,487,000 at June 30,
1998 and 8,485,000 at December 31, 1997 21,972,300 20,016,400
Deficit accumulated during the development stage (23,764,800) (22,070,400)
------------ ------------
Total shareholders' equity (deficit) (1,792,500) (2,054,000)
------------ ------------
Total liabilities and shareholders' equity (deficit) $ 1,865,600 $ 1,544,800
============ ============
</TABLE>
Note: The December 31, 1997 balance sheet has been derived from the restated
December 31, 1997 audited financial statements
3
<PAGE>
LIFERATE SYSTEMS, INC.
(A Development Stage Company)
Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
JULY 18, 1990
(DATE OF
THREE MONTHS SIX MONTHS INCEPTION) TO
ENDED JUNE 30 ENDED JUNE 30 JUNE 30,
1998 1998 1998
RESTATED 1997 RESTATED 1997 RESTATED
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Net revenues $ 121,600 $ 44,800 $ 395,500 $ 243,600 $ 2,206,100
Cost of revenues 222,400 220,900 444,700 520,600 2,507,200
------------ ------------ ------------ ------------ ------------
Gross profit (100,800) (176,100) (49,200) (277,000) (301,100)
Operating Expenses:
Sales and marketing 151,700 387,200 354,500 765,000 6,310,000
Research and development 332,300 360,900 553,800 742,000 9,398,200
General and administrative 462,500 655,100 763,300 1,143,400 8,047,200
------------ ------------ ------------ ------------ ------------
Total operating expenses 946,500 1,403,200 1,671,600 2,650,400 23,755,400
------------ ------------ ------------ ------------ ------------
Loss from operations (1,047,300) (1,579,300) (1,720,800) (2,927,400) (24,056,500)
Interest income and other, net 21,000 9,000 46,000 24,000 447,600
Interest expense 9,900 71,400 19,600 71,700 355,900
------------ ------------ ------------ ------------ ------------
Net loss before extraordinary item (1,036,200) (1,641,700) (1,694,400) (2,975,100) (23,964,800)
Extraordinary item-debt restructuring -- -- -- -- 200,000
------------ ------------ ------------ ------------ ------------
Net loss $ (1,036,200) $ (1,641,700) $ (1,694,400) $ (2,975,100) $(23,764,800)
============ ============ ============ ============ ============
Net loss per share - basic and diluted $ (0.08) $ (0.43) $ (0.14) $ (0.78) $ (9.84)
============ ============ ============ ============ ============
Weighted average number of
common shares outstanding 12,485,000 3,819,708 11,818,333 3,819,708 2,413,922
============ ============ ============ ============ ============
</TABLE>
See accompanying notes
4
<PAGE>
LIFERATE SYSTEMS, INC.
(A Development Stage Company)
Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
JULY 18, 1990
(DATE OF
SIX MONTHS INCEPTION) TO
ENDED JUNE 30, JUNE 30,
1998 1998
RESTATED 1997 RESTATED
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss $ (1,694,400) $ (2,975,100) $(23,764,800)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation 141,400 148,400 777,600
Amortization of software development costs 16,200 50,500 167,500
Amortization of discounts on long-term debt 13,800 -- 63,200
Value of stock options granted for services rendered -- 8,300 1,001,500
Value of warrants issued to note holders -- -- 43,500
Convertible subordinated note issued for services rendered -- -- 2,250,000
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 114,600 (94,200) (163,600)
Prepaid and other current assets 1,700 13,200 (52,800)
Accounts payable and other accrued liabilities 96,800 59,000 735,400
Deferred revenue (42,000) 58,700 130,300
Deferred rent (4,900) (5,900) --
------------ ------------ ------------
Net cash used in operating activities (1,356,800) (2,737,100) (18,025,100)
INVESTING ACTIVITIES
Software development costs (84,600) -- (864,100)
Purchase of furniture and equipment (23,800) (30,700) (1,016,300)
Proceeds from equipment sales 900 -- 900
------------ ------------ ------------
Net cash used in investing activities (107,500) (30,700) (1,879,500)
FINANCING ACTIVITIES
Payments on notes payable and capital lease obligations (4,400) (9,700) (430,800)
Stock subscription received -- -- 5,000
Proceeds from issuance of notes payable -- 1,017,500 2,027,700
Proceeds from issuance of common stock 1,955,900 30,900 19,554,100
------------ ------------ ------------
Net cash provided by financing activities 1,951,500 1,038,700 21,156,000
------------ ------------ ------------
Increase in cash and cash equivalents 487,200 (1,729,100) 1,251,400
Cash and cash equivalents at beginning of period 764,200 2,072,000 --
------------ ------------ ------------
Cash and cash equivalents at end of period $ 1,251,400 $ 342,900 $ 1,251,400
============ ============ ============
</TABLE>
See accompanying notes
5
<PAGE>
LIFERATE SYSTEMS, INC.
(A Development Stage Company)
Notes to Condensed Financial Statements
June 30, 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 June 30, 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.
5. Restatement
The Company has restated previously issued financial results for the year
ended December 31, 1997. The restated financial results reflect the
correction of an error related to the extraordinary gain recognized in a
transaction recorded as a troubled debt restructuring. The following
summarizes the impact of the restatement on operations for the six months
ended March 31, 1998:
As reported Restated
------------ -------------
Net loss $(1,799,500) $(1,694,400)
Net loss per share --
basic and diluted $ (0.15) $ (0.14)
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
Introduction
During the second quarter of 1998, the Company reduced its head count from 27 to
13 employees. Decreases in head count were made in all areas of the Company and
will result in significantly lower operating expenses in all areas of the
Company for the balance of 1998. These changes were made in order to control
expenses and focus the Company's resources on development of the next version of
its cardiovascular information system, rather than generating revenues from the
current version of its system. Accordingly, the Company's revenues decreased
from the first quarter of 1998 to the second quarter of 1998. The Company does
not expect revenues to begin to increase until after it has completed
development of the next version of its cardiovascular information system in
1999. The Company will be seeking additional capital during 1998 to finance
operations beyond the fourth quarter of 1998.
At the end of the second quarter, the Company's Cardiovascular Outpatient System
was in use by eight cardiovascular practice groups. The Company's CLE products
for cardiac catheterization laboratories were in use at two sites and the Asthma
and Allergy Outpatient System was in use at four asthma and allergy practice
groups.
The Company is reevaluating its asthma and allergy product in light of decreased
market demand. The Company had a development agreement with National Jewish
Medical and Research Center to develop a clinical information system for their
disease management program. During the second quarter, National Jewish Medical
and Research Center elected under the agreement not to continue with the next
development phase of the project. The Company also has an agreement with
National Asthma and Allergy System ("NAAS") for the development and installation
of an allergy and asthma outpatient system at up to eight asthma and allergy
practice groups affiliated with NAAS. At the end of 1997, the Company had
installed the system at four asthma and allergy practice groups. NAAS is in the
process of discontinuing operations and has asked to terminate the exclusive
marketing agreement between the Company and NAAS.
Results of Operations
The Company reported revenues of $121,600 for the three months ended June 30,
1998. Revenues consisted of installation and interface development fees of
$75,300 and recurring license fees of $46,300 for the quarter. Revenues for the
current quarter increased by $76,800, or 171%, over the same quarter one year
ago. Revenues for the quarter ended June 30, 1997 were $44,800 and consisted of
recurring license fees only.
Revenues for the six-month period ended June 30, 1998 totaled $395,500, an
increase of $151,900, or 62%, over the same period one year ago. Revenues
consisted of $304,700 of installation and interface fees and $90,800 of
recurring license fees for the six months ended June 30, 1998. Revenues for the
six months ended June 30, 1997 totaled $243,600 and consisted of $150,000 of
development fees, recurring fees of $92,800 and miscellaneous revenue of $800.
During 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. During the second quarter of 1998, the Company
decreased its employee head count further in order to more effectively match
expenses with present revenue levels.
Cost of revenues was $222,400 and $220,900 for the three months ended June 30,
1998 and 1997, respectively. Amortization of capitalized software development
costs included in cost of revenues was $10,300 and $25,200 for the three months
ended June 30, 1998 and 1997, respectively. Royalty expense included in cost of
revenues was zero for the second quarter of both years. Cost of revenues was
$444,700 and $520,600 for the six months ended June 30, 1998 and 1997,
respectively. Amortization of capitalized software development costs included in
cost of revenues was $16,200 and $50,400 for the six months ended June 30, 1998
and 1997, respectively. Royalty
7
<PAGE>
expense included in cost of sales was $0 and $14,900 for the six months ended
June 30, 1998 and 1997, respectively.
Sales and marketing expense was $151,700 and $387,200 for the three and six
months ended June 30, 1998, respectively. This compares to $354,500 and $765,000
for the three and six months ended June 30,1997, respectively. Expenses for the
three and six months ended June 30, 1998 have declined compared to the same
periods last year 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 June 30, 1998 were
$332,300 compared to $360,900 for the three months ended June 30, 1997. For the
six months ended June 30, 1998 research and development expenses were $553,800
compared to $742,000 for the six months ended June 30, 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 $84,600 of development costs. No
development costs were capitalized in the second quarter of 1998 or for the
first six months of 1997. Research and development costs have decreased from one
year ago due to the cost reduction program mentioned above. The cost reduction
program resulted in reductions in payroll, travel and other development
expenses. These decreases have been partially offset by increased consulting
expense related to new product development for the three and six months ended
June 30, 1998.
General and administrative expenses were $462,500 and $655,100 for the three
months ended June 30, 1998 and 1997, respectively. Expenses for the six months
ended June 30, 1998 and 1997 were $763,300 and $1,143,400, respectively.
Expenses for 1998 are lower in the areas of payroll and travel expenses due to
the cost reduction program mentioned above offset by the additional bad debt
expense of $161,000 recorded in the second quarter. Expenses for the three
months ended March 31,1997 included one-time expenses consisting of $93,900 of
legal fees for the renegotiation of certain royalty agreements and $53,900 of
recruiting expenses for a new chief executive officer. Expenses for the three
months ended June 30, 1997 included one-time expenses of a $100,000 milestone
payment under one of the royalty agreements and $22,100 of additional recruiting
expenses for a chief executive officer.
Interest income and other income and expenses were $21,000 and $9,000 for the
three months ended June 30, 1998 and 1997, respectively. For the six months
ended June 30, 1998 and 1997 interest income and other income and expenses were
$46,000 and $24,000, 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 was $9,900 and $71,400 for the three months ended June 30, 1998
and 1997, respectively. Interest expense for the six months ended June 30, 1998
was $19,600, a decrease of $52,100 over the same period one year ago. The
decrease is a result of the November 1997 restructuring of the convertible
subordinated notes payable issued by the Company during 1997 to be non-interest
bearing 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.
At June 30, 1998 the Company had $1,251,400 in cash and cash equivalents, an
increase of $487,200 from December 31, 1997. The increase was due to the sale of
Common Stock in January 1998, which resulted in net proceeds to the Company of
$1,955,300. During the first six months of 1998, the Company has used $1,356,800
of cash to fund operations, $84,600 to fund capitalized software development
costs, $22,900 to purchase capital equipment and $4,400 to make payments on
capital leases. The Company does not have significant capital equipment purchase
commitments.
8
<PAGE>
The Company estimates that its current cash balances will be sufficient to fund
operations of the Company through the end of 1998. Additional operating capital
will be needed to fund operations of the Company in 1999. 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.
9
<PAGE>
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
ITEM NUMBER ITEM METHOD OF FILING
27.1 Amended Financial Data Schedule Filed herewith
(b) Reports on Form 8-K
None.
10
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant has
caused this Amendment to be signed on its behalf by the undersigned, thereunder
duly authorized.
Dated: November 5, 1998
LIFERATE SYSTEMS, INC.
By: /s/ F.G. Hamilton
-----------------
F.G. Hamilton
Acting Chief Executive Officer
(Principal Executive Officer)
By: /s/ Kenneth G. Tarr
-------------------
Kenneth G. Tarr
Acting Chief Financial Officer
(Principal Financial and Accounting
Officer)
11
<PAGE>
LIFERATE SYSTEMS, INC.
EXHIBIT INDEX TO QUARTERLY
REPORT ON FORM 10-QSB
for the Quarterly Period ended June 30, 1998
ITEM NUMBER ITEM METHOD OF FILING
27.1 Amended Financial Data Schedule Filed herewith
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE STATEMENT OF OPERATIONS AND THE BALANCE SHEET IS QUALIFIED IN ITS ENTIRETY
BY REFERENCES TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,251
<SECURITIES> 0
<RECEIVABLES> 226
<ALLOWANCES> (63)
<INVENTORY> 0
<CURRENT-ASSETS> 58
<PP&E> 1,039
<DEPRECIATION> 744
<TOTAL-ASSETS> 1,866
<CURRENT-LIABILITIES> 408
<BONDS> 3,120
0
0
<COMMON> 21,972
<OTHER-SE> (23,765)
<TOTAL-LIABILITY-AND-EQUITY> 1,866
<SALES> 396
<TOTAL-REVENUES> 396
<CGS> 445
<TOTAL-COSTS> 1,672
<OTHER-EXPENSES> (46)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 20
<INCOME-PRETAX> (1,694)
<INCOME-TAX> 0
<INCOME-CONTINUING> (1,694)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,694)
<EPS-PRIMARY> (0.14)
<EPS-DILUTED> (0.14)
</TABLE>
