PROXYMED, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q/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 March 31, 2008
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________________ to ____________________
Commission file number # 000-22052
PROXYMED, INC.
(Exact name of registrant as specified in its charter)
| |
|
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| Florida
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65-0202059 |
(State or Other Jurisdiction of
Incorporation or Organization)
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|
(I.R.S. Employer
Identification No.) |
| |
|
|
1854 Shackleford Court, Suite 200,
Norcross, Georgia
|
|
30093 |
| (Address of Principal Executive Offices)
|
|
(Zip Code) |
(770) 806-9918
(Registrant’s Telephone Number Including Area Code)
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. [X] Yes [ ] No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer or a smaller reporting company. See the definitions of “accelerated filer”,
“large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check
one):
| |
|
|
|
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|
Large Accelerated Filer o
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|
Accelerated Filer o
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|
Non-Accelerated Filer o
(Do not check if a smaller
reporting company)
|
|
Smaller Reporting Company þ |
Indicate by check mark whether registrant is a shell company (as defined by Rule 12b-2 of the
Exchange Act). [ ] Yes [X] No
As of May 7, 2008, 13,782,915 shares of the registrant’s Common Stock, $0.001 par value per share,
were outstanding.
Explanatory Note
Subsequent to the filing of the Quarterly Report on Form 10-Q on May 20, 2008, the Company
discovered certain errors in the filing which the Company is correcting by filing this amended
Quarterly Report on Form 10-Q/A. For the convenience of the reader,
we are amending and resubmitting
the entire Form 10-Q.
The Company is filing
this amended Quarterly Report on Form 10-Q/A to make the following
typographical corrections:
(1) the loss on disposal in 2008 disclosed on the face of the consolidated statement of operations
(amounts in thousands) should be $2,349 rather than $1,367; (2) the loss on the sale of business
disclosed on the face of the consolidated statement of cash flows (amounts in thousands) should be
$2,349 rather than $1,367; (3) the accounts payable and accrued expenses disclosed on the face of
the consolidated statement of cash flows (amounts in thousands)
should be ($5,466) rather than
($4,484); (4) Note 2 to the consolidated financial statements has been revised by (a) adding a
sentence to the first paragraph describing the determination of the working capital adjustment to
the sale price of the Company’s NPPN business, (b) correcting the assets and liabilities “held for
sale” relative to its NPPN Business as follows: (i) current assets should be $8.6 million rather
than $8.1 million, (ii) current liabilities should be $2.2 million rather than $2.1 million, and
(iii) non-current liabilities should be $0.5 million rather than $0.4 million, and (c) correcting
the loss on the sale of the NPPN business disclosed in Note 2 that should be $2.3 million rather
than $3.4 million; (5) the table in Note 2 summarizing the unaudited results of the NPPN
discontinued operations for the period ended March 31, 2007 (in thousands) should list (a)
operating expenses, including depreciation and amortization as $2,898 rather than $3,880, (b) loss
from operations as ($1,284) rather than ($2,266), and (c) loss on sale of discontinued operations
as ($2,349) rather than ($1,367); (6) change certain headings set forth in the Results of
Operations for Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
contained in Management’s Discussion and Analysis of Financial Condition and Results of Operations
(the “MD&A”); and (7) Transaction Services segment Selling, General & Administrative Expenses for
the three months ending March 31, 2007 disclosed in the MD&A should be $6.5 million rather than
$7.1 million.
Management’s Discussion and Analysis of Financial Condition and Results of Operations gives effect
to the above items, where applicable.
Subsequent
to the original filing of this document, on May 22, 2008 the
Company entered into a definitive agreement regarding the sale of the
Laboratory Communications business. See the discussion of this
agreement in Note 11(f), Subsequent Events. The Company is also
amending the Form 10-Q to include disclosure of this subsequent
event as described above.
Except for items discussed above, no other information has been updated for events occurring
subsequently to the original filing on Form 10-Q on May 20, 2008.
PROXYMED, INC.
FORM 10-Q
FOR THE QUARTER ENDED MARCH 31, 2008
TABLE OF CONTENTS
| |
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|
|
|
|
|
| |
|
(Unaudited) |
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
272 |
|
|
$ |
1,390 |
|
Accounts receivable — trade,
net of allowance for doubtful
accounts of $755
and $8,668, respectively |
|
|
5,041 |
|
|
|
12,772 |
|
Escrow and
other receivables, net of escrow allowance of
$3,000 in 2008 |
|
|
16 |
|
|
|
89 |
|
Inventory, net |
|
|
294 |
|
|
|
434 |
|
Other current assets |
|
|
1,119 |
|
|
|
1,190 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
6,742 |
|
|
|
15,875 |
|
Property and equipment, net |
|
|
2,900 |
|
|
|
3,396 |
|
Goodwill |
|
|
3,694 |
|
|
|
11,870 |
|
Purchased
technology, capitalized software and other
intangible assets, net |
|
|
1,840 |
|
|
|
9,084 |
|
Other long-term assets |
|
|
741 |
|
|
|
430 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
15,917 |
|
|
$ |
40,655 |
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable, accrued expenses and other current liabilities |
|
$ |
7,432 |
|
|
$ |
13,339 |
|
Current portion of capital leases |
|
|
815 |
|
|
|
790 |
|
Notes payable and revolving credit facilities |
|
|
19,054 |
|
|
|
31,975 |
|
Deferred revenue |
|
|
267 |
|
|
|
346 |
|
Income taxes payable |
|
|
— |
|
|
|
237 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
27,568 |
|
|
|
46,687 |
|
Long-term portion of capital leases |
|
|
294 |
|
|
|
506 |
|
Long-term deferred compensation and other long-term liabilities |
|
|
432 |
|
|
|
447 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
28,294 |
|
|
|
47,640 |
|
|
|
|
|
|
|
|
Commitments and contingencies (see Note 9) |
|
|
|
|
|
|
|
|
Stockholders’ deficit: |
|
|
|
|
|
|
|
|
Series C 7% Convertible Preferred Stock — $.01 par value. Authorized |
|
|
|
|
|
|
|
|
300,000 shares; issued 253,265 shares; outstanding 2,000; liquidation
preference $100 |
|
|
|
|
|
|
|
|
Common Stock — $.001 par value. Authorized 30,000,000 shares; issued and
outstanding 13,782,915 shares |
|
|
14 |
|
|
|
14 |
|
Additional paid-in capital |
|
|
245,799 |
|
|
|
245,763 |
|
Accumulated deficit |
|
|
(258,190 |
) |
|
|
(252,762 |
) |
|
|
|
|
|
|
|
Total stockholders’ deficit |
|
|
(12,377 |
) |
|
|
(6,985 |
) |
|
|
|
|
|
|
|
Total liabilities and stockholders’ deficit |
|
$ |
15,917 |
|
|
$ |
40,655 |
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
4
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|
|
|
|
|
|
|
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|
Three Months Ended March, 31 |
|
| |
|
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|
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|
(Reclassified) |
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| |
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2008 |
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|
2007 |
|
Net revenues: |
|
|
|
|
|
|
|
|
Transaction fees and license fees |
|
$ |
8,044 |
|
|
$ |
7,601 |
|
Communication devices and other tangible goods |
|
|
455 |
|
|
|
1,939 |
|
|
|
|
|
|
|
|
|
|
|
8,499 |
|
|
|
9,540 |
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
Cost of transaction fees and license fees,
excluding depreciation and amortization |
|
|
1,929 |
|
|
|
1,522 |
|
Cost of laboratory communication devices and other tangible
goods, excluding depreciation and amortization |
|
|
78 |
|
|
|
1,071 |
|
Selling, general and administrative expenses |
|
|
6,743 |
|
|
|
7,166 |
|
Depreciation and amortization |
|
|
889 |
|
|
|
1,173 |
|
Loss on disposal of assets |
|
|
3 |
|
|
|
3 |
|
Litigation settlements |
|
|
6 |
|
|
|
— |
|
Write-off of impaired assets |
|
|
— |
|
|
|
5,040 |
|
|
|
|
|
|
|
|
|
|
|
9,648 |
|
|
|
15,975 |
|
|
|
|
|
|
|
|
Operating loss |
|
|
(1,149 |
) |
|
|
(6,435 |
) |
Interest expense, net |
|
|
632 |
|
|
|
876 |
|
|
|
|
|
|
|
|
Loss from continuing operations before income taxes |
|
|
(1,781 |
) |
|
|
(7,311 |
) |
Provision for income taxes |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
Loss from continuing operations, net |
|
|
(1,781 |
) |
|
|
(7,311 |
) |
Loss from
discontinued operations (including loss on disposal of $2,349 in 2008) |
|
|
(3,646 |
) |
|
|
(14,885 |
) |
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,427 |
) |
|
$ |
(22,196 |
) |
|
|
|
|
|
|
|
Basic and diluted weighted average shares used in computing loss per share |
|
|
13,782,915 |
|
|
|
13,210,188 |
|
|
|
|
|
|
|
|
Basic and diluted loss per share from continuing operations |
|
$ |
(0.13 |
) |
|
$ |
(0.55 |
) |
Basic and diluted loss per share from discontinued operations |
|
|
(0.26 |
) |
|
|
(1.13 |
) |
|
|
|
|
|
|
|
Net loss per share |
|
$ |
(0.39 |
) |
|
$ |
(1.68 |
) |
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements.
5
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(5,427 |
) |
|
$ |
(22,196 |
) |
Adjustments to reconcile net loss to net cash (used in)
operating activities: |
|
|
|
|
|
|
|
|
Non cash interest |
|
|
84 |
|
|
|
261 |
|
Depreciation and amortization |
|
|
1,003 |
|
|
|
1,807 |
|
Provision for obsolete inventory |
|
|
3 |
|
|
|
9 |
|
Loss on sale of business |
|
|
2,349 |
|
|
|
— |
|
Loss on disposal of impaired assets |
|
|
— |
|
|
|
19,449 |
|
Loss on disposal of fixed assets |
|
|
3 |
|
|
|
3 |
|
Allowance for bad debt and escrow recovery |
|
|
(4,913 |
) |
|
|
603 |
|
Share-based compensation |
|
|
36 |
|
|
|
265 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
Accounts and other receivables |
|
|
1,276 |
|
|
|
(691 |
) |
Inventory |
|
|
137 |
|
|
|
(174 |
) |
Other current and non-current assets |
|
|
(745 |
) |
|
|
(281 |
) |
Accounts payable and accrued expenses |
|
|
(5,466 |
) |
|
|
(923 |
) |
Deferred revenue |
|
|
390 |
|
|
|
(95 |
) |
Income taxes payable |
|
|
(244 |
) |
|
|
(164 |
) |
Other non-current liabilities |
|
|
89 |
|
|
|
(134 |
) |
|
|
|
|
|
|
|
Net cash (used in) operating activities |
|
|
(11,425 |
) |
|
|
(2,261 |
) |
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(7 |
) |
|
|
(279 |
) |
Capitalized software |
|
|
(77 |
) |
|
|
(192 |
) |
Divestiture of business |
|
|
23,500 |
|
|
|
— |
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing
activities |
|
|
23,416 |
|
|
|
(471 |
) |
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
Draws on line of credit |
|
|
11,409 |
|
|
|
14,063 |
|
Repayment of line of credit |
|
|
(20,338 |
) |
|
|
(10,733 |
) |
Payment of notes payable, capital leases and long-term debt |
|
|
(4,180 |
) |
|
|
(838 |
) |
|
|
|
|
|
|
|
Net cash (used in) provided by financing
activities |
|
|
(13,109 |
) |
|
|
2,492 |
|
|
|
|
|
|
|
|
Net (decrease) in cash and cash equivalents |
|
|
(1,118 |
) |
|
|
(240 |
) |
Cash and cash equivalents at beginning of period |
|
|
1,390 |
|
|
|
682 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
272 |
|
|
$ |
442 |
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
6
PROXYMED, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(Unaudited)
| (1) |
|
Summary of Significant Accounting Policies |
| |
a) |
|
Basis of Presentation— The accompanying unaudited consolidated financial statements of ProxyMed, Inc. d/b/a MedAvant
Healthcare Solutions (“MedAvant,” “we,” “us,” “our,” or “the Company”) and the notes thereto have been prepared in accordance
with the instructions of Form 10-Q and Rule 10-01 of Regulation S-X of the Securities and Exchange Commission (the “SEC”) and
do not include all of the information and disclosures required by accounting principles generally accepted in the United
States of America. However, such information reflects all adjustments (consisting of normal recurring adjustments), which
are, in the opinion of management, necessary for a fair statement of results for the interim periods. |
| |
| |
|
|
The unaudited results of operations for the three months ended March 31, 2008, are not necessarily indicative of the results
to be expected for the full year. The unaudited consolidated financial statements included herein should be read in
conjunction with the audited consolidated financial statements and the notes thereto included in the Company’s Annual Report
on Form 10-K for the year ended December 31, 2007, as filed with the SEC on April 15, 2008 (“10-K”). |
| |
| |
b) |
|
Going Concern— Over the last several years the Company has experienced declining revenues, recurring losses from operations
and limitations on access to capital. As of March 31, 2008, the Company’s working capital deficit was approximately $20.8
million and the accumulated deficit was approximately $258.2 million. The Company had availability under its Revolving Credit
Facility of approximately $1.7 million at December 31, 2007, approximately $0.3 million at March 31, 2008, and approximately
$0.6 million as of May 7, 2008. |
| |
| |
|
|
As of March 31, 2008 the Company had senior and subordinated debt in the aggregate principal amount of approximately $19.1
million that matures through 2008; of the $19.1 million approximately $6 million is due and owing to Laurus Master Fund, Ltd.
(“Laurus”) and is secured by substantially all of the Company’s assets. The amount owed to Laurus comes due on July 31, 2008.
An additional $13.1 million in subordinated, unsecured debt is due by December 31, 2008. Although a portion of the proceeds
from the sale of the Company’s subsidiaries, Plan Vista Solutions, Inc., National Network Services, LLC, Plan Vista
Corporation, Medical Resource, LLC, and National Provider Network, Inc. (collectively, the “Cost Containment Subsidiaries”,
“Cost Containment Business”, or “NPPN”) in February 2008 was used to reduce the Laurus debt, the Company currently does not
have the resources to repay in full the Laurus debt and the convertible notes when they mature in July 2008 and December
2008, respectively. The Company is currently in discussions with its lenders and exploring alternatives to restructure or
refinance this debt. If the Company is unable to obtain additional funding to repay or refinance the senior and subordinated
debt prior to maturity, the lenders could foreclose on the Company’s assets and/or take certain other action against the
Company. The effect of any such action on the Company’s operations and stock price could be significantly negative, and the
Company may be unable to continue as a going concern. |
| |
| |
|
|
The Company closely monitors its liquidity, capital resources and financial position on an ongoing basis, and has undertaken
a variety of initiatives in an effort to improve its liquidity position and continues to look for opportunities to increase
revenues and reduce operating expenses. |
| |
| |
c) |
|
Revenue Recognition— Revenue is derived from the Company’s Transaction Services and Laboratory Communication segments. |
| |
| |
|
|
Revenues in the Transaction Services segment are recorded as follows: |
| |
|
|
|
|
|
|
•
|
|
Revenues derived from insurance payers, pharmacies and
submitters are recognized on a per transaction basis or
flat fee basis in the period the services are rendered. |
|
|
•
|
|
Revenues associated with revenue sharing agreements are
recorded as gross revenue on a per transaction basis or on
a percentage of revenue basis, and may involve increasing
amounts or percentages based on transaction or revenue
volumes achieved. This treatment is in accordance with
Emerging Issues Task Force Consensus No. 99-19, “Reporting
Revenue Gross as a Principal Versus Net as an Agent.” |
|
|
•
|
|
Revenues from certain up-front fees are recognized ratably over the term of the contract. This
treatment is in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition”
(“SAB No. 104”). |
|
|
•
|
|
Revenues from support and maintenance contracts are recognized ratably over the contract period. |
7
| |
|
|
|
|
| |
|
Revenues in the Laboratory Communication segment
are recorded as follows: |
|
|
•
|
|
Revenues from support and maintenance contracts is recognized ratably over the contract period. |
|
|
•
|
|
Revenues from the sale of inventory and manufactured goods is recognized when the product is delivered, price is fixed
or determinable, and collectibility is probable. This treatment is in accordance with SAB No. 104. |
|
|
•
|
|
Revenues from the rental of laboratory communication devices is recognized ratably over the period of the rental contract. |
| |
d) |
|
Allowance for Doubtful Accounts/Revenue Allowances/Bad Debt Estimates— The Company relies on estimates to determine revenue adjustments and the
adequacy of its allowance for doubtful accounts receivable. These estimates are based on the Company’s historical experience and the industry in
which the Company operates. If the financial condition of the Company’s customers was to deteriorate, resulting in an impairment of their ability
to make payments, additional allowances may be required. Additionally, in the Company’s Transaction Services segment, the Company evaluates the
collectibility of its accounts receivable based on a combination of factors, including historical collection ratios. |
| |
| |
|
|
In circumstances where the Company is aware of a specific customer’s inability to meet its financial obligations, the Company records a reserve for
doubtful accounts against amounts due to reduce the net recognized receivable to the amount the Company reasonably believes will be collected. For
all other customers, the Company recognizes reserves for bad debts based on past write-off history and the length of time the receivables are past
due. To the extent historical credit experience is not indicative of future performance or other assumptions used by management do not prevail,
loss experience could differ significantly, resulting in either higher or lower future provision for losses. |
| |
| |
e) |
|
Net Loss per Share— Basic net loss per share of the Company’s Common Stock is computed by dividing the net loss by the weighted average shares of
Common Stock outstanding during the period. Diluted net loss per share reflects the potential dilution from the exercise or conversion of
instruments into the Company’s Common Stock; however, the following shares were excluded from the calculation of diluted net loss per share because
the effect would have been anti-dilutive: |
| |
|
|
|
|
|
|
|
|
| |
|
Three months ended March 31, |
|
| |
|
(unaudited) |
|
|
(unaudited) |
|
| |
|
2008 |
|
|
2007 |
|
Instruments excluded from the computation of net loss per share: |
|
|
|
|
|
|
|
|
Convertible preferred stock |
|
|
13,333 |
|
|
|
13,333 |
|
Convertible notes payable |
|
|
238,989 |
|
|
|
238,989 |
|
Stock options |
|
|
1,505,102 |
|
|
|
1,786,426 |
|
Warrants |
|
|
— |
|
|
|
13,333 |
|
|
|
|
|
|
|
|
|
|
|
1,757,424 |
|
|
|
2,052,081 |
|
|
|
|
|
|
|
|
| |
f) |
|
Share-Based Compensation— The Company accounts for stock-based
awards under Statement of Financial Accounting Standards (“SFAS”)
123(R) using the modified prospective method, which requires
measurement of compensation cost for all stock-based awards at fair
value on the date of grant and recognition of compensation over the
service period for awards expected to vest. |
| |
| |
|
|
The fair value of stock is determined using a lattice
valuation model. Such value is recognized as expense
over the service period, net of estimated forfeitures.
The estimation of stock awards that will ultimately
vest requires judgment, and to the extent actual
results or updated estimates differ from the Company’s
current estimates, such amounts will be recorded as a
cumulative adjustment in the period the estimates are
revised. The Company considers many factors when
estimating expected forfeitures, including types of
awards, employee class, and historical experience.
Actual results, and future changes in estimates, may
differ substantially from the Company’s current
estimates. The Company recognized approximately
$36,000 and $265,000 in share-based compensation
expense for the three months ended March 31, 2008 and
2007, respectively. |
8
| |
g) |
|
New Accounting Pronouncements— The Company adopted the provisions of Financial Accounting
Standards Board (“FASB”), Interpretation No. 48, (“FIN 48”), “Accounting for Uncertainty in Income
Taxes,” effective January 1, 2007. FIN 48 is an interpretation of SFAS No. 109, “Accounting for
Income Taxes,” which seeks to reduce the diversity in practice associated with certain aspects of
measurement and recognition in accounting for income taxes. In addition, FIN 48 provides guidance
on de-recognition, classification, interest and penalties, and accounting in interim periods and
requires expanded disclosure with respect to the uncertainty in income taxes. Adoption of FIN 48
had no cumulative effect on the Company’s consolidated financial position at January 1, 2007. At
March 31, 2008 and 2007, the Company had no significant unrecognized tax benefits related to
income taxes. The Company’s policy with respect to penalties and interest in connection with
income tax assessments is to classify penalties as a provision for income taxes and interest as
interest expense in its consolidated income statement. The Company files income tax returns in the
U.S. and several state jurisdictions. The Company believes it is no longer subject to U.S. and
state income tax examinations for years before 2004. |
| |
| |
|
|
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which is effective for
financial statements issued for fiscal years beginning after November 15, 2007 and is effective
for the Company beginning January 1, 2008. SFAS No. 157 defines fair value as “the price that
would be received from selling an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.” SFAS No. 157 also expands disclosure
requirements to include: (a) the fair value measurements of assets and liabilities at the
reporting date, (b) segregation of assets and liabilities between fair value measurements based on
quoted market prices and those based on other methods, information that enables users to assess
the method or methods used to estimate fair value when no quoted price exists. The adoption of
SFAS No. 157 did not have a material impact on the Company’s consolidated financial position,
results of operations and cash flows. |
| |
| |
|
|
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and
Financial Liabilities.” This new standard provides companies with an option to report selected
financial assets and liabilities at fair value. Generally accepted accounting principles have
required different measurement attributes for different assets and liabilities that can create
artificial volatility in earnings. The FASB believes that SFAS No. 159 helps mitigate this type of
accounting-induced volatility by enabling companies to report related assets and liabilities at
fair value, which would likely reduce the need for companies to comply with detailed rules for
hedge accounting. SFAS No. 159 also establishes presentation and disclosure requirements designed
to facilitate comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. It does not eliminate disclosure requirements included in
other accounting standards, including requirements for disclosures about fair value measurements
included in SFAS No. 157 and SFAS No. 107. SFAS No. 159 was effective for the Company beginning
January 1, 2008. The adoption of this new standard did not have a significant impact on the
Company’s financial position, results of operations and cash flows. |
| |
| |
|
|
In December 2007, the FASB issued SFAS No. 141(R), “Business Combinations”, which replaces SFAS
No. 141 which was issued in June 2001. SFAS No. 141(R) is effective for business combinations with
an acquisition date on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008. The objective of SFAS No. 141(R) is to improve the relevance,
representational faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects. To accomplish
that, it establishes principles and requirements for how the acquirer recognizes and measures in
its financial statements: a) the identifiable assets acquired, the liabilities assumed, and any
non-controlling interest in an acquiree, b) recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase, and c) determines what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects
of the business combination. The Company is currently in the process of reviewing this guidance to
determine the impact on its consolidated financial position, results of operations and cash flows. |
| |
| |
|
|
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements.” SFAS No. 160 amends Accounting Research Bulletin 51, “Consolidated
Financial Statements,” and requires all entities to report noncontrolling (minority) interests in
subsidiaries within equity in the consolidated financial statements, but separate from the parent
shareholders’ equity. SFAS No. 160 also requires any acquisitions or dispositions of
noncontrolling interests that do not result in a change of control to be accounted for as equity
transactions. Further, SFAS No. 160 requires that a parent recognize a gain or loss in net income
when a subsidiary is deconsolidated. SFAS No. 160 is effective for fiscal years beginning on or
after December 15, 2008. We do not expect the adoption of SFAS No. 160 will have a significant, if
any, impact on our financial position, results of operations and cash flows. |
| |
| |
|
|
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and Hedging
Activities, an amendment of FASB Statement No. 133.” SFAS No. 161 amends and expands the
disclosure requirements of SFAS No. 133 with the intent to provide users of financial statements
with an enhanced understanding of: (a) how and why an entity uses derivative instruments; (b) how
derivative instruments and related hedged items are accounted for under SFAS No. 133 and its
related interpretations and (c) how derivative instruments and related hedged items affect an
entity’s financial position, financial performance and cash flows. This statement is effective for
financial statements issued for fiscal years and interim periods beginning after November 15,
2008, with early application encouraged. We do not expect the adoption of SFAS No. 161 to have a
material effect on our financial position, results of operations and cash flows.
|
9
| (2) |
|
Sale of NPPN Business |
On February 1, 2008, the Company completed the sale of its subsidiaries, Plan Vista Solutions, Inc., National Network Services, LLC, Plan Vista Corporation, Medical
Resource, LLC, (“MRL”) and National Provider Network, Inc. (collectively, the “Cost Containment Subsidiaries”, “Cost Containment Business”, or “NPPN”) to Coalition
America, Inc. (“Coalition”) for $23.5 million. The
purchase price is subject to a working capital adjustment which will
be determined within 150 days following the closing date. Pursuant to the terms of the Escrow Agreement, $3.0 million of the purchase price was placed in escrow to cover
possible indemnification claims. The Company has reserves against the entire escrow amount.
The Company allocated the remaining $20.5 million net proceeds as follows: $4.0 million was used to pay transaction costs and certain NPPN liabilities, and the
remaining $16.5 million was used to reduce a portion of the Company’s senior debt. As of December 31, 2007, the Company had certain assets and liabilities “held for
sale” relative to its NPPN business, including current assets of
$8.6 million (primarily accounts receivable), non-current assets of $15.1 million (primarily
goodwill and other intangible assets), current liabilities of
$2.2 million (primarily accounts payable and accrued liabilities), and non-current liabilities of $0.5 million.
The
Company recognized a loss on the sale of the NPPN business of
approximately $2.3 million, which amount also includes transaction costs related to the completed
sale. The NPPN business has historically been included in the Company’s Transaction Services business segment along with the EDI business segment. As a result of
the sale and in accordance with SFAS No. 144, the financial
operations of the NPPN business is shown separately as discontinued operations on the consolidated
statements of operations. Consequently, the financial results related to the Transaction Services segment include only the financial operations of the EDI business.
The following table summarizes the unaudited results of the NPPN discontinued operations for the three months ended March 31, 2008 and March 31, 2007 (in thousands):
| |
|
|
|
|
|
|
|
|
| |
|
March 31, 2008 |
|
|
March 31, 2007 |
|
Operating revenues |
|
$ |
1,614 |
|
|
$ |
5,456 |
|
Operating expenses, including
depreciation and amortization of $114
and $633, respectively |
|
|
2,898 |
|
|
|
5,855 |
|
Write-off of impaired assets |
|
|
— |
|
|
|
14,409 |
|
|
|
|
|
|
|
|
Loss from operations |
|
|
(1,284 |
) |
|
|
(14,808 |
) |
Interest expense |
|
|
13 |
|
|
|
77 |
|
Loss on sale of discontinued operations |
|
|
(2,349 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Loss from discontinued operations |
|
$ |
(3,646 |
) |
|
$ |
(14,885 |
) |
|
|
|
|
|
|
|
| (3) |
|
Inventory |
| |
| |
|
Inventory consists of the following as of the dates indicated, and is valued at the lower of average cost or market: |
| |
|
|
|
|
|
|
|
|
| |
|
(Unaudited) |
|
|
|
|
|
| |
|
March 31, |
|
|
December 31, |
|
| |
|
2008 |
|
|
2007 |
|
| |
|
(In thousands) |
|
Materials, supplies and component parts |
|
|
132 |
|
|
|
193 |
|
Work in process |
|
|
134 |
|
|
|
62 |
|
Finished goods |
|
|
28 |
|
|
|
179 |
|
|
|
|
|
|
|
|
|
|
|
294 |
|
|
|
434 |
|
|
|
|
|
|
|
|
| (4) |
|
Goodwill & Other Intangible Assets |
| |
| |
|
As a result of the Company’s continuing revenue
and stock price declines during the first
quarter of 2007, the Company performed an
interim goodwill impairment test as of March
31, 2007. In accordance with the provisions of
SFAS No. 142, the Company used a discounted
cash flow analysis which indicated that the
book value of the Transaction Services segment
exceeded its estimated fair value and that
goodwill impairment had occurred. Step 2 of
this impairment test, as prescribed by SFAS No.
142, led us to conclude that an impairment of
goodwill had occurred. In addition, as a result
of the goodwill analysis, the Company assessed
whether there had been an impairment of the
Company’s long-lived assets in accordance with
SFAS No. 144. This impairment analysis
indicated that the carrying value of certain
finite-lived intangible assets was greater than
their expected undiscounted future cash flows.
Therefore, the Company concluded that these
intangible assets were impaired and adjusted
the carrying value of these assets to fair
value. Accordingly, the Company recorded a
non-cash impairment charge of $19.4 million for
the three months ended March 31, 2007 in its
Transaction Services Segment. This charge
included a $12.5 million impairment of goodwill
and a $6.9 million impairment of certain other
intangibles. For the period ended March 31,
2008, the Company has reviewed its goodwill and
other intangible assets and determined that no
impairment existed as of that date.
|
10
The balances in the carrying amounts of goodwill, net, for the periods ending December 31,
2007 and March 31, 2008 by operating segment are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Transaction |
|
Laboratory |
|
|
| In thousands |
|
Services |
|
Communications |
|
Total |
Balance as of December 31, 2007
|
|
$ |
|
11,870 |
|
$ |
— |
|
$ |
|
11,870 |
Balance as of March 31, 2008 (unaudited)
|
|
$ |
|
3,694 |
|
$ |
— |
|
$ |
|
3,694 |
| |
|
|
|
|
|
|
The following table summarizes the changes in the Company’s other intangibles for the three
months ended March 31, 2008, net of discontinued operations.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Other Intangibles |
|
|
|
|
|
|
|
|
|
|
Other Intangibles |
|
| |
|
Balance as of |
|
|
|
|
|
|
|
|
|
|
Balance as of |
|
| |
|
December 31, |
|
|
|
|
|
|
Amortization |
|
|
March 31, |
|
| (in thousands) |
|
2007 |
|
|
Additions |
|
|
Expense |
|
|
2008 (unaudited) |
|
Capitalized software |
|
$ |
1,583 |
|
|
$ |
77 |
|
|
$ |
(220 |
) |
|
$ |
1,440 |
|
Purchased technology |
|
|
640 |
|
|
|
— |
|
|
|
(240 |
) |
|
|
400 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,223 |
|
|
$ |
77 |
|
|
$ |
(460 |
) |
|
$ |
1,840 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
The estimates of useful lives of other intangible assets are based on historical experience,
the industry in which the Company operates, or on contractual terms. Other intangible assets are
being amortized on a straight-line basis. Amortization expense was $0.5 million for each of the
three months ended March 31, 2008 and 2007, respectively.
11
As of March 31, 2008, estimated future amortization of other intangible assets is as follows:
| |
|
|
|
|
|
| In thousands (unaudited) |
|
2008 (remainder of the year) |
|
$ |
1,354 |
|
2009 |
|
|
428 |
|
2010 |
|
|
58 |
|
2011 |
|
|
— |
|
2012 |
|
|
— |
|
2013 |
|
|
— |
|
|
|
|
|
Total |
|
$ |
1,840 |
|
|
|
|
|
| |
|
|
Revolving Credit Facility and Term Debt-- On
December 7, 2005, the
Company and certain of
its wholly-owned
subsidiaries, entered
into a Security and
Purchase Agreement (“Loan
Agreement”) with Laurus
Master Fund, Ltd.
(“Laurus”) to provide up
to $20.0 million in
financing to the Company.
Under the terms of the
Loan Agreement, Laurus
extended financing to the
Company in the form of a
$5.0 million secured term
loan (“Term Loan”) and a
$15.0 million secured
revolving credit facility
(“Revolving Credit
Facility”). The Term Loan
has a stated term of five
years and will accrue
interest at Prime plus
2%, subject to a minimum
interest rate of 8%. The
Term Loan is payable in
equal monthly principal
installments of
approximately $89,300
plus interest until the
maturity date on December
6, 2010. The Revolving
Credit Facility has a
stated term of three
years and will accrue
interest at the 90 day
LIBOR rate plus 5%,
subject to a minimum
interest rate of 7%, and
a maturity date of
December 6, 2008, with
two one-year options at
the discretion of Laurus.
Additionally, in
connection with the Loan
Agreement, the Company
issued 500,000 shares of
its Common Stock, par
value $0.001 per share,
to Laurus that were
valued at approximately
$2.4 million at the time
of issuance. |
| |
| |
|
|
The Company granted
Laurus a first priority
security interest in
substantially all of the
Company’s present and
future tangible and
intangible assets
(including all
intellectual property) to
secure the Company’s
obligations under the
Loan Agreement. The Loan
Agreement contains
various customary
representation and
warranties of the Company
as well as customary
affirmative and negative
covenants including,
without limitation,
limitations on liens of
property, maintaining
specific forms of
accounting and record
maintenance and limiting
the incurrence of
additional debt. The Loan
Agreement does not
contain restrictive
covenants regarding
minimum earning
requirements, historical
earning levels, fixed
charge coverage or
working capital
requirements. The Company
can borrow up to three
times trailing 12-months
of historical earnings,
as defined in the Loan
Agreement. Per the Loan
Agreement, the Company is
required to maintain a
lock box arrangement
wherein monies received
are automatically swept
to repay the loan balance
on the Revolving Credit
Facility. |
| |
| |
|
|
The Loan Agreement also
contains certain
customary events of
default including, among
others, non-payment of
principal and interest,
violation of covenants
and in the event the
Company is involved in
certain insolvency
proceedings. Upon the
occurrence of an event of
default Laurus is
entitled to, among other
things, accelerate all
obligations of the
Company. In the event
Laurus accelerates the
loans, the amount due
will include all accrued
interest plus 120% of the
then outstanding
principal amount of the
loans being accelerated
as well as all unpaid
fees and expenses of
Laurus. In addition, if
the Revolving Credit
Facility is terminated
for any reason, whether
because of a prepayment
or acceleration, there
shall be paid an
additional premium of up
to 5% of the total amount
of the Revolving Credit
Facility. In the event
the Company elects to
prepay the Term Loan, the
amount due shall be the
accrued interest plus
115% of the then
outstanding principal
amount of the Term Loan.
Due to certain subjective
acceleration clauses
contained in the
agreement and a lockbox
arrangement, the
Revolving Credit Facility
is classified as current
in the accompanying
consolidated balance
sheet at March 31, 2008. |
| |
| |
|
|
On June 21, 2007, the
Company entered into an
Amendment to the Loan
Agreement (“June
Amendment”) with Laurus
whereby the amount
available under the
Revolving Credit Facility
was increased $3.0
million to $18.0 million.
The June Amendment had a
maturity date of June 30,
2008. During the term of
the June Amendment, the
revised amounts available
under the Revolving
Credit Facility
decreased, as set forth
in the June Amendment,
and the amount available
under the Revolving
Credit Facility at June
30, 2008 was to return to
$15.0 million as
committed under the
original Loan Agreement.
In connection with the
June Amendment, the
Company issued 572,727
shares of the Company’s
Common Stock to Laurus
that were valued at
approximately $1.0
million. The costs of
these shares were
capitalized as debt
issuance costs and will
be amortized over the
term of the June
Amendment. |
| |
| |
|
|
The Company revised its
estimate of revenue
allowances and the
allowance for doubtful
accounts for the period
ended June 30, 2007.
These changes in
estimates negatively
impacted the Company’s
availability under the
Revolving Credit Facility
(which is based on an
earnings formula as
defined in the Loan
Agreement) and resulted
in an overadvance on its
available borrowings at
June 30, 2007. Subsequent
to June 30, 2007, the
Company obtained a waiver
from Laurus until June
30, 2008 regarding this
overadvance on its
available borrowings.
|
12
| |
|
|
On October 10, 2007, the
Company entered into an
Amendment to the Loan
Agreement (the “October
Amendment”) with Laurus
whereby Laurus agreed to
fix the available
Revolving Credit Facility
at $16.5 million through
December 31, 2007 in the
event that certain
conditions were met on
dates specified in the
October Amendment. The
October Amendment
superseded the June
Amendment. In
consideration for the
October Amendment, the
Company agreed to pay
Laurus $1.25 million as
follows: (a) $1.0 million
on October 10, 2007 and
(b) $0.25 million on the
earlier of (i) an event
of default under the Loan
Agreement and October
Amendment, if any, or
(ii) December 31, 2007. |
| |
| |
|
|
On November 1, 2007,
Laurus notified the
Company that an event of
default had occurred by
the Company’s failure to
execute an asset purchase
or stock purchase
agreement by October 31,
2007 as required by the
terms of the October
Amendment. In addition,
Laurus notified the
Company that it was
taking no immediate
action with respect to
this event of default but
would reserve all right
and remedies available to
Laurus under the Loan
Agreement and October
Amendment. As a result of
this event of default,
all amounts due to Laurus
are classified as current
liabilities in the
accompanying consolidated
balance sheet at March
31, 2008. |
| |
| |
|
|
On February 11, 2008, the
Company entered into a
Waiver and Amendment
Agreement to the Loan
Agreement (the “February
Amendment”) with Laurus
whereby the maximum
available amount under
the Loan Agreement has
been reduced from $18.0
million to (a) for the
period commencing on
February 7, 2008 through
and including February
29, 2008, $5.2 million,
(b) for the period
commencing on March 1,
2008 through and
including March 15, 2008,
$5.7 million, and (c) for
the period commencing on
March 16, 2008 through
and including April 30,
2008, $6.2 million;
provided however, that in
the event a Budget
Violation (defined below)
occurred during any of
the aforementioned
periods of time, the
maximum amount available
under the Loan Agreement
would have automatically
become $5.2 million for
the duration of the term
of the Loan Agreement. In
addition, the Loan
Agreement was amended
such that interest will
accrue on the outstanding
principal amount at a
rate of 12% annually,
commencing on March 1,
2008, through April 30,
2008 at which time all
outstanding principal and
accrued but unpaid
interest was to become
due and payable. |
| |
| |
|
|
Pursuant to the February
Amendment, the Company is
obligated to prepare and
deliver to Laurus a
cumulative transaction
report on a weekly basis
during the period from
February 29, 2008 through
April 30, 2008 setting
forth the Company’s
cumulative transactions
and cumulative cash
receipts for the
applicable period,
estimated revenues for
the applicable period,
and, on the first day of
each month, the actual
revenues for the prior
month. A “Budget
Violation” would have
occurred at such time as: (a) the Company’s
cumulative transactions
and cumulative cash
receipts are more than
five percent (5%) less
than projected targets
for such cumulative
transactions and
cumulative cash receipts
as set forth in a
mutually agreed upon
budget for the applicable
period, (b) the Company’s
estimated revenues are
more than fifteen percent
(15%) less than the
projected estimated
revenues for the
applicable period as set
forth in a mutually
agreed upon budget for
the applicable period, or
(c) the Company’s actual
revenues for the
applicable prior month
are more than five
percent (5%) less than
the projected target for
such actual revenues for
such month as set forth
in a mutually agreed upon
budget for such month. |
| |
| |
|
|
In addition, pursuant to
the February Amendment,
Laurus waived its rights
under the Loan Agreement
with respect to the
existing default under
the Loan Agreement, and
the Company released
Laurus and certain
related parties from any
claims the Company may
have against such
released parties related
to acts or omissions of
Laurus or such related
parties prior to the date
of the February
Amendment. Further, (a)
in consideration for the
partial reduction of the
maximum available amount
under the Loan Agreement
prior to the expiration
of the revolving loan
term, the Company has
paid Laurus a one time
fee equal to $472,000,
and (b) pursuant to the
terms of the Loan
Agreement, the Company
also paid Laurus a one
time term note
termination fee of
$455,357. |
| |
| |
|
|
On April 30, 2008, the
Company entered into an
agreement with Laurus to
extend the maturity date
of the Company’s
obligations to repay
outstanding principal,
and accrued but unpaid
interest, owed by the
Company to Laurus under
that certain Security and
Purchase Agreement with
Laurus Master Fund, Ltd.
(“Laurus”) dated December
6, 2005 (the “Loan
Agreement”) and the
related revolving credit
facility (the “Revolving
Credit Facility”). Laurus
has agreed to extend such
Maturity Date through
July 31, 2008. |
| |
| |
|
|
In addition, effective
April 24, 2008, the
Company entered into an
Overadvance Side Letter
(the “Overadvance Side
Letter”) to the Loan
Agreement with Laurus.
Under the Overadvance
Side Letter, Laurus has
agreed to fix the
overadvance amount
available under the
Revolving Credit Facility
at $125,000, which
provides the Company with
an additional $100,000 in
financing under such
Revolving Credit
Facility. Laurus has also
agreed that the
overadvance shall not
trigger an event of
default under the Loan
Agreement at this time.
In consideration for this
extension of additional
credit and waiver, the
Company has agreed to pay
Laurus $25,000. |
| |
| |
|
|
On May 9. 2008, the
Company entered into an
amendment (the “Omnibus
Amendment”) to the Loan
Agreement with Laurus
that provides for a
maximum availability
under the line of credit
of up to $7.0 million.
In addition, the Omnibus
Amendment includes
covenants requiring the
Company to achieve
minimum levels of
consolidated cash
receipts, consolidated
revenues and consolidated
EBITDA for the months of
May and June in 2008. See
Note (11) (e), Subsequent
Events, and Item 2.
Liquidity and Capital
Resources, for additional
information. |
13
| |
(b) |
|
Convertible Notes - On December 31, 2002, the
Company issued $13.4 million of 4% uncollateralized
convertible promissory notes (the “Convertible
Notes”) to the former shareholders of MedUnite, a
leading provider of physician office transaction
processing services, as part of the consideration
paid in the acquisition of MedUnite. The
Convertible Notes mature on December 31, 2008 and
interest is payable quarterly in cash in arrears.
The Convertible Notes are convertible into 716,968
shares, based on a conversion price of $18.323 per
share. Convertibility was dependent upon certain
revenue targets being met. During the measurement
period, only the first revenue target was achieved.
As a result only one-third of the original number
of shares into which the Convertible Notes were
convertible will remain convertible until December
31, 2008. The Convertible Notes are now convertible
into 238,989 shares of the Company’s common stock. |
| |
| |
|
|
The Convertible Notes principal balance of $13.1
million is classified as current because the
maturity date falls within one year of the balance
sheet date. Interest on the Convertible Notes in
the amount of $131, 370 is due and payable on the
first day of each calendar quarter and late
interest payments are subject to a 30 day cure
period. As of the filing of this Form 10-Q, the
Company had not made the interest payment due on
April 1, 2008, and therefore, is in default under
the terms of the Convertible Notes. |
| |
| |
(c) |
|
Notes Payable - On October 10, 2006, the Company
signed two $1.0 million notes payable in
conjunction with its acquisition of MRL. The notes
payable accrue interest at 7% and are payable in 24
equal monthly installments of principal and
interest of approximately $0.1 million, beginning
in November 2006. These notes were paid off as
part of the NPPN business sale on February 1, 2008.
Refer to Note (2), Sale of NPPN Business, for
additional information on the NPPN transaction. |
| (6) |
|
Equity Transactions |
| |
| |
|
During the three months ended March 31, 2008, the
Company did not grant any stock options to
officers, directors, and employees. During the
three months ended March 31, 2008, no employee
stock options were exercised, and 414,332 stock
options were cancelled. |
| |
| (7) |
|
Segment Information |
| |
| |
|
As defined in SFAS No. 131, “Disclosures About
Segments of an Enterprise and Related Information”,
the Company has two operating segments: Transaction
Services and Laboratory Communications. Basic
differences in products, services and customer bases
underlie the Company’s decision to report these two
separate segments. Transaction Services focuses on
electronic exchanges of information between healthcare
providers and payers, primarily through the Company’s
EDI platform. Technology, such as the Company’s
Phoenix platform, plays an essential role in
operations and serving the Company’s Transaction
Services customers. Historically, the Transaction
Services segment included the NPPN business, which the
Company sold in February 2008. The Transaction
Services segment information presented below excludes
the NPPN business, which is presented as discontinued
operations. Laboratory Communication produces
equipment that facilitates results reporting between
laboratories and healthcare providers. Therefore, the
operating environment is different as is the
management perspective. Besides having different
customers than Transaction Services, Laboratory
Communications’ revenue structure is different than
Transaction Services. In addition to selling or
leasing the communication equipment, Laboratory
Communications provides support services under
maintenance agreements post sale. Transaction Services
generally recognizes revenue when transactions are
processed for a customer. See Note (1) (c) for
additional revenue recognition information relative to
these two operating segments. |
| |
| |
|
The segment reporting includes revenue and expense by
each operating unit, including depreciation and
amortization. Because the Company’s financing,
particularly the debt, is negotiated and secured on a
consolidated basis, the segment reporting does not
allocate interest expense (or interest income) by
reportable segment. The following table summarizes net
revenues, operating income (loss) and total assets for
each of the segments, net of discontinued operations. |
14
| |
|
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
| |
|
2008 |
|
|
2007 |
|
| |
|
(In thousands) |
|
Net revenues by operating segment: |
|
|
|
|
|
|
|
|
Transaction Services |
|
$ |
6,980 |
|
|
$ |
6,954 |
|
Laboratory Communication |
|
|
1,519 |
|
|
|
2,586 |
|
|
|
|
|
|
|
|
|
|
$ |
8,499 |
|
|
$ |
9,540 |
|
|
|
|
|
|
|
|
Operating income (loss) by operating segment: |
|
|
|
|
|
|
|
|
Transaction Services |
|
$ |
(1,377 |
) |
|
$ |
(7,041 |
) |
Laboratory Communication |
|
|
228 |
|
|
|
606 |
|
|
|
|
|
|
|
|
|
|
$ |
(1,149 |
) |
|
$ |
(6,435 |
) |
|
|
|
|
|
|
|
| |
|
|
| |
|
March 31, 2008 |
|
|
December 31, 2007 |
|
Total assets by operating segment: |
|
|
|
|
|
|
|
|
Transaction Services |
|
$ |
954 |
|
|
$ |
2,551 |
|
Laboratory Communication |
|
|
14,963 |
|
|
|
14,333 |
|
|
|
|
|
|
|
|
|
|
$ |
15,917 |
|
|
$ |
16,884 |
|
|
|
|
|
|
|
|
| (8) |
|
Income Taxes |
| |
| |
|
As of March 31, 2008, the Company had a net
deferred tax asset of approximately $88.7
million, which was fully offset by a valuation
allowance due to cumulative losses in recent
years. Realization of the net deferred tax
asset is dependent upon the Company generating
sufficient taxable income prior to the
expiration of the federal net operating loss
carry-forward. The Company will adjust this
valuation reserve if, during future periods,
management believes it will generate
sufficient taxable income to realize the net
deferred tax asset. |
| |
| (9) |
|
Commitments and Contingencies |
| |
(a) |
|
Litigation—The Company was named as a defendant in an action filed in July 2006, in the United
States District Court of New Jersey by MedAvante, Inc., (“MedAvante”). MedAvante claimed that the
Company’s use of the names “MedAvant” and “MedAvant Healthcare Solutions” infringed trademark
rights allegedly held by MedAvante. MedAvante sought unspecified compensatory damages and
injunctive relief. On February 12, 2007, the District Court issued a settlement order. The
existence of a proposed Settlement and Release Agreement is currently being litigated. The total
value of the contested settlement would be approximately $1.3 million, of which $1.0 million would
be covered by insurance proceeds. The Company does not believe the parties have agreed to the terms
of any settlement at this time. MedAvante has taken the opposing view. The Court has not yet ruled
on the matter. The Company has accrued the preliminary estimate of $0.3 million (net of expected
insurance proceeds) based upon the uncertain outcome of any litigation. |
| |
| |
|
|
From time to time, the Company is a party to other legal proceedings in the course of business.
However, the Company does not expect these other legal proceedings to have a material adverse
effect on the Company’s business or financial condition. |
15
| |
(b) |
|
Employment Agreements— The Company entered into employment agreements with certain executives and
other members of management that provide for cash severance payments if these employees are
terminated without cause. The Company’s aggregate commitment under these agreements is $1.6 million
at March 31, 2008. |
| (10) |
|
Supplemental Disclosure of Cash Flow Information |
| |
| |
|
Cash paid for interest was $2.0 million for the quarter ended March 31, 2008, and $0.7 million for the quarter ended March 31, 2007. During each of the three months ended March 31, 2008, and
March 31, 2007, the Company made income tax payments to the state of New York in the amount of $0.2 million. |
| |
(a) |
|
Effective April 11, 2008, Peter E. Fleming, III, the Company’s interim Chief Executive Officer, was appointed, unanimously, by the sitting members of
the Company board of directors (the “Board”) to become a member of the Company Board, in order to fill one (1) of the Company’s (4) vacancies then
currently existing on the Company’s Board. |
| |
| |
(b) |
|
Interest on the Convertible Note in the amount of $131,370 is due and payable on the first day of each calendar quarter and late interest payments are
subject to a 30 day cure period. As of the filing of this Form 10-Q, the Company had not made the interest payment due on April 1, 2008, and, therefore
is in default under the terms of the Convertible Notes. |
| |
| |
(c) |
|
On April 22, 2008, Gerard M. Hayden, Jr. provided notice to the Company of his resignation as Chief Financial Officer (“CFO”) and employee. Mr. Hayden’s
resignation from the office of CFO became effective May 9, 2008 (“Termination Date”). |
| |
| |
|
|
In connection with Mr. Hayden’s resignation, the Company shall: (a) pay Mr. Hayden’s base salary through the Termination Date; (b) pay Mr. Hayden the
pro rata portion of any accrued vacation not already taken; and (c) continue to pay any applicable employee benefits for Mr. Hayden until the
Termination Date. The Company shall have no other liabilities or obligations to Mr. Hayden upon payment in full of the salary and benefits described
above. |
| |
| |
|
|
On April 22, 2008, Mark R. Simcoe, CPA, was appointed as the Company’s interim CFO, effective May 9, 2008 to succeed Mr. Hayden. As the Company’s
interim CFO, Mr. Simcoe will oversee the Company’s accounting, audit and financial reporting matters. |
| |
| |
(d) |
|
On April 22, 2008, the Company received a letter from the Nasdaq Stock Market (“Nasdaq”) indicating that, for the prior thirty (30) consecutive trading
days, the Company’s common stock had not maintained the minimum value of publicly held shares of $15.0 million required for continued listing, as set
forth in Nasdaq Marketplace Rule 4450(b)(3) (the “MVPHS Rule”). The letter also indicated that, in accordance with Marketplace Rule 4450(e)(1), the
Company will be provided ninety (90) calendar days, or until July 21, 2008, to regain compliance with the MVPHS Rule, and if at any time before July 21,
2008 the minimum value of publicly held shares of the Company’s common stock is $15.0 million or greater for a minimum of ten (10) consecutive trading
days, the Nasdaq staff will provide written notification that the Company is in compliance with the MVPHS Rule. The Nasdaq letter further states that if
the Company does not regain compliance with the MVPHS Rule by July 21, 2008, the Nasdaq staff will provide written notification that the Company’s
securities will be delisted from the Nasdaq Global Market. At that time, the Nasdaq Marketplace Rules would permit the Company to appeal the Nasdaq
staff’s determination to delist the Company’s securities to a Nasdaq Listing Qualifications Panel. |
| |
| |
|
|
The Company is currently evaluating its alternatives to resolve the listing deficiency. If the Company is unable to resolve the listing deficiency, the
Company may apply to transfer its common stock to the Nasdaq Capital Market if its securities satisfy the requirements for continued inclusion for the
Nasdaq Capital Market. If the Company submits a transfer application and pays the applicable fees by July 21, 2008, the initiation of the delisting
proceedings will be stayed pending the Nasdaq staff’s review of the application. If the Nasdaq staff does not approve the transfer application to the
Nasdaq Capital Market, the Nasdaq staff will provide written notification that the Company’s common stock will be delisted from the Nasdaq Global
Market. |
| |
| |
|
|
The Nasdaq letter has no effect on the listing of the Company’s common stock on the Nasdaq Global Market as of the filing of this Form 10-Q. |
| |
| |
(e) |
|
On April 30, 2008, the Company entered into an agreement with Laurus to extend the maturity date of the Company’s obligations to repay the outstanding
principal, and accrued but unpaid interest, owed by the Company to Laurus under the Loan Agreement. Laurus has agreed to extend the Maturity Date to
July 31, 2008. |
| |
| |
|
|
In addition, effective April 24, 2008, the Company entered into a side letter (the “Overadvance Side Letter”) to the Loan Agreement with Laurus. Under
the Overadvance Side Letter, Laurus agreed to fix the overadvance available under the Revolving Credit Facility at $125,000, which provides the Company
with an additional $100,000 in financing under the Revolving Credit Facility. Laurus has also agreed that the overadvance will not trigger an event of
default under the Loan Agreement at this time. In consideration for this extension of additional credit and waiver, the Company has agreed to pay Laurus
$25,000. |
16
| |
|
|
On May 9, 2008, the Company entered into an amendment (the “Omnibus Amendment”) to the Loan Agreement with Laurus that provides for a maximum
availability under the Revolving Credit Facility of up to $7.0 million. As a result of the various amendments to the Revolving Credit Facility, as of
May 7, 2008, the Company had $0.6 million in available credit under the Revolving Credit Facility. In addition, the Omnibus Amendment includes
covenants requiring the Company to achieve minimum levels of consolidated cash receipts, consolidated revenues and consolidated EBITDA for the months of
May and June in 2008. The minimum levels are as follows: |
| |
|
|
| Fiscal Month Ending |
|
“consolidated cash receipts” |
| May 31, 2008
|
|
$2,250,000 |
| June 30, 2008
|
|
$2,150,000 |
| |
|
|
| Fiscal Month Ending |
|
“consolidated revenues” |
| May 31, 2008
|
|
$2,350,000 |
| June 30, 2008
|
|
$2,350,000 |
| |
|
|
| Fiscal Month Ending |
|
“consolidated EBITDA” |
| May 31, 2008
|
|
$115,000 |
| June 30, 2008
|
|
$25,000 |
As consideration for executing the Omnibus Amendment, the Company agreed to pay Laurus, a non-refundable payment in an amount equal to $325,000.
| (f) |
|
|
On May 22, 2008, the Company entered
into a definitive agreement to sell its Laboratory Communications
business to ETSec. The transaction is anticipated to close by the end
of June, 2008 for $2.1 million, subject to certain adjustments
at closing. |
17
ITEM 2 — MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
Management’s discussion and analysis of financial condition and results of operations (“MD&A”)
is provided as a supplement to ProxyMed, Inc.’s (“ProxyMed,” “MedAvant,” “we,” “us,” “our,” or “the
Company”) unaudited consolidated financial statements in this Form 10-Q and notes thereto and to
the audited consolidated financial statements and the notes thereto included in the Company’s
Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the Securities and
Exchange Commission (“SEC”) on April 15, 2008. Unless the context otherwise requires, all
references to “the Company,” “we,” “us,” “our,” “ProxyMed” or “MedAvant” refer to ProxyMed, Inc.,
d/b/a MedAvant Healthcare Solutions, and its subsidiaries.
Introduction
MedAvant Healthcare Solutions (“MedAvant”) is an information technology company that
facilitates the exchange of medical claim and clinical information among doctors, hospitals,
medical laboratories, pharmacies and insurance payers. MedAvant also enables the electronic
transmission of laboratory results and prescription orders.
MedAvant is a trade name of ProxyMed, Inc. which was incorporated in 1989 in Florida. In
December 2005, ProxyMed began doing business under the new operating name, MedAvant Healthcare
Solutions, to unite all business units and employees under one brand identity. The new name was one
of several results of a strategic analysis completed in the third quarter of 2005 following the
acquisition of seven companies between 1997 and 2004.
Management believes MedAvant is the nation’s fifth largest claims processor and is the largest
company that facilitates delivery of laboratory results.
Operating Segments
The Company operates two separately managed reportable segments: Transaction Services and
Laboratory Communications. A description of these segments, their primary services and the
Company’s source of revenue, in each, is as follows:
Transaction Services
| |
|
|
|
|
|
|
o
|
|
Processing claims. The primary tool the Company’s customers use to
process claims is its Phoenix platform, supplemented by a real-time
web portal called “myMedAvant”. It offers standard and premium
services with features such as verifying a patient’s insurance,
enrolling with payers, tracking a claim’s progress with the payer and
retrieving reports from payers. For the three months ended March 31,
2008 the Company processed 42.5 million transactions, an 11% increase
over the three months ended March 31, 2007. Providers pay for claims
processing based on either a flat monthly fee or a per- transaction
fee. |
|
|
|
|
|
|
|
o
|
|
Historically, the Transaction Services segment included the NPPN
business, which the Company sold in February 2008. The Transaction
Services segment information presented below excludes the NPPN
business, which is presented as discontinued operations. |
Laboratory Communications
| |
|
|
|
|
|
|
o
|
|
Printing Technology. The Company’s intelligent printing technology is
integrated into printers for labs to purchase and install in physician
offices. This allows for the secure transmittal of laboratory reports.
Laboratories also purchase support, maintenance and monitoring
programs to manage printers that have the Company’s integrated
technology. |
|
|
|
|
|
|
|
o
|
|
Pilot. This patent-pending, web-enabled device sits in a provider’s
office and is used to transfer lab reports in virtually any format to
a printer, a personal computer or a hand-held device. It integrates
with most Practice Management Systems and usually saves the provider
the cost of a dedicated phone line. Labs either purchase Pilot devices
with an annual support program or they subscribe to Pilot with a
program that includes support services. |
|
|
|
|
|
|
|
o
|
|
Fleet Management System (“FMS”). Labs use this online tool to monitor
printers in provider offices and receive alerts for routine problems
such as a printer being out of paper or having a paper jam. FMS can
also be used to monitor printer inventory and schedule regular
maintenance. Labs pay a monthly fee per printer to use FMS. |
18
Results of Operations
Three Months Ended March 31, 2008 Compared to Three Months Ended March 31, 2007
(some percents may not foot due to rounding)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
(Unaudited) |
|
|
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
|
|
|
|
|
|
| |
|
|
|
|
|
% of Net |
|
|
|
|
|
|
% of Net |
|
|
|
|
|
|
|
| (In thousands) |
|
2008 |
|
|
Revenues |
|
|
2007 |
|
|
Revenues |
|
|
Change $ |
|
|
Change % |
|
Net revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services |
|
$ |
6,980 |
|
|
|
82.1 |
% |
|
$ |
6,954 |
|
|
|
72.9 |
% |
|
$ |
26 |
|
|
|
0.4 |
% |
Laboratory Communication |
|
|
1,519 |
|
|
|
17.9 |
% |
|
|
2,586 |
|
|
|
27.1 |
% |
|
|
(1,067 |
) |
|
|
-41.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,499 |
|
|
|
100.0 |
% |
|
|
9,540 |
|
|
|
100.0 |
% |
|
|
(1,041 |
) |
|
|
-10.9 |
% |
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services |
|
|
1,201 |
|
|
|
17.2 |
% |
|
|
1,356 |
|
|
|
19.5 |
% |
|
|
(155 |
) |
|
|
-11.4 |
% |
Laboratory Communication |
|
|
806 |
|
|
|
53.1 |
% |
|
|
1,237 |
|
|
|
47.8 |
% |
|
|
(431 |
) |
|
|
-34.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,007 |
|
|
|
23.6 |
% |
|
|
2,593 |
|
|
|
27.2 |
% |
|
|
(586 |
) |
|
|
-22.6 |
% |
Selling, general and
administrative expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services |
|
|
6,294 |
|
|
|
90.2 |
% |
|
|
6,487 |
|
|
|
93.3 |
% |
|
|
(193 |
) |
|
|
-3.0 |
% |
Laboratory Communication |
|
|
449 |
|
|
|
29.6 |
% |
|
|
679 |
|
|
|
26.3 |
% |
|
|
(230 |
) |
|
|
-33.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,743 |
|
|
|
79.3 |
% |
|
|
7,166 |
|
|
|
75.1 |
% |
|
|
(423 |
) |
|
|
-5.9 |
% |
Impairment
charges: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services |
|
|
— |
|
|
|
0.0 |
% |
|
|
5,040 |
|
|
|
72.5 |
% |
|
|
(5,040 |
) |
|
|
-100.0 |
% |
Laboratory Communication |
|
|
— |
|
|
|
0.0 |
% |
|
|
— |
|
|
|
0.0 |
% |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
0.0 |
% |
|
|
5,040 |
|
|
|
72.5 |
% |
|
|
(5,040 |
) |
|
|
-100.0 |
% |
Depreciation and amortization: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services |
|
|
855 |
|
|
|
12.2 |
% |
|
|
1,112 |
|
|
|
16.0 |
% |
|
|
(257 |
) |
|
|
-23.1 |
% |
Laboratory Communication |
|
|
34 |
|
|
|
2.2 |
% |
|
|
61 |
|
|
|
2.4 |
% |
|
|
(27 |
) |
|
|
-44.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
889 |
|
|
|
10.5 |
% |
|
|
1,173 |
|
|
|
12.3 |
% |
|
|
(284 |
) |
|
|
-24.2 |
% |
Operating
loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services |
|
|
(1,377 |
) |
|
|
-19.7 |
% |
|
|
(7,041 |
) |
|
|
-101.3 |
% |
|
|
5,664 |
|
|
|
-80.4 |
% |
Laboratory Communication |
|
|
228 |
|
|
|
15.0 |
% |
|
|
606 |
|
|
|
23.4 |
% |
|
|
(378 |
) |
|
|
-62.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,149 |
) |
|
|
-13.5 |
% |
|
|
(6,435 |
) |
|
|
-67.5 |
% |
|
|
5,286 |
|
|
|
-82.1 |
% |
Interest expense |
|
|
632 |
|
|
|
7.4 |
% |
|
|
876 |
|
|
|
9.2 |
% |
|
|
(244 |
) |
|
|
-27.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
continuing operations, net |
|
$ |
(1,781 |
) |
|
|
|
|
|
$ |
(7,311 |
) |
|
|
|
|
|
$ |
5,530 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19
Net Revenues. Consolidated net revenues decreased $1.0 million, or 11%, to $8.5 million for
the three months ended March 31, 2008 compared to $9.5 million for the three months ended March 31,
2007.
Net revenues in the Company’s Transaction Services segment remained steady at $7.0 million,
for both periods. This included an increase in Transaction Services revenue of $0.3 million due to
increased transaction volumes, offset by $0.3 million due to the elimination of certain
unprofitable product lines, including the pharmacy.
Laboratory Communication segment net revenues decreased $1.0 million, or 41%, to $1.5 million
for the three months ended March 31, 2008, compared to $2.6 million for the three months ended
March 31, 2007. This decrease is primarily related to the downturn in business in one of the
Company’s largest customers. Revenue declines are likely a result of continued competitive
pressures which may affect pricing, revenues and cash flows.
Cost of Sales. Consolidated cost of sales decreased $.6 million, or 22.6%, to $2.0 million,
for the three months ended March 31, 2008 compared to $2.6 million for the same period last year.
The following table illustrates the Company’s cost of sales as a percentage of segment net
revenues:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
(Unaudited) |
|
|
|
|
|
| |
|
Three Months Ended March 31, |
|
| |
|
|
|
|
|
% of Segment |
|
|
|
|
|
|
% of Segment |
|
| (In thousands) |
|
2008 |
|
|
Net Revenue |
|
|
2007 |
|
|
Net Revenue |
|
Cost of sales: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services |
|
$ |
1,201 |
|
|
|
17.2 |
% |
|
$ |
1,356 |
|
|
|
19.5 |
% |
Laboratory Communication |
|
|
806 |
|
|
|
53.1 |
% |
|
|
1,237 |
|
|
|
47.8 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,007 |
|
|
|
23.6 |
% |
|
$ |
2,593 |
|
|
|
27.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Gross margin: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Transaction Services |
|
$ |
5,779 |
|
|
|
82.8 |
% |
|
$ |
5.598 |
|
|
|
80.5 |
% |
Laboratory Communication |
|
|
713 |
|
|
|
46.9 |
% |
|
|
1,349 |
|
|
|
52.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
6,492 |
|
|
|
76.4 |
% |
|
$ |
6,947 |
|
|
|
72.8 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Cost of sales in the Company’s Transaction Services segment consists of EDI transaction fees,
provider network access fees, services and license fees, third-party electronic transaction
processing costs, certain telecommunication and co-location center costs, and revenue sharing
arrangements with the Company’s business partners. Cost of sales decreased $0.2 million, or 11%, to
$1.2 million, for the three months ended March 31, 2008, compared to $1.4 million for the same
period last year. Cost of sales as a percentage of segment net revenues improved to 17% during the
period from 20% last year. This improvement was primarily due to re-contracting with certain
vendors. Gross margins on Transaction Services increased to 83% during the three months ended March
31, 2008, compared to 81% in the same period last year as management continued to focus on more
profitable product lines.
Cost of sales in the Company’s Laboratory Communication segment includes hardware, third party
software, consumable materials, direct manufacturing labor and indirect manufacturing overhead.
Cost of sales decreased $0.4 million to $0.8 million for the three months ended March 31, 2008,
compared to the same period in 2007. Cost of sales as a percentage of segment revenue increased to
53% during the period, from 48% last year. This increase was primarily due to the corresponding
decrease in net revenues during the period.
Selling, General and Administrative Expenses (“SG&A”). SG&A decreased for the three months
ended March 31, 2008, by $0.4 million, or 6%, to $6.8 million from $7.2 million for the three
months ended March 31, 2007. SG&A expenses as a percentage of total net revenues increased to 79%
for the three months ended March 31, 2008, from 75% in the same period last year.
Transaction Services segment SG&A expenses decreased $0.2 million or 3%, to $6.3 million for
the three months ending March 31, 2008, compared to $6.5 million for the same period last year.
This decrease was primarily due to lower payroll expenses resulting from the reduction in the
number of employees.
20
Laboratory Communication segment SG&A expenses decreased for the three months ended March 31,
2008 by $0.2 million, or 30%, to $0.4 million from $0.7 million for the three months ended March
31, 2007. This decrease was primarily due to lower payroll expenses resulting from the reduction
in the number of employees.
Impairment Charges. As a result of the Company’s continuing revenue and stock price declines
during the first quarter of 2007, the Company performed a goodwill impairment test as of March 31,
2007. In accordance with the provisions of SFAS No. 142, the Company used a discounted cash flow
analysis which indicated that the book value of the Transaction Services segment exceeded its
estimated fair value and that goodwill impairment had occurred. In addition, as a result of the
goodwill analysis, the Company assessed whether there had been an impairment of the Company’s
long-lived assets in accordance with SFAS No. 144. The Company concluded that the book value of
certain intangible assets was higher than their expected future cash flows and that impairment had
occurred. In addition, the Company also reduced the remaining useful lives of its other intangible
assets based on the foregoing analysis. Accordingly, the Company recorded a non-cash impairment
charge of $5.0 million for the three months ended March 31, 2007 in its Transaction Services
Segment. This charge included a $3.9 million impairment of goodwill and a $1.1 million impairment
of certain other intangibles. For the three months ended March 31, 2008, no impairment charge was
deemed necessary.
For the three months ended March 31, 2008, and March 31, 2007, no impairment charge was deemed
necessary in the Company Laboratory Communications segment.
Depreciation and Amortization. Depreciation and amortization decreased by $0.3 million to $0.9
million for the three months ended March 31, 2008, compared to $1.2 million for the same period
last year. This decrease is primarily the result of the impairment charge recorded for the three
months ended March 31, 2007.
Operating Loss. As a result of the foregoing, the combined operating loss for the three
months ended March 31, 2008, was $1.1 million compared to an operating loss of $6.4 million for the
same period last year.
Interest Expense. Net interest expense for the three months ended March 31, 2008, was $0.6
million compared to $0.9 for the same period last year. This decrease in expense was primarily due
to lower debt levels on the Company’s Laurus debt facility.
Loss from Continuing Operations, Net. As a result of the foregoing, loss from continuing
operations for the three months ended March 31, 2008 and 2007, was $1.8 million and $7.3 million,
respectively
Loss from Discontinued Operations. For the three months ended March 31, 2008 and 2007, loss
from discontinued operations was $3.6 million and $14.9 million, respectively. Included in the loss
for 2008, is a $2.3 million loss recognized on the sale of the NPPN business.
Net Loss. As a result of the foregoing, net loss for the three months ended March 31, 2008 and
2007, was $5.4 million and $22.2 million, respectively.
Liquidity and Capital Resources
Over the last several years the Company has experienced declining revenues, recurring losses
from operations and limitations on its access to capital. The working capital deficit was
approximately $20.8 million and the accumulated deficit was approximately $258.2 million as of
March 31, 2008. The Company had availability under its revolving credit facility of approximately
$1.7 million at December 31, 2007, approximately $0.3 million at March 31, 2008, and approximately
$0.6 million as of May 7, 2008.
The Company closely monitors its liquidity, capital resources and financial position on an
ongoing basis, and has undertaken a variety of initiatives in an effort to improve its liquidity
position. For example, during the second quarter of 2007, the Company reduced its headcount and
during the second half of 2007, the Company experienced attrition in its workforce as not all
vacated positions have been re-filled. The result is that the Company has further reduced its labor
and payroll expenses but does not believe that this additional reduction in workforce size has had
a material adverse effect on the Company’s service levels; the Company continues to seek ways to
operate more efficiently.
Simultaneous with its expense management efforts, the Company has been continually evaluating
and pursuing strategic transactions, such as the sale of the Company’s pharmacy transaction
business that occurred on April 30, 2007. On February 1, 2008, the Company closed on the previously
announced NPPN transaction. Of the approximate $20.5 million net proceeds, $16.5 million was
allocated to reduce Laurus senior debt and the remaining $4.0 million was used to retire other
liabilities and pay transaction related expenses. The Company continues to review all of its
strategic options.
On December 7, 2005, the Company and certain of its wholly-owned subsidiaries, entered into a
Security and Purchase Agreement (the “Loan Agreement”) with Laurus to provide up to $20.0 million
in financing. Under the terms of the Loan Agreement, Laurus extended financing to the Company in
the form of a $5.0 million secured term loan (the “Term Loan”) and a $15.0 million secured
revolving credit facility (the “Revolving Credit Facility”). The Term Loan has a stated term of
five (5) years and will accrue interest at Prime plus 2%, subject to a minimum interest rate of 8%.
The Term Loan is payable in equal monthly principal installments of approximately $89,300 plus
interest until the maturity date of December 6, 2010. The Revolving Credit Facility has a stated
term of three (3) years and will accrue interest at the 90 day LIBOR rate plus 5%, subject to a
minimum interest rate of 7%, and a maturity date of December 6, 2008 with two (2) one-year
extension-options at the discretion of Laurus. Additionally, in connection with the Loan Agreement,
the Company issued 500,000 shares of the Company Common Stock, par value $0.001 per share (the
“Closing Shares”) to Laurus that were valued at approximately $2.4 million at the time of issuance.
The Company granted Laurus a first priority security interest in substantially all of the
Company’s present and future tangible and intangible assets (including all intellectual property)
to secure the Company’s obligations under the Loan Agreement. The Loan Agreement contains various
21
customary representations and warranties of us as well as customary affirmative and negative
covenants, including, without limitation, liens of property, maintaining specific forms of
accounting and record maintenance, and limiting the incurrence of additional debt. The Loan
Agreement does not contain restrictive covenants regarding minimum earning requirements, historical
earning levels, fixed charge coverage, or working capital requirements. The Company can borrow up
to three times the trailing 12-months of historical earnings, as defined in the agreement. Per the
Loan Agreement, the Company is required to maintain a lock box arrangement wherein monies received
by us are automatically swept to repay the loan balance on the revolving credit facility.
The Loan Agreement also contains certain customary events of default, including, among others,
non-payment of principal and interest, violation of covenants, and in the event the Company is
involved in certain insolvency proceedings. Upon the occurrence of an event of default, Laurus is
entitled to, among other things, accelerate all obligations. In the event Laurus accelerates the
loans, the amount due will include all accrued interest plus 120% of the then outstanding principal
amount of the loans being accelerated as well as all unpaid fees and expenses of Laurus. In
addition, if the Revolving Credit Facility is terminated for any reason, whether because of a
prepayment or acceleration, there shall be paid an additional premium of up to 5% of the total
amount of the Revolving Credit Facility. In the event the Company elects to prepay the Term Loan,
the amount due shall be the accrued interest plus 115% of the then outstanding principal amount of
the Term Loan. Due to certain subjective acceleration clauses contained in the agreement and a
lockbox arrangement, the revolving credit facility is classified as current in the accompanying
unaudited consolidated balance sheets.
On June 21, 2007, the Company entered into an Amendment to the Loan Agreement (the “June
Amendment”) with Laurus whereby the amount available under the Revolving Credit Facility was
increased $3.0 million to $18.0 million. The June Amendment had a maturity date of June 30, 2008.
During the term of the June Amendment, the revised amounts available under the Revolving Credit
Facility decreased, as defined in the June Amendment, and the amount available under the Revolving
Credit Facility at June 30, 2008 was to return to $15.0 million as committed under the original
Loan Agreement. In connection with the June Amendment, the Company issued 572,727 shares of the
Company Common Stock to Laurus that were valued at approximately $1.0 million. The costs of these
shares were capitalized as debt issuance costs and will be amortized over the term of the June
Amendment.
As more fully disclosed in Note (1) (d), the Company revised its estimate of revenue
allowances and the allowance for doubtful accounts for the period ended June 30, 2007. These
changes in estimates negatively impacted the Company’s availability under the Revolving Credit
Facility (which is based on an earnings formula as defined in the Loan Agreement) and resulted in
an overadvance on its available borrowings at June 30, 2007. Subsequent to June 30, 2007, the
Company obtained a waiver from Laurus regarding this overadvance on its available borrowings until
June 30, 2008.
On October 10, 2007, the Company entered into an Amendment to the Loan Agreement (the “October
Amendment”) with Laurus whereby Laurus agreed to fix the available Revolving Credit Facility at
$16.5 million through December 31, 2007 in the event that certain conditions were met on dates
specified in the October Amendment. The October Amendment supersedes the June Amendment. In
consideration for the October Amendment, the Company agreed to pay Laurus $1.25 million as follows:
(a) $1.0 million on October 10, 2007 and (b) $0.25 million on the earlier of (i) an event of
default under the Loan Agreement and October Amendment, if any, or (ii) December 31, 2007.
On November 1, 2007, Laurus notified the Company that an event of default had occurred by the
Company’s failure to execute an asset purchase or stock purchase agreement by October 31, 2007 as
required by the terms of the October Amendment. In addition, Laurus notified the Company that it
was taking no immediate action with respect to this event of default but would reserve all rights
and remedies available to Laurus under the Loan Agreement and October Amendment. As a result of
this event of default, the Company has classified all amounts due to Laurus as current liabilities
in the accompanying unaudited consolidated balance sheet at December 31, 2007.
On February 11, 2008, the Company executed a Waiver and Amendment Agreement to the Loan
Agreement with Laurus dated December 6, 2005 (“the February Amendment”). As described elsewhere in
this filing, the maximum available amount under the Loan Agreement was reduced from $18.0 million
to: (a) for the period commencing on February 7, 2008 through and including February 29, 2008, $5.2
million, (b) for the period commencing on March 1, 2008 through and including March 15, 2008, $5.7
million, and (c) for the period commencing on March 16, 2008 through and including April 30, 2008,
$6.2 million; provided, however, that in the event a Budget Violation (defined below) occurred
during any such period of time, the maximum amount available under the Loan Agreement would have
automatically become $5.2 million for the duration of the term of the loan. In addition, the Loan
Agreement was amended such that interest shall accrue on the outstanding principal amount at a rate
of 12% per annum calculated based on a 360 day year and payable monthly, in arrears, commencing on
March 1, 2008, and on the first business day of each consecutive calendar month thereafter until
April 30, 2008 at which time all outstanding principal and accrued but unpaid interest would have
become due and payable. The Company is currently in discussions with Laurus and exploring
alternatives to restructure or refinance this debt, but there can be no assurances that the Company
will be able to achieve such a restructuring or refinancing.
In addition, pursuant to the February Amendment, Laurus waived its rights under the Loan
Agreement with respect to the existing default under the Loan Agreement, and the Company released
Laurus and certain related parties from any claims the Company may have against such released
parties related to acts or omissions of Laurus or such related parties prior to the date of the
February Amendment. Further, (i) in consideration for the partial reduction of the maximum
available amount under the Loan Agreement prior to the expiration of the revolving loan term, the
Company has paid Laurus a one-time fee equal to $472,000, and (ii) pursuant to the terms of the
Loan Agreement, the Company also paid Laurus a one-time term note termination fee of $455,357. As a
result of the amended terms of the Revolving Credit Facility, the Company’s available sources of
liquidity have been partially diminished.
As a result of these items, including the December 2008 maturity of $13.1 million of
convertible debt, the Company’s independent registered public accounting firm has issued a going
concern opinion with respect to the Company’s consolidated financial statements for the year ended
December 31, 2007.
22
On April 30, 2008, the Company entered into an agreement with Laurus to extend the maturity
date (the “Maturity Date”) of the Company’s obligations to repay outstanding principal, and accrued
but unpaid interest, owed by the Company to Laurus under the Loan Agreement and the related
Revolving Credit Facility. Laurus has agreed to extend such Maturity Date through July 31, 2008.
In addition, effective April 24, 2008, the Company entered into an Overadvance Side Letter
(the “Overadvance Side Letter”) to the Loan Agreement with Laurus. Under the Overadvance Side
Letter, Laurus has agreed to fix the overadvance amount available under the Revolving Credit
Facility at $125,000, which provides the Company with an additional $100,000 in financing under
such Revolving Credit Facility. Laurus has also agreed that the overadvance shall not trigger an
event of default under the Loan Agreement at this time. In consideration for this extension of
additional credit and waiver, the Company has agreed to pay Laurus $25,000.
On May 9, 2008, the Company entered into an amendment to the Loan Agreement (the “Omnibus
Amendment”) with Laurus that provides for a maximum availability under the Revolving Credit
Facility of up to $7.0 million. As a result of the various amendments to the Revolving Credit
Facility, as of May 7, 2008, the Company had $0.6 million in available credit under the Revolving
Credit Facility. In addition, the Omnibus Amendment includes covenants requiring the Company to
achieve minimum levels of consolidated cash receipts, consolidated revenues and consolidated EBITDA
for the months of May and June in 2008. The minimum levels are as follows:
| |
|
|
Fiscal Month Ending
|
|
“consolidated cash receipts” |
|
|
|
|
| May 31, 2008
|
|
$2,250,000 |
| June 30, 2008
|
|
$2,150,000 |
|
|
|
|
| Fiscal Month Ending
|
|
“consolidated revenues” |
|
|
|
|
| May 31, 2008
|
|
$2,350,000 |
| June 30, 2008
|
|
$2,350,000 |
|
|
|
|
| Fiscal Month Ending
|
|
“consolidated EBITDA” |
|
|
|
|
| May 31, 2008
|
|
$115,000 |
| June 30, 2008
|
|
$25,000 |
As consideration for the Omnibus Amendment, the Company agreed to pay to Laurus, a
non-refundable payment in an amount equal to $325,000.
As disclosed in further detail in Note 5(b), interest on the Convertible Notes (issued to the
former shareholders of MedUnite as part of the consideration paid in the acquisition of MedUnite)
in the amount of $137, 370 is due and payable on the first day of each calendar quarter and late
interest payments are subject to a 30 day cure period. As of the filing of this Form 10-Q, the
Company had not made the interest payment due on April 1, 2008, and, therefore is in default under
the Convertible Notes.
Application of Critical Accounting Policies and Estimates
The Company’s discussion and analysis of its financial condition and results of operations are
based on the Company’s consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States of America. The preparation of
the Company’s consolidated financial statements requires it to make estimates and judgments that
affect the reported amounts of assets, liabilities, revenues and expenses and related disclosure of
contingent assets and liabilities. The Company bases its estimates on historical experience and on
various other assumptions that are believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results may differ from these estimates
under different assumptions or conditions, but the Company believes that any variation in results
would not have a material effect on the itsy financial condition. The Company evaluates its
estimates on an ongoing basis.
The Company believes the following critical accounting policies affect the more significant
judgments and estimates used in the preparation of its consolidated financial statements. For a
detailed discussion on the application of these and other accounting policies, see Note 1 in the
Notes to Consolidated Financial Statements of the Company Form 10-K for the year ended December 31,
2007.
Revenue Recognition — Revenue is derived from the Company Transaction Services and Laboratory
Communication segments.
The Company Transaction Services segment provides transaction and value-added services
principally between health care providers, insurance companies, physicians and pharmacies. Such
transactions and services include electronic claims submission and reporting, insurance eligibility
verification, claims status inquiries, referral management, electronic remittance advice, patient
statement processing, encounters and cost savings services for payers including claims re-pricing
and bill negotiation. Through the Company Laboratory Communication segment, the Company sells,
rents and services intelligent remote reporting devices and provides lab results reporting through
the Company’s software products.
Transaction Services revenues are derived from insurance payers, pharmacies and submitters
(physicians and other entities including billing services, practice management software vendors and
claims aggregators). Such revenues are recorded on either a per transaction fee basis or on a flat
fee basis (per physician, per tax ID, etc.) and are recognized in the period in which the service
is rendered. Agreements with payers or pharmacies span one to three years on a non-exclusive basis.
Agreements with submitters have one year terms, renew automatically and are generally terminable
23
thereafter upon 30 to 90 days notice. Transaction fees vary according to the type of transaction
and other factors, including volume level commitments.
Also, in the Company Transaction Services segment, certain transaction fee revenue is subject
to revenue sharing pursuant to agreements with resellers, vendors or gateway partners and is
recorded as gross revenue in accordance with Emerging Issues Task Force (“EITF”) Issue No. 99-19,
“Reporting Revenue Gross as a Principal versus Net as an Agent.” Such revenue sharing amounts are
based either on a per transaction basis or a percentage of revenue basis and may involve increasing
amounts or percentages based on transaction or revenue volumes achieved.
Revenue from certain up-front fees charged primarily for the development of electronic
transactions for payers and the implementation of services for submitters in the Company
Transaction Services segment is amortized ratably over three years, which is the expected life of
customer agreements in accordance with Staff Accounting Bulletin No. 104, “Revenue Recognition”
(“SAB No. 104”).
Revenue from support and maintenance contracts on the Company products in both the Company
Transaction Services and Laboratory
Communication segments is recognized ratably over the contract period, which does not exceed one
year. Such amounts are billed in advance and established as deferred revenue. In the Company
Laboratory Communication segment, revenue from sales of inventory and manufactured goods is
recognized in accordance with SAB No. 104.
Revenues from maintenance fees on laboratory communication devices are charged on an annual or
quarterly basis and are recognized ratably over the service period.
Service fees may also be charged on a per event basis and are recognized after the service has
been performed.
Revenue from the rental of laboratory communication devices is recognized ratably over the
applicable period of the rental contract. Such contracts require monthly rental payments and have
terms of one to three years, then renewing to a month-to-month period after the initial term is
expired. Contracts may be cancelled upon 30 days notice. A significant amount of rental revenues
are derived from contracts that are no longer under the initial non-cancelable term. At the end of
the rental period, the customer may return or purchase the unit at fair market value. Upon sale of
the revenue earning equipment, the gross proceeds are included in net revenues and the
undepreciated cost of the equipment sold is included in cost of sales.
Goodwill — The Company has adopted the provisions of SFAS No. 142, “Goodwill and Other
Intangible Assets,” effective January 1, 2002. Under SFAS No. 142, goodwill must be reviewed at
least annually for impairment and between annual tests in certain circumstances. SFAS No. 142
requires that goodwill be tested for impairment at the reporting unit level at adoption and at
least annually thereafter, utilizing a “fair value” methodology. During 2007 the Company performed
two interim tests and completed its most recent annual test as of December 31, 2007. The interim
tests and the December 31, 2007 analysis utilized cash-flow based market comparables in assessing
fair value for its goodwill impairment testing and the Company concluded that there was impairment
of its goodwill. Accordingly, the Company recorded the impairment charges described here and in its
audited financial statements for 2007.
Capitalized Software Development and Research and Development — Costs incurred internally and
fees paid to outside contractors and consultants during the application development stage of the
Company’s internally used software products are capitalized. Costs of upgrades and major
enhancements that result in additional functionality are also capitalized. Costs incurred for
maintenance and minor upgrades are expensed as incurred. All other costs are expensed as incurred
as research and development expenses and are included in selling, general and administrative
expenses. Application development stage costs generally include software configuration, coding,
installation of hardware and testing. Once the project is completed, capitalized costs are
amortized over their remaining estimated economic life. The Company’s judgment is used in
determining whether costs meet the criteria for immediate expense or capitalization. The Company
periodically reviews projected cash flows and other criteria in assessing the impairment of any
internal-use capitalized software and takes impairment charges as needed.
Purchased Technology and Other Intangibles Assets — Purchased technology and other intangible
assets are amortized on a straight-line basis over their estimated useful lives of 3 to 12 years.
The carrying values of purchased technology and intangible assets are reviewed if the facts and
circumstances indicate that they may be impaired. This review indicates whether assets will be
recoverable based on future expected cash flows and, if not recoverable, whether there is an
impairment of such assets.
Reserve for Doubtful Accounts/Revenue Allowances/Bad Debt Estimates — The Company relies on
estimates to determine revenue allowances, bad debt expense and the adequacy of the reserve for
doubtful accounts receivable. These estimates are based on the Company’s historical experience and
the industry in which the Company operates. If the financial condition of the Company’s customers
were to deteriorate, resulting in their inability to make payments, additional allowances may be
required. Additionally, in the Company’s Cost Containment business prior to its sale in February
2008, the Company evaluated the collectibility of its accounts receivable based on a combination of
factors. In circumstances where the Company is aware of a specific customer’s inability to meet its
financial obligations, the Company records a specific reserve for bad debts against amounts due to
reduce the net recognized receivable to the amount the Company reasonably believes will be
collected. For all other customers, the Company recognizes revenue reserves based on past write-off
history, average percentage of receivables written off historically and the length of time the
receivables are past due. To the extent historical credit experience is not indicative of future
performance or other assumptions used by management do not prevail, loss experience could differ
significantly, resulting in either higher or lower future provisions for losses. As part of this
process, the Company revised its estimates of revenue allowances within the Company’s former Cost
Containment business at various times during 2007 to reflect changes in historical collections due
to changes in customer mix and service offerings. In addition, as discussed below, the Company
wrote off approximately $1.7 million of accounts receivable from certain customers that management
determined were uncollectible during the year ended December 31, 2007.
24
New Accounting Pronouncements
The Company adopted the provisions of Financial Accounting Standards Board (“FASB”),
Interpretation No. 48, (“ FIN 48”), “Accounting for Uncertainty in Income Taxes,” effective January
1, 2007. FIN 48 is an interpretation of SFAS No. 109, “Accounting for Income Taxes,” which seeks to
reduce the diversity in practice associated with certain aspects of measurement and recognition in
accounting for income taxes. In addition, FIN 48 provides guidance on derecognition,
classification, interest and penalties, and accounting in interim periods and requires expanded
disclosure with respect to the uncertainty in income taxes. Adoption of FIN 48 had no cumulative
effect on the Company’s consolidated financial position at January 1, 2007. At March 31, 2008, the
Company had no significant unrecognized tax benefits related to income taxes. The Company’s policy
with respect to penalties and interest in connection with income tax assessments or related to
unrecognized tax benefits is to classify penalties as provision for income taxes and interest as
interest expense in its consolidated income statement. The Company files income tax returns in the
U.S. federal and several state jurisdictions. The Company believes that the Company is no longer
subject to U.S. federal and state income tax examinations for years before 2004.
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements,” which is effective
for financial statements issued for the fiscal year beginning after November 15, 2007 and,
therefore, is effective for the Company in 2008. SFAS No. 157 defines fair value as “the price that
would be received to sell an asset or paid to transfer a liability in an orderly transaction
between market participants at the measurement date.” SFAS No. 157 also expands disclosure
requirements to include: (a) the fair value measurements of assets and liabilities at the reporting
date, (b) segregation of assets and liabilities between fair value measurements based on quoted market prices and those
based on other methods and (c) information that enables users to assess the method or methods used
to estimate fair value when no quoted price exists. The Company does not believe that the adoption
of SFAS No 157 will have a material impact on its consolidated financial position, results of
operations and cash flows.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities.” This new standard provides companies with an option to report selected
financial assets and liabilities at fair value. Generally accepted accounting principles have
required different measurement attributes for different assets and liabilities that can create
artificial volatility in earnings. The FASB believes that SFAS No. 159 helps to mitigate this type
of accounting-induced volatility by enabling companies to report related assets and liabilities at
fair value, which would likely reduce the need for companies to comply with detailed rules for
hedge accounting. SFAS No. 159 also establishes presentation and disclosure requirements designed
to facilitate comparisons between companies that choose different measurement attributes for
similar types of assets and liabilities. It does not eliminate disclosure requirements included in
other accounting standards, including requirements for disclosures about fair value measurements
included in SFAS No. 157 and SFAS No. 107. It is effective beginning January 1, 2008 for the
Company. Management does not believe the adoption of this new standard will have a significant
impact on the Company’s financial position, results of operations and cash flows.
In December 2007 the FASB issued SFAS No. 141(R), “Business Combinations”, which is effective
for business combinations for which the acquisition date is on or after the beginning of the first
annual reporting period beginning on or after December 15, 2008 and replaces SFAS No. 141, which
was issued in June 2001. The objective of this SFAS 141(R) is to improve the relevance,
representational faithfulness, and comparability of the information that a reporting entity
provides in its financial reports about a business combination and its effects. To accomplish that,
this Statement establishes principles and requirements for how the acquirer recognizes and measures
in its financial statements the identifiable assets acquired, the a) liabilities assumed, and any
non-controlling interest in the acquiree, b) recognizes and measures the goodwill acquired in the
business combination or a gain from a bargain purchase and, c) determines what information to
disclose to enable users of the financial statements to evaluate the nature and financial effects
of the business combination. The Company is currently in the process of reviewing this guidance to
determine its impact on its consolidated financial position, results of operations and cash flows.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statements.” SFAS No. 160 amends Accounting Research Bulletin 51, “Consolidated Financial
Statements,” and requires all entities to report noncontrolling (minority) interests in
subsidiaries within equity in the consolidated financial statements, but separate from the parent
shareholders’ equity. SFAS No. 160 also requires any acquisitions or dispositions of noncontrolling
interests that do not result in a change of control to be accounted for as equity transactions.
Further, SFAS No. 160 requires that a parent recognize a gain or loss in net income when a
subsidiary is deconsolidated. SFAS No. 160 is effective for fiscal years beginning on or after
December 15, 2008. The Company does not believe the adoption of SFAS No. 160 will have a
significant, if any, impact on our financial position, results of operations and cash flows.
In March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments and
Hedging Activities, an amendment of FASB Statement No. 133.” SFAS No. 161 amends and expands the
disclosure requirements of SFAS No. 133 with the intent to provide users of financial statements
with an enhanced understanding of: (1) how and why an entity uses derivative instruments; (2) how
derivative instruments and related hedged items are accounted for under SFAS No. 133 and its
related interpretations and (3) how derivative instruments and related hedged items affect an
entity’s financial position, financial performance and cash flows. This statement is effective for
financial statements issued for fiscal years and interim periods beginning after November 15, 2008,
with early application encouraged. The Company does not believe the adoption of SFAS 161 to have a
material effect on our financial position, results of operations and cash flows.
Cautionary Statement Pursuant to Safe Harbor Provisions of the Private Securities Litigation Reform
Act of 1995
Statements contained in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” and elsewhere in this report contain information that includes or is based
upon forward-looking statements within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements present the Company expectations or forecasts of future events.
These statements can be identified by the fact that they do not relate strictly to historical or
current facts. They frequently are accompanied by words such as “anticipate,” “estimate,” “expect,”
“project,” “intend,” “plan,” “believe,” and other words and terms of similar meaning. In
particular, these include statements relating to: the Company’s ability to identify suitable
acquisition candidates; the Company’s successful integration of any future acquisitions; the
Company’s ability
25
to successfully sell certain business units; the Company’s ability to
successfully develop, market, sell, cross-sell, install and upgrade the Company’s clinical and
financial transaction services and applications to new and current physicians, payers, medical
laboratories and pharmacies; the Company’s ability to compete effectively on price and support
services; the Company’s ability to increase revenues and revenue opportunities; and the Company’s
ability to meet expectations regarding future capital needs and the availability of credit and
other financing sources.
All statements other than statements of historical fact are statements that could be deemed
forward-looking statements, including any projections of earnings, revenues, synergies, accretion,
margins or other financial items; any statements of the plans, strategies and objectives of
management for future operations, including the execution of integration and restructuring plans
and the anticipated timing of filings, approvals and closings relating to the merger or other
planned acquisitions or dispositions; any statements concerning proposed new products, services,
developments or industry rankings; any statements regarding future economic conditions or
performance; any statements of belief; and any statements of assumptions underlying any of the
foregoing.
Actual results may differ significantly from projected results due to a number of factors,
including, but not limited to, the soundness of the Company’s business strategies relative to
perceived market opportunities; the Company’s assessment of the healthcare industry’s need, desire
and ability to become technology efficient; market acceptance of the Company’s products and
services; and the Company’s ability and that of the Company’s business associates to comply with
various government rules regarding healthcare information and patient privacy.
Forward-looking statements are not guarantees of performance. They involve risks,
uncertainties and assumptions. The Company’s future
results and shareholder values may differ materially from those expressed in the forward-looking
statements. Many of the factors that will determine these results and values are beyond the
Company’s ability to control or predict. The Company refers you to the cautionary statements and
risk factors set forth in the documents it files from time to time with the SEC, particularly the
Company’s Annual Report on Form 10-K for the year ended December 31, 2007, as filed with the SEC on
April 15, 2008. Shareholders are cautioned not to put undue reliance on any forward-looking
statements. For those statements, the Company claims the protection of the safe harbor for
forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The
Company expressly disclaims any intent or obligation to update any forward-looking statements.
Available Information
MedAvant’s Internet address is www.medavanthealth.com. MedAvant makes available free of charge
on or through its Internet website the Company’s Annual Report on Form 10-K, Quarterly Reports on
Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”),
as soon as reasonably practicable after such material is electronically filed with, or furnished
to, the SEC. The Company stock is traded on the Nasdaq Global Market under the stock symbol “PILL.”
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company does not own any derivative financial instruments or derivative commodity
instruments. The Company has no international sales and, therefore, the Company does not believe
that it is exposed to material risks related to foreign currency exchange rates, or tax changes.
ITEM 4T. CONTROLS AND PROCEDURES
Disclosure Controls and Procedures
Under the supervision and with the participation of the Company’s management, including its
CEO and CFO, the Company has evaluated the effectiveness of the design and
operation of its disclosure controls and procedures pursuant to the Securities Exchange Act of
1934, as amended (the “Exchange Act”) as of the end of the period covered by this report.
Disclosure controls are controls and procedures designed to reasonably assure that information
required to be disclosed in the Company’s reports filed under the Exchange Act, such as this Form
10-Q, is (i) recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and (ii) accumulated and communicated to management, including the CEO and
CFO, as appropriate to allow timely decisions regarding required disclosures. The Company’s
quarterly evaluation of disclosure controls and procedures includes an evaluation of some
components of its internal control over financial reporting.
The Company’s evaluation of its disclosure controls and procedures included a review of the
controls’ objectives and design, its implementation of the controls and the effect of the controls
on the information generated for use in this Form 10-Q. During the course of management’s
evaluation of the Company’s controls, it advised the audit committee of the Company’s board of
directors that it had identified certain issues that rose to the level of a “material weakness” in
the Company’s disclosure controls and related internal controls. A “material weakness” is a
significant deficiency, or combination of deficiencies, that results in more than a remote
likelihood that a material misstatement of the annual or interim financial statements will not be
prevented or detected. A “significant deficiency” is a control deficiency, or combination of
control deficiencies, that adversely affects the Company’s
ability to initiate, authorize, record, process, or report external financial data reliably in
accordance with generally accepted accounting principles such that there is more than a remote
likelihood that a misstatement of the Company’s annual or interim financial statements that is more
than inconsequential will not be prevented or detected.
Specifically, management identified the following item that constitutes a material weakness:
| • |
|
The Company had, at the time of preparation of
this Quarterly Report on Form 10-Q, inadequate resources and training in the accounting and
financial reporting group. This condition is largely due to a major divestiture and
significant staff turnover. |
Due to the foregoing item and potential impact on the financial statements and disclosures and
the importance of the annual and interim financial closing and reporting process, in the aggregate,
there is more than a remote likelihood that a material misstatement of the annual or interim
financial statements would not have been prevented or detected. Based on this evaluation, the CEO
and CFO concluded that the Company’s disclosure controls and procedures were not effective as of
March 31, 2008.
To address the material weakness described above, the Company has taken, or plans to take, the
following remedial actions:
| • |
|
The Company will more clearly define the roles and
responsibilities throughout its entire accounting and finance department; |
| • |
|
The Company has hired additional key personnel into its accounting and finance department and intends to hire additional
key personnel and to implement a training plan with respect to this new personnel; and |
| • |
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The Company has developed and disseminated
critical accounting policies and procedures to the accounting staff. |
As management continues to evaluate and review the Company’s remediation process, the Company
may modify its present intentions and conclude that additional or different actions would better
serve the remediation of its material weakness. The Company expects that the remediation of its
material weakness as described above will be completed during 2008.
Internal Control Over Financial Reporting
There were no significant changes made in the Company’s internal control over financial
reporting during the three months ended March 31, 2008 that have materially affected or are
reasonably likely to materially affect the Company’s internal control over financial reporting as
all the remedial measures have not been fully implemented or have not operated for a significant
period of time. Although the Company has addressed several of the internal control weaknesses that
existed during this reporting period, the remaining weakness is significant and continues to
materially affect its internal control over financial reporting. However, the Company does intend
to take additional remedial action related to its material weakness described above which may
result in a significant change to its internal control over financial reporting in the future.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was named as a defendant in an action filed in July 2006, in the United States
District Court of New Jersey by MedAvante, Inc., (“MedAvante”). MedAvante claimed that the
Company’s use of the names “MedAvant” and “MedAvant Healthcare Solutions” infringed trademark
rights allegedly held by MedAvante. MedAvante sought unspecified compensatory damages and
injunctive relief. On February 12, 2007, the District Court issued a settlement order. The
existence of a proposed Settlement and Release Agreement is currently being litigated. The total
value of the contested settlement would be approximately $1.3 million, of which $1.0 million would
be covered by insurance proceeds. The Company does not believe the parties have agreed to the terms
of any settlement at this time. MedAvante has taken the opposing view. The Court has not yet ruled
on the matter. The Company has accrued the preliminary estimate of $0.3 million (net of expected
insurance proceeds) based upon the uncertain outcome of any litigation.
From time to time, the Company is a party to other legal proceedings in the course of its
business. The Company, however, does not expect such other legal proceedings to have a material
adverse effect on its business or financial condition.
26
ITEM 1A. RISK FACTORS
The Company identified the following material change from the risk factors disclosed in the
“Risk Factors” section of the Company’s Annual Report on Form 10-K for the fiscal year ended
December 31, 2007, filed on April 15, 2008.
RISK RELATED TO AN INVESTMENT IN THE COMPANY’S SECURITIES
Failure to achieve and maintain effective internal controls could have a material adverse effect on
the Company’s business, operating results and stock price.
The Company’s management is required to periodically evaluate the design and effectiveness of
the Company’s disclosure controls and procedures and related internal controls over financial
reporting. During the course of management’s evaluation for the quarter ended March 31, 2008, it
identified certain significant deficiencies in the Company’s internal control over financial
reporting, which on an accumulated basis, rose to the level of a material weakness. As a result,
management, including the Company’s Chief Executive Officer (“CEO”) and Chief Financial Officer
(“CFO”), concluded that there is more than a remote likelihood that a material misstatement of the
annual or interim financial statements would not have been prevented or detected due to the
material weakness identified by management. As a result, the CEO and
CFO concluded that the Company’s
disclosure controls and procedures were not effective as of March 31, 2008. If the Company does not
remediate this material weakness, it could result in a material misstatement or omission in the
Company’s annual or interim financial statements which could, in turn, have a material adverse
effect on its business, operating results and stock price.
The Company intends to remediate this material weakness by (i) more clearly defining the roles
and responsibilities throughout its entire accounting and finance department, (ii) disseminating
critical accounting policies to the accounting staff and senior managers and training such
accounting staff and senior managers with respect to these policies, and (iii) hiring and training
additional personnel into the accounting and finance department. Any failure to implement such
remedial measures or any failure to maintain such measures could have a material adverse effect on
the Company’s business, operating results and stock price.
ITEM 3. DEFAULTS UPON SECURITIES
On December 31, 2002, the Company issued $13.4 million of 4% convertible promissory notes to
former shareholders of MedUnite as part of the consideration paid in the acquisition of MedUnite.
Interest on these convertible notes in the amount of $131,370 is due and payable on the first day
of each calendar month and late interest payments have a thirty (30) day cure period. As of the
date of filing of this Form 10-Q, the Company has not made the interest payment that was due on
April 1, 2008. As a result, the Company is now in default under these convertible notes.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Shareholders of the Company on January 22, 2008 (the
“Special Meeting”). At the Special Meeting, the Company’s shareholders voted on and approved the
sale of the Company’s Cost Containment Business to Coalition. The following is the vote approving
the sale of the Cost Containment Business:
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Broker |
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For |
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Against |
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Abstain |
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Non-Votes |
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Sale of Cost Containment Business to Coalition |
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8,491,008 |
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10,287 |
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966 |
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-0- |
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ITEM 6. EXHIBITS
The following exhibits are furnished or filed as part of this Report on Form 10-Q :
| |
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10.55
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Employment Agreement, dated May 6, 2008, by and between ProxyMed, Inc d/b/a MedAvant Healthcare Solutions and Peter E. Fleming, III
(incorporated by reference to Exhibit 10.55 of the Form 8-K, File No. 000-22052, reporting an event dated May 6, 2008).* |
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10.56
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Omnibus Amendment, dated May 8, 2008, to that certain Security and Purchase Agreement, dated December 6, 2005, by and between ProxyMed, Inc.
d/b/a MedAvant Healthcare Solutions and Laurus Master Fund, Ltd. (incorporated by reference to Exhibit 10.56 of Form
8-K, File No. 000-22052, reporting an event dated May 8,
2008). |
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31.1
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Certification by Peter E. Fleming, III, Interim Chief Executive Officer, pursuant to Exchange Act Rules 13a-14 and 15d-14. (Filed herewith). |
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31.2
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Certification by Mark Simcoe,
Interim Chief Financial Officer, pursuant to Exchange Act Rules 13a-14 and 15d-14. (Filed herewith). |
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32.1
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Certification by Peter E. Fleming, III, Interim Chief Executive Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002. (Filed herewith). |
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32.2
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Certification by Mark Simcoe,
Interim Chief Financial Officer, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002. (Filed herewith). |
| |
* Denotes management contract or compensating plan or arrangement. |
27
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.
PROXYMED, INC.
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Date: |
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May 23, 2008
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By:
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/s/ Peter E. Fleming, III
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Peter E. Fleming, III |
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Interim Chief Executive Officer |
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| Date: |
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May 23, 2008
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By:
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/s/ Mark Simcoe
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Mark Simcoe |
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Interim Chief Financial Officer |
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28