UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2004
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ___________ to ______________
Commission File
Number: 024768
------------------------------------------------------------------------
RAMP CORPORATION
----------------
(Exact name of issuer as specified in its charter)
Delaware 84-123311
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
33 Maiden Lane, New York, New York 10038
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(212) 440-1500
--------------------------------------------------------------------------------
(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 an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act).
[ ]Yes [X] No
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of August 11, 2004.
Common Stock, $0.001 par value 200,691,217
------------------------------ ----------------
Class Number of Shares
RAMP CORPORATION
INDEX
-----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of June 30, 2004 (Unaudited) and December 31,
2003
Unaudited Consolidated Statements of Operations for the three and six months
ended June 30, 2004 and 2003
Unaudited Consolidated Statements of Cash Flows for the six months ended June
30, 2004 and 2003
Notes to Unaudited Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
Index to Exhibits
PART I
ITEM 1. FINANCIAL STATEMENTS
RAMP CORPORATION (FORMERLY MEDIX RESOURCES, INC.)
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
2004 2003
------------------------------------
(Unaudited)
ASSETS
CURRENT ASSETS
Cash $ 166,000 $ 1,806,000
Accounts receivable 196,000 182,000
Unbilled receivables 67,000 -
Prepaid expenses and other 222,000 321,000
------------------------------------
TOTAL CURRENT ASSETS 651,000 2,309,000
------------------------------------
NON-CURRENT ASSETS
Property and equipment, net 1,439,000 731,000
Security deposits 260,000 398,000
Goodwill 4,962,000 4,853,000
Other intangible assets, net 1,201,000 1,382,000
------------------------------------
TOTAL NON-CURRENT ASSETS 7,862,000 7,364,000
------------------------------------
TOTAL ASSETS $ 8,513,000 $ 9,673,000
====================================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Promissory notes and current portion of long term debt $ 1,752,000 $ 232,000
Accounts payable 2,968,000 847,000
Accounts payable - related parties 326,000 261,000
Accrued expenses 2,980,000 2,067,000
------------------------------------
TOTAL CURRENT LIABILITIES 8,026,000 3,407,000
------------------------------------
Long-term debt, net of current portion and
debt discount of $138,000 and $169,000 147,000 269,000
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
1996 Preferred stock, 10% cumulative convertible, $1 par value, 488
shares authorized, 155 shares issued, 1 share outstanding,
liquidation preference $10,000 plus accrued and unpaid dividends - -
2003 Series A convertible stock, $1 par value, 3,200 shares authorized,
3,112 shares issued and outstanding at December 31, 2003 - 3,000
Common stock, $0.001 par value, 400,000,000 shares authorized,
179,261,216 and 145,244,392 issued and outstanding at June 30, 2004 and
December 31, 2003, respectively 179,000 145,000
Deferred compensation (332,000) (86,000)
Additional paid-in capital 87,975,000 78,303,000
Accumulated deficit (87,482,000) (72,368,000)
------------------------------------
TOTAL STOCKHOLDERS' EQUITY 340,000 5,997,000
------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,513,000 $ 9,673,000
====================================
See notes to unaudited consolidated financial statements.
1
RAMP CORPORATION (FORMERLY MEDIX RESOURCES, INC.)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------------- ---------------------------------------
2004 2003 2004 2003
------------------ ------------------ ------------------ -------------------
REVENUES $ 423,000 $ - $ 803,000 $ 173,000
COSTS AND EXPENSES
Software and technology costs 1,836,000 798,000 3,034,000 1,191,000
Selling, general and administrative expenses 6,651,000 1,675,000 12,341,000 3,765,000
Costs associated with terminated acquisition - - - 142,000
------------------ ------------------ ------------------ -------------------
TOTAL OPERATING EXPENSES 8,487,000 2,473,000 15,375,000 5,098,000
------------------ ------------------ ------------------ -------------------
Other income (expense)
Other income 2,000 9,000 3,000 18,000
Interest expense (20,000) (6,000) (19,000) (9,000)
Financing costs (510,000) (134,000) (526,000) (135,000)
------------------ ------------------ ------------------ -------------------
TOTAL OTHER INCOME (EXPENSE) (528,000) (131,000) (542,000) (126,000)
------------------ ------------------ ------------------ -------------------
NET LOSS (8,592,000) (2,604,000) (15,114,000) (5,051,000)
Disproportionate deemed dividend issued
to certain warrant holders (698,000) - (841,000) (1,133,000)
------------------ ------------------ ------------------ -------------------
NET LOSS APPLICABLE TO COMMON STOCKHOLDERS $ (9,290,000) $ (2,604,000) $ (15,955,000) $ (6,184,000)
================== ================== ================== ===================
Basic and diluted weighted average 171,614,713 82,126,955 161,833,017 80,645,905
common shares outstanding
Basic and diluted loss per common share ($0.05) ($0.03) ($0.10) ($0.08)
See notes to unaudited consolidated financial statements.
2
RAMP CORPORATION (FORMERLY MEDIX RESOURCES, INC.)
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months
Ended June 30,
------------------------------------------
2004 2003
-------------------- --------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (15,114,000) $ (5,151,000)
Adjustments to reconcile net loss to cash (used in)
provided by operating activities:
Depreciation and amortization 349,000 109,000
Deferred revenue (2,000) (173,000)
Common stock, options and warrants issued for
services, consulting and settlements 1,503,000 301,000
Net changes in operating assets and liabilities 3,177,000 419,000
-------------------- --------------------
NET CASH USED IN OPERATING ACTIVITIES (10,087,000) (4,495,000)
-------------------- --------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (875,000) (12,000)
Note receivable - (205,000)
Business acquisition costs, net of cash acquired - (300,000)
-------------------- --------------------
NET CASH USED IN INVESTING ACTIVITIES (875,000) (517,000)
-------------------- --------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of promissory notes 1,650,000 1,541,000
Principal payments on debt and notes payable (134,000) (68,000)
Proceeds from issuance of preferred and
common stock, net of offering costs 5,513,000 1,681,000
Proceeds from the exercise of options and warrants 2,293,000 737,000
-------------------- --------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 9,322,000 3,891,000
-------------------- --------------------
NET DECREASE IN CASH (1,640,000) (1,121,000)
Cash, beginning of period 1,806,000 1,369,000
-------------------- --------------------
CASH, END OF PERIOD $ 166,000 $ 248,000
==================== ====================
See Notes 6-8 and 10 for discussion of non-cash investing activities for the six
months ended June 30 2004.
Non-cash financing activities for the six months ended June 30, 2003: Issuance
of 100,000 shares of $0.001 par value common stock valued at $48,000 issued with
cash of $300,000; the total being the purchase price of the ePhysician assets
Issuance of warrants to placement agent valued at $215,000 in a private
placement
See notes to unaudited consolidated financial statements.
3
RAMP CORPORATION (FORMERLY MEDIX RESOURCES, INC.)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements are unaudited and reflect all
adjustments (consisting only of normal recurring adjustments), which are, in the
opinion of management, necessary for a fair presentation of the financial
position and operating results for the interim periods presented. They comply
with Regulation S-X and the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required under generally accepted
accounting principles for complete financial statements. The consolidated
balance sheet as of December 31, 2003 has been derived from the audited
financial statements. The unaudited consolidated financial statements contained
herein should be read in conjunction with the financial statements and notes
thereto contained in the Company's Form 10-K for the fiscal year ended December
31, 2003. The results of operations for the three and six months ended June 30,
2004 are not necessarily indicative of the results for the entire fiscal year
ending December 31, 2004 or for any other interim period in the fiscal year
ending December 31, 2004.
The accompanying consolidated financial statements have been prepared
assuming the Company will continue as a going concern. The Company has
experienced substantial recurring losses to date which raise substantial doubt
about its ability to continue as a going concern. In addition, at June 30, 2004,
the Company had a working capital deficit of $7,375,000. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty. Management continues to pursue fund-raising
activities, including private placements, to continue to fund the Company's
operations until such time as revenues are sufficient to support operations.
There can be no assurances that additional funds will be raised or that the
Company will ever be profitable.
2. GOODWILL AND OTHER INTANGIBLE ASSETS, NET
On November 10, 2003, in connection with an Asset Purchase Agreement
entered into between the Company and The Duncan Group, Inc., the Company
completed the purchase of substantially all of the tangible and intangible
assets, and assumed certain liabilities, of Frontline Physicians Exchange and
Frontline Communications ("OnRamp"). The unaudited financial information in the
table below summarizes the combined results of operations of the Company and
OnRamp, on a pro forma basis, as though the companies had been combined as of
January 1, 2003. This pro forma data is presented for informational purposes
only and is not intended to represent or be indicative of the results of
operations that would have been reported had the acquisition taken place on
January 1, 2003, and should not be taken as representative of the future results
of operations of the Company.
Three Months Ended Six Months Ended
June 30, 2003 June 30, 2003
---------------------------------------------
Revenues $ 361,000 $ 836,000
Net loss applicable to common stockholders (2,593,000) (6,132,000)
Loss per share applicable to common
stockholders - basic and diluted ($0.03) ($0.08)
4
Total goodwill at June 30, 2004, includes $1,605,000 related to the
balance of goodwill acquired through the acquisition of Cymedix in 1998, and
$3,357,000 of goodwill related to the Company's acquisition of OnRamp. Under the
terms of the Asset Purchase Agreement, and as previously disclosed, the Company
is required to pay additional purchase price contingent on the outcome of
certain future events, including cash payments equal to 15% of OnRamp's gross
revenues during 2004. Accordingly, approximately $105,000 was recorded as an
increase to Goodwill during the six months ended June 30, 2004.
Under Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets, the Company reviews its goodwill for impairment at
least annually, or more frequently whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recovered. During the
second quarter and into the third quarter of 2004, there was a significant
decrease in the Company's market capitalization. In light of this development,
the Company is presently re-evaluating the goodwill balances of each of its
reporting units, specifically Ramp and OnRamp, to determine whether any
impairment charges are required to be recorded under generally accepted
accounting principles. Although the market capitalization of the Company as a
whole at June 30, 2004 exceeded the aggregate net worth of the Company, the
analysis required under generally accepted accounting principles is to be done
by reporting unit. Therefore, the Company intends on hiring an outside valuation
firm to assist in the analysis, and should it be determined that goodwill of one
or both reporting units is impaired, the Company will record an impairment
charge upon such determination.
In connection with the Company's acquisitions of ePhysician in March 2003
and OnRamp in November 2003, in addition to goodwill, the Company recorded
certain other intangible assets. At June 30, 2004, the Company's Other
intangible assets, net consisted of the following:
Accumulated
Cost Amortization Average useful lives
---- ------------ --------------------
Trade name and related marks $347,000 $ 58,000 7 years
Customer-related intangibles 844,000 135,000 5 years
Non-compete agreements 20,000 4,000 3 years
Software and other technology 307,000 120,000 3 years
------- ------- -
Total $1,518,000 $317,000
========== ========
Amortization expense during the three and six months ended June 30, 2004
was $91,000 and $181,000, respectively.
3. NEW BUSINESS
In 2003 the Company formed a wholly-owned subsidiary, LifeRamp Family
Financial, Inc. ("LifeRamp"), in Utah and commenced exploring the feasibility of
using LifeRamp to commence a new business, making non-recourse loans to
terminally ill cancer patients secured by their life insurance policies. In May
2004 the Company decided to proceed with the launch of LifeRamp and had
previously retained Shattuck Hammond Partners as its investment banker and
financial advisor in the structuring and capitalization of LifeRamp.
During 2003 and for the first six months of 2004 the Company invested
approximately $1.1 million and $1.8 million in LifeRamp, respectively. In July
2004 the Company decided to indefinitely delay LifeRamp's continued development
and commencement of operations until adequate funding is obtained or other
strategic alternative measures can be implemented by the
5
Company. There can be no assurance that the Company will secure financing on
favorable terms necessary to fund LifeRamp's proposed business model, that the
necessary regulatory approvals will be obtained or that the business, if
commenced, will be cash flow positive or profitable. If the Company is not
successful in obtaining funding for LifeRamp or other strategic alternatives are
not implemented, the Company will be required to re-evaluate the carrying value
of the long-lived assets associated with LifeRamp's operations (including fixed
assets and lease obligations which total approximately $400,000) for impairment.
4. POTENTIAL ACQUISITION
On April 22, 2004, the Company entered into a letter of intent to acquire
substantially all of the electronic medical record software business operated by
Berdy Medical Systems, Inc. Such letter of intent is subject to the
satisfaction of customary closing conditions including the negotiation and
execution of a definitive purchase agreement. The Company anticipates that the
acquisition will be completed in the third quarter of 2004, however, no
assurance can be given that such transaction will be consummated. This
acquisition is not expected to be material to the Company's financial
statements.
5. REDUCTION IN FORCE
In June 2004, the Company implemented a reduction in force and salary
reduction program, pursuant to which 41 employees were terminated and some of
the remaining employees agreed to accept, during the six-month period ending
November 30, 2004, in lieu of a portion of their base salaries, a retention
bonus equal to an individually negotiated multiple of the amount of their
reduction in pay in the form of shares of the Company's Common Stock, payable
only if they remained employed on November 30, 2004. The net realization of
savings and cash outflows resulting from the reduction in force and changes in
compensation is expected to be evident beginning in the third quarter of 2004.
6. EMPLOYMENT AND RETAINER AGREEMENTS
On April 25, 2004, Darryl R. Cohen resigned as a director, Chairman and
Chief Executive Officer and Andrew Brown, the Company's then current President,
was appointed Chairman and Chief Executive Officer of the Company. In connection
with Mr. Cohen's resignation, the Company recorded a compensation charge of
approximately $15,000 related to accrued bonus and tax benefit on his restricted
stock awards during the second quarter of 2004. Additionally, in the second
quarter of 2004, the Company recorded a charge of approximately $400,000 with
respect to the benefit Mr. Cohen received upon his termination as a result of
the Company's having earlier accelerated the vesting of his stock-based awards,
pursuant to a promissory note of the Company collateralized by the pledge of
those shares.
On June 1, 2004, the Company entered into an employment agreement with
Andrew Brown. During the employment period, which will end on June 30, 2006, Mr.
Brown will be paid a base salary at an annual rate of $240,000 per year;
provided that, during the six-month period ending November 30, 2004, Mr. Brown
will be paid a base salary at the rate of $120,000 per year and receive a
retention bonus of three times the amount of his reduction in pay payable in the
form of shares of the Company's common stock, but only if he remains employed as
Chief Executive Officer on November 30, 2004, is terminated before that date
without "cause" or resigns before that date for "good reason". The employment
agreement also provides for the payment of performance-based bonuses tied to the
growth of the Company's gross revenues, the grant of up to 6,000,000 options
under the 2004 Stock Incentive Plan, with an exercise price of
6
$0.18 per share, and the issuance to Mr. Brown of a warrant whereby he will be
entitled to purchase up to one-nineteenth of the outstanding shares, at an
exercise price to be determined. The employment agreement also provides that in
the event that Mr. Brown's employment is terminated for good reason within six
months or his employment is terminated within one year without cause after any
person or group acquires more than 25% of the combined voting power of the
Company's then outstanding Common Stock, all of Mr. Brown's options will become
fully vested and immediately exercisable and Mr. Brown will be paid an amount
equal to twice his annual base salary and twice his bonus compensation received
during the twelve months immediately preceding the date of termination of Mr.
Brown's employment; provided that if the change in control resulted from the
sale of the Company for less than $31 million, the payments to Mr. Brown will be
in amounts as described above in this paragraph as if the word "twice" had been
deleted.
In June 2004, the Company entered into amendments of its employment
agreements with Louis Hyman, Chief Technology Officer, and Mitchell M. Cohen,
Chief Financial Officer, which provide that in the event that Mr. Hyman's or Mr.
Cohen's employment is terminated within one year without cause after any person
or group acquires more than 25% of the combined voting power of the Company's
then outstanding Common Stock, all of his options will become fully vested and
immediately exercisable and he will be paid an amount equal to twice his annual
base salary and twice his bonus compensation received during the twelve months
immediately preceding the date of termination of his employment; provided that
if the change in control resulted from the sale of the Company for less than $31
million, the payments to Mr. Hyman and/or Mr. Cohen will be in amounts as
described above in this paragraph as if the word "twice" had been deleted.
On May 25, 2004, the Company entered into retainer agreements with Steven
Berger and Jeffrey Stahl, M.D., two independent directors. Pursuant to these
agreements, each independent director was granted a five-year option to purchase
200,000 shares of the Company's common stock at an exercise price of $0.19 per
share, and will be paid a quarterly fee of $7,500 in arrears, except that in the
case of Dr. Stahl the quarterly payments due on August 25, 2004 and November 25,
2004 were paid in advance in the form of 78,947 performance shares of common
stock, which will vest as to 50% on each of such dates.
7. PROMISSORY NOTES
In May and June 2004 the Company issued an aggregate of $1,650,000 of
promissory notes which bear interest at the prime rate plus 2%. The notes plus
accrued interest were repaid on July 14, 2004 from the proceeds of the issuance
of $4,200,000 of convertible promissory notes (see Note 13, Subsequent Events).
In connection with investment advisory services, in June 2004 Richard Rosenblum
and David Stefansky received an aggregate of 1,000,000 shares of the Company's
unregistered common stock and 1,000,000 unregistered common stock purchase
warrants at an exercise price of $0.18. The fair value of these issuances of
$477,000 was recorded as debt issuance costs.
8. EQUITY TRANSACTIONS
STOCKHOLDER RIGHTS PLAN
On May 27, 2004 the Company adopted a stockholder rights plan (commonly
known as a "poison pill") in order to deter possibly abusive tactics by a
stockholder or group. The stockholder rights plan (the "Rights Plan") is set
forth in a Rights Agreement dated May 27, 2004
7
between Ramp and Computershare Trust Company, Inc., as Rights Agent. The Rights
Agreement provides for the distribution of one preferred share purchase right
("Right") on each share of Common Stock issued and outstanding as of the close
of business on June 4, 2004 (the "Record Date"). Initially the Rights will trade
with the Common Stock and will not be represented by separate certificates. Each
Right represents the right to purchase, for an exercise price of $40 per Right,
one one-hundredth (1/100) share of Ramp Series B Participating Preferred Stock,
par value $.001 per share ("Preferred Share"), but will not be exercisable
unless and until certain events occur.
OPTION AND WARRANT EXERCISES
During the three and six months ended June 30, 2004, the Company received
net proceeds of $295,000 and $2,293,000, respectively, from the exercise of
stock options and warrants resulting in the issuance of 4,691,000 shares and
10,970,000 shares, respectively, of common stock. The exercise of warrants
during the three months ended June 30, 2004 was affected by the modification of
several warrants held by investors to induce them to exercise. The proceeds and
number of shares affected by these modifications is approximately $190,000 and
4,345,718 shares of common stock. In the comparable periods of 2003, the Company
received proceeds of $575,000 and $737,000, respectively, from the exercise of
stock options and warrants resulting in the issuance of 3,125,000 and 3,480,000
shares, respectively, of common stock.
COMPANY PURCHASE OF STOCK OPTIONS
On April 13, 2004, the Company reduced the number of directors on its
Board from six to five pursuant to its by-laws, which permits the Board to set
the number of directors from time to time. This change was made to avoid the
possibility of a deadlocked Board with an evenly split vote. At the time of such
change, J.D. Kleinke resigned from the Board. On April 14, 2004, Samuel H.
Havens and David Friedensohn resigned as directors and on April 15, 2004, Steven
C. Berger and Richard A. Kellner became directors of the Company to fill the
vacancies created by Messrs. Havens' and Friedensohn's resignations. In
connection with the board members' resignations, their stock options were
purchased by the Company and a related compensation charge of approximately
$355,000 was recognized during the three months ended June 30, 2004.
Additionally, Mr. Kellner resigned from the Board on June 4, 2004.
CONTINGENT WARRANTS
At June 30, 2004, the Company had an obligation to provide 5,150,000
warrants under the Amended and Restated Common Stock Purchase Warrant with
WellPoint Pharmacy Management if certain specified performance criteria are met.
The warrants, which expire on September 8, 2004, provide for exercise prices
which are above the current market price of the Company's stock. No additional
warrants were earned during the six months ended June 30, 2004, and many of the
performance criteria for issuance of the warrants are no longer feasible. If all
of the remaining performance criteria were met at June 30, 2004, the fair value
of the related warrants and resulting expense would have been approximately
$579,000, using the Black-Scholes option pricing model, with assumptions of 101%
volatility, no dividend yield and a risk-free rate of 2.0%.
The Company has entered into an agreement with an unrelated third party
for marketing services with the third party's sole compensation under the
agreement limited to warrants to purchase shares of common stock of the Company.
The third party pays all of its expenses. Issuance of the warrants is based on a
formula related to the success of the third party in selling the services of the
Company. No services have been sold to date and therefore no warrants have
8
been issued under this agreement. If, as and when the third party is entitled to
receive such warrants the warrants to purchase the first 2,000,000 shares of
common stock shall be exercisable at $0.57 per share and shall expire on
February 6, 2008. Warrants to purchase shares in excess of 2,000,000 shall have
terms identical to the first warrants but have an exercise price equal to the
closing price of the Company's common stock on the day preceding the day of
issuance of the warrants.
WARRANT MODIFICATIONS AND OTHER RELATED TRANSACTIONS
During the first six months of 2004, the Company modified certain warrants
previously issued in connection with its Series C Preferred and other financing
transactions. Warrants to exercise a total of approximately 400,000 shares were
modified to extend the periods in which they could be exercised. Additionally,
of this group of warrants, those representing approximately 5,604,050 shares
were modified to reduce their exercise prices from a range of $0.82 to $0.30, to
a new exercise price of $0.40 to $0.001.
These modifications were primarily made to increase the likelihood of the
holders exercising such warrants. The Company has applied the modification
principles in SFAS 123, using the Black-Scholes model to determine the value of
these changes in warrants.
In connection with a settlement agreement with an existing investor, the
Company issued approximately 1.3 million shares to this investor during the
second quarter of 2004. The Company accounted for this as a disproportionate
deemed dividend which increased the net loss applicable to common shareholders
and basic and diluted net loss per share for the three and six month periods
ended June 30, 2004.
PRIVATE PLACEMENTS
In March 2004, the Company sold 10,869,565 shares of common stock to an
accredited investor at a purchase price of $0.46 per share, raising proceeds of
$4,751,000, net of $249,000 in offering costs. In connection with the private
placement, the investor also received a five-year warrant to purchase 2,173,913
shares of common stock at an exercise price of $0.80 per share. The Company also
issued a five-year warrant to purchase 173,912 shares of common stock at $0.80
per share to a finder and five-year warrants to purchase an aggregate of 831,391
shares of our common stock at $0.80 per share to the placement agent and its
affiliates for its services in the placement. In addition, finders and placement
agents received an aggregate of 407,000 shares of the Company's common stock.
The fair value of warrants and common stock issued to finders and placement
agents was approximately $520,000. The investor has an anti-dilutive feature in
the event the Company raises funds at a price of less than $0.46 per share (see
Note 13 for discussion of subsequent events).
Also, during the quarter ended March 31, 2004, the Company completed a
private placement of its common stock and raised net proceeds of $763,000. A
total of 191,250 units were placed, each consisting of ten shares of common
stock and two warrants. Subscribers purchased each unit for $4.00 and are
entitled to exercise warrant rights to purchase one share of common stock at a
purchase price of $0.60 per share for a five-year period commencing on or after
July 1, 2004 and terminating on June 30, 2009.
9
9. STOCK OPTIONS
During the second quarter of 2004, the Company issued to employees options
to purchase 4,447,000 shares of common stock at exercise prices ranging from
$0.18 to $0.64. Such options were granted under the Company's 2003 Stock
Incentive Plan. The weighted-average estimated grant date fair value, as defined
by SFAS No. 123, Stock-Based Compensation, of options granted in the second
quarter of 2004, was $0.22. The Company used the Black-Scholes option-pricing
model to estimate the options' fair value by considering the following
assumptions: the options exercise price and expected life, the underlying
current market price of the stock and expected volatility, expected dividends
and the risk free interest rate corresponding to the term of the option.
The Company has adopted the disclosure-only provisions of SFAS No. 123 and
continues to apply the accounting principles prescribed by APB No. 25 to its
employee stock-based compensation awards. Had compensation cost for the
Company's options issued to such employee been determined based on the fair
value at the grant date for awards consistent with the provisions of SFAS No.
123, as amended by SFAS No. 148, the Company's net loss and basic loss per
common share would have been changed to the pro forma amounts indicated below:
---------------------------------------- ---------------------------------------
For the Three Months For the Six Months
---------------------------------------- ---------------------------------------
Ended June 30, Ended June 30,
---------------------------------------- ---------------------------------------
2004 2003 2004 2003
Net loss applicable to common ($9,290,000) ($2,604,000) ($15,955,000) ($6,184,000)
stockholders - as reported
Add back: Employee compensation 424,000 - 440,000 -
expense as reported
Less: fair value of employee (131,000) (6,000) (273,000) (295,000)
compensation expense
Net loss applicable to common ($8,997,000) ($2,610,000) ($15,788,000) ($6,479,000)
stockholders - pro forma
Basic and diluted loss per common ($0.05) ($0.03) ($0.10) ($0.08)
share - as reported
Basic and diluted loss per common ($0.05) ($0.03) ($0.10) ($0.08)
share - pro forma
10
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option-pricing model with the following weighted-average
assumptions used:
------------------------
For the Six Months
Ended June 30,
------------------------
2004 2003
--------- ---------
Approximate risk free rate 2.0% 2.50%
Average expected life 5 years 5 years
Dividend yield 0% 0%
Volatility 124% 137%
10. RELATED PARTY TRANSACTIONS
Accounts payable - related parties as of June 30, 2004 includes
approximately $326,000 in connection with the Company's acquisition of OnRamp,
which is owed to the former owners of OnRamp who are now employees of the
Company.
Until his appointment as the Company's President and Chief Operating
Officer in October 2003, Andrew Brown was employed by External Affairs, Inc. In
August 2003, the Company entered into a consulting agreement with External
Affairs for a term which ended June 30, 2004, under which External Affairs
agreed to act as the Company's investor relations and strategy consultant and
assist the Company with capital raising efforts. The agreement provided for
payments to External Affairs of $328,000, with a discretionary bonus of
potentially up to $275,000 based upon the Company attaining a specified level of
revenue during the term of the agreement. On October 10, 2003, Mr. Brown was
appointed as the Company's President and Chief Operating Officer, and Mr. Brown,
External Affairs and the Company agreed to reduce the compensation payable to
External Affairs under the August 2003 Consulting Agreement to $20,000 per
month, with the remainder payable as employee compensation to Mr. Brown as
President and Chief Operating Officer. External Affairs was granted 500,000
restricted shares of the Company's common stock in July 2003. Pursuant to the
agreement, External Affairs also received a five-year option to purchase an
aggregate 1,500,000 shares of the Company's common stock at $0.25 per share, of
which (i) options to purchase 500,000 shares vest in 25% increments every three
months beginning September 9, 2003 conditioned on Mr. Brown continuing to render
services to the Company at the end of each three-month period, and (ii) options
to purchase 1 million shares which will vest on July 9, 2008, subject to earlier
vesting in June 2004 based upon a formula contained in the agreement. The
agreement is terminable by either the Company or External Affairs for any reason
on ninety days prior written notice, subject to certain offset rights in the
event of termination by External Affairs for other than "good reason". External
Affairs transferred all of its options and restricted shares to Mr. Brown
effective October 10, 2003. In November 2003, all of these options and
restricted shares became fully vested in return for Mr. Brown collateralizing a
promissory note. During 2003 and the first six months of 2004, the Company paid
$310,000 and $102,000, respectively, to External Affairs in consulting fees.
11
11. SEGMENT INFORMATION
Summarized financial information concerning the Company's reportable
segments, technology and professional services, is shown in the following table
for the six months ended June 30, 2004 (the Company only had one reportable
segment during the six months ended June 30, 2003):
For the Six Months
Ended June 30, 2004
-----------------------------
Professional
Technology Services Total
---------- -------- -----
Revenue $ 100,000 $ 703,000 $ 803,000
Net loss (14,968,000) (146,000) (15,114,000)
Total assets $ 3,563,000 $ 4,950,000 $ 8,513,000
12. COMMITMENTS AND CONTINGENCIES
From time to time, the Company is involved in claims and litigation that
arise out of the normal course of business. Currently, other than as discussed
below, there are no pending matters that in management's judgment are expected
to have a material impact on the Company's financial statements.
In February 2004 the Company relocated its executive offices (under a
sublease that expires on June 29, 2008) to 33 Maiden Lane, New York, New York.
By stipulation the Company has surrendered the premises located at 410 Lexington
Avenue. In connection with this lease abandonment, the Company recorded an
accrual for expected losses on the lease equal to the present value of the
remaining lease payments, net of reasonable sublease income, of approximately
$168,000, which was recorded in the first quarter of 2004 in selling, general
and administrative expenses in the accompanying statements of operations. During
the second quarter of 2004 the Company revised its estimate of the expected
lease loss and recorded an additional accrual of $60,000. In addition, the
Company's landlord agreed to offset the Company's security deposit of $130,000
in satisfaction of a portion of the amounts due under the lease. The remaining
obligation to the landlord is included in accrued expenses in the Company's
balance sheet as of June 30, 2004.
On May 28, 2004, the Company, as sub-subtenant, received written notice
(the "Notice") from Clinton Group, Inc., as subtenant and sub-sublandlord
("Clinton") stating, in relevant part, that the Company is in default under that
certain Agreement of Sublease (the "Sublease"), dated as of April 15, 2004, by
and between Clinton and the Company for the premises located at on the 31st
Floor at 55 Water Street, New York, New York as a result of the following: (i)
the Company's failure to deliver the first month's rent and the security deposit
payable under the Sublease, and (ii) the Company's failure to cooperate with
Clinton to obtain written consent to the Sublease by each of New Water Street
Corp., as landlord, and Lynch, Jones & Ryan, Inc., as tenant and sub-landlord.
The Notice stated Clinton intends to pursue all legal rights and remedies
available to it under the laws of the State of New York and Clinton reserves all
rights with respect thereto. On or about July 16, 2004, Clinton, as plaintiff,
filed a summons and complaint against the Company, as defendant, with the
Supreme Court of the State of New York, County of New York (Index No. 110371)
alleging, among other things, breach of the Sublease for non-payment of the
security deposit and one month's rent. The summons and complaint has not yet
been served upon the Company and an answer is not yet due. Clinton seeks
repossession of the
12
premises, damages for non-payment of rent in the sum of $128,629, additional
damages under the Sublease through the date of trial for the remainder of the
term of the Sublease, plus interest and attorneys' fees. The Company has been
engaged in good faith settlement discussions with Clinton. If a settlement
cannot be agreed upon, the Company believes it has good and meritorious defenses
and/or counterclaims to the claims made by Clinton and intends to vigorously
defend against any and all claims made by Clinton.
In the second quarter of 2004 the Company decided to vacate its office
facilities in Florida. In connection with this lease abandonment, the Company
recorded an accrual for expected losses on the lease equal to the present value
of the remaining lease payments, net of reasonable sublease income, of
approximately $83,000, which was recorded in the second quarter of 2004 in
selling, general and administrative expenses in the accompanying statements of
operations.
13. SUBSEQUENT EVENTS
On July 14, 2004, the Company entered into a Note and Warrant Purchase
Agreement (the "Note Purchase Agreement") with Cottonwood Ltd. and Willow Bend
Management Ltd., each an accredited investor. Under the terms of the Note
Purchase Agreement, the Company issued a convertible promissory note in the
aggregate principal amount of $2,100,000 to each of Cottonwood Ltd. and Willow
Bend Management Ltd. Each promissory note is convertible into shares of common
stock at an initial conversion price of $0.30 cents per share, or 7,000,000
shares of common stock. In addition, the Company issued to each of Cottonwood
Ltd. and Willow Bend Management Ltd. warrants exercisable into 4,683,823 shares
of common stock at an exercise price of $0.11 cents per share, warrants
exercisable into 4,683,823 shares of common stock at an exercise price of $0.15
cents per share, warrants exercisable into 4,683,823 shares of common stock at
an exercise price of $0.35 cents per share and warrants exercisable into
4,683,823 shares of common stock at an exercise price of $0.40 cents per share.
The warrants have a term of one year. The issuance of the warrants along with
convertible debt will create a beneficial conversion discount which will be
amortized to interest expense in future periods.
Pursuant to the Registration Rights Agreement, dated concurrently with the
Note Purchase Agreement (the "Registration Rights Agreement"), the Company
agreed to register the shares of common stock underlying the convertible
promissory notes and warrants with the SEC on a registration statement and to
pay to Cottonwood Ltd. and Willow Bend Management Ltd. liquidated damages if the
Registration Statement is not filed on or before August 13, 2004 and/or is not
declared effective within 90 days following the date the Registration Statement
is filed with the SEC, an amount, at the option of the Company, in cash or
shares of common stock registered with the SEC equal to: (i) one percent (1.0%)
of the initial investment amount for each calendar month or portion thereof of
delayed effectiveness, up to two calendar months, and (ii) two percent (2.0%) of
the initial investment amount for each calendar month or portion thereof
thereafter until effectiveness, less any amount of convertible promissory note
that has been converted or redeemed.
Redwood Capital Partners, Inc. acted as the Company's placement agent in
connection with the Note Purchase Agreement. As compensation to Redwood for its
services as placement agent and in addition to payment in cash of $320,000 to
Redwood, the Company agreed to issue to Redwood warrants exercisable into
350,000 shares of common stock exercisable at $0.11 cents per share for a one
year term, warrants exercisable into 350,000 shares of common stock exercisable
at $0.15 cents per share for a one year term, warrants exercisable into 350,000
shares of common stock exercisable at $0.35 cents per share for a one year term
and warrants exercisable into 350,000 shares of common stock exercisable at
$0.40 cents per share for a one
13
year term. In connection with the issuance of warrants, the Company agreed to
register the shares underlying the warrants with the SEC on a registration
statement. The placement agent fees paid in cash and warrants will be recorded
as additional deferred financing costs in the third quarter, and amortized over
the maturity of the related notes or upon the notes' conversion, if such
conversion occurs earlier.
On July 14, 2004 the Company entered into a Letter Agreement (the "Letter
Agreement") with Hilltop Services, Ltd. in connection with the anti-dilution
provisions contained in that certain Common Stock and Warrant Purchase
Agreement, dated March 4, 2004, between Hilltop Services, Ltd. and the Company
(the "Hilltop Agreement"). Under the terms of the Letter Agreement and in
consideration for the waiver by Hilltop of its anti-dilution rights, the Company
issued to Hilltop Services, Ltd. an additional 24,130,435 shares of common
stock, a convertible promissory note in the aggregate principal amount of
$1,920,000 convertible into shares of the Company's common stock at a conversion
price of $0.30 cents per share, or 6,400,000 shares of common stock, and
warrants exercisable into 4,282,354 shares of common stock at an exercise price
of $0.11 cents per share, warrants exercisable into 4,282,354 shares of common
stock at an exercise price of $0.15 cents per share, warrants exercisable into
4,282,354 shares of common stock at an exercise price of $0.35 cents per share
and warrants exercisable into 4,282,354 shares of common stock at an exercise
price of $0.40 cents per share. The warrants have a term of one year. Pursuant
to the Registration Rights Agreement the Company agreed to register the shares
of common stock as well as the shares of common stock underlying the convertible
promissory note and warrants on a registration statement. In connection with the
sale of the common stock and warrants under the Hilltop Agreement, two placement
agents received an aggregate of 407,000 shares of the Company's Common Stock.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
We develop and market healthcare connectivity software centered around our
CarePoint Suite of healthcare communication technology products for electronic
prescribing of drugs, laboratory orders and results, Internet-based
communication, data integration and transaction processing through a handheld
device or browser, at the patient point-of-care. Our products enable
communication of healthcare information among physicians' offices, pharmacies,
hospitals, pharmacy benefit managers, health management organizations,
pharmaceutical companies and health insurance companies. Our technology is
designed to provide access to safer, better healthcare and more accurate and
less expensive patient point-of-care information gathering and processing.
In expanding its services for medical professionals, in November 2003, we
acquired the businesses and assets of OnRamp, which provides telephone answering
services to physicians and other medically-related businesses and which provides
telephone answering and telephone virtual office services to non-medical
businesses and professionals.
In 2003 the Company formed a wholly-owned subsidiary, LifeRamp Family
Financial, Inc. ("LifeRamp"), in Utah and commenced exploring the feasibility of
using LifeRamp to commence a new business, making non-recourse loans to
terminally ill cancer patients secured by their life insurance policies. In May
2004 the Company decided to proceed with the launch of LifeRamp
14
and had previously retained Shattuck Hammond Partners as its investment banker
and financial advisor in the structuring and capitalization of LifeRamp.
During 2003 and for the first six months of 2004 the Company invested
approximately $1.1 million and $1.8 million in LifeRamp, respectively. In July
2004 the Company decided to indefinitely delay LifeRamp's continued development
and commencement of operations until adequate funding is obtained or other
strategic alternative measures can be implemented by the Company. There can be
no assurance that the Company will secure financing on favorable terms necessary
to fund LifeRamp's proposed business model, that the necessary regulatory
approvals will be obtained or that the business, if commenced, will be cash flow
positive or profitable. If the Company is not successful in obtaining funding
for LifeRamp or other strategic alternatives are not implemented, the Company
will be required to re-evaluate the carrying value of the long-lived assets
associated with LifeRamp's operations (including fixed assets and lease
obligations which total approximately $400,000) for impairment.
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS
To the extent that any statements made in this Form 10-Q contain
information that is not historical, these statements are essentially
forward-looking. Forward-looking statements can be identified by the use of
words such as "experts," "plans," "will," "may," "anticipates", "believes,"
"should," "intends," "estimates," and other words of similar meaning. These
statements are subject to risks and uncertainties that cannot be predicted or
quantified and consequently, actual results may differ materially from those
expressed or implied by such forward-looking statements. Such risks and
uncertainties include, without limitation, our ability to raise capital to
finance the development of our Internet services and related software, the
effectiveness, profitability and the marketability of those services, our
ability to protect our proprietary information and to retain and expand our user
base, the establishment of an efficient corporate operating structure as we grow
and, other risks detailed from time-to-time in our filings with the Securities
and Exchange Commission ("SEC"). We do not intend to undertake any obligation to
publicly update any forward-looking statements.
WE HAVE REPORTED SIGNIFICANT RECURRING NET LOSSES applicable to common
shareholders which endanger our viability as a going concern and caused our
accountants to issue a "going concern" explanatory opinion in their annual audit
reports. We have reported net losses of $(31,321,000), $(9,014,000) and
$(10,636,000) for the years ended December 31, 2003, 2002 and 2001,
respectively, and $(15,955,000) for the six months ended June 30, 2004. At June
30, 2004, we had an accumulated deficit of $(87,482,000). These losses and
negative operating cash flows have caused our accountants to include a "going
concern" explanatory paragraph in their reports in connection with their audit
of our financial statements for the years ended December 31, 2003, 2002 and
2001. We rely on investments and financings to provide working capital. While we
believe we can continue to sell our securities to raise the cash needed to
continue operating until cash flow from operations can support our business,
there can be no assurance that this will occur. There can be no assurance that
additional investments in our securities or other debt or equity financings will
be available to us on favorable terms, or at all, to adequately support the
development and deployment of our technology. Failure to obtain such capital on
a timely basis could result in lost business opportunities.
OUR INDEPENDENT ACCOUNTANTS HAVE ADVISED OUR MANAGEMENT AND OUR AUDIT
COMMITTEE THAT THERE WERE MATERIAL WEAKNESSES IN OUR INTERNAL CONTROLS AND
PROCEDURES DURING FISCAL YEAR 2003, WHICH MANAGEMENT BELIEVES HAVE CONTINUED
THROUGH THE FISCAL PERIOD ENDED JUNE 30, 2004. The Company has taken steps and
has a plan to correct the
15
material weaknesses. Progress was made in both the first and second quarters,
however management believes that if these material weaknesses are not corrected,
a potential misapplication of generally accepted accounting principles or
potential accounting error in our consolidated financial statements could occur.
Enhancing our internal controls to correct the material weaknesses has and will
result in increased costs to us.
Based upon management's review of our internal controls and procedures,
our management, including our current chief executive officer and current chief
financial officer, has determined that we had inadequate controls and procedures
constituting material weaknesses as of December 31, 2003 which persisted during
the first and second quarters of fiscal year 2004. These inadequate controls and
procedures included:
- Inadequate accounting staffing and records to identify and record
all accounting entries.
- Lack of management review of our bank reconciliations, timely review
of expense reports, and timely review of agreements governing
complex financing transactions, employee and non-employee stock
based compensation arrangements and other transactions having
accounting ramifications.
- Failure to perform an adequate internal review of financial
information in periodic reports to ensure accuracy and completeness.
- Inadequate segregation of duties consistent with our internal
control objectives.
- Ineffective utilization of existing administrative personnel to
perform ministerial accounting functions, which would allow our
accounting department the opportunity to perform bookkeeping,
recordkeeping and other accounting functions effectively.
- Lack of management review of entries to the general ledger.
Our management has implemented and continues to implement potential
enhancements to our internal controls and procedures that it believes will
remedy the inadequacies in our internal controls and procedures.
The following sets forth the steps we have taken through the fiscal period
ended June 30, 2004:
- In November 2003, we hired a permanent chief financial officer with
public company reporting experience.
- In December 2003, we hired a staff accountant responsible for, among
other things, recording accounts payable. The individual assists the
chief financial officer and controller to identify, report and
record transactions in a timely manner and provides additional
segregation of duties consistent with our internal control
objectives.
- Management reassigned certain tasks among the expanded accounting
department, as well as existing administrative personnel to perform
ministerial accounting functions, to improve and better accomplish
bookkeeping, recordkeeping and other accounting functions.
- We commenced a search for new position of Vice President Finance,
which position was filled on August 2, 2004. The new Vice President
Finance will be wholly dedicated to the areas of internal control,
financial accounting and reporting.
- The review and sign off on all monthly bank reconciliations by the
chief financial officer has been instituted.
16
- The review of all underlying agreements, contracts and financing
arrangements prior to execution for accounting ramifications has
already been undertaken by the chief financial officer to the extent
possible.
- We strengthened certain controls over cash disbursements, including
adopting a policy that requires dual signatures of two senior
officers, at least one of whom is not involved in a transaction, on
disbursements in excess of $10,000.
- We implemented a policy requiring attendance by outside counsel at
all Board and Audit Committee meetings, including the timely
preparation of minutes of such meetings and reports to management to
discuss our implementation of any plans to address conditions
constituting the material weaknesses in its internal controls.
We intend on implementing the following plans to enhance our internal
controls in the fiscal quarter ending September 30, 2004:
- As the new Vice President Finance (hired on August 2, 2004)
transitions into his responsibilities and gains a full understanding
of our business, it is anticipated that this additional resource
will allow further redistribution of responsibilities among the
expanded accounting department and, more specifically, provide the
chief financial officer with the necessary time to perform oversight
and supervisory functions in future periods. This includes timely
review of all underlying agreements, contracts and financing
arrangements, expense reports, entries to the general ledger and
periodic filings with the Securities and Exchange Commission.
- Our implementation of formal mechanized month-end, quarter-end and
year-end closing and consolidation processes.
- The appointment of additional independent directors who will serve
on our Audit Committee.
While we believe that the remedial actions that have been or will be taken
will result in correcting the conditions constituting the material weaknesses in
our internal controls as soon as practicable, the exact timing of when the
conditions will be corrected is dependent upon future events which may or may
not occur. We are making every effort to correct the conditions expediently and
expect to correct the conditions, thereby eliminating the material weaknesses no
later than the fourth quarter of fiscal year 2004. It is estimated that the cost
to implement the actions set forth above will be approximately $300,000 for our
fiscal year ending December 31, 2004 and approximately $200,000 for each fiscal
year thereafter. In addition, substantial additional costs may be necessary to
implement the provisions of section 404 of the Sarbanes-Oxley Act of 2003 as
relates to the company's documentation and testing of the effectiveness of
internal controls in 2005.
THE SUCCESS OF THE DEVELOPMENT, DISTRIBUTION AND DEPLOYMENT OF OUR
TECHNOLOGY IS DEPENDENT TO A SIGNIFICANT DEGREE ON OUR KEY MANAGEMENT AND
TECHNICAL PERSONNEL. We believe that our success will also depend upon our
ability to attract, motivate and retain highly skilled, managerial, sales and
marketing, and technical personnel, including software programmers and systems
architects skilled in the computer languages in which our technology operates.
Competition for such personnel in the software and information services
industries is intense. The loss of key personnel, or the inability to hire or
retain qualified personnel, could have a material adverse effect on our results
of operations, financial condition or business.
17
WE EXPECT TO CONTINUE TO EXPERIENCE LOSSES UNTIL SUCH TIME AS OUR
TECHNOLOGY CAN BE SUCCESSFULLY DEPLOYED AND PRODUCE REVENUES. The continuing
development, marketing and deployment of our technology will depend upon our
ability to obtain additional financing. Our technology has generated limited
recurring revenues to date. We are funding our operations now through the sale
of our securities.
WE MAY NOT BE ABLE TO RETAIN OUR LISTING ON THE AMERICAN STOCK EXCHANGE.
The American Stock Exchange has not notified us of any listing concerns.
However, should our common stock trade at a low price for a substantial period
of time or should the American Stock Exchange consider our circumstances for
continued listing in a negative light, we may not be able to retain our listing.
The American Stock Exchange has certain listing requirements in order for us to
continue to have our common stock traded on this exchange. Although the American
Stock Exchange does not identify a specific minimum price per share that our
stock must trade above or any other rigid standards compelling delisting, we may
risk delisting if our common stock trades at a low price per share for a
substantial period of time or if it fails to meet the financial condition,
result of operations, market capitalization or other financial or non-financial
standards considered by the American Stock Exchange. Trading in our common stock
after a delisting, if any, would likely be conducted in the over-the-counter
markets in the so-called "pink sheets" or on the National Association of
Securities Dealers' Electronic Bulletin Board. As a consequence of a delisting
our shareholders would find it more difficult to dispose of, or to obtain
accurate quotations as to the market value of, our common stock, and our common
stock would become substantially less attractive as collateral for margin and
purpose loans, for investment by financial institutions under their internal
policies or state investment laws or as consideration in future capital raising
transactions.
ALTHOUGH WE HAVE HAD OPERATIONS SINCE 1988, BECAUSE OF OUR MOVE AWAY FROM
TEMPORARY HEALTHCARE STAFFING TO PROVIDE HEALTHCARE CONNECTIVITY SOLUTIONS AT
THE POINT OF CARE, WE HAVE A RELATIVELY SHORT OPERATING HISTORY IN THE
HEALTHCARE CONNECTIVITY SOLUTIONS BUSINESS AND LIMITED FINANCIAL DATA TO
EVALUATE OUR BUSINESS AND PROSPECTS. In addition, our business model is likely
to continue to evolve as we attempt to develop our product offerings and enter
new markets. As a result, our potential for future profitability must be
considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies that are attempting to move into new markets
and continuing to innovate with new and unproven technologies. We are still in
the process of gaining experience in marketing physician connectivity products,
providing support services, evaluating demand for products, financing a
technology business and dealing with government regulation of health information
technology products. While we are putting together a team of experienced
executives, they have come from different backgrounds and may require some time
to develop an efficient operating structure and corporate culture for our
company. Furthermore, our executive management and Board of Directors have been
subject to change as executives have left or been terminated and others have
been hired to take their places and directors have left and others have been
elected or appointed to take their places. Such changes can cause disruption and
distraction.
ALTHOUGH WE HAVE FOCUSED OUR BUSINESS ON HEALTHCARE CONNECTIVITY, WE MAY
DECIDE TO EXPLORE NEW BUSINESS MODELS BEFORE OUR CORE BUSINESS GENERATES CASH
FLOW, IF AT ALL. Until feasibility is proven for our new LifeRamp business,
scarce resources will be allocated to an endeavor that has not yet been
successfully commercialized.
THE SUCCESS OF OUR PRODUCTS AND SERVICES IN GENERATING REVENUE MAY BE
SUBJECT TO THE QUALITY AND COMPLETENESS OF THE DATA THAT IS GENERATED AND STORED
BY THE PHYSICIAN OR OTHER HEALTHCARE PROFESSIONALS AND ENTERED INTO OUR
INTERCONNECTIVITY SYSTEMS, INCLUDING THE
18
FAILURE TO INPUT APPROPRIATE OR ACCURATE INFORMATION. Failure or unwillingness
by the healthcare professional to accommodate the required information may
result in our not being paid for our services.
AS A DEVELOPER OF CONNECTIVITY TECHNOLOGY PRODUCTS, WE WILL BE REQUIRED TO
ANTICIPATE AND ADAPT TO EVOLVING INDUSTRY STANDARDS AND REGULATIONS AND NEW
TECHNOLOGICAL DEVELOPMENTS. The market for our technology is characterized by
continued and rapid technological advances in both hardware and software
development, requiring ongoing expenditures for research and development, and
timely introduction of new products and enhancements to existing products. Our
future success, if any, will depend in part upon our ability to enhance existing
products, to respond effectively to technology changes and changes in applicable
regulations, and to introduce new products and technologies that are functional
and meet the evolving needs of our clients and users in the healthcare
information systems market.
WE RELY ON A COMBINATION OF INTERNAL DEVELOPMENT, STRATEGIC RELATIONSHIPS,
LICENSING AND ACQUISITIONS TO DEVELOP OUR PRODUCTS AND SERVICES. The cost of
developing new healthcare information services and technology solutions is
inherently difficult to estimate. Our development of proposed products and
services may take longer than originally expected, require more testing than
originally anticipated and require the acquisition of additional personnel and
other resources. In addition, there can be no assurance that the products or
services we develop or license will be able to compete with the alternatives
available to our customers.
NEW OR NEWLY INTEGRATED PRODUCTS AND SERVICES WILL NOT BECOME PROFITABLE
UNLESS THEY ACHIEVE SUFFICIENT LEVELS OF MARKET ACCEPTANCE. There can be no
assurance that healthcare providers will accept from us new products and
services, or products and services that result from integrating existing and/or
acquired products and services, including the products and services we are
developing to integrate our services into the physician's office or other
medical facility, such as our handheld solution. In addition, there can be no
assurance that any pricing strategy that we implement for any such products and
services will be economically viable or acceptable to the target markets.
Failure to achieve broad penetration in target markets with respect to new or
newly integrated products and services could have a material adverse effect on
our business prospects. The market for our connectivity products and services in
the healthcare information systems may be slow to develop due to the large
number of practitioners who are resistant to change, as well as the financial
investment and workflow interruptions associated with change, particularly in a
period of rising pressure to reduce costs in the marketplace.
ACHIEVING MARKET ACCEPTANCE OF NEW OR NEWLY INTEGRATED PRODUCTS AND
SERVICES IS LIKELY TO REQUIRE SIGNIFICANT EFFORTS AND EXPENDITURES. Achieving
market acceptance for new or newly integrated products and services is likely to
require substantial marketing efforts and expenditure of significant funds to
create awareness and demand by participants in the healthcare industry. In
addition, deployment of new or newly integrated products and services may
require the use of additional resources for training our existing sales force
and customer service personnel and for hiring and training additional
salespersons and customer service personnel. There can be no assurance that the
revenue opportunities from new or newly integrated products and services will
justify amounts spent for their development, marketing and roll-out.
WE COULD BE SUBJECT TO BREACH OF WARRANTY CLAIMS IF OUR SOFTWARE PRODUCTS,
INFORMATION TECHNOLOGY SYSTEMS OR TRANSMISSION SYSTEMS CONTAIN ERRORS,
EXPERIENCE FAILURES OR DO NOT MEET CUSTOMER EXPECTATIONS. We could face breach
of warranty or other claims or additional development costs if the software and
systems we sell or license to customers or use to provide services contain
undetected errors, experience failures, do not perform in accordance with
19
their documentation, or do not meet the expectations that our customers have for
them. Undetected errors in the software and systems we provide or those we use
to provide services could cause serious problems for which our customers may
seek compensation from us. We attempt to limit, by contract, our liability for
damages arising from negligence, errors or mistakes. However, contractual
limitations on liability may not be enforceable in certain circumstances or may
otherwise not provide sufficient protection to us from liability for damages.
IF OUR SYSTEMS OR THE INTERNET EXPERIENCE SECURITY BREACHES OR ARE
OTHERWISE PERCEIVED TO BE INSECURE, OUR BUSINESS COULD SUFFER. A security breach
could damage our reputation or result in liability. We retain and transmit
confidential information, including patient health information. Despite the
implementation of security measures, our infrastructure or other systems that we
interface with, including the Internet, may be vulnerable to physical break-ins,
hackers, improper employee or contractor access, computer viruses, programming
errors, attacks by third parties or similar disruptive problems. Any compromise
of our security, whether as a result of our own systems or systems that they
interface with, could reduce demand for our services.
OUR PRODUCTS PROVIDE APPLICATIONS THAT RELATE TO PATIENT MEDICATION
HISTORIES AND TREATMENT PLANS. Any failure by our products to provide and
maintain accurate, secure and timely information could result in product
liability claims against us by our clients or their affiliates or patients. We
maintain insurance that we believe currently is adequate to protect against
claims associated with the use of our products, but there can be no assurance
that our insurance coverage would adequately cover any claim asserted against
us. A successful claim brought against us in excess of our insurance coverage
could have a material adverse effect on our results of operations, financial
condition and/or business. Even unsuccessful claims could result in the
expenditure of funds in litigation, as well as diversion of management time and
resources. Certain of our products are subject to compliance with the Health
Insurance Portability And Accountability Act Of 1996 (HIPAA). Failure to comply
with HIPAA may have a material adverse effect on our business.
GOVERNMENT REGULATION OF HEALTHCARE AND HEALTHCARE INFORMATION TECHNOLOGY
IS IN A PERIOD OF ONGOING CHANGE AND UNCERTAINTY THAT CREATES RISKS AND
CHALLENGES WITH RESPECT TO OUR COMPLIANCE EFFORTS AND OUR BUSINESS STRATEGIES.
The healthcare industry is highly regulated and is subject to changing
political, regulatory and other influences. Federal and state legislatures and
agencies periodically consider programs to reform or revise the United States
healthcare system. These programs may contain proposals to increase governmental
involvement in healthcare or otherwise change the environment in which
healthcare industry participants operate. Particularly, compliance with HIPAA
and related regulations are causing the healthcare industry to incur substantial
costs to change its procedures. Healthcare industry participants may respond by
reducing their investments or postponing investment decisions, including
investments in our products and services. Although we expect these regulations
to have the beneficial effect of spurring adoption of our software products, we
cannot predict with any certainty what impact, if any, these and future
healthcare reforms might have on our business. Existing laws and regulations
also could create liability, cause us to incur additional costs or restrict our
operations. The effect of HIPAA on our business is difficult to predict and
there can be no assurance that we will adequately address the business risks
created by the HIPAA. We may incur significant expenses relating to compliance
with HIPAA. Furthermore, we are unable to predict what changes to HIPAA, or the
regulations issued pursuant to HIPAA, might be made in the future or how those
changes could affect our business or the costs of compliance with HIPAA.
20
GOVERNMENT REGULATION OF THE INTERNET COULD ADVERSELY AFFECT OUR BUSINESS.
The Internet and its associated technologies are subject to government
regulation. Our failure to accurately anticipate the application of applicable
laws and regulations, or any other failure to comply, could create liability for
us, result in adverse publicity, or negatively affect our business. In addition,
new laws and regulations may be adopted with respect to the Internet or other
online services covering user privacy, patient confidentiality, consumer
protection and other services. We cannot predict whether these laws or
regulations will change or how such changes will affect our business. Government
regulation of the Internet could limit the effectiveness of the Internet for the
methods of healthcare e-commerce that we are providing or developing or even
prohibit the sale of particular products and services.
OUR INTERNET-BASED SERVICES ARE DEPENDENT ON THE DEVELOPMENT AND
MAINTENANCE OF THE INTERNET INFRASTRUCTURE AND DATA STORAGE FACILITIES
MAINTAINED BY THIRD PARTIES. Our ability to deliver our Internet-based products
and services is dependent on the development and maintenance of the
infrastructure of the Internet and the maintenance of data storage facilities by
third parties. This includes maintenance of a reliable network backbone and data
storage facilities with the necessary speed, data capacity and security, as well
as timely development of complementary products such as high-speed modems, for
providing reliable Internet access and services. If the Internet continues to
experience increased usage, the Internet infrastructure may be unable to support
the demands placed on it. In addition, the performance of the Internet may be
harmed by increased usage. The Internet has experienced a variety of outages and
other delays as a result of damages to portions of its infrastructure, and it
could face outages and delays in the future. These outages and delays could
reduce the level of Internet usage as well as the availability of the Internet
to us for delivery of our Internet-based products and services.
SOME OF OUR PRODUCTS AND SERVICES WILL NOT BE WIDELY ADOPTED UNTIL
BROADBAND CONNECTIVITY IS MORE GENERALLY AVAILABLE. Some of our products and
services and planned services require a continuous broadband connection between
the physician's office or other healthcare provider facilities and the Internet.
The availability of broadband connectivity varies widely from location to
location and even within a single geographic area. The future availability of
broadband connections is unpredictable and is not within our control. While we
expect that many physicians' offices and other healthcare provider facilities
will remain without ready access to broadband connectivity for some period of
time, we cannot predict how long that will be. Accordingly, the lack of these
broadband connections will continue to place limitations on the number of sites
that are able to utilize our Internet-based products and services and the
revenue we can expect to generate form those products and services.
COMPLIANCE WITH LEGAL AND REGULATORY REQUIREMENTS WILL BE CRITICAL TO
LIFERAMP'S OPERATIONS, IF ANY. If we, directly or indirectly through our
subsidiaries, erroneously disclose information that could be confidential and/or
protected health information, we could be subject to legal action by the
individuals involved, and could possibly be subject to criminal sanctions. In
addition, if LifeRamp is launched and fails to comply with applicable insurance
and consumer lending laws, states could bring actions to enforce statutory
requirements, which could limit its business practices in such states,
including, without limitation, limiting or eliminating its ability to charge or
collect interest on its loans or related fees, or limit or eliminate its ability
to secure its loans with its borrowers' life insurance policies. Any such
actions, if commenced, would have a material and adverse impact on LifeRamp's
business, operations and financial condition.
WE HAVE BEEN GRANTED CERTAIN PATENT RIGHTS, TRADEMARKS AND COPYRIGHTS
RELATING TO OUR SOFTWARE. However, patent and intellectual property legal issues
for software programs, such as our products, are complex and currently evolving.
Since patent applications are secret until
21
patents are issued in the United States, or published in other countries, we
cannot be sure that we are first to file any patent application. In addition,
there can be no assurance that competitors, many of which have far greater
resources than we do, will not apply for and obtain patents that will interfere
with our ability to develop or market product ideas that we have originated.
Furthermore, the laws of certain foreign countries do not provide the protection
to intellectual property that is provided in the United States, and may limit
our ability to market our products overseas. We cannot give any assurance that
the scope of the rights we have are broad enough to fully protect our technology
from infringement. Litigation or regulatory proceedings may be necessary to
protect our intellectual property rights, such as the scope of our patent. Such
litigation and regulatory proceedings are very expensive and could be a
significant drain on our resources and divert resources from product
development. There is no assurance that we will have the financial resources to
defend our patent rights or other intellectual property from infringement or
claims of invalidity. We have been notified by a party that it believes our
pharmacy product may infringe on patents that it holds. We have retained patent
counsel who has made a preliminary investigation and determined that our product
does not infringe on the identified patents. At this time no legal action has
been instituted. WE ALSO RELY UPON UNPATENTED PROPRIETARY TECHNOLOGY AND NO
ASSURANCE CAN BE GIVEN THAT OTHERS WILL NOT INDEPENDENTLY DEVELOP SUBSTANTIALLY
EQUIVALENT PROPRIETARY INFORMATION AND TECHNIQUES OR OTHERWISE GAIN ACCESS TO OR
DISCLOSE OUR PROPRIETARY TECHNOLOGY OR THAT WE CAN MEANINGFULLY PROTECT OUR
RIGHTS IN SUCH UNPATENTED PROPRIETARY TECHNOLOGY. No assurance can be given that
efforts to protect such information and techniques will be successful. The
failure to protect our intellectual property could have a material adverse
effect on our operating results, financial position and business.
AS OF AUGUST 11, 2004, WE HAD 200,691,217 OUTSTANDING SHARES OF COMMON
STOCK AND 58,205,107 SHARES OF COMMON STOCK RESERVED FOR ISSUANCE UPON THE
EXERCISE OF OPTIONS, WARRANTS, AND SHARES OF OUR CONVERTIBLE PREFERRED STOCK AND
CONVERTIBLE DEBENTURES OUTSTANDING ON SUCH DATE. Most of these shares will be
immediately saleable upon exercise or conversion under registration statements
we have filed with the SEC. The exercise prices of options, warrants or other
rights to acquire common stock presently outstanding range from $0.01 per share
to $4.97 per share. During the respective terms of the outstanding options,
warrants, preferred stock and other outstanding derivative securities, the
holders are given the opportunity to profit from a rise in the market price of
our common stock, and the exercise of any options, warrants or other rights may
dilute the book value per share of our common stock and put downward pressure on
the price of our common stock. The existence of the options, conversion rights,
or any outstanding warrants may adversely affect the terms on which we may
obtain additional equity financing. Moreover, the holders of such securities are
likely to exercise their rights to acquire common stock at a time when we would
otherwise be able to obtain capital on terms more favorable than could be
obtained through the exercise or conversion of such securities.
WE HAVE RAISED SUBSTANTIAL AMOUNTS OF CAPITAL IN PRIVATE PLACEMENTS FROM
TIME TO TIME. The securities offered in such private placements were not
registered under the Securities Act or any state "blue sky" law in reliance upon
exemptions from such registration requirements. Such exemptions are highly
technical in nature and if we inadvertently failed to comply with the
requirements of any of such exemptive provisions, investors would have the right
to rescind their purchase of our securities or sue for damages. If one or more
investors were to successfully seek such rescission or prevail in any such suit,
we could face severe financial demands that could materially and adversely
affect our financial position. Financings that may be available to us under
current market conditions frequently involve sales at prices below the prices at
which our
22
common stock currently trades on the American Stock Exchange, as well as the
issuance of warrants or convertible securities at a discount to market price.
INVESTORS IN OUR SECURITIES MAY SUFFER DILUTION. The issuance of shares of
common stock or shares of common stock underlying warrants, options or preferred
stock or convertible notes will dilute the equity interest of existing
stockholders and could have a significant adverse effect on the market price of
our common stock. The sale of common stock acquired at a discount could have a
negative impact on the market price of our common stock and could increase the
volatility in the market price of our common stock. In addition, we may seek
additional financing which may result in the issuance of additional shares of
our common stock and/or rights to acquire additional shares of our common stock.
The issuance of our common stock in connection with such financing may result in
substantial dilution to the existing holders of our common stock. Those
additional issuances of common stock would result in a reduction of your
percentage interest in our company.
HISTORICALLY, OUR COMMON STOCK HAS EXPERIENCED SIGNIFICANT PRICE
FLUCTUATIONS. One or more of the following factors influence these fluctuations:
o unfavorable announcements or press releases relating to the
technology sector;
o regulatory, legislative or other developments affecting us
or the healthcare industry generally;
o conversion of our preferred stock and convertible debt into
common stock at conversion rates based on then current market
prices or discounts to market prices of our common stock and
exercise of options and warrants at below current market
prices;
o sales by those financing our company through convertible
securities the underlying common stock of which have been
registered with the SEC and may be sold into the public market
immediately upon conversion; and
o market conditions specific to technology and internet
companies, the healthcare industry and general market
conditions.
IN ADDITION, IN RECENT YEARS THE STOCK MARKET HAS EXPERIENCED SIGNIFICANT
PRICE AND VOLUME FLUCTUATIONS. These fluctuations, which are often unrelated to
the operating performance of specific companies, have had a substantial effect
on the market price for many healthcare related technology companies. Factors
such as those cited above, as well as other factors that may be unrelated to our
operating performance, may adversely affect the price of our common stock.
WE HAVE NOT HAD EARNINGS, BUT IF EARNINGS WERE AVAILABLE, IT IS OUR
GENERAL POLICY TO RETAIN ANY EARNINGS FOR USE IN OUR OPERATIONS. Therefore, we
do not anticipate paying any cash dividends on our common stock in the
foreseeable future despite the recent reduction of the federal income tax rate
on dividends. Any payment of cash dividends on our common stock in the future
will be dependent upon our financial condition, results of operations, current
and anticipated cash requirements, preferred rights of holders of preferred
stock, plans for expansion, as well as other factors that our Board of Directors
deems relevant. We anticipate that our future financing agreements may prohibit
the payment of common stock dividends without the prior written consent of those
investors.
23
WE MAY HAVE TO LOWER PRICES OR SPEND MORE MONEY TO COMPETE EFFECTIVELY
AGAINST COMPANIES WITH GREATER RESOURCES THAN OURS, WHICH COULD RESULT IN LOWER
REVENUES. The eventual success of our products in the marketplace will depend on
many factors, including product performance, price, ease of use, support of
industry standards, competing technologies and customer support and service.
Given these factors we cannot assure you that we will be able to compete
successfully. For example, if our competitors offer lower prices, we could be
forced to lower prices which could result in reduced or negative margins and a
decrease in revenues. If we do not lower prices we could lose sales and market
share. In either case, if we are unable to compete against our main competitors,
which include established companies with significant financial resources, we
would not be able to generate sufficient revenues to grow our company or reverse
our history of operating losses. In addition, we may have to increase expenses
to effectively compete for market share, including funds to expand our
infrastructure, which is a capital and time intensive process. Further, if other
companies choose to aggressively compete against us, we may have to increase
expenses on advertising, promotion, trade shows, product development, marketing
and overhead expenses, hiring and retaining personnel, and developing new
technologies. These lower prices and higher expenses would adversely affect our
operations and cash flows.
AS WITH ANY BUSINESS, GROWTH IN ABSOLUTE AMOUNTS OF SELLING, GENERAL AND
ADMINISTRATIVE EXPENSES OR THE OCCURRENCE OF EXTRAORDINARY EVENTS COULD CAUSE
ACTUAL RESULTS TO VARY MATERIALLY AND ADVERSELY FROM THE RESULTS CONTEMPLATED BY
THE FORWARD-LOOKING STATEMENTS. Budgeting and other management decisions are
subjective in many respects and thus susceptible to incorrect decisions and
periodic revisions based on actual experience and business developments, the
impact of which may cause us to alter our marketing, capital expenditures or
other budgets, which may, in turn, affect our results of operations. Assumptions
relating to the foregoing involve judgments with respect to, among other things,
future economic, competitive and market conditions, and future business
decisions, all of which are difficult or impossible to predict accurately and
many of which are beyond our control. Although we believe the assumptions
underlying the forward-looking statements are reasonable, any of the assumptions
could prove inaccurate, and therefore, there can be no assurance that the
results contemplated in the forward-looking statements will be realized.
In light of the significant uncertainties inherent in the forward-looking
information included in this report, the inclusion of such information should
not be regarded as a representation by us or any other person that our
objectives or plans of our company will be achieved.
CRITICAL ACCOUNTING POLICIES AND ITEMS AFFECTING COMPARABILITY
Quality financial reporting relies on consistent application of our
accounting policies that are based on accounting principles generally accepted
in the United States. The policies discussed below are considered by management
to be critical to understanding our financial statements and often require
management judgment and estimates regarding matters that are inherently
uncertain.
REVENUE RECOGNITION
We recognize revenue from service contracts relating to our OnRamp
division as services are performed, provided that the following revenue
recognition criteria are met:
- Persuasive evidence of an arrangement exists
- Service is provided
- The fee is fixed and determinable
- Collectibility is probable
24
SOFTWARE AND TECHNOLOGY COSTS
We incur costs for software research and development efforts. Such costs
primarily include payroll, employee benefits and other headcount-related costs
associated with product development. Technological feasibility for our software
products is reached shortly before the products are released commercially. Costs
incurred after technological feasibility is established are not material, and
accordingly, we expense all software and technology costs as incurred.
SEGMENT INFORMATION
We follow SFAS No. 131, Disclosures About Segments of an Enterprise and
Related Information, which establishes standards for reporting and displaying
certain information about reportable segments. As a result of our acquisition of
certain assets of OnRamp, as of November 10, 2003, we manage and evaluate our
operations in two reportable segments: Technology and Professional Services. The
Professional Services segment consists of the OnRamp business which derives
revenues from two distinct customer bases, medical and commercial, however,
management concentrates on the performance of each segment as a whole. The
accounting policies of the reportable segments are the same as described in the
summary of significant accounting policies. Management evaluates performance
based on revenues and operating profit (loss). We had only one reportable
segment during the first two quarters of 2003.
GOODWILL
Goodwill represents acquisition costs in excess of the fair value of net
tangible assets of businesses purchased. In conjunction with our adoption of
SFAS No. 142, Goodwill and Other Intangible Assets, we evaluate our goodwill
annually for impairment, or earlier if indicators of potential impairment exist.
The determination of whether or not goodwill or other intangible assets have
become impaired involves a significant level of judgment in the assumptions
underlying the approach used to determine the value of the reporting units.
Changes in our strategy and/or market conditions could significantly impact
these judgments and require adjustments to recorded amounts of intangible
assets. We will continue to evaluate our goodwill for impairment on an annual
basis or sooner if indicators of potential impairment exist.
LONG-LIVED ASSETS
We review our long-lived assets, including our property and equipment and
our intangible assets other than goodwill, for impairment whenever events or
changes in circumstances indicate that the carrying amount of the asset may not
be recovered in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Term Assets. We look primarily to the undiscounted future cash
flows in our assessment of whether or not long-lived assets have been impaired.
CONTINGENCIES
We are subject to legal proceedings, lawsuits and other claims related to
labor, service and other matters. We are required to assess the likelihood of
any adverse judgments or outcomes to these matters as well as potential ranges
of probable losses. A determination of the amount of reserves required, if any,
for these contingencies are made after careful analysis of each individual
issue. The required reserves may change in the future due to new developments in
each
25
matter or changes in approach, such as a change in settlement strategy in
dealing with these matters.
EQUITY TRANSACTIONS
In many of our financing transactions, warrants have been issued.
Additionally, we issue options and warrants to nonemployees from time to time as
payment for services. In all these cases, we apply the principles of SFAS No.
123 to value these awards, which inherently include a number of estimates and
assumptions including stock price volatility factors. We based our estimates and
assumptions on the best information available at the time of valuation, however,
changes in these estimates and assumptions could have a material effect on the
valuation of the underlying instruments.
RESULTS OF OPERATIONS
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 2004 TO THE THREE MONTHS ENDED
JUNE 30, 2003
REVENUES - Total revenues for the three months ended June 30, 2004
increased to $423,000, as compared to no revenues in 2003. The increase was
primarily due to our acquisition of OnRamp, which contributed $362,000 in 2004.
HealthRamp revenues for the 2004 period totaled $61,000, as compared to no
revenues in 2003. Substantially all of this amount was earned from a
distribution partner in connection with marketing our product to a targeted
group of physicians.
EXPENSES - Total operating expenses for the three months ended June 30,
2004 were $8.5 million, compared to $2.5 million for the six months ended June
30, 2003, an increase of $6 million.
Software and technology costs increased $1.0 million, or 125%, from the
three months ended June 30, 2003, to $1.8 million. The increase is due to the
growth in personnel, including our recently formed engineering and quality
assurance groups, totaling $650,000, increases in consulting and travel related
costs of $50,000, as well as higher technology tools and communication costs of
$300,000.
Selling, general and administrative expenses increased $5.0 million, or
297%, from the three months ended June 30, 2003, to $6.7 million. The increase
relates in part to operating expenses of OnRamp, which was acquired in November
2003, of approximately $426,000 and expenses incurred by the Company in the
period relating to the development of LifeRamp of approximately $894,000. The
remainder of the increase in the 2004 period over the 2003 period is primarily
attributable to the following: increased salaries and related costs for sales,
marketing, customer care, executive and administrative personnel of
approximately $1.0 million, non-cash compensation charges of $700,000, increased
legal and professional fees of approximately $620,000, $700,000 for computer and
office supplies and related costs, $127,000 for expansion of the marketing and
sales departments, severance costs of $151,000 and increased advertising and
promotion costs of approximately $70,000.
OTHER INCOME (EXPENSE) for the three months ended June 30, 2004 were
$(528,000), compared to $(131,000) for the quarter ended June 30, 2003, an
increase of $397,000. The increase is due to financing costs incurred in the
2004 period relating to our financing transactions.
26
As a result of the financings mentioned above, the three months ended June
30, 2004 was impacted by a disproportionate deemed dividend totaling $698,000,
caused by the modification of warrants held by certain warrant holders and the
issuance of additional shares of common stock to previous investors, to induce
these investors to exercise their warrants and continue to invest in future
periods..
As a result of the above factors, the net loss applicable to our common
shareholders for the three months ended June 30, 2004 increased to $9.3 million,
as compared to $2.6 million in 2003.
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 2004 TO THE SIX MONTHS ENDED JUNE
30, 2003
REVENUES - Total revenues for the six months ended June 30, 2004 increased
to $803,000, or 364%, as compared to $173,000 in 2003. The increase was
primarily due to our acquisition of OnRamp, which contributed $703,000 in 2004.
HealthRamp revenues for the 2004 period totaled $100,000, as compared to
$173,000 in 2003. Approximately 88 percent of this amount was earned from a
distribution partner in connection with marketing our product to a targeted
group of physicians. The revenues in 2003 were in connection with prior software
customization agreements with third parties.
EXPENSES - Total operating expenses for the six months ended June 30, 2004
were $15.4 million, compared to $5.1 million for the six months ended June 30,
2003, an increase of $10.3 million.
Software and technology costs increased $1.8 million, or 155%, from the
six months ended June 30, 2003, to $3.0 million. The increase is due to the
growth in personnel, including our recently formed engineering and quality
assurance groups, totaling $900,000, increases in consulting and travel related
costs of $240,000, as well as higher technology tools and communication costs of
$708,000.
Selling, general and administrative expenses increased $8.6 million, or
228%, from the six months ended June 30, 2003, to $12.3 million. The increase
relates in part to operating expenses of OnRamp, which was acquired in November
2003, of approximately $842,000 and expenses incurred by the Company in the
period relating to the development of LifeRamp of approximately $1.8 million.
The remainder of the increase in the 2004 period over the 2003 period is
attributable to the following: increased salaries and related costs for sales,
marketing, customer care, executive and administrative personnel of
approximately $1.9 million, severance costs of $151,000, non-cash compensation
charges of $700,000, increased legal and professional fees of approximately
$800,000, $400,000 relating to increased rent and lease abandonment costs;
$950,000 for computer and office supplies and related costs, $356,000 for
expansion of the marketing and sales departments, and increased advertising and
promotion costs of approximately $700,000, including our television
advertisement campaign.
In June 2004, the Company implemented a reduction in force and salary
reduction program, pursuant to which 41 employees were terminated and some of
the remaining employees agreed to accept, during the six-month period ending
November 30, 2004, in lieu of a portion of their base salaries, a retention
bonus equal to an individually negotiated multiple of the amount of their
reduction in pay, payable in the form of shares of our Common Stock, but only if
they remained employed on November 30, 2004. The realization of savings
resulting from the reduction in workforce and compensation is expected to be
evident beginning in the third quarter of 2004.
27
OTHER INCOME (EXPENSE) for the six months ended June 30, 2004 were
$(542,000), compared to $(126,000) for the period ended June 30, 2003, an
increase of $416,000. The increase is due to financing costs incurred in the
2004 period relating to our financing transactions.
As a result of the financings mentioned above, the six months ended June
30, 2004 was impacted by a disproportionate deemed dividend totaling $841,000,
caused by the modification of warrants held by certain warrant holders and the
issuance of additional shares of common stock to previous investors, to induce
these investors to exercise their warrants and continue to invest in future
periods.
As a result of the above factors, the net loss applicable to our common
shareholders for the six months ended June 30, 2004 increased to $16.0 million,
as compared to $6.2 million in 2003.
GOODWILL AND OTHER LONG-LIVED ASSETS
Under Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill
and Other Intangible Assets, the Company reviews its goodwill for impairment at
least annually, or more frequently whenever events or changes in circumstances
indicate that the carrying amount of the asset may not be recovered. During the
second quarter and into the third quarter of 2004, there was a significant
decrease in the Company's market capitalization. In light of this development,
the Company is presently re-evaluating the goodwill balances of each of its
reporting units, specifically Ramp and OnRamp, to determine whether any
impairment charges are required to be recorded under generally accepted
accounting principles. Although the market capitalization of the Company as a
whole at June 30, 2004 exceeded the aggregate net worth of the Company, the
analysis required under generally accepted accounting principles is to be done
by reporting unit. Therefore, the Company intends on hiring an outside valuation
firm to assist in the analysis, and should it be determined that goodwill of one
or both reporting units is impaired, the Company will record an impairment
charge upon such determination.
In July 2004 the Company decided to indefinitely delay LifeRamp's
continued development and commencement of operations until adequate funding is
obtained or other strategic alternative measures can be implemented by the
Company. There can be no assurance that the Company will secure financing on
favorable terms necessary to fund LifeRamp's proposed business model, that the
necessary regulatory approvals will be obtained or that the business, if
commenced, will be cash flow positive or profitable. If the Company is not
successful in obtaining funding for LifeRamp or other strategic alternatives are
not implemented, the Company will be required to re-evaluate the carrying value
of the long-lived assets associated with LifeRamp's operations (including fixed
assets and lease obligations which total approximately $400,000) for impairment.
LIQUIDITY AND CAPITAL RESOURCES
We had $166,000 in cash as of June 30, 2004 compared to $1,806,000 as of
December 31, 2003. The net working capital deficit was $(7,375,000) as of June
30, 2004 compared to a deficit of $(1,098,000) as of December 31, 2003.
During the six months ended June 30, 2004, we made capital expenditures to
purchase property and equipment of $875,000. During the period we raised
proceeds of approximately $9,322,000 from financing activities; reflecting
$5,513,000 from the issuance of our preferred and common stock, net of offering
costs, $1,650,000 from the issuance of promissory notes and $2,293,000 from the
exercise of options and warrants. Partially offsetting this were payments of
debt and notes payable of $134,000.
28
We have incurred operating losses for the past several years, the majority
of which are related to the development of the Company's healthcare connectivity
technology and related marketing efforts. These losses have produced operating
cash flow deficiencies, and negative working capital, which raise substantial
doubt about our ability to continue as a going concern. Our future operations
are dependent upon management's ability to source additional equity capital.
We expect to continue to experience losses in the near term, until such
time that our technologies can be successfully deployed with physicians to
produce revenues. The continuing deployment, marketing and the development of
the merged technologies will depend on our ability to obtain additional
financing. We have not generated any significant revenue to date from this
technology. We are currently funding operations through the sale of common
stock, and there are no assurances that additional investments or financings
will be available as needed to support the development and deployment of merged
technologies. The need for us to obtain additional financing is acute and
failure to obtain adequate financing could result in lost business
opportunities, the sale of our company at a distressed price or may lead to the
financial failure of our company.
We are currently funding our operations now through the sale of our
securities, and continued to do so in the six months ended June 30, 2004. In
order to raise funds, the Company has typically issued deeply discounted
securities in terms of beneficial conversion prices of, and/or additional
warrants issued with, the underlying securities. Under our financing agreements,
when we sell securities convertible into our common stock we are required to
register those securities so that the holder will be free to sell them in the
open market. There can be no assurance that additional investments or financings
will be available to us on favorable terms, or at all, as needed to support the
development and deployment of our technology. Failure to obtain such capital on
a timely basis could result in lost business opportunities, the sale of our
technology at a distressed price or the financial failure of our Company. See
"FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS".
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We do not hold or engage in transactions with market risk sensitive
instruments.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Our management, including our chief executive officer and chief financial
officer, has carried out an evaluation of the effectiveness of our disclosure
controls and procedures as of June 30, 2004, pursuant to Exchange Act Rules
13a-15(e) and 15(d)-15(e). Our auditors, BDO Seidman, LLP, have advised us that,
under standards established by the American Institute of Certified Public
Accountants ("AICPA"), reportable conditions involve matters that come to the
attention of auditors that relate to significant deficiencies in the design or
operation of internal controls of an organization that, in the auditors'
judgment, could adversely affect the organization's ability to record, process,
summarize and report financial data consistent with the assertions of management
in the consolidated financial statements.
The Company has taken steps and has a plan to correct the material
weaknesses. Progress was made in both the first and second quarters, however BDO
Seidman, LLP has advised our management and our Audit Committee that, in BDO
Seidman, LLP's opinion, there were
29
reportable conditions during 2003, some of which persisted through the six
months ended June 30, 2004, which constituted material weaknesses in internal
control. More specifically, our accounting staffing, records and controls were
insufficient to identify and record all accounting entries necessary to reflect
our financial position, results of operations and cash flows in accordance with
generally accepted accounting principles in the United States, and prepare
financial reports in compliance with the rules and regulations of the SEC. In
particular, there were numerous accounting errors and misapplications of
accounting principles generally accepted in the United States, due in large
measure, to the absence of a chief financial officer or other individual with
the appropriate experience and background to handle accounting and financial
reporting matters arising from the complexity of a number of our transactions.
However, BDO Seidman, LLP has advised the Audit Committee that these conditions
were considered in determining the nature, timing, and extent of the procedures
performed for the audit of our financial statements as of and for the year ended
December 31, 2003 and the SAS 100 review of our financial statements for the
quarterly periods ended March 31, and June 30, 2004, and that these conditions
did not affect its audit report dated April 4, 2004 with respect to our
financial statements as of and for the year ended December 31, 2003, which
includes an explanatory paragraph indicating that our recurring losses from
operations and working capital deficit raise substantial doubt about our ability
to continue as a going concern.
As a result of the material weaknesses described above, our management,
including our current chief executive officer and current chief financial
officer, has determined that our disclosures controls and procedures were
inadequate as of December 31, 2003 and June 30, 2004.
See "FORWARD LOOKING STATEMENTS AND ASSOCIATED RISKS" under Item 2 of this
report and Changes in Internal Control Over Financial Reporting below for
actions being taken by management to date to improve the Company's internal
controls and procedures.
Changes in Internal Control
During the period covered by this report, we have made the following changes in
our controls and procedures which we believe have resulted in significant
improvements:
- Management reassigned certain tasks among the expanded accounting
department, as well as existing administrative personnel to perform
ministerial accounting functions, to improve and better accomplish
bookkeeping, recordkeeping and other accounting functions.
- We commenced a search for new position of Vice President Finance,
which position was filled on August 2, 2004. The new Vice President
Finance will be wholly dedicated to the areas of internal control,
financial accounting and reporting.
- The review and sign off on all monthly bank reconciliations by the
chief financial officer has been instituted.
- The review of all underlying agreements, contracts and financing
arrangements prior to execution for accounting ramifications has
already been undertaken by the chief financial officer to the extent
possible.
- We strengthened certain controls over cash disbursements, including
adopting a policy that requires dual signatures of two senior
officers, at least one of whom is not involved in a transaction, on
disbursements in excess of $10,000.
30
- We implemented a policy requiring attendance by outside counsel at
all Board and Audit Committee meetings, including the timely
preparation of minutes of such meetings and reports to management to
discuss our implementation of any plans to address conditions
constituting the material weaknesses in its internal controls.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On May 28, 2004, the Company, as sub-subtenant, received written notice
(the "Notice") from Clinton Group, Inc., as subtenant and sub-sublandlord
("Clinton") stating, in relevant part, that the Company is in default under that
certain Agreement of Sublease (the "Sublease"), dated as of April 15, 2004, by
and between Clinton and the Company for the premises located at on the 31st
Floor at 55 Water Street, New York, New York as a result of the following: (i)
the Company's failure to deliver the first month's rent and the security deposit
payable under the Sublease, and (ii) the Company's failure to cooperate with
Clinton to obtain written consent to the Sublease by each of New Water Street
Corp., as landlord, and Lynch, Jones & Ryan, Inc., as tenant and sub-landlord.
The Notice stated Clinton intends to pursue all legal rights and remedies
available to it under the laws of the State of New York and Clinton reserves all
rights with respect thereto. On or about July 16, 2004, Clinton, as plaintiff,
filed a summons and complaint against the Company, as defendant, with the
Supreme Court of the State of New York, County of New York (Index No. 110371)
alleging, among other things, breach of the Sublease for non-payment of the
security deposit and one month's rent. The summons and complaint has not yet
been served upon the Company and an answer is not yet due. Clinton seeks
repossession of the premises, damages for non-payment of rent in the sum of
$128,629, additional damages under the Sublease through the date of trial for
the remainder of the term of the Sublease, plus interest and attorneys' fees.
The Company has been engaged in good faith settlement discussions with Clinton.
If a settlement cannot be agreed upon, the Company believes it has good and
meritorious defenses and/or counterclaims to the claims made by Clinton and
intends to vigorously defend against any and all claims made by Clinton.
From time to time, the Company is involved in claims and litigation that
arise out of the normal course of business. Except as set forth herein, there
are no pending matters that in management's judgment may be considered
potentially material to us.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None during the quarter ended June 30, 2004.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
A. EXHIBITS
10.1 Amendment No. 1 dated as of June 1, 2004 to Executive Employment
Agreement dated as of November 17, 2003 between the Company and Mitchell
M. Cohen.
10.2 Amendment No. 1 dated as of June 1, 2004 to Executive Employment
Agreement dated as of October 1, 2003 between the Company and Louis
Hyman.
10.3 Executive Employment Agreement dated as of June 1, 2004 between the
Company and Andrew Brown.
10.4 Promissory Note dated May 19, 2004 in the principal amount of $1,000,000
issued by the Company in favor of Canon Ventures Limited.
10.5 Promissory Note dated June 14, 2004 in the principal amount of $400,000
issued by the Company in favor of Canon Ventures Limited.
10.6 Promissory Note dated June 28, 2004 in the principal amount of $250,000
issued by the Company in favor of Canon Ventures Limited.
31.1 Certification by Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification by Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification by Chief Executive Officer and Chief Financial Officer
Pursuant to 18 U.S.C. Section 1350, Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
31
B. REPORTS ON FORM 8-K DURING THE QUARTER REPORTED ON:
1. Current Report on Form 8-K filed April 1, 2004, under Item 9 reporting the
issuance of a press release reporting the Registrant's recent filings with
the SEC and other developments.
2. Current Report on Form 8-K filed May 7, 2004, under Item 9 regarding the
issuance of press releases on May 6 and May 7, 2004 regarding the
registrant's new wholly-owned subsidiary, LifeRamp Family Financial, Inc.
("LifeRamp"); Heather Urich as National Spokesperson for LifeRamp; Susan
Boucher as Senior Vice President for Advocacy and Public Relations for
LifeRamp; and retaining of Shattuck Hammond Partners as the investment
banker and financial advisor in the structuring and capitalization of
LifeRamp.
3. Current Report on Form 8-K filed June 9, 2004, under Item 5 regarding
audited financial statements and pro forma information of The Duncan
Group, Inc. d/b/a / Frontline Physicians Exchange ("Frontline"). The
acquisition of substantially all of the assets of Frontline has been
previously announced by the Registrant.
32
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, and the undersigned has also signed in
his capacity as principal financial officer of the Registrant.
Dated: August 16, 2004
Ramp Corporation
(Registrant)
/s/ Mitchell M. Cohen
---------------------
Mitchell M. Cohen
Chief Financial Officer
33
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION
----------- -----------
*10.1 Amendment No. 1 dated as of June 1, 2004 to Executive Employment
Agreement dated as of November 17, 2003 between the Company and
Mitchell M. Cohen.
*10.2 Amendment No. 1 dated as of June 1, 2004 to Executive Employment
Agreement dated as of October 1, 2003 between the Company and
Louis Hyman.
*10.3 Executive Employment Agreement dated as of June 1, 2004 between
the Company and Andrew Brown.
*10.4 Promissory Note dated May 19, 2004 in the principal amount of
$1,000,000 issued by the Company in favor of Canon Ventures
Limited.
*10.5 Promissory Note dated June 14, 2004 in the principal amount of
$400,000 issued by the Company in favor of Canon Ventures
Limited.
*10.6 Promissory Note dated June 28, 2004 in the principal amount of
$250,000 issued by the Company in favor of Canon Ventures
Limited.
*31.1 Certification by Chief Executive Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
*31.2 Certification by Chief Financial Officer Pursuant to Section 302
of the Sarbanes-Oxley Act of 2002
*32 Certification by Chief Executive Officer and 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
34