UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the quarterly period ended MARCH 31, 2003
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ________________ to _______________
Commission file number: 000-22052
PROXYMED, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 65-0202059
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2555 DAVIE ROAD, SUITE 110, FT. LAUDERDALE, FLORIDA 33317
--------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(954) 473-1001
-------------------------------
(Registrant's telephone number)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 registrant is an accelerated filer (as defined in
Rule 12b-2 of the Securities Exchange Act of 1934) [X] Yes [ ] No
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date:
COMMON STOCK, $.001 PAR VALUE
6,782,938 SHARES AS OF MAY 14, 2003
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
March 31, December 31,
2003 2002
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents $ 10,347,000 $ 16,378,000
Accounts receivable - trade, net 10,970,000 10,060,000
Notes and other receivables 502,000 503,000
Inventory 2,912,000 2,774,000
Other current assets 1,614,000 1,022,000
------------- -------------
Total current assets 26,345,000 30,737,000
Property and equipment, net 5,827,000 5,719,000
Goodwill, net 32,944,000 32,797,000
Purchased technology, capitalized software and
other intangible assets, net 17,800,000 18,220,000
Restricted cash 1,151,000 825,000
Other assets 400,000 406,000
------------- -------------
Total assets $ 84,467,000 $ 88,704,000
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Notes payable and current portion of long-term debt $ 1,193,000 $ --
Accounts payable and accrued expenses 16,671,000 21,472,000
Deferred revenue 494,000 516,000
------------- -------------
Total current liabilities 18,358,000 21,988,000
Convertible notes 13,400,000 13,400,000
Other long-term debt 1,938,000 --
Long-term deferred revenue and other long-term liabilities 2,488,000 2,581,000
------------- -------------
Total liabilities 36,184,000 37,969,000
------------- -------------
Stockholders' equity:
Series C 7% Convertible preferred stock - $.01 par value. -- --
Authorized 300,000 shares; issued 253,265 shares;
outstanding 2,000 shares; liquidation preference $13,333
Common stock - $.001 par value. Authorized 13,333,333 shares; 7,000 7,000
issued and outstanding 6,782,938 shares
Additional paid-in capital 146,187,000 146,187,000
Accumulated deficit (97,725,000) (95,273,000)
Note receivable from stockholder (186,000) (186,000)
------------- -------------
Total stockholders' equity 48,283,000 50,735,000
------------- -------------
Total liabilities and stockholders' equity $ 84,467,000 $ 88,704,000
============= =============
The accompanying notes are an integral part of
the consolidated financial statements.
2
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
Three Months Ended March 31,
-------------------------------
2003 2002
------------ ------------
Revenues:
Transaction fees, services and license fees $ 12,560,000 $ 6,709,000
Communication devices and other tangible goods 4,870,000 4,794,000
------------ ------------
17,430,000 11,503,000
------------ ------------
Costs and expenses:
Cost of transaction fees, services and license fees 4,271,000 2,132,000
Cost of tangible goods 3,222,000 3,247,000
Selling, general and administrative expenses 10,760,000 5,493,000
Depreciation and amortization 1,330,000 569,000
Loss on disposal of assets 125,000 --
------------ ------------
19,708,000 11,441,000
------------ ------------
Operating income (loss) (2,278,000) 62,000
Interest income (expense), net (174,000) (13,000)
------------ ------------
Net income (loss) (2,452,000) 49,000
Deemed dividends -- 612,000
------------ ------------
Net loss applicable to common shareholders $ (2,452,000) $ (563,000)
============ ============
Basic and diluted loss per share $ (0.36) $ (0.11)
============ ============
Basic and diluted weighted average shares outstanding 6,782,938 5,114,596
============ ============
The accompanying notes are an integral part of
the consolidated financial statements.
3
PROXYMED, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Three Months Ended March 31,
-------------------------------
2003 2002
------------ ------------
Cash flows from operating activities:
Net income (loss) $ (2,452,000) $ 49,000
Adjustments to reconcile net income (loss) to net provided by
(used in) operating activities:
Depreciation and amortization 1,330,000 569,000
Provision for (recovery of) doubtful accounts 54,000 (34,000)
Provision for obsolete inventory 10,000 60,000
Loss on disposal of fixed assets 125,000 --
Changes in assets and liabilities, net of
effect of acquisitions and dispositions:
Accounts and other receivables (984,000) (91,000)
Inventory (148,000) (164,000)
Other current assets (262,000) (341,000)
Accounts payable and accrued expenses 1,797,000 12,000
Deferred revenue (38,000) 94,000
Other, net 74,000 (21,000)
------------ ------------
Net cash provided by (used in) operating activities (494,000) 133,000
------------ ------------
Cash flows from investing activities:
Capital expenditures (910,000) (413,000)
Capitalized software (276,000) (138,000)
Collection of notes receivable 81,000 14,000
Proceeds from sale of fixed assets 64,000 --
Increase in restricted cash (326,000) --
Payments for acquisition-related costs (3,860,000) --
------------ ------------
Net cash used in investing activities (5,227,000) (537,000)
------------ ------------
Cash flows from financing activities:
Payment of note payable related to acquisition of business -- (7,000,000)
Payment of notes payable, capital leases and long-term debt (310,000) (29,000)
------------ ------------
Net cash used in financing activities (310,000) (7,029,000)
------------ ------------
Net decrease in cash and cash equivalents (6,031,000) (7,433,000)
Cash and cash equivalents at beginning of period 16,378,000 12,601,000
------------ ------------
Cash and cash equivalents at end of period $ 10,347,000 $ 5,168,000
============ ============
The accompanying notes are an integral part of
the consolidated financial statements.
4
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION - The accompanying unaudited consolidated
financial statements of ProxyMed, Inc. and subsidiaries ("ProxyMed"
or the "Company") and the notes thereto have been prepared in
accordance with the instructions of Form 10-Q and Rule 10-01 of
Regulation S-X of the Securities and Exchange Commission (the "SEC")
and do not include all of the information and disclosures required
by accounting principles generally accepted in the United States of
America. However, such information reflects all adjustments
(consisting of normal recurring adjustments), which are, in the
opinion of management, necessary for a fair statement of results for
the interim periods.
On December 31, 2002, the Company acquired all of the capital stock
of MedUnite, Inc. ("MedUnite"), a privately-held company providing
healthcare claims processing services founded by seven of the
nation's largest health insurers, for $10,000,000 in cash and
$13,400,000 in 4% convertible debt. The operations of MedUnite are
reflected with those of the Company for the three months ended March
31, 2003.
The results of operations for the three months ended March 31, 2003
are not necessarily indicative of the results to be expected for the
full year. The unaudited consolidated financial statements included
herein should be read in conjunction with the audited consolidated
financial statements and the notes thereto included in the Company's
Annual Report on Form 10-K for the year ended December 31, 2002 as
filed with the SEC on April 15, 2003.
(b) REVENUE RECOGNITION - Electronic transaction processing fee
revenue is recorded in the period the service is rendered. Certain
transaction fee revenue is subject to revenue sharing pursuant to
agreements with resellers, vendors or gateway partners and are
recorded as gross revenues. Revenue from sales of inventory and
manufactured goods is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the price is fixed or
determinable and collectibility is probable. Revenue from certain
up-front fees is amortized ratably over the expected life of the
customer. Revenue from hardware leases, software rentals and
maintenance fees is recognized ratably over the applicable period.
(c) NET LOSS PER SHARE - Basic net loss per share is computed by
dividing net loss applicable to common shareholders by the weighted
average shares of common stock outstanding during the period.
Diluted loss per share reflects the potential dilution from the
exercise or conversion of securities into common stock; however,
stock options and warrants totaling 1,753,153 shares and 960,378
shares at March 31, 2003 and 2002, respectively, as well as common
shares issuable on conversion of Series C preferred stock (13,333
and 20,000 shares, if converted on March 31, 2003 and 2002,
respectively), were excluded from the calculation of diluted loss
per share because their effects would have been antidilutive.
5
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
In December 2002, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 148,
"Accounting for Stock-Based Compensation - Transition and
Disclosure". SFAS No. 148 amends SFAS No. 123, "Accounting for
Stock-Based Compensation", to provide alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123 to
require prominent disclosures in both annual and interim financial
statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results.
The disclosure provisions of SFAS No. 148 are effective for fiscal
years ending after December 15, 2002.
ProxyMed continues to apply Accounting Principles Board ("APB")
Opinion No. 25, "Accounting for Stock Issued to Employees" and
related interpretations in accounting for its stock option plans and
has not adopted the recognition provisions of SFAS No. 123, as
amended by SFAS No. 148. The Company measures compensation expense
related to the grant of stock options and stock-based awards to
employees (including independent directors) whereby compensation
expense, if any, is generally based on the difference between the
exercise price of an option, or the amount paid for an award, and
the market price or fair value of the underlying common stock at the
date of the award or at the measurement date for variable awards.
Stock-based compensation arrangements involving non-employees are
accounted for based on the fair value of the option or award
pursuant to SFAS No. 123.
6
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
Under SFAS No. 123, compensation cost for the Company's stock-based
compensation plans would be determined based on the fair value at
the grant dates for awards under those plans. Had the Company
adopted SFAS No. 123 in accounting for its stock option plans, the
Company's consolidated net loss and net loss per share for the
quarters ended March 31, 2003 and March 31, 2002 would have been
adjusted to the pro forma amounts indicated as follows:
Three Months Ended March 31,
-----------------------------
2003 2002
----------- -----------
Net loss applicable to
common shareholders, as reported $(2,452,000) $ (563,000)
Total stock-based employee pro forma compensation
expense determined under fair
value based method for all awards (150,000) (312,000)
----------- -----------
Pro forma net loss applicable
to common shareholders $(2,602,000) $ (875,000)
=========== ===========
Basic and diluted net loss per common share:
As reported $ (0.36) $ (0.11)
Pro forma $ (0.38) $ (0.17)
(d) NEW ACCOUNTING PRONOUNCEMENTS - In April 2003, the FASB issued SFAS
No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities". SFAS No. 149 amends and clarifies accounting
for derivative instruments, including certain derivative instruments
embedded in other contracts, and for hedging activities under SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities". SFAS No. 149 is effective for contracts entered into or
modified after June 30, 2003, except for certain provision that
relate to SFAS No. 133 implementation issues that have been
effective for fiscal quarters that began prior to June 15, 2003 and
for hedging relationships designated after June 30, 2003. Since
currently the Company does not have derivative instruments, the
Company does not believe that the implementation SFAS No. 149 will
have a material effect on the Company's consolidated financial
statements and related disclosures.
7
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
(2) INVENTORY
Inventory consists of the following at March 31, 2003:
Materials, supplies and component parts $2,014,000
Work in process 211,000
Finished goods 687,000
----------
$2,912,000
==========
(3) GOODWILL AND OTHER INTANGIBLE ASSETS
(a) GOODWILL - The changes in the carrying amounts of goodwill for the
three months ended March 31, 2003 by operating segment are as
follows:
Electronic
healthcare Laboratory
transaction communication
processing solutions Total
----------- ---------- -----------
Balance as of December 31, 2002 $30,695,000 $2,102,000 $32,797,000
Purchase price adjustments 147,000 -- 147,000
----------- ---------- -----------
Balance as of March 31, 2003 $30,842,000 $2,102,000 $32,944,000
=========== ========== ===========
(b) OTHER INTANGIBLE ASSETS - The carrying amounts of other intangible
assets as of March 31, 2003 and December 31, 2002, by category, are
as follows:
March 31, 2003 December 31, 2002
------------------------------------------------- -------------------------------------------------
Carrying Accumulated Carrying Accumulated
Amount Amortization Net Amount Amortization Net
------------ ------------ ----------- ------------ ------------ -----------
Capitalized software $ 759,000 $ (82,000) $ 677,000 $ 527,000 $ (58,000) $ 469,000
Purchased technology 9,172,000 (1,705,000) 7,467,000 9,127,000 (1,315,000) 7,812,000
Customer relationships 10,251,000 (595,000) 9,656,000 10,251,000 (312,000) 9,939,000
------------ ------------ ----------- ------------ ------------ -----------
$ 20,182,000 $ (2,382,000) $17,800,000 $ 19,905,000 $ (1,685,000) $18,220,000
============ ============ =========== ============ ============ ===========
Amortization expense of other intangible assets was $697,000 and
$149,000 for the three months ended March 31, 2003 and 2002,
respectively.
As of March 31, 2003, estimated future amortization expense of other
intangible assets is as follows: $2,615,000 for the remaining
quarters of 2003, $2,693,000 in 2004, $2,572,000 in 2005, $2,425,000
in 2006, $2,274,000 in 2007, and $1,790,000 in 2008.
8
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
(4) DEBT OBLIGATIONS
In February 2003, the Company financed $422,000 and $306,000 for
certain liability insurance policies over 7 months at 4.76% and 24 months at
5.25%, respectively. The note for $422,000 is unsecured while the note for
$306,000 is collateralized by a letter of credit in the amount of $325,000
(supported with restricted cash) at March 31, 2003.
In March 2003, the Company restructured $3,368,000 in accounts payable
and accrued expenses acquired from MedUnite and outstanding at December 31, 2002
to one vendor by paying $750,000 in cash and financing the balance of $2,618,000
with an unsecured note payable over 36 months at 8% commencing March 2003.
In April 2003, the Company financed a net total of $1,990,000
($2,797,000 in accounts payable and accrued expenses offset by $807,000 in
accounts receivable) existing at December 31, 2002 from MedUnite to a former
owner of MedUnite by issuing an unsecured note payable over 24 months at 6%.
(5) EQUITY TRANSACTIONS
(a) SERIES C PREFERRED CONVERSION OFFER - On December 13, 2001, the
Company offered to convert its then outstanding Series C Preferred
into shares of common stock at a reduced conversion price (the
"Conversion Offer"). For a period of sixty days ending February 11,
2002, the holders of the Series C Preferred shares were able convert
such shares at a reduced conversion price of $13.05 per share
instead of the original conversion price of $15.00. At the
conclusion of the Conversion Offer on February 11, 2002, holders of
98.5% of the outstanding Series C Preferred had converted their
shares into a total of 1,538,636 common shares. A deemed dividend
charge of $612,000 was recorded in the first quarter of 2002 for
conversions consummated after the 2001 year end.
(b) STOCK OPTIONS - During the three months ended March 31, 2003, the
Company granted a total of 50,000 stock options at exercise prices
between $7.50 and $10.01 per share to employees. Such options are
for a ten-year term and vest equally over the following three years.
In April 2003, the six outside directors of ProxyMed were each
granted 10,000 stock options at an exercise price of $7.28 per
share. Such options are for a ten-year term and vest equally over
the following three years.
9
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
(6) SEGMENT INFORMATION
ProxyMed operates in two reportable segments that are separately
managed: Electronic healthcare transaction processing and Laboratory
communication solutions. Electronic healthcare transaction processing includes
transaction and value-added services principally between physicians and
insurance companies (Payer Services) and physicians and pharmacies (Prescription
Services); and Laboratory communication solutions includes the sale, lease and
service of communication devices principally to laboratories and the contract
manufacturing of printed circuit boards (Laboratory Services). Intersegment
sales are not material, and there were no foreign sales for any periods
presented.
Three Months Ended March 31,
-------------------------------
2003 2002
------------ ------------
Net revenues:
Electronic healthcare transaction processing $ 11,291,000 $ 5,278,000
Laboratory communication solutions 6,139,000 6,225,000
------------ ------------
$ 17,430,000 $ 11,503,000
============ ============
Operating income (loss):
Electronic healthcare transaction processing $ (1,941,000) $ 152,000
Laboratory communication solutions 587,000 593,000
Corporate and consolidating (924,000) (683,000)
------------ ------------
$ (2,278,000) $ 62,000
============ ============
March 31,
-------------------------------
2003 2002
------------ ------------
Total assets:
Electronic healthcare transaction processing $ 60,400,000 $ 14,211,000
Laboratory communication solutions 12,424,000 8,648,000
Corporate and consolidating 11,643,000 6,161,000
------------ ------------
$ 84,467,000 $ 29,020,000
============ ============
(7) INCOME TAXES
As of March 31, 2003, the Company had a net deferred tax asset of
approximately $66.0 million, which was fully offset by a valuation allowance.
Realization of the net deferred tax asset is dependent upon the Company
generating sufficient taxable income prior to the expiration of the federal net
operating loss carryforwards. The Company will adjust this valuation reserve, if
during future periods, management believes the Company will generate sufficient
taxable income to realize the net deferred tax asset.
10
PROXYMED, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED), CONTINUED
(8) LEASES
In April 2003, the Company terminated MedUnite's facility lease in San
Diego, California effective July 1, 2003 in consideration for a $750,000 letter
of credit held by the landlord (supported with restricted cash), furniture at
the facility with a value of approximately $153,000, and other costs of $69,000.
As a replacement for this facility, the Company subleased office space in the
same geographic area at a monthly rent of $6,000 per month through September
2004.
11
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
ProxyMed is an electronic healthcare transaction processing services
company providing connectivity services and related value-added products to
physician offices, payers, medical laboratories, pharmacies, and other
healthcare providers. Our electronic transaction processing services support a
broad range of both financial and clinical transactions. To facilitate these
services, we operate ProxyNet, our secure, proprietary national electronic
information network, which provides physicians and other healthcare providers
with direct connectivity to one of the industry's largest group of payers, the
largest group of clinical laboratories, and the largest group of chain and
independent pharmacies. Our products and services are currently provided from
our main operating facilities located in Fort Lauderdale, Florida; New Albany,
Indiana; Santa Ana, California; Norcross, Georgia; and Sioux Falls, South
Dakota. We also operate our clinical network and portions of our financial and
real-time production computer networks from a secure co-location site in
Atlanta, Georgia.
We remain committed to our strategy, which is focused on leveraging our
leading position as an independent back-end connectivity provider to small
physician offices. Through strategic relationships and partnerships with
front-end solutions providers, our goal is to drive more healthcare transactions
through PROXYNET while remaining neutral in the battle for the physician's
desktop. Additionally, since we have an existing customer base of physicians and
other healthcare providers, we expect that there will be opportunities to
increase revenues by cross-selling our existing products and services to these
current customers, as well as revenue opportunities from the development of new
services from our development efforts, including Internet-based transaction
services, and from opportunities afforded by HIPAA as it relates to privacy,
security and education. We remain committed to developing additional
capabilities and value-added products and services, and to expanding our
back-end connectivity network.
On December 31, 2002, we acquired all of the outstanding stock of
MedUnite, Inc. ("MedUnite") for $10,000,000 in cash and aggregate of $13,400,000
principal amount of 4% convertible promissory notes. In addition, we incurred
$8,321,000 in transaction and exit related costs. Interest on the convertible
notes is payable in cash on a quarterly basis. The convertible promissory notes
are payable in full on December 31, 2008 and are convertible into an aggregate
of 731,322 shares of our common stock if the founders of MedUnite achieve
certain revenue-based triggers over the next three and one-half year period. The
shares of our common stock issuable upon conversion of the convertible notes
will be registered by us promptly after a stockholder achieves a conversion
trigger event. If and when these notes become convertible, we will record a
beneficial conversion charge in our operations to the extent that the fair
market value of the common stock is in excess of the conversion price. The
operations of MedUnite are reflected with those of the Company for the three
months ended March 31, 2003.
12
RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002.
NET REVENUES. Consolidated net revenues for the three months ended
March 31, 2003 increased by $5,927,000, or 52%, to $17,430,000 from consolidated
net revenues of $11,503,000 for the three months ended March 31, 2002. Net
revenues classified by our reportable segments are as follows:
Three Months Ended March 31,
----------------------------
2003 2002
----------- -----------
Electronic healthcare transaction processing $11,291,000 $ 5,278,000
Laboratory communication solutions 6,139,000 6,225,000
----------- -----------
$17,430,000 $11,503,000
=========== ===========
Net revenues in our Electronic healthcare transaction processing
segment increased by 114% over the 2002 period. This increase is primarily due
to the acquisition of MedUnite which contributed $4,628,000, or 41%, of the
segment revenues. Excluding MedUnite, revenue growth from our existing
transaction business increased by 26% between periods.
Total healthcare transactions processed during the three months ended
March 31, 2003 were 56,479,000 (including 21,862,000 transactions from MedUnite)
equating to an annualized run rate of over 225 million transactions processed.
Excluding MedUnite, transaction growth between the periods was 31%. A summary of
the number of transactions we processed for the periods presented is as follows:
Three Months Ended March 31,
-----------------------------
2003 2002
---------- ----------
Core transactions 49,601,000 20,220,000
Encounters 6,878,000 6,198,000
---------- ----------
Total transactions 56,479,000 26,418,000
========== ==========
"Core" transactions represent all transactions except for encounters.
"Encounters" are an administrative reporting transaction for payers but do not
generate revenue for the provider who must submit them. Accordingly, rather than
submitting on a routine basis, most providers choose to periodically "catch up"
on their submissions, creating monthly and quarterly swings in both the number
of encounters we process and what percentage of our transaction mix they
represent. Since encounters are at a significantly lower price point than
claims, these swings make it difficult to easily analyze our
quarter-over-quarter growth in our core business. In addition, we do not expect
our encounter volume to grow on an annual basis, as payers are not expanding the
capitated service model that is the foundation of encounters. Therefore, we
believe that breaking out encounters shows more clearly our growth in core
transactions, which are the growth engine for our Electronic healthcare
transaction services segment.
13
For the 2003 period, approximately 65% of our revenues came from our
Electronic healthcare transaction processing segment compared to 46% from this
segment for the 2002 period. For the remainder of 2003 and beyond, it is
anticipated that our greatest growth will come from this segment.
Laboratory communication solutions segment net revenues decreased by 1%
from the 2002 period. While our revenues in this segment started the year slowly
as we had expected, most of our revenues is this segment comes from the sale of
fixed assets to our lab and contract manufacturing customers. We believe that
overall spending for fixed assets is down across the economy and will continue
to be soft going into the summer. In addition, we expected to start the year
slowly due to the effect of the 2002 merger and acquisition activity among our
top lab customers. Typically, our business with labs decreases for a period of
time after the acquisition, and then rebounds. We anticipate that a
strengthening economy, a resumption of normal ordering from the merged labs and
increased penetration into the hospital outreach market will help to improve
revenue for our Laboratory communications solutions segment over the balance of
the year.
COST OF SALES. Consolidated cost of sales decreased as a percentage of
net revenues to 43% for the three months ended March 31, 2003 from 47% for the
three months ended March 31, 2002. Cost of sales classified by our reportable
segments is as follows:
Three Months Ended March 31,
----------------------------
2003 2002
---------- ----------
Electronic healthcare transaction processing $4,266,000 $2,132,000
Laboratory communication solutions 3,227,000 3,247,000
---------- ----------
$7,493,000 $5,379,000
========== ==========
Cost of sales in our Electronic healthcare transaction processing
segment consists of transaction fees, services and license fees, third-party
electronic transaction processing costs, certain telecommunication and
co-location center costs, revenue sharing arrangements with our business
partners, third-party database licenses, and certain travel expenses. Cost of
sales as a percentage of revenues decreased to 38% in the 2003 period compared
to 40% in the same period last year primarily due to a change in the mix of
transaction types from higher cost patient statements to lower costs claims.
Cost of sales in the Laboratory communication solutions segment
includes hardware, third-party software, and consumable materials. Cost of sales
as a percentage of revenues remained constant in the 2003 period compared to the
same period last year.
SELLING, GENERAL AND ADMINISTRATIVE EXPENSES. Consolidated SG&A
increased for the three months ended March 31, 2003 by $5,267,000, or 96%, to
$10,760,000 from consolidated SG&A of $5,493,000 for the three months ended
March 31, 2002. Consolidated SG&A expenses as a percentage of consolidated
revenues increased to 62% for the 2003 period compared to 48% in the same period
last year. SG&A expenses classified by our reportable segments are as follows:
14
Three Months Ended March 31,
---------------------------
2003 2002
----------- ----------
Electronic healthcare transaction processing $ 7,787,000 $2,630,000
Laboratory communication solutions 2,093,000 2,230,000
Corporate 880,000 633,000
----------- ----------
$10,760,000 $5,493,000
=========== ==========
Electronic healthcare transaction processing segment SG&A expenses for
the three months March 31, 2003 increased 196% over the same period last year
primarily due to the incremental expenses incurred in the operations of
MedUnite. Excluding MedUnite, SG&A expenses in this segment increased by 23% due
to costs related to our HIPAA compliance efforts, implementation staffing and
sales/marketing programs implemented since the first quarter of last year.
While we expected to incur significant SG&A costs related to the
MedUnite operations in the first quarter of 2003, we also expected to reduce
them at a higher rate than we achieved during the early part of the quarter. In
addition, we incurred some unbudgeted expenses of about $100,000 for additional
transaction-related accounting and legal fees. Despite these challenges, we
exited the quarter on an expense run rate in line with our initial expectations.
With continued expense reduction efforts anticipated in the second quarter, we
expect to achieve positive cash flow in our MedUnite operations before the
fourth quarter of 2003.
Laboratory communication solutions segment SG&A expenses for the three
month ended March 31, 2003 decreased by 6% over the same period last year
primarily due to cost cutting measures implemented in the fourth quarter of last
year. As a result, segment SG&A expenses as a percentage of segment net revenues
decreased to 34% for the 2003 period compared to 36% for the same period last
year.
Corporate SG&A expenses increased 39% for the three months ended 2003
compared to the same period last year primarily due to increased insurance
premiums, professional fees and personnel costs.
DEPRECIATION AND AMORTIZATION. Consolidated depreciation and
amortization increased by $761,000 to $1,330,000 for the three months ended 2003
from $569,000 for the same period last year. This increase was primarily due to
$465,000 for the amortization of intangible assets acquired in the MedUnite
acquisition. Depreciation and amortization classified by our reportable segments
is as follows:
Three Months Ended March 31,
---------------------------
2003 2002
---------- --------
Electronic healthcare transaction processing $1,056,000 $364,000
Laboratory communication solutions 230,000 155,000
Corporate 44,000 50,000
---------- --------
$1,330,000 $569,000
========== ========
15
LOSS ON DISPOSAL OF ASSETS. As a result of the consolidation of the
ProxyMed and MedUnite offices in Atlanta during the quarter ended March 31,
2003, we recorded $125,000 in losses primarily related to the disposition of
certain assets owned and leased that were acquired in our acquisition of MDP
Corporation in 2001. The consolidation of our Atlanta offices is expected to
save us over $300,000 on an annual basis going forward in rents and other
occupancy costs.
OPERATING INCOME (LOSS). As a result of the foregoing, consolidated
operating loss for the three months ended March 31, 2003 was $2,278,000 compared
to operating income of $62,000 for the same period last year. Operating income
(loss) classified by our reportable segments is as follows:
Three Months Ended March 31,
---------------------------
2003 2002
----------- ---------
Electronic healthcare transaction processing $(1,941,000) $ 152,000
Laboratory communication solutions 587,000 593,000
Corporate (924,000) (683,000)
----------- ---------
$(2,278,000) $ 62,000
=========== =========
INTEREST, NET. Consolidated net interest expense for the three months
ended March 31, 2003 was $174,000 compared to $13,000 for the same period last
year. This increase in expense is primarily due to interest related to our
convertible debt issued to the former owners of MedUnite and the financing of
certain liabilities of MedUnite during the 2003 period.
NET INCOME (LOSS). As a result of the foregoing, consolidated net loss
for the three months ended March 31, 2003 was $2,452,000 compared to net income
of $49,000 for the same period last year.
DEEMED DIVIDENDS. We incurred deemed dividends of $612,000 during the
three months ended March 31, 2002 as a result of non-cash accounting charges for
the conversion of 31,650 preferred shares into 242,510 shares of common stock by
our Series C preferred shareholders in 2002 pursuant to our offer to convert
their shares commencing in December 2001.
NET LOSS APPLICABLE TO COMMON SHAREHOLDERS. As a result of the
foregoing, we reported net loss applicable to common shareholders of $2,452,000
for the three months ended March 31, 2003 compared to $563,000 for the for the
three months ended March 31, 2002.
16
LIQUIDITY AND CAPITAL RESOURCES
In the three months ended March 31, 2003, cash used by operating
activities totaled $494,000. During this period, we paid $3,860,000 in
acquisition related costs for MedUnite; paid $1,186,000 for fixed assets and
capitalized software; paid $310,000 against our notes payable and certain long
term debt; and transferred $325,000 as support for a letter of credit used to
collateralize the financing of a certain liability insurance policy. These
activities were principally financed through available cash resources. After
these activities, we had cash and cash equivalents totaling $10,347,000 as of
March 31, 2003. These available funds will be used for operations, strategic
acquisitions, the further development of our products and services, and other
general corporate purposes. We continue to evaluate other acquisition
opportunities and strategic alternatives that may add synergies to our product
offerings and business strategy.
At the current time, we do not have any material commitments for capital
expenditures except for approximately $333,000 that is committed evenly over the
next two years related to the licensing of software for use in our internal
systems. In February 2003, we paid the second $167,000 towards this commitment.
Excluding MedUnite, we expect to incur $600,000 for various development
projects originally scheduled to be undertaken by us in 2003. Additionally, we
expect to incur additional development and related hardware/software costs of up
to approximately $2.0 million in the future related to the completion of
enhancements for the real-time network platform acquired from MedUnite.
During the 2002 year, we consistently improved our operating results as a
result of both internal and external growth, successful cross-selling of our
transaction services, and our ability to monitor expenses. With our additional
equity financing at the end of the first quarter of 2002, we were able to
consummate four acquisitions during the year, culminating with our acquisition
of MedUnite at the end of the year. Unfortunately, MedUnite had incurred
significant losses since its inception and was utilizing cash significantly in
excess of amounts it was generating primarily due to technical and research and
development activities related to their various processing platforms. As a
result, at the time we acquired MedUnite, there were substantial liabilities and
obligations as well as future commitments (both recorded and unrecorded at
December 31, 2002) associated with the business in addition to the transaction
and exit costs associated with the acquisition.
In an effort to immediately curtail and reduce the expenditure levels,
MedUnite's senior management team was terminated along with approximately 20% of
the general workforce in an effort to control these costs as many duplicative
positions were eliminated. While we did not achieve the expected reductions in
MedUnite's costs early in the first quarter, we did exit the quarter on an
expense run rate in line with our expectations. Furthermore, in February 2003,
we moved our prior Atlanta facility into MedUnite's Norcross facility and in
April 2003 terminated our San Diego facility lease effective July 1, 2003 in
return for a $750,000 letter of credit held by the current landlord and
furniture at that facility.
17
Additionally, other contractual obligations have been or are in the
process of being cancelled or renegotiated with the respective vendors. We have
attempted to enter into financing agreements with certain major vendors as a
means to settling liabilities that existed at December 31, 2002, and to date
have financed $3,368,000 of liabilities to one vendor; $1,990,000 in net
liabilities to a former owner of MedUnite; and $382,000 for a required insurance
policy as part of the acquisition. Between these financing agreements, existing
capital leases, and the convertible notes issued in the acquisition, we will
incur significant interest expense charges in 2003. With continued efforts
during second quarter of 2003, we now anticipate that we will be able to drive
positive cash flow in this business before the fourth quarter of 2003.
We believe that we have sufficient cash and cash equivalents on hand to
fund our future operational capital requirements and expenditures, and a
sufficient level of capital in order to fund specific research and development
projects or to pursue smaller additional strategic acquisitions. However, if we
need additional capital funding in the future to further our strategic plans,
there can be no assurance that any additional funding will be available to us,
or if available, that it will be available on acceptable terms. If we are
successful in obtaining additional financing, the terms of the financing may
have the effect of significantly diluting or adversely affecting the holdings or
the rights of the holders of our common stock. We believe that if we are not
successful in obtaining additional financing for further product development or
strategic acquisitions, such inability may adversely impact our ability to
successfully execute our business plan and may put us at a competitive
disadvantage.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Our discussion and analysis of our financial condition and results of
operations are based on our consolidated financial statements, which have been
prepared in accordance with accounting principles generally accepted in the
United States. The preparation of our financial statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses, and related disclosure of contingent assets and
liabilities. We base our estimates on historical experience and on various other
assumptions that are believed to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values
of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates under different assumptions or
conditions but we believe that any variation in results would not have a
material effect on our financial condition. On an ongoing basis, we evaluate our
estimates.
We believe the following critical accounting policies affect our more
significant judgments and estimates used in the preparation of our consolidated
financial statements. For a detailed discussion on the application of these and
other accounting policies, see Note 1 in the Notes to Consolidated Financial
Statements beginning on Page F-7 in our Form 10-K for the year ended December
31, 2002.
18
REVENUE RECOGNITION - Electronic transaction processing fee revenue is
recorded in the period the service is rendered. Certain transaction fee revenue
may be subject to revenue sharing per agreements with resellers, vendors or
gateway partners and are recorded as gross revenues. Revenue from sales of
inventory and manufactured goods is recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the price is fixed or determinable
and collectibility is probable. Revenue from certain up-front fees is amortized
ratably over the expected life of the customer or contract. Revenue from
hardware leases, network access and maintenance fees is recognized ratably over
the applicable period.
GOODWILL - We adopted the provisions of SFAS No. 142, "Goodwill and Other
Intangible Assets" effective January 1, 2002. Under SFAS No. 142, goodwill is
reviewed at least annually for impairment. This adoption resulted in the
reduction of approximately $808,000 of amortization relating to its existing
goodwill each quarter, which would have otherwise been recorded through the
first quarter of 2004. SFAS No. 142 requires that goodwill be tested for
impairment at the reporting unit level at adoption and at least annually
thereafter, utilizing a "fair value" methodology versus an undiscounted cash
flow method required under previous accounting rules. In accordance with its
adoption of FAS No. 142, we completed its initial impairment test of goodwill
during the first quarter of 2002 and our annual test at December 31, 2002
utilizing various valuation techniques including a market value analysis. No
impairment charges were recorded as a result of these tests.
CAPITALIZED SOFTWARE DEVELOPMENT AND RESEARCH AND DEVELOPMENT - Costs
incurred internally and fees paid to outside contractors and consultants during
the application development stage of our internally used software products are
capitalized. Costs of upgrades and major enhancements that result in additional
functionality are also capitalized. Costs incurred for maintenance and minor
upgrades are expensed as incurred. All other costs are expensed as incurred as
research and development expenses (which are included in selling, general and
administrative expenses). Application development stage costs generally include
software configuration, coding, installation to hardware and testing. Once the
project is completed, capitalized costs are amortized over their remaining
estimated economic life. Our judgment is used in determining whether costs meet
the criteria for immediate expense or capitalization. We periodically review
projected cash flows and other criteria in assessing the impairment of any
internal-use capitalized software and take impairment charges as needed.
EQUITY TRANSACTIONS - Over the past two years, we have engaged in various
equity transactions. These transactions were first aimed at providing capital to
continue to operate and grow our business and then became a critical step aimed
at simplifying our capital structure. These transactions are complex and require
the application of various accounting rules and standards that have resulted in
significant cash and non-cash charges reflected primarily as deemed dividend
charges included our net loss applicable to common shareholders.
19
BAD DEBT ESTIMATES - We rely on estimates to determine the bad debt
expense and the adequacy of the reserve for doubtful accounts receivable. These
estimates are based on our historical experience and the industry in which we
operate. If the financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payments, additional
allowances may be required.
NEW ACCOUNTING PRONOUNCEMENTS
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003, except for certain
provision that relate to SFAS No. 133 implementation issues that have been
effective for fiscal quarters that began prior to June 15, 2003 and for hedging
relationships designated after June 30, 2003. Since currently we currently not
have derivative instruments, we do not believe that the implementation SFAS No.
149 will have a material effect our consolidated financial statements and
related disclosures.
CAUTIONARY STATEMENT PURSUANT TO SAFE HARBOR PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995
This document contains forward-looking statements that reflect our current
assumptions and expectations regarding future events. While these statements
reflect our current judgment, they are subject to risks and uncertainties.
Actual results may differ significantly from projected results due to a number
of factors, including, but not limited to, the soundness of our business
strategies relative to the perceived market opportunities; our ability to
identify suitable acquisition candidates; our successful integration of MedUnite
and any other future acquisitions; our ability to successfully develop, market,
sell, cross-sell, install and upgrade our clinical and financial transaction
services and applications to new and current physicians, payers, medical
laboratories and pharmacies; our ability to compete effectively on price and
support services; our assessment of the healthcare industry's need, desire and
ability to become technology efficient; and our ability and that of our business
associates to comply with various government rules regarding healthcare
information and patient privacy. These and other risk factors are more fully
discussed the risk factors starting on page 15 in our Form 10-K for the year
ended December 31, 2002, which we strongly urge you to read. We expressly
disclaim any intent or obligation to update any forward-looking statements. When
used in this document, the words "believes", "estimated", "expects",
"anticipates", "may" and similar expressions are intended to identify
forward-looking statements.
AVAILABLE INFORMATION
Our Internet address is www.proxymed.com. We make available free of
charge on or through our Internet website our annual report on Form 10-K,
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after such material was
electronically filed with, or furnished to, the SEC.
20
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We own no derivative financial instruments or derivative commodity
instruments. We derive no revenues from international operations and do not
believe that we are exposed to material risks related to foreign currency
exchange rates.
ITEM 4. CONTROLS AND PROCEDURES
Within ninety (90) days prior to the filing of this report, the Company
evaluated the effectiveness and operation of the Company's disclosure controls
and procedures (as defined in Exchange act Rule 13a-14(c)), under the
supervision and with the participation of the Company's management, including
the Company's Chief Executive Officer and Chief Financial Officer. Based upon
such evaluation, the Chief Executive Officer and Chief Financial Officer
concluded that there was no reasonably apparent deficiency in the Company's
disclosure controls and procedures such that the controls and procedures should
not be expected to operate effectively. The Company is not aware of any
significant changes in the Company's internal controls or in other factors that
could significantly affect those controls subsequent to the date of the most
recent evaluation of such controls by the Company.
21
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits:
- 99.1 - Certification of Chief Executive Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
- 99.2 - Certification of Chief Financial Officer pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002
(b) Reports on Form 8-K:
- January 9, 2003 - Report on acquisition of all of the capital
stock of MedUnite, Inc. on December 31, 2002.
- February 25, 2003 - Report on fourth quarter and year ended
December 31, 2002 teleconference call held on February 20, 2003,
including transcript thereon and press release dated February 20,
2003, pursuant to Regulation FD.
- March 17, 2003 - Amendment to Report on Form 8-K filed on January
9, 2003 to provide the financial information required in
connection with the acquisition of MedUnite, Inc. on December 31,
2002.
22
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
PROXYMED, INC.
Date: MAY 15, 2003 By: /s/ MICHAEL K. HOOVER
------------ --------------------------------
Michael K. Hoover
Chief Executive Officer
Date: MAY 15, 2003 By: /s/ JUDSON E. SCHMID
------------ --------------------------------
Judson E. Schmid
Chief Financial Officer
23
CERTIFICATIONS
I, Michael K. Hoover, Chief Executive Officer of ProxyMed, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of ProxyMed, Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
a. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant
changes in internal controls or in other factors that could
significantly affect internal controls subsequent to the date of
our most recent evaluation, including any corrective actions with
regard to the significant deficiencies and material weaknesses.
Date: MAY 15, 2003
/s/ MICHAEL K. HOOVER
-----------------------------
Michael K. Hoover
Chief Executive Officer
24
I, Judson E. Schmid, Chief Financial Officer of ProxyMed, Inc., certify that:
1. I have reviewed this quarterly report on Form 10-Q of ProxyMed, Inc;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
we have:
a. designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b. evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing of this quarterly report (the "Evaluation Date");
and
c. presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of the registrant's board of directors (or persons
performing the equivalent function):
d. all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
e. any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent evaluation,
including any corrective actions with regard to the significant
deficiencies and material weaknesses.
Date: MAY 15, 2003
/s/ JUDSON E. SCHMID
---------------------------
Judson E. Schmid
Chief Financial Officer
25