Earnings-Out---Looks Good
May 15, 1998
NETSMART TECHNOLOGIES INC (NTST)
Quarterly Report (SEC form 10-Q)
Management's Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
Three Months Ended March 31, 1998 and 1997
During the quarter ended March 31, 1998, the Company evaluated its smart card business and has
determined that the cash requirements do not justify the continued operations of the development of
such business in the increasingly competitive smart card market. As a result, the Company is
discontinuing its smart card operations and is only marketing smart card products in connection with
its behavioral health information systems ("BHIS") business. The Company anticipates that it will
either sell or terminate its smart card business during the quarter ended June 30, 1998.
The Company's revenue for the three months ended March 31, 1998 (the "March 1998 period")
was $2,541,000, an increase of $969,000, or 62% from the revenue for the three months ended
March 31, 1997 (the "March 1997 period") which was $1,572,000.
Revenue from the Company's BHIS business represented all of its revenue for the March 1998
period. During the March 1997 period, the Company's BHIS business accounted for approximately
$957,000, or 88.0% of revenue, and smart card sales accounted for the remaining $130,000. Sales
of smart card products represented sales to one customer in the March 1997 period. The largest
component of revenue in the March 1998 period was data center (service bureau) revenue which
increased to $679,000 from $485,000 in the March 1997 period, reflecting a 40% increase. This
increase was substantially the result of a special project performed for a client which may not
continue at the existing rate for the balance of the year. The turnkey systems labor revenue
increased to $650,000 in the March 1998 period from $351,000 in the March 1997 period,
reflecting an increase of 85%. This increase is substantially the result of growth in the BHIS backlog
and the ability of the Company to provide the staff necessary to generate additional revenue.
Maintenance revenue decreased to $314,000 in the March 1998 period from $324,000 in the
March 1997 period, reflecting a decrease of 3%. Revenue from third party hardware and software
increased to $308,000 in the March 1998 period from $212,000 in the March 1997 period, an
increase of 45%. Sales of third party hardware and software are made only in connection with the
sales of turnkey systems. License revenue increased to $360,000 in the March 1998 period from
$70,000 in the March 1997 period, an increase of 414%. License revenue is generated as part of a
sale of BHIS pursuant to a contract or purchase order that includes delivery of the system and
maintenance. Revenue from the sales of the Company's methadone division totaled $229,000 in the
March 1998 period. There was no revenue for the methadone division in the March 1997 period.
Revenue from contracts from government agencies represented 31% of revenue for the March
1998 period and 33% of revenue for the March 1997 period.
Gross profit increased to $857,000 in the March 1998 period from $157,000 in the March 1997
period, a 445% increase. Losses associated with the Company's Smart Card business amounted to
$213,000 in the March 1998 period. The increase in the gross profit was substantially the result of
higher gross margin from the increased BHIS revenue, particularly from the license revenue which
provides higher margins.
Selling, general and administrative expenses were $706,000 in the March 1998 period, an increase
of 10% from the $639,000 in the March 1997 period. This increase was the result of an increase in
commissions and advertising and promotion expenses which were partially offset by a decrease in
personnel and salaries in the administrative area.
In the March 1997 period the Company recognized its 50% share of its loss in its joint venture
corporation with respect to the purchase of SATC software. The amount of such loss was $58,000.
The Company discontinued development of this software development in October 1997.
The Company incurred product development expense of $315,000 in the March 1998 period.
These costs were related to the Company's BHIS products. There were no such costs on the
March 1997 period.
Interest expense was $67,000 in the March 1998 period, a decrease of $1,000, or 2% from the
$68,000 in the March 1997 period . The most significant component of the interest expense on an
ongoing basis is the interest payable to the Company's asset-based lender. The Company pays
interest on such loans at a rate equal to prime plus 8 1/2% plus a fee of 5/8% of the face amount of
the invoice.
Related party administrative expense was $45,000 in the March 1998 and March 1997 periods.
These charges are pursuant to an agreement with the Company's principal stockholder to provide
general business, management and financial consulting services for a monthly fee of $15,000.
As a result of the foregoing factors, the Company incurred a net loss of $274,000, or $.03, per
share in the March 1998 period, as compared with a net loss of $653,000 , or $.10, per share in
the March 1997 period.
Liquidity and Capital Resources
The Company had a working capital deficit of $716,000 at March 31, 1998 as compared to a
working capital deficit of $537,000 at December 31, 1997, and the Company's cash position
decreased from $855,000 at December 31, 1997 to $401,000 at March 31, 1998. The decrease
in working capital for the three months ended March 31, 1998 was substantially due to the net loss
incurred for the three months ended March 31, 1998.
The Company's principal source of funds, other than revenue, is an accounts receivable financing
agreement with an asset based lender whereby it may borrow up to 80% of eligible accounts
receivable up to a maximum of $1,250,000. This maximum will increase to $1.5 million effective
August 1, 1998. As of March 31, 1998, the outstanding borrowings under this facility was
$1,210,000. At March 31, 1998, the maximum amount available under this formula was
$1,230,000. During the quarter, with the consent of the asset-based lender, the Company from time
to time exceeded the maximum borrowing level provided in its agreement with the asset-based
lender.
At March 31, 1998, accounts receivable and costs and estimated profits in excess of interim billings
were approximately $3.1 million, representing approximately 111 days of revenue based on
annualizing the revenue for the three months ended March 31, 1998, although no assurance can be
given that revenue will continue at the same level as the three month period. Accounts receivable at
March 31, 1998 increased by $135,000 from $2,182,000 at December 31, 1997 to $2,317,000
at March 31, 1998. A significant portion of the loss for the March 1998 period reflected expenses
relating to its smart card business. Although the Company anticipates that such expenses will
continue at a reduced level during the second quarter of 1998, it does not foresee such expenses
continuing in any significant amount beyond May 31, 1998. The Company believes that, with the
elimination of expenses relating to the smart card business, the Company's cash on hand, together
with revenue from its BHIS business, will be sufficient to enable it to continue to operate at least
through the end of 1998 without additional funding. However, there can be no assurance that the
Company will not require significant additional funding prior to the end of 1998 or that it will be able
to obtain any required funding. |
