UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2004
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number 0-32601
ESSENTIAL GROUP, INC.
(Exact name of registrant as specified in its charter)
| Delaware | 33-0597050 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification Number) |
1325 Tri-State Parkway, Suite 300
Gurnee, Illinois 60031
(Address of principal executive offices, including zip code)
(847) 855-7676
(Registrant’s telephone number, including area code)
N/A
(Former Name, 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. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
At November 1, 2004, there were 3,430,043 shares of Class A common stock outstanding and 685,324 shares of Class B common stock outstanding.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
ESSENTIAL GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited, in thousands, except share data)
| September 30, 2004 |
December 31, 2003 |
|||||||
| ASSETS | ||||||||
| CURRENT ASSETS: |
||||||||
| Cash and cash equivalents |
$ | 100 | $ | 1,984 | ||||
| Accounts receivable, net of allowance for doubtful accounts of $383 and $383 |
8,472 | 12,222 | ||||||
| Prepaid expenses |
2,728 | 2,766 | ||||||
| Total current assets |
11,300 | 16,972 | ||||||
| FIXED ASSETS: |
||||||||
| Cost |
6,757 | 6,770 | ||||||
| Less – Accumulated depreciation and amortization |
(6,292 | ) | (5,996 | ) | ||||
| Total fixed assets, net |
465 | 774 | ||||||
| OTHER ASSETS: |
||||||||
| Other |
24 | 27 | ||||||
| Total other assets |
24 | 27 | ||||||
| $ | 11,789 | $ | 17,773 | |||||
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| CURRENT LIABILITIES: |
||||||||
| Accounts payable |
$ | 1,661 | $ | 2,409 | ||||
| Line of Credit |
410 | |||||||
| Capital leases |
— | 14 | ||||||
| Accrued investigator fees |
6,213 | 9,126 | ||||||
| Accrued wages and other |
2,644 | 2,655 | ||||||
| Deferred revenue |
3,324 | 4,022 | ||||||
| Total current liabilities |
14,252 | 18,226 | ||||||
| CONTINGENCIES AND COMMITMENTS |
||||||||
| REDEEMABLE CONVERTIBLE PREFERRED STOCK: |
||||||||
| Series A redeemable convertible preferred stock, par value $0.001 per share; 9,741,400 shares authorized; 4,992,621 shares issued and outstanding |
85,699 | 80,673 | ||||||
| STOCKHOLDERS’ DEFICIT: |
||||||||
| Class A common stock, par value $0.001 per share; 25,000,000 shares authorized; 3,434,626 shares issued and 3,430,043 shares outstanding |
3 | 3 | ||||||
| Class B convertible common stock, par value $0.001 per share; 685,324 shares authorized, issued and outstanding |
1 | 1 | ||||||
| Series B convertible preferred stock, par value $0.001 per share; 228,436 shares authorized, issued and outstanding |
— | — | ||||||
| Series E convertible preferred stock, par value $0.001 per share; 30,164 shares authorized, issued and outstanding |
— | — | ||||||
| Warrants to purchase common stock |
79 | 79 | ||||||
| Additional paid-in-capital |
33,092 | 33,088 | ||||||
| Accumulated deficit |
(121,291 | ) | (114,251 | ) | ||||
| (88,116 | ) | (81,080 | ) | |||||
| Treasury stock, at cost, 4,583 shares |
(46 | ) | (46 | ) | ||||
| Total stockholders’ deficit |
(88,162 | ) | (81,126 | ) | ||||
| $ | 11,789 | $ | 17,773 | |||||
See accompanying notes to condensed consolidated financial statements.
1
ESSENTIAL GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited, in thousands, except share data)
| Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
| REVENUE |
$ | 8,321 | $ | 10,838 | $ | 29,341 | $ | 34,415 | ||||||||
| EXPENSES: |
||||||||||||||||
| Direct study costs |
5,756 | 7,267 | 20,367 | 22,753 | ||||||||||||
| Selling, general and administrative |
3,193 | 4,242 | 10,627 | 13,405 | ||||||||||||
| Depreciation and amortization |
98 | 128 | 323 | 444 | ||||||||||||
| Total expenses |
9,047 | 11,637 | 31,317 | 36,602 | ||||||||||||
| OPERATING LOSS |
(726 | ) | (799 | ) | (1,976 | ) | (2,187 | ) | ||||||||
| OTHER INCOME, net |
(12 | ) | (4 | ) | (39 | ) | 5 | |||||||||
| Loss before provision for income taxes |
(738 | ) | (803 | ) | (2,015 | ) | (2,182 | ) | ||||||||
| PROVISION FOR INCOME TAXES |
— | — | — | — | ||||||||||||
| NET LOSS |
(738 | ) | (803 | ) | (2,015 | ) | (2,182 | ) | ||||||||
| ACCRETION OF PREFERRED STOCK |
1,709 | 1,577 | 5,026 | 4,622 | ||||||||||||
| Net loss applicable to common stockholders |
$ | (2,447 | ) | $ | (2,380 | ) | $ | (7,041 | ) | $ | (6,804 | ) | ||||
| BASIC AND DILUTED NET LOSS PER COMMON SHARE: |
||||||||||||||||
| Loss per common share- |
||||||||||||||||
| Class A |
$ | (0.59 | ) | $ | (0.58 | ) | $ | (1.71 | ) | $ | (1.65 | ) | ||||
| Class B |
(0.59 | ) | (0.58 | ) | (1.71 | ) | (1.65 | ) | ||||||||
| Weighted average number of common shares outstanding- |
||||||||||||||||
| Class A |
3,430,043 | 3,430,043 | 3,430,043 | 3,430,043 | ||||||||||||
| Class B |
685,324 | 685,324 | 685,324 | 685,324 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
2
ESSENTIAL GROUP, INC. AND SUBSIDIARY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
| Nine Months Ended September 30, |
||||||||
| 2004 |
2003 |
|||||||
| CASH FLOWS FROM OPERATING ACTIVITIES: |
||||||||
| Net loss |
$ | (2,015 | ) | $ | (2,182 | ) | ||
| Adjustments to reconcile net loss to net cash and cash equivalents used in operating activities: |
||||||||
| Depreciation and amortization |
323 | 444 | ||||||
| Compensatory stock options |
5 | 35 | ||||||
| Other |
2 | (14 | ) | |||||
| Changes in assets and liabilities, net |
(578 | ) | 625 | |||||
| Net cash and cash equivalents used in operating activities |
(2,263 | ) | (1,092 | ) | ||||
| CASH FLOWS FROM INVESTING ACTIVITIES: |
||||||||
| Purchases of fixed assets, net |
(17 | ) | (49 | ) | ||||
| Net cash and cash equivalents used in investing activities |
(17 | ) | (49 | ) | ||||
| CASH FLOWS FROM FINANCING ACTIVITIES: |
||||||||
| Proceeds (payments) on Line of Credit, net |
410 | — | ||||||
| Proceeds (payments) on capital leases, net |
(14 | ) | 21 | |||||
| Net cash and cash equivalents used in financing activities |
(396 | ) | 21 | |||||
| Net decrease in cash and cash equivalents |
(1,884 | ) | (1,120 | ) | ||||
| CASH AND CASH EQUIVALENTS, beginning of period |
1,984 | 2,774 | ||||||
| CASH AND CASH EQUIVALENTS, end of period |
$ | 100 | $ | 1,654 | ||||
| SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: |
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| Cash paid for: |
||||||||
| Interest on capital leases |
$ | 39 | $ | 7 | ||||
| Taxes |
3 | 5 | ||||||
See accompanying notes to condensed consolidated financial statements.
3
ESSENTIAL GROUP, INC. AND SUBSIDIARY
UNAUDITED NOTES TO CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
| 1. | Basis of Presentation |
The accompanying unaudited interim condensed consolidated financial statements of Essential Group, Inc. (formerly known as AmericasDoctor, Inc.) (the “Company”) have been prepared pursuant to the rules of the Securities and Exchange Commission for quarterly reports on Form 10-Q and do not include all of the information and note disclosures required by accounting principles generally accepted in the United States of America. The information furnished herein includes all adjustments, consisting of normal recurring adjustments, which are, in the opinion of management, necessary for a fair presentation of results for the interim periods presented. The results of operations for the nine months ended September 30, 2004 are not necessarily indicative of the results to be expected for the year ending December 31, 2004. These financial statements should be read in conjunction with the audited financial statements and notes to the audited financial statements as of and for the year ended December 31, 2003 included in the Company’s Annual Report on Form 10-K (See Note 4).
Certain prior year amounts have been reclassified to conform to the current year presentation.
| 2. | Liquidity and Future Operations |
Net cash used in operating activities was approximately $2.3 million for the nine months ended September 30, 2004. Approximately $1.1 million of cash was used for operating activities during the same period in 2003. Cash used in operating activities increased substantially in the nine months ended September 30, 2004 due to changes in working capital accounts and investment in the expansion of contract research organization (“CRO”) services (See Note 4).
Working capital was approximately $(3.0) million as of September 30, 2004 and $(1.3) million as of December 31, 2003. The decrease from December 31, 2003 to September 30, 2004 was primarily the result of the decrease in cash from funding operations and the expansion of services as a CRO.
The Company has generated negative cash flows since its inception. As a result, it has financed its operations to date through the sale of equity securities. To date, the Company has raised approximately $53.6 million in net proceeds from the sale of common stock, redeemable convertible preferred stock, and preferred stock. Cash and cash equivalents and short-term marketable securities were approximately $0.1 million and $2.0 million as of September 30, 2004 and December 31, 2003, respectively.
On September 27, 2004, the Company and its subsidiary, AmericasDoctor.com Coordinator Services, Inc., entered into a secured revolving credit facility with Silicon Valley Bank (the “Credit Facility”). The Credit Facility permits a maximum borrowing capacity of $6.0 million and has a termination date of September 27, 2006.
Amounts available under the Credit Facility are calculated as a percentage of the Company’s eligible receivables and are capped at $2.5 million through December 31, 2004. As of September 30, 2004, the Company would have had an availability under the Credit Facility of $3.3 million but for the $2.5 million cap. As of September 30, 2004, the Company had $410,139 of borrowings outstanding under the Credit Facility.
4
The Credit Facility requires the Company to pay minimum monthly interest of $3,500, even if no borrowings are outstanding. Borrowings under the Credit Facility are secured by substantially all of the Company’s assets. Among other restrictions, the Credit Facility includes certain restrictive covenants, including covenants related to indebtedness and asset acquisitions and dispositions, and requires the Company to comply with a number of affirmative covenants related to the operation of its business, including financial covenants regarding a minimum ratio of assets to liabilities, a minimum tangible net worth and a requirement that holders of over one-third of its Series A-2 through A-6 preferred stock waive their rights to, or otherwise agree not to, redeem such stock until at least October 27, 2006. Under the Credit Facility, borrowings bear interest at prime plus 1.0%, subject to a minimum interest rate of 5.5% and the previously described minimum monthly interest requirement. As of September 30, 2004, the Company was in compliance with the debt covenants.
On September 27, 2004, in connection with the Company’s entry into the Credit Facility described above, the Company terminated its existing secured revolving credit agreement with CapitalSource Finance LLC (the “CapitalSource Credit Agreement”). The Credit Facility described above provides the Company with an increased borrowing capacity due to a more favorable definition and calculation of eligible receivables, more flexible financial covenants and a lower cost of borrowing.
As a result of the Company’s termination of the CapitalSource Credit Agreement, the Company was required to pay CapitalSource Finance LLC a termination fee of $150,000 plus related interest and other expenses of $18,889. These payments are reflected in the September 30, 2004 financial statements contained herein.
| 3. | Net Losses Per Share |
Basic and diluted net loss per common share is based on the weighted average number of Class A and Class B shares of common stock outstanding. Basic net loss per share is computed by dividing net loss available to Class A and Class B common stockholders for the period by the weighted average number of Class A and Class B common shares outstanding during the period. Diluted net loss per share is computed by dividing net loss available to Class A and Class B common stockholders for the period by the weighted average number of Class A and Class B common and common equivalent shares outstanding during the period. Stock warrants, preferred stock and stock options were not included in the diluted net loss per common share calculation since their impact is anti-dilutive. As of September 30, 2004, 5,251,221 outstanding preferred stock shares, 2,778,467 outstanding stock options and 93,541 outstanding Class A common stock warrants were excluded from the calculation of diluted earnings per share because they were anti-dilutive. However, these options could be dilutive in the future.
5
The following is a reconciliation of the Company’s basic and diluted net loss per share for the quarter and nine months ended September 30, 2004 and 2003 (unaudited, in thousands, except share data):
| Quarter Ended September 30, |
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| 2004 |
2003 |
|||||||||||||||||||
| Net Loss |
Number of Shares |
Per Share Amount |
Net Loss |
Number of Shares |
Per Share Amount |
|||||||||||||||
| Net loss available to: |
||||||||||||||||||||
| Class A shareholders |
$ | (2,039 | ) | 3,430,043 | ||||||||||||||||