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United States
Securities and Exchange Commission
Washington, D.C. 20549
Form 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2003
Commission file number 0-20468
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(Exact name of registrant as specified in its charter)
Delaware 68-0195770
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
629 J Street, Sacramento, CA 95814
(Address of principal executive offices)
(916) 231-0400
(Registrant's telephone number, including area code)
33 Jewell Court, Portsmouth, N.H. 03801
(Former address 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]
------ ------
Number of shares of common stock outstanding as of April 30, 2003, 66,903,043
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Balance Sheets
(Unaudited)
March 31, June 30,
Assets 2003 2002
------ ---------------------- --------------------
Current assets:
Cash and cash equivalents $ 1,173,455 $ 402,291
Trade accounts receivable 16,457 3,602
Prepaid maintenance and service fees 33,213 -
Prepaid expenses and other current assets 136,632 81,223
---------------------- --------------------
Total current assets 1,359,757 487,116
---------------------- --------------------
Property and equipment:
Equipment and software 858,240 788,192
Accumulated depreciation and amortization (489,749) (297,987)
---------------------- --------------------
Property and equipment, net 368,491 490,205
---------------------- --------------------
Prepaid license and service fees 160,841 211,498
Other non-current assets 1,615 14,490
---------------------- --------------------
$ 1,890,704 $ 1,203,309
====================== ====================
Liabilities and Stockholders' Equity (Deficit)
----------------------------------------------
Current liabilities:
Payable to Healthcare Exchange participants $ 663,905 $ 409,738
Trade accounts payable 334,824 438,460
Accrued payroll and related expenses 216,989 274,777
Accrued preferred stock dividends 283,195 283,195
Accounts payable and accrued interest payable to stockholders 983,013 797,232
Notes payable to stockholder 2,873,694 2,212,529
Convertible notes payable to stockholder 2,445,288 2,423,823
Convertible notes payable to third party 587,719 -
Accrued interest payable to third party 54,575 -
Other current liabilities 239,499 254,469
---------------------- --------------------
Total current liabilities 8,682,701 7,094,223
---------------------- --------------------
Commitments and contingencies
Stockholders' equity (deficit):
Convertible preferred stock, $6.00 par value - 1,200,000 shares authorized
none issued and outstanding at March 31, 2003 and June 30, 2002, 204,167
shares designated Series D, none issued and outstanding at
March 31, 2003 and June 30, 2002
Common stock, $0.01 par value - 100,000,000 shares authorized; 66,844,709
issued and outstanding at March 31, 2003
(60,968,213 at June 30, 2002) 668,447 609,682
Additional paid-in capital 58,106,995 52,862,283
Accumulated deficit (65,567,439) (59,362,879)
---------------------- --------------------
Total stockholders' equity (deficit) (6,719,997) (5,890,914)
---------------------- --------------------
$ 1,890,704 $ 1,203,309
====================== ====================
See accompanying notes to condensed financial statements.
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
Healthcare exchange
Revenue $ 829,011 $ 430,308 $ 2,483,565 $ 792,402
Costs (597,562) (401,529) (1,783,652) (976,530)
-------------- ------------- -------------- --------------
Gross profit (loss) 231,449 28,779 699,913 (184,128)
Selling, marketing and product development costs (822,523) (1,852,186) (3,727,803) (4,903,843)
General and administrative expenses (546,603) (673,076) (2,001,035) (1,778,955)
-------------- ------------- -------------- --------------
Loss from operations (1,137,677) (2,496,483) (5,028,925) (6,866,926)
Other income (expense)
Interest income 2,640 744 10,902 41,523
Interest expense to third party (319,604) - (698,294) -
Interest expense to stockholders and directors (149,233) (111,673) (488,243) (364,200)
-------------- ------------- -------------- --------------
Total other income (expense) (466,197) (110,929) (1,175,635) (322,677)
-------------- ------------- -------------- --------------
Net loss $ (1,603,874) $(2,607,412) $ (6,204,560) $ (7,189,603)
============== ============= ============== ==============
Basic and diluted net loss per share $ (0.02) $ (0.04) $ (0.10) $ (0.12)
============== ============= ============== ==============
Shares used in per share calculations 66,789,339 61,261,644 64,603,997 60,019,455
============== ============= ============== ==============
See accompanying notes to condensed financial statements.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Statements of Cash Flows
(Unaudited)
Nine Months Ended
March 31,
2003 2002
------------------------ ----------------------
Net cash used in operating activities $ (4,483,193) $ (6,138,409)
------------------------ ----------------------
Cash flows used in investing activities:
Purchases of property and equipment (70,048) (244,589)
Maturities of short-term investments - 1,354,159
------------------------ ----------------------
Net cash provided (used) by investing activities (70,048) 1,109,570
------------------------ ----------------------
Cash flows from financing activities:
Proceeds from sale of common stock 3,872,056 2,743,787
Proceeds from exercise of options and warrants 26,349 238,277
Proceeds from notes payable to stockholders 619,000 428,902
Proceeds from convertible notes payable to third party
and warrants 1,000,000 -
Payments on notes payable to stockholders (193,000) -
------------------------ ----------------------
Net cash provided by financing activities 5,324,405 3,410,966
------------------------ ----------------------
Net increase (decrease) in cash and cash equivalents 771,164 (1,617,873)
Cash and cash equivalents at beginning of period 402,291 3,159,017
------------------------ ----------------------
Cash and cash equivalents at end of period $ 1,173,455 $ 1,541,144
======================== ======================
See accompanying notes to condensed financial statements.
4
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Notes to Condensed Financial Statements
March 31, 2003
(Unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States
for interim financial information and pursuant to the rules and regulations of
the Securities and Exchange Commission. Accordingly, they do not include all of
the information and footnotes required by accounting principles generally
accepted in the United States for complete financial statements. For further
information, refer to the financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the fiscal year ended June 30,
2002.
In the opinion of management, the unaudited condensed financial statements
contain all adjustments, consisting of normal recurring adjustments, considered
necessary to present fairly the Company's financial position at March 31, 2003
and June 30, 2002, results of operations for the three and nine months ended
March 31, 2003 and 2002, and cash flows for the three and nine months ended
March 31, 2003 and 2002. The results for the period ended March 31, 2003 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending June 30, 2003.
The Company has incurred operating losses since inception, which have resulted
in an accumulated deficit of $65,567,439 at March 31, 2003. Based on the steps
the Company has taken to refocus its operations and obtain additional financing,
the Company believes that it has developed a viable plan to address the
Company's ability to continue as a going concern, and that this plan will enable
the Company to continue as a going concern, at least through the end of fiscal
year 2003. The Company engaged a placement agent to assist in the sale of shares
of the Company's common stock in a private placement. During October 2002, the
Company received gross proceeds of $4,125,000 through the sale of 4,125,000
shares pursuant to this offering. Cash proceeds net of offering costs were
$3,872,056. In addition, the due dates of Notes Payable to Stockholder and
Convertible Notes Payable to Stockholder were extended from December 31, 2002 to
December 31, 2003. [See Part I Item 2 "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and Capital
Resources"]
There can be no assurance that this plan will be successfully implemented, and
if not successfully implemented the Company may be required to reduce the
development efforts of its Healthcare Exchange or be forced into seeking
protection under federal bankruptcy laws. As a result, the report of independent
auditors on the Company's June 30, 2002 financial statements includes an
explanatory paragraph indicating there is substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
5
Note 2 - Financing Arrangements
On July 26, 2002, the Company received cash of $1,000,000 in exchange for
issuance of a convertible note (the "Note"). The Note bears interest at 8% and
is payable at the earliest of July 25, 2003 or when the Company raises an
additional $8,000,000 through debt or equity financing. Pursuant to the original
terms of the Note, all or a portion of the Note may be converted into shares of
common stock at the lower of $2.25 per share (the initial subscription per share
price of the Private Placement completed in March 2002) or $1.00 per share (the
subscription price of the stock sold in the Private Placement during October
2002); or if the Company sells shares of its common stock, or issues options,
warrants or other securities convertible into shares of its common stock before
March 29, 2003 at a price less than the conversion price of $1.00, then the
conversion price will be equal to the per share price of Common Stock
subsequently sold by the Company, (excluding common stock that may be (i) issued
in connection with a merger, (ii) issued as a dividend, (iii) issued upon the
exercise of options subsequently issued after the closing to employees of or
consultants to the Company, or (iv) issued upon the exercise of existing
options, warrants or other convertible securities).
In consideration for the loan the Company issued three warrants on July 26,
2002. Each warrant provides for the purchase of 100,000 shares of the Company's
common stock at an exercise price equal to the $1.00 subscription per share
price of the October 2002 Private Placement, or if further shares are offered at
a lower price per share, then at that price. The First and Second Warrants
became exercisable on July 26, 2002 and January 26, 2003, respectively, and are
exercisable before the expiration date. The Third Warrant issued may only be
exercisable if the Company does not repay the Note within one year from the
issuance of the Note. When, and if, exercisable the lender may exercise these
warrants through July 26, 2009.
In connection with the issuance of the Note and the First and Second Warrants,
the Company estimated the aggregate fair value of the First and Second Warrants
to be $254,000 using the Black-Scholes model. In accordance with EITF 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios," and EITF 00-27, "Application of
Issue No. 98-5 to Certain Convertible Instruments," the Company has recognized
$299,878 and $643,719 through interest expense for the three and nine month
periods respectively, ending March 31, 2003 for a portion of the fair value of
the First and Second Warrants and a portion of the beneficial conversion feature
of the Note, which was estimated to be in total $802,000. The Company will
record additional amounts totaling $412,281 through interest expense until July
26, 2003 for the remaining fair value of the First and Second Warrants and the
beneficial conversion feature of the Note recorded at the initial transaction
date, and in accordance with EITF 00-27, the additional beneficial conversion
feature recorded in the quarter ending December 31, 2002 of $624,222 relating to
the reset of the conversion price of the Note from $2.25 to $1.00 per share.
6
The Company engaged a placement agent to assist in the sale of shares of the
Company's common stock in a private placement. During October 2002, the Company
received gross proceeds of $4,125,000 through the sale of 4,125,000 shares
pursuant to this offering. Cash proceeds net of offering costs were $3,872,056.
In connection with the October Private Placement, the Company paid the placement
agent a placement fee of 6% of the gross proceeds raised by them and a five year
warrant to purchase 10% of the Common Stock placed by them at an exercise price
of $1.00 per share. In addition, the Company paid a finder's fee to one
individual of $12,500 and issued a warrant to purchase 30,000 shares of common
stock at $1.00 per share.
Resulting from the closing of the October 2002 Private Placement of Common
Stock, 1,540,729 additional shares were issued to investors who purchased shares
of common stock in the January 2002 private placement based on the October 2002
Private Placement price of $1.00 per share. A compensation expense of $347,222
was recorded for the additional shares issued to the Company's Chairman and
Chief Financial Officer.
On November 1, 2002, the Company agreed with Company's Chairman and Chief
Financial Officer to extend the due date on notes payable to him until December
31, 2003 in exchange for an extension fee of 2%. These extended notes total
$2,873,694, including accrued interest and extension fees, and bear interest at
10.25% per annum. Also on November 1, 2002, the Company agreed with the other
note holder to extend the due date of his convertible promissory notes until
December 31, 2003. These convertible promissory notes total $2,445,288,
including accrued interest, bear interest at 10.25% per annum and are
convertible into common stock at $3.00 per share at the note holder's option.
As a result of the Company's July 2002 bridge financing in which the Company
granted warrants equal to 30% of the loan at an exercise price of $1.00 per
share, the Company granted to the investors of the January 2002 and October 2002
Private Placements warrants to purchase 30% of their respective investment at an
exercise price of $1.00 per share. Mr. Cameron, as a participant in the private
placement, received a warrant to purchase 150,000 shares of common stock at an
exercise price of $1.00 per share, which was greater than the fair value of the
common stock at the warrant issuance date.
During the quarter ended December 31, 2002, the facilities lease agreement
between the Company and the Company's Chairman and Chief Financial Officer was
modified to reflect an annual base rent of $120 until further notice from
lessor, in his sole and absolute discretion, to return the rent to its previous
level. To recognize the estimated market rate of this transaction, a monthly
expense of $11,424 is recognized through rent expense and other capital
contributions.
Note 3 - Comprehensive Loss
Total comprehensive loss for the three months ended March 31, 2003 and 2002 was
$1,603,874, and $2,607,412, and $6,204,560 and $7,189,581 for the nine months
ended March 31, 2003 and 2002 respectively. Other comprehensive income (loss)
represents the net change in unrealized gains (losses) on available-for-sale
securities.
7
Note 4 - Net Loss Per Share
As the Company has reported net losses in all periods presented, basic and
diluted loss per share have been calculated on the basis of net loss applicable
to common stockholders divided by the weighted average number of common stock
shares outstanding without giving effect to outstanding options, warrants, and
convertible securities whose effects are anti-dilutive. For the three and nine
months ended March 31, 2003 and 2002 there were stock options, stock warrants,
and convertible notes payable outstanding, which could potentially dilute
earnings per share in the future but were not included in the computation of
diluted loss per share as their effect was anti-dilutive in the periods
presented.
The Company accounts for its stock-based compensation plans under the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" and related interpretations.
Under the intrinsic value method, compensation cost is the excess, if any, of
the quoted market price or fair value of the stock at the grant date or other
measurement date over the amount an employee must pay to acquire the stock.
The following table illustrates the effect on net loss and net loss per share if
the Company had applied the fair value recognition provision of Statement of
Financial Accounting Standards Board Statement No. 123, "Accounting for
Stock-Based-Compensation" to stock-based compensation.
Three Months Ended Nine Months Ended
March 31, March 31,
2003 2002 2003 2002
Net loss, as reported $ (1,603,874) $(2,607,412) $ (6,204,560) $ (7,189,603)
Add: Stock-based employee compensation expense included
in reported net loss - 135,583 347,222 135,583
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
(1,439,418) (1,300,520) (4,356,226) (3,581,681)
-------------- ------------- -------------- --------------
Pro forma net loss $ (3,043,292) $(3,772,349) $ 10,213,564) $ 10,635,701)
============== ============= ============== ==============
Loss per share:
Basic and diluted - as reported $ (0.02) $ (0.04) $ (0.10) $ (0.12)
============== ============= ============== ==============
Basic and diluted - pro forma $ (0.05) $ (0.06) $ (0.16) $ (0.18)
============== ============= ============== ==============
Option valuation models were developed for use in estimating the fair value of
traded options that have no vesting restrictions and are fully transferable. In
addition, option valuation models require the input of highly subjective
assumptions, including the expected life of the option. Because the Company's
employee stock options have characteristics significantly different from those
of traded options and because changes in the subjective input assumptions can
materially affect the fair value estimates, in management's opinion, the
8
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
Note 5 - Stock Option Grant
On January 25, 2003, the Board of Directors approved the issuance of a
non-qualified option grant to Mr. Jeffrey S. McCormick, Chief Executive Officer,
to purchase up to 4,000,000 shares of common stock at the exercise price of
$1.25 per share. The effective date of the option grant is November 7, 2002. The
option grant is to vest over a four year period, commencing with the vesting of
the first 1,000,000 shares of common stock on January 31, 2003. Thereafter, the
option to purchase additional 1,000,000 shares of common stock shall vest on
January 31 of each year through 2006. No compensation expense was recorded in
connection with this option grant as the exercise price was greater than the
fair value of the common stock at the option grant date.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Management's Discussion and Analysis
The following discussion provides information to facilitate the understanding
and assessment of significant changes in trends related to the financial
condition of the Company and its results of operations. It should be read in
conjunction with the Company's financial statements and the notes thereto and
other financial information included elsewhere in the Form 10-K for the fiscal
year ended June 30, 2002.
Overview
General
Alternative Technology Resources, Inc. (hereinafter referred to as "ATR," the
"Company," "we" or "us") has developed and is operating an Exchange for
healthcare services ("Healthcare Exchange"). The purpose of the Healthcare
Exchange is to utilize the Internet and other technologies to facilitate
Provider (defined below) initiated discounts and administrative, billing and
remittance services for all commercial lines of business in the healthcare
industry. The Healthcare Exchange offers a direct and efficient conduit between
Providers and Purchasers (defined below) of healthcare services and/or their
agents, such as Preferred Provider Organizations.
ATR does not provide healthcare services, but rather expects to act as a neutral
conduit for efficiency between Providers, Purchasers and their intermediaries
including preferred provider organizations, that should benefit all. ATR
believes that reducing the costs associated with traditional "bricks and mortar"
operations, creating economies of scale, facilitating access to Providers and
Purchasers, streamlining overhead costs, exploiting possibilities for functional
integration, reducing errors and speeding the payment of claims should allow
Purchasers to pay less and Providers to recover more of what they bill.
9
Providers submit bills to the Company, who reprices the bills to the rate set by
the Providers, including adding a transaction-processing fee, and then routes
them to Purchasers or their intermediaries. The Company receives payments from
Purchasers on behalf of the Providers, and then remits payments to the
Providers.
ATR's Healthcare Exchange began operations with a limited number of Providers
and Purchasers in the quarter ending June 30, 2001. The Company continues to
receive, process and analyze operating data, and the results of the Company's
analysis will determine the amount and timing of remaining development related
efforts.
The Company is currently recruiting medical doctors, medical groups, hospitals
and other health care practitioners (collectively, "Providers") in twenty-three
markets in sixteen states to offer their services through the Healthcare
Exchange to those who purchase or facilitate the purchase of healthcare services
("Purchasers").
The Company has outsourced to multiple vendors portions of the development and
operations of the information systems for its Healthcare Exchange. The Company
contracts with an application services provider to license, support and run
software to process medical bills submitted to the Company's Healthcare
Exchange. ATR also works with vendors to receive claims from Providers through
electronic clearinghouses and to convert paper claims into electronic formats.
ATR is evaluating other potential technology vendors as well.
History
Alternative Technology Resources, Inc. was founded as 3Net Systems, Inc. in
1989. In August 1999, James W. Cameron, Jr., the Company's largest stockholder,
was named Chairman and Chief Executive Officer. Under his direction the Company
identified what it believes to be a significant business opportunity and began
developing a business model involving the establishment of a Healthcare Exchange
under the name "DoctorandPatient."
In February 2000, Jeffrey S. McCormick assumed the position of the Company's
Chief Executive Officer. Mr. McCormick has significant experience in financing,
managing and growing early stage development companies as a managing director of
Boston-based Saturn Asset Management, Inc. Mr. McCormick has served as an
advisor or director of several Internet and electronic commerce companies over
the last six years. As the Company's CEO, Mr. McCormick is responsible for all
phases of development, implementation and operation of the Company's Healthcare
Exchange. Mr. Cameron still acts as Chairman and Chief Financial Officer and
continues to play an active and substantial role in formulating the Company's
business strategy and policy.
The Company is using its management's experience in health care and information
technology to establish the Healthcare Exchange, which has become the Company's
sole focus. ATR's Healthcare Exchange began operations with a limited number of
Providers and Purchasers in the quarter ending June 30, 2001. The Company
continues to receive, process and analyze operating data, and the results of the
10
Company's analysis will determine the amount and timing of remaining development
related efforts. ATR's previous business was recruiting, hiring, and training
foreign computer programmers and placing them with U.S. companies. In line with
the Company's strategy to focus on the establishment of the Healthcare Exchange,
ATR suspended recruitment of foreign computer programmers in December 1999 and
began pursuing the conversion of foreign computer programmers to become
employees of ATR's customers. This conversion process was complete as of June
30, 2001, and the Company is no longer in that business.
Critical Accounting Policies
Revenue Recognition. The Company recognizes revenue for the
transaction-processing fee when earned and the Company has substantially
completed all of its obligations under the contract.
Product Development Costs. In October 1999, the Company began incurring costs to
develop its Healthcare Exchange. In accordance with SOP 98-5, "Reporting Costs
on Start-Up Activities," start-up costs associated with the Healthcare Exchange
have been expensed as incurred.
Prepaid License and Service Fees. Prepaid license and services fees are recorded
at cost and amortized on a straight-line basis over the service period.
Management considers whether indicators of impairment of these assets are
present at each balance sheet date and an impairment loss is recorded, if
necessary. In assessing the recoverability of the Company's prepaid license and
service fees, the Company must make assumptions regarding estimated future cash
flows and other factors to determine the fair value of the respective assets. If
these estimates or their related assumptions change in the future, the Company
may be required to record impairment charges for these assets not previously
recorded.
Financial Condition
Cash and cash equivalents increased $771,164 since June 30, 2002 attributable to
cash proceeds from financing activities of $5,324,405 received in October 2002
Private Placement and proceeds from notes payable, partially offset by cash used
in operations of $4,483,193 during the nine months ended March 31, 2003. At
March 31, 2003, substantially all of ATR's cash was invested in money market
accounts.
Because the Company is emphasizing the development of the Healthcare Exchange,
the results of operation for the nine months ended March 31, 2003 may not be
indicative of results of operations for the year ended June 30, 2003.
Results of Operation
Healthcare Exchange
Healthcare Exchange Revenue. The Company began operations with a limited number
of Providers in the quarter ending June 30, 2001. Providers submit bills to ATR,
who reprices the bills to the rate set by the Providers, including adding a
transaction-processing fee, and then routes them to Purchasers or their
intermediaries. ATR receives payments from Purchasers on behalf of Providers,
11
and then remits payments to Providers. The Company recognizes revenue for the
transaction-processing fee when earned and the Company has substantially
completed all of its obligations under the contract. During the three and nine
month periods ending March 31, 2003, $829,011 and $2,483,565 of revenue was
recognized, respectively, as compared to $430,308 and $792,402 for the three and
nine month periods ending March 31, 2002. The increase is primarily the result
of an increase in the number of healthcare providers contracted with the
Healthcare Exchange.
Healthcare Exchange Costs. Healthcare Exchange costs are the direct costs
related to the processing of the bills submitted by Providers and payments
received from Purchasers. These costs include the salary and other wage and
benefit costs of the Healthcare Exchange operations staff and the operating cost
of the application services provider and other technology providers. The costs
for the three and nine month periods ending March 31, 2003 were $597,562 and
$1,783,652, respectively, in comparison to $401,529 and $976,530 for the three
and nine month periods ending March 31, 2002. As of March 31, 2003, there were
32 operations staff members responsible for the processing of bills submitted by
Providers and payments received from Purchasers, compared to 18 operations staff
members as of March 31, 2002.
Selling, Marketing and Product Development Costs
In October 1999, the Company began incurring costs to develop its Healthcare
Exchange. Costs incurred are primarily the salary, other wage and benefit costs
of ATR's employees and other operational costs associated with recruiting the
network of healthcare providers. The costs for the three and nine month periods
ending March 31, 2003 were $822,523 and $3,727,803, respectively, in comparison
to $1,852,186 and $4,903,843 for the three and nine month periods ending March
31, 2002. The decrease is the result of reduction of sales staff to 19 at March
31, 2003 from 48 at March 31, 2002.
General and Administrative Expenses
General and administrative expenses were $546,603 and $2,001,035 for the three
and nine month periods ended March 31, 2003, in comparison to $673,076 and
$1,778,955 for the three and nine month periods ending March 31, 2002. The
decrease for the three month period ended March 31, 2003 in comparison to the
same period ended March 31, 2002 was the result of the compensation expense of
approximately $135,600 recorded during the three month period ended March 31,
2002 for the Company's Chairman and Chief Financial Officer's participation in
the January 2002 Private Placement of Common Stock. No such expense was recorded
for the three month period ended March 31, 2003. The increase for nine month
period ended March 31, 2003 in comparison to the same period ended March 31
,2002 was primarily the result of compensation expense of $347,222 recorded
during the quarter ended December 31, 2002 for additional shares issued to the
Company's Chairman and Chief Financial Officer resulting from the price
adjustment to the January 2002 Private Placement of Common Stock, in which Mr.
Cameron was an investor. The adjustment was based on the closing price of the
October 2002 Private Placement of Common Stock of $1.00 per share.
12
Other Income (Expense)
Interest Income. Interest income is related to the short-term investment of cash
balances, primarily in money market accounts. The change in the three month
period is not significant, and the decrease for the nine month period is the
result of reduced cash balances at March 31, 2003 as compared to the same period
in fiscal 2002.
Interest Expense to Third Party. Interest expense to third party of $319,604 and
$698,294, for the three and nine month periods ending March 31, 2003, resulted
primarily from the fair value of warrants issued in connection with a
convertible note and the beneficial conversion feature of the convertible note
to third party, which were recognized through interest expense. No interest
expense to third party was recognized during the same period in the prior fiscal
year.
Interest Expense to Stockholders and Directors. Interest expense to stockholders
and directors of $149,233 and $488,243 was recognized for the three and nine
month periods ending March 31, 2003 in comparison to $111,673 and $364,200 for
the three and nine month periods ending March 31, 2003. This increase resulted
primarily from the extension of stockholder notes as of November 1, 2002, which
included a 2% fee.
Income Taxes
As of June 30, 2002 the Company had net operating loss carryforwards for federal
and state income tax purposes of approximately $46,119,000 and $26,245,000,
respectively. The federal net operating loss carryforwards expire in 2004
through 2022 and the state net operating loss carryforwards expire in 2002
through 2022. The Company also has approximately $98,000 and $25,000 of research
and development tax credit carryforwards for federal and state income tax
purposes, respectively. The federal research and development tax credit
carryforwards expire in 2005.
In connection with the Company's initial public offering in August 1992, a
change of ownership (as defined in Section 382 of the Internal Revenue Code of
1986, as amended) occurred. As a result, the Company's net operating loss
carryforwards generated through August 20, 1992 (approximately $1,900,000) are
subject to an annual limitation in the amount of approximately $300,000.
In 1993, a controlling interest of the Company's stock was purchased, resulting
in a second annual limitation in the amount of approximately $398,000 on the
Company's ability to utilize net operating loss carryforwards generated between
August 11, 1992 and September 13, 1993 (approximately $7,700,000).
In accordance with provisions of the Internal Revenue Code Section 382,
additional portions of the net operating loss carryforwards may be disallowed as
a result of additional changes in ownership of the Company.
The Company expects the aforementioned annual limitations will result in net
operating loss carryovers, which will not be utilized prior to the expiration of
the carryover period.
13
Liquidity and Capital Resources
For the nine month period ending March 31, 2003, the Company earned revenues of
$2,483,565 but incurred a net loss of $6,204,560. Until the Company can generate
sufficient revenue to finance its operations, the Company will have to seek
other financing. Traditionally, the Company has used a combination of equity and
debt financing and revenue generated to fund operations but has incurred
operating losses since its inception, which has resulted in an accumulated
deficit of $65,567,439 at March 31, 2003. The Company had cash and cash
equivalents of $1,173,455 and negative working capital of 7,322,944 at March 31,
2003. Such negative working capital includes a $1,000,000 convertible promissory
note due July 25, 2003.
During October 2002 the Company sold 4,125,000 shares of its common stock at a
purchase price of $1.00 per share. The shares of common stock issued in the
private placement are restricted securities. Net proceeds from the offering were
$3,872,056. In connection with the private placement, the Company engaged
Stonegate Securities, Inc. as placement agent who received a placement fee of 6%
on the gross proceeds received from the sale of common stock placed by them and
a five year warrant to purchase 10% of the common stock placed by them at $1.00
per share. The placement of the common stock was exempt from registration
pursuant to Regulation D.
On July 26, 2002 Company received short-term unsecured financing in the form of
a convertible note of $1,000,000 from a lender. This note bears interest at 8%
and is payable at the earliest of July 25, 2003 or when the Company, raises
$8,000,000 through debt or equity financing. All or a portion of the convertible
note may be converted into shares of common stock at the lower of $1.00 per
share, the subscription per share price of the October 2002 Private Placement of
Common Stock, or if further shares are offered at a price less than the per
share price of $1.00, then the conversion price will be equal to the per share
price subsequently offered by the Company. In consideration for the loan the
Company issued three warrants. The Company issued to the lender one warrant to
purchase 100,000 shares of common stock. The lender received a second warrant to
purchase 100,000 shares of common stock that became exercisable as the Company
did not repay the convertible note within 180 days of the agreement. The lender
received a third warrant to purchase 100,000 shares of common stock that may be
exercisable if the Company does not repay the convertible note within one year
of the agreement. Each of the warrants has an exercise price of $1.00, the
subscription per share price of the October 2002 Private Placement of Common
Stock, or if further shares are offered at a lower price per share at that
price. When, and if, exercisable the lender may exercise these warrants through
July 26, 2009.
In connection with the issuance of the Note and the First and Second Warrants,
the Company estimated the aggregate fair value of the First and Second Warrants
to be $254,000 using the Black-Scholes model. In accordance with EITF 98-5,
"Accounting for Convertible Securities with Beneficial Conversion Features or
Contingently Adjustable Conversion Ratios," and EITF 00-27, "Application of
Issue No. 98-5 to Certain Convertible Instruments," the Company has recognized
$299,878 and $643,719 through interest expense for the three and nine month
periods respectively, ending March 31, 2003 for a portion of the fair value of
the First and Second Warrants and a portion of the beneficial conversion feature
of the Note, which was estimated to be in total $802,000. The Company will
14
record additional amounts totaling $412,281 through interest expense until July
26, 2003 for the remaining fair value of the First and Second Warrants and the
beneficial conversion feature of the Note recorded at the initial transaction
date, and in accordance with EITF 00-27, the additional beneficial conversion
feature recorded in the quarter ending December 31, 2002 of $624,222 relating to
the reset of the conversion price of the Note from $2.25 to $1.00 per share.
During the period between January 9, 2002 and March 28, 2002, the Company sold
1,232,585 shares of its common stock at a purchase price of $2.25 per share. The
shares of common stock issued in the private placement are restricted
securities. Further pursuant to the private placement, it was agreed that in the
event that within one year from the final closing the Company sells shares of
common stock, or securities exercisable or convertible into common stock, at a
price less than $2.25 per share, the Company would issue additional shares to
these investors in an amount such that the overall purchase price will be equal
to the lower, subsequent sales price. The forgoing shall exclude common stock
that may be issued in connection with a merger, as a dividend, pursuant to the
exercise of outstanding options, warrants and other convertible securities and
pursuant to options subsequently issued to employees. Net proceeds from the
offering were $2,742,519. The proceeds from the private placement were used to
fund operations and repay debt. The Company's Chairman and Chief Financial
Officer purchased 222,222 shares of the Company's common stock in the private
placement. Because the purchase price of such stock was less than the public
trading price on the date of purchase, the Company recorded compensation expense
of $138,583 during fiscal year 2002. Resulting from the closing of the October
2002 Private Placement of Common Stock, 1,540,729 additional shares were issued
to these investors based on the October 2002 Private Placement price of $1.00
per share. Compensation expense recorded during the quarter ended December 31,
2002, for the additional shares issued to the Company's Chairman and Chief
Financial Officer was $347,222.
As of June 30, 2002, the Company had received short-term, unsecured financing to
fund its operations in the form of notes payable of $4,636,352, from Mr. Cameron
and another stockholder. These notes bear interest at 10.25%. During the three
month period ending September 30, 2002, Mr. Cameron loaned the Company an
additional $619,000 bearing interest at 10.25% payable on December 31, 2002. On
November 1, 2002, the Company agreed with Mr. Cameron to extend the due date on
notes payable to him until December 31, 2003 in exchange for an extension fee of
2%. These extended notes total $2,873,694, including accrued interest and
extension fees, and bear interest at 10.25% per annum. Also on November 1, 2002,
the Company agreed with the other note holder to extend the due date of his
convertible promissory notes until December 31, 2003. These convertible
promissory notes total $2,445,288, including accrued interest, bear interest at
10.25% per annum and are convertible into common stock at $3.00 per share at the
note holder's option.
The Company signed agreements effective in January 2001 with an application
services provider to license, support and run software to process medical bills
submitted to the Company's Healthcare Exchange. The agreements are for 66
months. The application service provider required payment of an initial base
license fee of $250,000, which is being amortized over 66 months, and start-up
costs, including data center set up, training and implementation fees of
approximately $145,000, which were expensed. The agreements require monthly
minimum payments, currently of approximately $35,000, and additional fees, that
15
are transaction based, if volumes exceed levels included in the monthly
minimums.
The Company's Healthcare Exchange development efforts will require substantial
funds prior to generating sufficient revenues to fund operations and repay debt.
Based on the steps the Company has taken to refocus its operations and obtain
additional financing, the Company believes that it has developed a viable plan
to address the Company's ability to continue as a going concern, and that this
plan will enable the Company to continue as a going concern through at least the
end of fiscal 2003. Although during the nine months ended March 31, 2003, the
Company earned gross profit, it continues to recognize net loss, (and expects to
recognize net loss in the near future until the Company's business plan is
successfully implemented.) No assurance can be given that the Company's business
plan will be successfully implemented. Further, if the Company continues to
recognize losses, it will be required to raise additional capital for its
operations. If the Company is unsuccessful in implementing its business plan or,
if required, raising additional capital, the Company may be required to reduce
the development efforts of its Healthcare Exchange or be forced into seeking
protection under federal bankruptcy laws. As a result, the report of independent
auditors on the Company's June 30, 2002 financial statements includes an
explanatory paragraph indicating there is substantial doubt about the Company's
ability to continue as a going concern. The financial statements do not include
any adjustments to reflect the possible future effects on the recoverability and
classification of assets or the amounts and classification of liabilities that
may result from the outcome of this uncertainty.
The following table represents the debt requirements pertaining to contractual
obligations of the Company over the next five years:
- --------------------------------------------- ------------------------------------------------------------------------------
Contractual Obligations Payments Due by Period
- --------------------------------------------- ------------------------------------------------------------------------------
Total Less than 1 1-3 years 4-5 years After 5
year years
- --------------------------------------------- ------------------ --------------- --------------- -------------- ------------
Notes payable to stockholder $ 2,873,694 $ 2,873,694 $ - $ - $ -
Convertible notes payable to stockholder 2,445,288 2,445,288 - - -
Convertible note payable to third party 1,000,000 1,000,000 - - -
Operating leases - facilities - payable to
stockholder 360 120 240 - -
Operating leases - equipment 130,279 49,178 73,103 7,998 -
Application services provider 1,989,141 619,992 1,369,149 - -
- --------------------------------------------- ------------------ --------------- --------------- -------------- ------------
Total contractual cash obligations $ 8,438,762 $ 6,988,272 $ 1,442,492 $ 7,998 $ -
- --------------------------------------------- ------------------ --------------- --------------- -------------- ------------
During the quarter ending December 31, 2002, the facilities lease agreement
between the Company and the Company's Chairman and Chief Financial Officer was
modified to reflect an annual base rent of $120 until further notice from
lessor, in his sole and absolute discretion, to return the rent to its previous
level. To recognize the estimated market rate for this transaction a monthly
expense of $11,424 is recognized through rent expense and other capital
contributions.
16
PART I FINANCIAL INFORMATION
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has notes payable in the aggregate amount of $6,318,982 as of March
31, 2003 payable to two stockholders of the Company and another lender. The
notes bear interest at 8% to 10.25% per annum and are due from July 25, 2003 to
December 31, 2003, or earlier if other funding is obtained. The Company does not
believe that any change in interest rates will have a material impact on the
Company during fiscal 2003. Further, the Company has no foreign operations and
therefore is not subject to foreign currency fluctuations.
Item 4. Controls and Procedures
Within the 90 days prior to the date of this Form 10-Q, the Company carried out
an evaluation, under the supervision and with the participation of the Company's
management, including the Company's President and Chief Executive Officer along
with the Company's Chief Financial Officer, of the effectiveness of the design
and operation of the Company's disclosure controls and procedures pursuant to
Exchange Act Rule 13a-14. Based upon that evaluation, the Company's President
and Chief Executive Officer along with the Company's Chief Financial Officer
concluded that the Company's disclosure controls and procedures are effective in
timely alerting them to material information relating to the Company required to
be included in this Form 10-Q.
There have been no significant changes in the Company's internal controls or in
other factors, which could significantly affect internal controls subsequent to
the date the Company carried out its evaluation.
17
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities and Use of Proceeds
On January 25, 2003, in consideration of the contributions to the Company the
Board of Directors in a Unanimous Written Consent approved the issuance of a
non-qualified option grant to Mr. Jeffrey S. McCormick, Chief Executive Officer,
to purchase up to 4,000,000 shares of common stock at the exercise price of
$1.25 per share. The effective date of the Option Grant is November 7, 2002. The
option grant is to vest over a four year period, commencing with the vesting of
the first 1,000,000 shares of the common stock on January 31, 2003. Thereafter,
the option to purchase additional 1,000,000 shares of the option stock shall
vest on January 31 of each year through 2006.
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
None
Item 5 Other Information
Pre-approval of Non-audit Services. In accordance with Section 10A(i)(2) of the
Securities Exchange Act of 1934, as added by Section 202 of the Sarbanes-Oxley
Act of 2002, the Company is responsible for disclosing non-audit services to be
performed by the Company's external auditors, Ernst & Young LLP, that have been
pre-approved by the audit committee. Non-audit services are defined by law as
services other than those provided in connection with an audit of the financial
statements of the Company. During the quarterly period covered by this filing,
the audit committee approved the following non-audit services: assistance with
the filing of the Company's registration statement on Form S-8. The nature of
the above services is considered by the Company to be audit-related services
that are closely related to the financial statement audit process.
Item 6 Exhibits and Reports on Form 8-K
(a) Exhibit 99.1 Certification Pursuant to Section 906 of the
Sarbanes-Oxley Act.
(b) Reports on Form 8-K None
18
SIGNATURES
In accordance with 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.
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(Registrant)
Dated: May 15, 2003
/S/ JEFFREY S. MCCORMICK
-------------------------------------
Jeffrey S. McCormick
Chief Executive Officer
/S/ JAMES W. CAMERON, JR.
-------------------------------------
James W. Cameron, Jr.
Chairman of the Board and
Chief Financial Officer
19
Certification
I, Jeff McCormick, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alternative
Technology Resources, Inc. ("Registrant");
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 officer 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 date 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 officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of 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
20
6. The Registrant's other certifying officer 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 significant deficiencies and material weaknesses.
Date: May 15, 2003
/S/ JEFFREY S. MCCORMICK
------------------------
Jeffrey S. McCormick, Chief Executive Officer
21
I, James W. Cameron, Jr. certify that:
1. I have reviewed this quarterly report on Form 10-Q of Alternative
Technology Resources, Inc. ("Registrant");
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 officer 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 date 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 officer and I have disclosed, based on
our most recent evaluation, to the Registrant's auditors and the audit
committee of 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
22
6. The Registrant's other certifying officer 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 significant deficiencies and material
weaknesses.
Date: May 15, 2003
/S/ JAMES W. CAMERON, JR.
-------------------------
James W. Cameron, Jr., Chief Financial Officer