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 September 30, 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 of (IRS Employer Identification No.)
incorporation or organization)
629 J Street, Sacramento, CA 95814
(Address of principal executive offices)
(916) 231-0400
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. 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 October 31, 2003, 72,476,014
1
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Balance Sheets
(Unaudited)
September 30, June 30,
Assets 2003 2003
------
---------------------- ---------------------
Current assets:
Cash and cash equivalents $ 664,114 $ 270,102
Trade accounts receivable 28,963 20,492
Prepaid expenses and other current assets 113,020 43,857
---------------------- ---------------------
Total current assets 806,097 334,451
---------------------- ---------------------
Property and equipment:
Equipment and software 788,710 865,555
Accumulated depreciation and amortization (585,853) (547,479)
---------------------- ---------------------
Property and equipment, net 202,857 318,076
---------------------- ---------------------
Prepaid license and service fees 126,268 140,567
---------------------- ---------------------
$ 1,135,222 $ 793,094
====================== =====================
Liabilities and Stockholders' Equity (Deficit)
----------------------------------------------
Current liabilities:
Payable to Healthcare Exchange participants $ 79,552 $ 294,192
Trade accounts payable 570,920 551,762
Accrued payroll and related expenses 138,458 142,355
Accrued preferred stock dividends - 283,195
Accounts payable and accrued interest payable to stockholders 6,232 871,063
Notes payable to stockholder - 2,873,694
Convertible notes payable to stockholder 336,711 2,681,415
Accrued interest payable to third party 14,685 74,521
Other current liabilities 284,804 327,672
---------------------- ---------------------
Total current liabilities 1,431,362 8,099,869
---------------------- ---------------------
Convertible notes payable to third party 1,000,000 896,930
Commitments and contingencies
Stockholders' equity (deficit):
Convertible preferred stock, $6.00 par value - 1,200,000 shares authorized
none issued and outstanding at September 30, 2003 and June 30, 2003,
204,167 shares designated Series D, none issued and outstanding at
September 30, 2003 and June 30, 2003
2,000 shares designated Series A, 1,232 shares issued and outstanding at
September 30, 2003 and none issued and outstanding June 30, 2003 7,392 -
Common stock, $0.01 par value - 100,000,000 shares authorized;
72,476,014issued and outstanding at September 30, 2003
(66,908,669 at June 30, 2003) 724,760 669,087
Additional paid-in capital 65,911,328 58,155,268
Accumulated deficit (67,939,620) (67,028,060)
---------------------- ---------------------
Total stockholders' equity (deficit) (1,296,140) (8,203,705)
---------------------- ---------------------
$1,135,222 $ 793,094
====================== =====================
See accompanying notes to condensed financial statements.
2
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended
September 30,
2003 2002
Healthcare exchange
Revenue $ 380,817 $ 776,560
Costs (339,753) (543,702)
------------------ --------------------
Gross profit (loss) 41,064 232,858
Selling, marketing and product development costs (234,840) (1,397,306)
General and administrative expenses (515,252) (509,015)
------------------ --------------------
Loss from operations (709,028) (1,673,463)
Other income (expense)
Interest income 250 430
Interest expense to third party (103,070) (77,315)
Interest expense to stockholders and directors (99,712) (136,458)
------------------ --------------------
Total other income (expense) (202,532) (213,343)
------------------ --------------------
Net loss $ (911,560) $ (1,886,806)
================== ====================
Basic and diluted net loss per share $ (0.01) $ (0.03)
================== ====================
Shares used in per share calculations 68,595,826 61,016,315
================== ====================
See accompanying notes to condensed financial statements.
3
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Statements of Cash Flows
(Unaudited)
Three Months Ended
September 30,
2003 2002
------------------------ ----------------------
Net cash used in operating activities $ (934,391) $ (1,062,532)
------------------------ ----------------------
Cash flows used in investing activities:
Purchases of property and equipment - (28,884)
Sale and disposal of property and equipment 76,844 -
------------------------ ----------------------
Net cash provided (used) by investing activities 76,844 (28,884)
------------------------ ----------------------
Cash flows from financing activities:
Prepaid financing costs - (52,626)
Proceeds from sale of preferred stock 1,232,000 -
Proceeds from exercise of options and warrants 19,559 7,476
Proceeds from notes payable to stockholders - 619,000
Proceeds from convertible notes payable to third party
and warrants - 1,000,000
------------------------ ----------------------
Net cash provided by financing activities 1,251,559 1,573,850
------------------------ ----------------------
Net increase (decrease) in cash and cash equivalents 394,012 482,434
Cash and cash equivalents at beginning of period 270,102 402,291
------------------------ ----------------------
Cash and cash equivalents at end of period $ 664,114 $ 884,725
======================== ======================
See accompanying notes to condensed financial statements.
4
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Notes to Condensed Financial Statements
September 30, 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 Alternative Technology Resources, Inc.'s (hereinafter referred to as "ATR",
the "Company, " "we," or "us") annual report on Form 10-K for the fiscal year
ended June 30, 2003. On November 12, 2003, the Company and its independent
auditors, Ernst & Young LLP, mutually agreed to cease their existing
professional relationship. This change has been reported in a Form 8-K dated
November 12, 2003. The Company is currently involved in the process of engaging
a new independent public accountant. As a result, the interim financial
statements included in this quarterly report on Form 10-Q were not reviewed by
an independent public accountant.
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 September 30,
2003 and June 30, 2003, results of operations for the three months ended
September 30, 2003 and 2002, and cash flows for the three months ended September
30, 2003 and 2002. The results for the period ended September 30, 2003 are not
necessarily indicative of the results to be expected for the entire fiscal year
ending June 30, 2004.
The Company has incurred operating losses since inception, which have resulted
in an accumulated deficit of $67,939,620 at September 30, 2003. As we enter
fiscal year 2004, we continue to face significant challenges with respect to
revenue and cash shortages. In light of our prior losses and current stock price
of our common stock, no assurance can be given that we will be able to raise
additional funds for our operations, if necessary. We are taking a number of
steps to address these challenges including further reductions in operating
expenses and liabilities. In addition, our business strategy is to transition
our existing Providers to our direct pay program where Providers will submit
their claims to us, and we will process and reprice the claims to the rate set
by Providers. After re-pricing, claims will be then sent to Purchasers or their
intermediaries who will pay the Providers directly. Providers will be invoiced
our transaction fee for each claim re-priced. We will recognize revenue when it
is earned and collectibility is reasonably assured. Revenue is earned when we
have completed claim re-pricing obligations under our service agreement with the
Provider.
We launched our direct pay program during quarter ending September 30, 2003.
Under this program, we will receive a fee for each claim that we process. In
order to attract new Providers and increase the number of claims that we
5
process, we have reduced our transaction fee which will require us to process a
higher number of claims that we have not previously been able to obtain in order
to generate sufficient revenue for our operations. This program is new and we
are unsure whether it will be accepted by the healthcare industry or whether we
will be able to attract sufficient number of Providers in order to process the
number of claims we will need to generate sufficient revenues to sustain our
operations. If we are unable to successfully launch our direct pay program or
gain the confidence of Providers, we may be required to further reduce our
operation expenses or be forced into seeking protection under federal bankruptcy
laws.
Note 2 - Financing Arrangements
- -------------------------------
On August 15, 2003, Mr. James W. Cameron, the Company's former officer and
director, purchased 1,232 shares of our Series A Preferred Stock, $6.00 par
value per share, at $1,000 per share for an aggregate sum of $1,232,000. The
Series A Preferred Stock provides for a dividend preference of $0.50 per share
if and when declared by the board of directors and a liquidation preference of
$6.00 per share. In addition, the shares of Series A Preferred Stock have no
voting rights, except as required by law, and are not convertible into any other
securities.
On August 15, 2003, Mr. Cameron assigned to Mr. Baron, our new chairman, all of
his interest to the promissory notes payable by the Company in the aggregate
principal amount of $2,873,694 along with $283,195 in accrued Series D Preferred
Stock dividends owed by the Company. On September 18, 2003, Mr. Baron forgave
all of the obligations owed by the Company under the promissory notes including
the accrued and unpaid interest along with $283,195 in accrued Series D
Preferred Stock dividends.
On August 15, 2003, Mr. Cameron, McCormick ATEK Investments LLC, an entity
controlled by Mr. Jeffrey McCormick, our director and former officer, and the
Company mutually agreed, without value, to cancel the option requiring Mr.
Cameron to sell 6,000,000 shares of our common stock owned by Mr. Cameron to
McCormick ATEK Investment LLC at the purchase price of $3.625 per share.
On September 19, 2003, we reached an agreement with The Negri Trust to convert
$2,344,704 of the outstanding principal and all accrued and unpaid interest as
of that date under convertible notes into 3,086,043 shares of our common stock.
During fiscal year 2003, the facilities lease agreement between the Company and
the Mr. James W. Cameron 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 was recognized through rent expense
and other capital contributions. On July 1, 2003, Company entered into a sixth
addendum to the lease, which reduces the square footage occupied by the Company
and stipulates the monthly rent to be $3,794.
On July 26, 2002, the Company received short-term unsecured financing in the
form of a convertible note of $1,000,000 from a lender ("Convertible Note").
6
This Convertible Note, bearing interest at 8% was originally payable on July 25,
2003. On July 25, 2003, the Company extended this note to the earlier of July
22, 2005 or when the Company receives $8,000,000 in 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 or the subsequent subscription price per
share of any debt or equity offering made by the Company. In consideration for
the amendment, the Company agreed to convert all accrued and unpaid interest as
of July 25, 2003 into 2,285,714 shares of its common stock at a rate of $0.035
per share and to secure the Convertible Note with our assets. In connection with
the amendment, the Company has classified the Convertible Note as a long-term
obligation since the term of repayment has been extended to July 22, 2005.
In consideration for the Convertible Note, 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 Company's October 2002 Private Placement. 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 became exercisable on July 26, 2003 and is also exercisable before the
expiration date. 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
$952,930 through interest expense for fiscal year 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 recorded additional amounts totaling $103,070 in the quarter ending
September 30, 2004 through interest expense 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.
In July 2002, 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 $3,816,209. In connection with the October 2002 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. The warrant had an
estimated fair value of $22,800.
Resulting from the closing of the October 2002 Private Placement, 1,540,729
additional shares were issued to investors who purchased shares of common stock
7
in the January 2002 Private Placement based on the October 2002 Private
Placement price of $1.00 per share. Compensation expense of $347,222 was
recorded for the additional shares issued to the Company's then Chairman and
Chief Financial Officer.
As a result of the issuance of the Convertible Note on July 26, 2002 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.
As of quarter ending September 30, 2003, the amount of $336,711 is outstanding
under an unsecured convertible note from a shareholder of the Company. This note
bears interest at 10.25% per annum and is due on December 31, 2003.
Note 3 - Comprehensive Loss
- ---------------------------
Total comprehensive loss for the three months ended September 30, 2003 and 2002
was $911,560, and $1,886,806. Other comprehensive income (loss) represents the
net change in unrealized gains (losses) on available-for-sale securities.
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 months
ended September 30, 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.
8
Three Months Ended
September 31,
2003 2002
Net loss, as reported $ (911,560) $(1,886,806)
Add: Stock-based employee compensation expense included
in reported net loss - -
Deduct: Total stock-based employee compensation expense
determined under fair value based method for all awards
- -
-------------- -------------
Pro forma net loss $ (911,560) $(1,886,806)
============== =============
Loss per share:
Basic and diluted - as reported $ (0.01) $ (0.03)
============== =============
Basic and diluted - pro forma $ (0.01) $ (0.03)
============== =============
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
existing models do not necessarily provide a reliable single measure of the fair
value of its employee stock options.
Note 5 - Commitments and Contingencies
- --------------------------------------
The Company may from time to time become a party to various legal proceedings
arising in the ordinary course of its business. The Company is not currently
subject to any legal proceedings.
The Company signed agreements effective in January 2001 with an application
services provider to license, support and run software to process medical claims
submitted to the Company's Healthcare Exchange. The agreements are for a period
of 66 months. They required payment of an initial base license fee of $250,000,
which is being amortized over the expected term of the arrangement, and data
center set up, training and implementation fees of about $145,000, which were
expensed. The agreements require monthly minimum payments currently of about
$35,000 and additional fees that are transaction based if volumes exceed levels
included in the monthly minimums. On October 10, 2003, the Company terminated
its agreement with the application services provider. As a result, the Company
pursued the development of an internal technical solution to replace the
services provided by this vendor. The internal application was implemented on
October 15, 2003.
9
In November 1995, the Company entered into a lease agreement for its facility in
Sacramento, California under a one-year lease with Mr. Cameron. The lease has
been extended to January 31, 2004. Payments under this facilities lease were
approximately $141,330 per year. At June 30, 2003, $559,220 of rent owed for
fiscal years 1996 through 2003 is included in the balance of accounts payable
and accrued interest payable to stockholders. During the fiscal year 2003, the
facilities lease agreement between the Company and Mr. Cameron 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 was recognized through rent expense and other capital contributions. On
July 1, 2003 the Company entered into a sixth addendum to the lease, which
reduces the square footage occupied by the Company and stipulates the monthly
rent to be $3,794.
Note 6 - 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 was November 7, 2002.
Subject to acceleration events, the option grant was 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. 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. Subsequent to the June 30, 2003, Mr.
McCormick's employment agreement was terminated because of his resignation as
the Company's Chief Executive Officer. Pursuant to the terms of the option
agreement, all 4,000,000 options immediately vested and are exercisable.
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, 2003.
OVERVIEW
General
As used in this report, the terms "we," "us," "our", "ATR," and the "Company"
mean Alternative Technology Resources, Inc., unless otherwise indicated.
10
We are engaged in the business of operating a Healthcare Exchange. In July 2003,
we began operating the Healthcare Exchange under our new name "National
Healthcare Exchange Services" or "NHXS". The purpose of the Healthcare Exchange
is to facilitate provider initiated discounts for all commercial lines of
business in the healthcare industry. The Healthcare Exchange offers a direct
conduit between medical doctors, medical groups, hospitals and other healthcare
practitioners (collectively "Providers") and those who purchase or facilitate
the purchase of healthcare services and/or their agents, such as Preferred
Provider Organizations ("Purchasers"). The Healthcare Exchange is used in the
absence of an existing agreement between the Provider and the Purchaser of
healthcare services.
Under the Healthcare Exchange program, Providers submit claims to us, and we
process and reprice the claims to the rate set by the Providers, including
adding a transaction-processing fee. We then route the adjusted claims to
Purchasers or their intermediaries. We receive payments from Purchasers on
behalf of Providers, and then remit payments to Providers.
During fiscal 2003, we experienced substantial loss in implementing and
operating the Healthcare Exchange. As a result, we are revising our Healthcare
Exchange program to provide for a direct pay program whereby Providers' claims
will be sent to the Purchasers via our Healthcare Exchange and payment will be
made directly to the Providers. We will then invoice the Providers a transaction
fee for each claim processed and forwarded to the Purchaser.
Our Healthcare Exchange began operations with a limited number of Providers and
Purchasers in the quarter ending June 30, 2001. We continue to receive, process,
and analyze operating data, and the results of our analysis will determine the
amount and timing of remaining development related efforts.
There are no geographic limitations to the recruitment of Providers. However,
our primary recruitment efforts have been in 15 states and the District of
Columbia.
We have outsourced to multiple vendors portions of the development and
operations of the information systems for the Healthcare Exchange. We work with
vendors to receive claims from Providers through electronic clearinghouses and
to convert paper claims into electronic formats. We are evaluating other
potential technology vendors as well.
We do not provide healthcare services, but rather act as a neutral conduit
between Providers and Purchasers including preferred provider organizations. We
believe that our Healthcare Exchange provides both economic and administrative
efficiencies to both Providers and Purchasers in the absence of a traditional
health plan agreement.
History
In August 1999, we identified what we believe to be a significant business
opportunity in the healthcare industry and began developing a business model
involving the establishment of the Healthcare Exchange under the name
"DoctorandPatient." Prior to providing an exchange for healthcare services, we
11
were in the business of recruiting, hiring and training foreign computer
programmers and placing them with U.S. companies. During fiscal year 2001, we
ceased our computer programmer operations to concentrate on our Healthcare
Exchange and, in July 2003, we began phasing out the name "DoctorandPatient" and
began marketing under the new name "National Healthcare Exchange Services."
During fiscal year 2003, we focused our attention on expanding our markets in
order to try to increase our revenues. In line with our objectives, we hired a
significant number of employees to promote the Healthcare Exchange. This rapid
growth in employees placed a significant strain upon our financial resources
without producing sufficient revenue to accommodate this growth. As a result, we
had to take steps to reduce our expenses in an effort to improve our financial
condition. Such steps included closing our headquarters located in Portsmouth,
New Hampshire and relocating these functions to our office in Sacramento,
California. In addition, we reduced the number of our employees from 98 as of
December 31, 2002 to 27 by September 30, 2003.
As we enter fiscal year 2004, we continue to face significant challenges with
respect to revenue and cash shortages. As of September 30, 2003, our cash
balance had declined to approximately $700,000, and in light of our prior losses
and current stock price of our common stock, no assurance can be given that we
will be able to raise additional funds for our operations, if necessary. We are
taking a number of steps to address these challenges including further
reductions in operating expenses and liabilities. In addition, our business
strategy is to transition our existing Providers to our direct pay program where
Providers will submit their claims to us, and we will process and reprice the
claims to the rate set by Providers. After re-pricing, claims will be then sent
to Purchasers or their intermediaries who will pay the Providers directly.
Providers will be invoiced our transaction fee for each claim re-priced. We will
recognize revenue when it is earned and collectibility is reasonably assured.
Revenue is earned when we have completed claim re-pricing obligations under our
service agreement with the Provider.
During quarter ending September 2003 we launched our direct pay program. Under
this program, we receive a fee for each claim that we process. In order to
attract new Providers and increase the number of claims that we process, we have
reduced our transaction fee which will require us to process a higher number of
claims that we have not previously been able to obtain in order to generate
sufficient revenue for our operations. This program is new and we are unsure
whether it will be accepted by the healthcare industry or whether we will be
able to attract sufficient number of Providers in order to process the number of
claims we will need to generate sufficient revenues to sustain our operations.
If we are unable to successfully launch our direct pay program or gain the
confidence of Providers, we may be required to further reduce our operation
expenses or be forced into seeking protection under federal bankruptcy laws.
We believe that the value proposition of the Healthcare Exchange for our direct
pay program is significant. The transition to the direct pay program has been
driven by the cost and complexity of receiving and processing payments from
Purchasers on behalf of Providers. Our current program, whereby we would receive
payments directly from the Purchasers and remit the payment, after deducting our
fee, to the Providers created a tension between the Provider and us that
interfered with efforts by our sales and marketing staff to recruit new
Providers. By developing the direct pay program, we removed the Healthcare
12
Exchange between the Purchaser's payments and the Provider, and allowed the
Healthcare Exchange to act as a neutral conduit. We believe that the simplicity
of the direct pay program will allow us to accelerate the growth in new
Providers. We also believe that the direct pay program will also reduce the
barriers to marketing to large healthcare provider organizations. Under the
direct pay program, our transaction fee will be less than our transaction fee
for our current program. Therefore, we must substantially increase the number of
claims that we process in order to generate sufficient revenues for our
operations. We intend to initially market our direct pay program to our existing
Providers by transitioning them from our current program to the direct pay
program. If we are unable to successfully launch our direct pay program or gain
the confidence of Providers, we may be required to further reduce our operating
expenses and/or seek additional funds for our operations. If we are unable to
raise additional funds, we may be forced into seeking protection under federal
bankruptcy laws.
In addition to the direct pay program, we will begin test marketing of a
compliance program. The compliance program allows the Healthcare Exchange to
re-price medical claims within an existing agreement between the Provider and
the Purchaser. The compliance program could allow Providers to use the
Healthcare Exchange for more of their claims. Our market with the direct pay
program is limited to those claims for which there is no existing health plan
agreement. Applying the efficiencies of the Healthcare Exchange to an existing
health plan agreement can improve the Providers' ability to insure compliance
with a health plan's fee schedule. More importantly, we believe that this
compliance program could significantly increase the number of claims we process
for Providers.
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 $394,012 since June 30, 2003 attributable to
cash proceeds from financing activities of $1,232,000received in August 2003
13
from the sale of Series A Preferred stock, partially offset by cash used in
operations of $934,391 during the three months ended September 30, 2003. At
September 30, 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 three months ended September 30, 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,
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. Under the direct pay
program providers submit their healthcare claims to us for re-pricing to the
Healthcare Exchange rate. We then route the adjusted claims to Purchasers or
their intermediaries, who pay the Providers directly. We then invoice the
Providers a transaction fee for each claim processed and forwarded to the
Purchaser.
During the three month period ending September 30, 2003, $380,817 of revenue was
recognized, as compared to $776,560 for the three month period ending September
30, 2002. The development and implementation of the direct pay program and
transitioning of our Providers to the direct pay program was the primary cause
of the reduction in revenue in comparison to the previous year.
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 month period ending September 30, 2003 were $339,753 in comparison
to $543,702 for the three month period ending September 30, 2002. The decrease
is primarily due to the reduction in staffing and related costs, and other cost
reduction measures implemented during the September 2003 quarter end. As of
September 30, 2003, there were 10 operations staff members responsible for the
processing of bills submitted by Providers and payments received from
Purchasers, compared to 31 operations staff members as of September 30, 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 month period ending
September 30, 2003 were $234,840, in comparison to $1,397,306 for the three
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month period ending September 30, 2002. The decrease is the result of reduction
of sales staff to 8 at September 30, 2003 from 43 at September 30, 2002. The
Company's existing IT staff developed the internal repricing and compliance
program, resulting in development costs being recognized as compensation.
General and Administrative Expenses
General and administrative expenses were $515,252 for the three month period
ended September 30, 2003, in comparison to $509,015 for the three month period
ending September 30, 2002. The increase for the three month period ended
September 30, 2003 in comparison to the same period ended September 30, 2002 was
the result of the expense of approximately $125,714 recorded during the three
month period ended September 30, 2003 for the conversion of interest accrued on
the $1,000,000 convertible note payable to common stock at less than market
value. This expense was offset by the decrease in compensation and related
expenses as a result of reductions in staffing.
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 ending September 30, 2003 is not significant in comparison to the same
period in fiscal 2002.
INTEREST EXPENSE TO THIRD PARTY. Interest expense to third party of $103,070,
for the three month period ending September, 2003, in comparison to $77,315 for
the three month period ending September 30, 2002, 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
INTEREST EXPENSE TO STOCKHOLDERS AND DIRECTORS. Interest expense to stockholders
and directors of $99,712, was recognized for the three month period ending
September 30, 2003 in comparison to $136,458, for the three month period ending
September 30, 2002. This decrease resulted primarily from the conversion of
accrued interest on convertible notes payable to stockholder into common stock
and the forgiveness of debt of accrued interest on notes payable to stockholder
during the three month period ending September 30, 2003.
Income Taxes
As of June 30, 2003, we had net operating loss carryforwards for federal income
tax purposes of approximately $53,000,000 that expire in the years 2005 through
2023 and federal research and development tax credits of approximately $100,000
that expire in the year 2005.
As of June 30, 2003, we had net operating loss carryforwards for state income
tax purposes of approximately $20,000,000 that expire in the years 2004 through
2013 and state research and development tax credits of approximately $30,000
that do not expire.
15
In connection with our 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, our 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 our stock was purchased, resulting in a
second annual limitation in the amount of approximately $398,000 on our ability
to utilize net operating loss carryforwards generated between August 11, 1992
and September 13, 1993 (approximately $7,700,000).
Utilization of our net operating loss and credit carryforwards may be subject to
substantial annual limitation due to the ownership change limitations provided
by the Internal Revenue Code and similar state provisions. Such an annual
limitation could result in the expiration of the net operating loss and credits
before utilization.
We expect that the aforementioned annual limitations will result in net
operating loss carryovers, which will not be utilized prior to the expiration of
the carryover period.
LIQUIDITY AND CAPITAL RESOURCES
For the three month period ending September 30, 2003, we earned revenues of
$380,817 but incurred a net loss of $911,560. In August 2003, we raised
additional capital through the sales of 1,232 shares of our Series A Preferred
Stock, $6.00 par value per share, at $1,000 per share for an aggregate sum of
$1,232,000. It is our intention to use this capital to successfully market and
implement the direct pay program to attract new Providers and to increase the
number of claims that we process. However, this direct pay program is new and we
are unsure whether it will be accepted by the healthcare industry or whether we
will be able to attract a sufficient number of Providers in order to process the
number of claims we will need to generate sufficient revenues to sustain our
operations. In order to attract new Providers and increase the number of claims
that we process under this new direct pay program, we have reduced our
transaction fee which will require us to process a higher number of claims that
we have not previously been able to obtain in order to generate sufficient
revenue for our operations. As of September 26, 2003, our cash balance had
declined to approximately $700,000. In light of our prior losses and current
stock price, it is unlikely that we will be able, at this time, to raise
additional capital if required. If our direct pay program is unsuccessful, we
will be required to further reduce our expenses. If we are unable to
successfully launch our direct pay program or gain the confidence of Providers,
we may be required to further reduce our operating expenses and/or be forced
into seeking protection under federal bankruptcy laws. Given the conditions
described above, the report of independent auditors on our June 30, 2003
financial statements includes an explanatory paragraph indicating there is
substantial doubt about our 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.
As of June 30, 2003, we had received short-term, unsecured financing to fund our
operations in the form of notes payable of $5,555,109 from Mr. Cameron, our then
chairman and chief financial officer and another stockholder. These notes bear
16
interest at 10.25%. On November 1, 2002, we 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, we 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 $2,681,415, 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. During fiscal year 2003, Mr. Cameron loaned us an
additional $619,000 bearing interest at 10.25%, of which $193,000 was repaid to
Mr. Cameron in October 2002. During the first quarter of fiscal 2004, the notes
payable in the amount of $2,873,694 were assigned by Mr. Cameron to Mr. Baron,
and as September 30, 2003, Mr. Baron forgave all of the obligations under such
notes. In addition, of the convertible notes totaling $2,681,415, the note
holder agreed to convert $2,344,704 of the outstanding principal and all accrued
and unpaid interest under certain convertible notes into 3,086,043 shares of our
common stock leaving a total of $336,711 outstanding.
In October 2002, we sold 4,125,000 shares of our common stock at a purchase
price of $1.00 per share. The shares of common stock issued in the private
placement are restricted securities. Cash proceeds, net of offering costs, were
$3,816,209. In connection with the October 2002 private placement, we 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, we 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.
On July 26, 2002, we received short-term unsecured financing in the form of a
convertible note of $1,000,000 from a lender. This convertible note bears
interest at 8% and was originally payable on July 25, 2003. On July 25, 2003, we
extended this note to the earlier of July 22, 2005 or when we receive $8,000,000
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 or the
subsequent subscription price per share of any debt or equity offering made by
us.
In consideration for the loan, we issued three warrants on July 26, 2002. Each
warrant provides for the purchase of 100,000 shares of our common stock at an
exercise price equal to the $1.00 subscription per share price of the October
2002 private placement. The first and second warrants became exercisable on July
26, 2002 and January 26, 2003, respectively. The third warrant became
exercisable on July 25, 2003. The lender may exercise these warrants through
July 26, 2009.
In connection with the issuance of the convertible note and the first and second
warrants, we 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," we have recognized $309,211
and $952,930 through interest expense for the three and twelve month periods
respectively, ending June 30, 2003 for a portion of the fair value of the first
and second warrants and a portion of the beneficial conversion feature of the
convertible note, which was estimated to be in total $802,000. We have recorded
additional amounts totaling $103,070 during the first quarter of 2004 through
17
interest expense for the remaining fair value of the first and second warrants
and the beneficial conversion feature of the convertible 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 convertible
note from $2.25 to $1.00 per share.
During the period between January 9, 2002 and March 28, 2002, we sold 1,232,584
shares of our common stock at a purchase price of $2.25 per share. The shares of
common stock issued in the private placement are restricted securities.
Proceeds, net of offering costs, were $2,742,519. The proceeds from the private
placement were used to fund operations and repay debt. Our then chairman and
chief financial officer purchased 222,222 shares our 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, we recorded compensation expense of
$138,583 during fiscal year 2002. In October 2002, pursuant to the terms of this
private placement and as a result of the October 2002 private placement at a
purchase price lower than $2.25, 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 of $347,222 was recorded for the additional shares
issued to our then chairman and chief financial officer.
As a result of our July 2002 bridge financing in which we granted warrants equal
to 30% of the loan at an exercise price of $1.00 per share, we 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. Our then chairman and chief financial officer, 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.
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
- --------------------------------------------- ------------------ --------------- --------------- -------------- ------------
Convertible notes payable to stockholder 336,711 336,711 - - -
Convertible note payable to third party 1,000,000 1,000,000 - -
Operating leases - facilities - payable to
stockholder 275,860 34,146 140,722 100,992 -
Operating leases - equipment 52,549 32,190 20,359 - -
Application services provider 33,842 33,842 - - -
- --------------------------------------------- ------------------ --------------- --------------- -------------- ------------
Total contractual cash obligations $ 1,698,962 $ 436,889 $ 1,161,081 $ 100,992 $ -
- --------------------------------------------- ------------------ --------------- --------------- -------------- ------------
18
During fiscal year 2003, the facilities lease agreement between the Company and
the Mr. James W. Cameron 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 was recognized through rent expense
and other capital contributions. On July 1, 2003, Company entered into a sixth
addendum to the lease, which reduces the square footage occupied by the Company
and stipulates the monthly rent to be $3,794.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company has notes payable in the aggregate amount of $1,336,711 as of
September 30, 2003 payable to a stockholder of the Company and another lender.
The notes bear interest at 8% to 10.25% per annum and are due from December 31,
2003 to July 22, 2005, 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 2004. Further, the Company has no foreign operations and
therefore is not subject to foreign currency fluctuations.
Item 4. Controls and Procedures
We carried out an evaluation, under the supervision and with the participation
of our management, including our Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures (as defined by Exchange Act Rule 13a-15(e)) as of the end of our
first fiscal quarter pursuant to Exchange Act Rule 13a-15(b). Based upon that
evaluation, our Chief Executive Officer and Chief Financial Officer concluded
that our disclosure controls and procedures are effective in ensuring that
information required to be disclosed by us in reports that we file or submit
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission's rules and
forms.
There have been no changes in our internal control over financial reporting
identified in connection with our evaluation as of the end of the first fiscal
quarter that occurred during such quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial
reporting. However, on November 12, 2003, the Company and its independent
auditors, Ernst & Young LLP, mutually agreed to cease their existing
professional relationship. This change has been reported in a Form 8-K dated
November 12, 2003. The Company is currently involved in the process of engaging
a new independent public accountant. As a result, the interim financial
statements included in this quarterly report on Form 10-Q were not reviewed by
an independent public accountant.
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
None
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Item 2 Changes in Securities and Use of Proceeds
On July 25, 2003, we issued 2,285,714 shares of our common stock to a lender for
all accrued and unpaid interest in the aggregate amount of $80,000 under a
convertible note as of July 25, 2003. The issuance was exempt from registration
pursuant to Rule 506.
On August 15, 2003, we sold 1,232 shares of our Series A Preferred Stock, $6.00
par value per share, at $1,000 per share for an aggregate sum of $1,232,000 to
an accredited investor pursuant to Rule 506. No commission or finder's fee was
paid in connection with this transaction. The Series A Preferred Stock provides
for a dividend preference of $0.50 per share if and when declared by the board
of directors and a liquidation preference of $6.00 per share. In addition, the
shares of Series A Preferred Stock have no voting rights, except as required by
law, and are not convertible into any other securities.
On September 19, 2003, we reached an agreement with The Negri Trust to convert
$2,344,704 of the outstanding principal and all accrued and unpaid interest as
of that date under the convertible notes into 3,086,043 shares of our common
stock. The issuance was exempt from registration pursuant to Rule 506. We
amended the original convertible notes to provide for the issuance of shares for
accrued and unpaid interest. Further, under the terms of this amendment, The
Negri Trust is entitled to piggy back registration rights.
Item 3 Defaults Upon Senior Securities
None
Item 4 Submission of Matters to a Vote of Security Holders
Not Applicable
Item 5 Other Information
The Company intends to file a Certificate of Amendment with the Delaware
Secretary of State to change its corporate name from Alternative Technology
Resources, Inc. to National Healthcare Exchange Services, Inc. and a Form 15
with the Securities and Exchange Commission to terminate the registration of its
common stock and to suspend its duty to file reports required by Section 13(a)
under the Securities Exchange Act of 1934.
Item 6 Exhibits and Reports on Form 8-K
a. Exhibits
None.
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b. Reports on Form 8-K:
Date of Report Item(s) Description
November 12, 2003 4 Changes in Registrant's Certifying Accountants
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
(Registrant)
Dated: February 9, 2004
/s/ Mark W. Rieger
---------------------------------------------------
Mark W. Rieger
Chief Executive Officer/Chief Financial Officer
21