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 December 31, 2002
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)
33 Jewell Court, Portsmouth, N.H. 03801
(Address of principal executive offices)
(603) 501-3200 (Registrant's
telephone number, including area code)
(Former address if changed since last report)
Check 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
Number of shares of common stock outstanding as of January 31, 2003, 66,768,441
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Balance Sheets
(Unaudited)
December 31, June 30,
Assets 2002 2002
------
---------------------- --------------------
Current assets:
Cash and cash equivalents $ 2,415,962 $ 402,291
Trade accounts receivable 27,020 3,602
Prepaid maintenance and service fees 61,681 -
Prepaid expenses, and other current assets 189,078 81,223
---------------------- --------------------
Total current assets 2,693,741 487,116
---------------------- --------------------
Property and equipment:
Equipment and software 842,345 788,192
Accumulated depreciation and amortization (428,573) (297,987)
---------------------- --------------------
Property and equipment, net 413,772 490,205
---------------------- --------------------
Prepaid license and service fees 171,143 211,498
Other non-current assets 5,907 14,490
---------------------- --------------------
$ 3,284,563 $ 1,203,309
====================== ====================
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Payable to Healthcare Exchange participants $ 908,440 $ 409,738
Trade accounts payable 241,856 438,460
Accrued payroll and related expenses 249,840 274,777
Accrued preferred stock dividends 283,195 283,195
Accounts payable and accrued interest payable to stockholders 858,432 797,232
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 343,841 -
Accrued interest payable to third party 34,849 -
Other current liabilities 275,451 254,469
---------------------- --------------------
Total current liabilities 8,514,886 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 December 31, 2002 and June 30, 2002, 204,167
shares
Designated Series D, none issued and outstanding at December 31, 2002 and
June 30, 2002
Common stock, $0.01 par value - 100,000,000 shares authorized; 66,758,529
shares issued and outstanding at December 31, 2002
(60,968,213 at June 30, 2002) 667,585 609,682
Additional paid-in capital 58,065,656 52,862,283
Accumulated deficit (63,963,564) (59,362,879)
---------------------- --------------------
Total stockholders' equity (deficit) (5,230,323) (5,890,914)
---------------------- --------------------
$ 3,284,563 $ 1,203,309
====================== ====================
See accompanying notes to condensed financial statements.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Statements of Operations
(Unaudited)
Three Months Ended Six Months Ended
December 31, December 31,
2002 2001 2002 2001
Healthcare exchange
Revenue $ 877,993 $ 253,876 $ 1,654,553 $ 362,094
Costs (642,387) (350,213) (1,186,089) (575,001)
-------------- --- ------------- -------------- --------------
Gross profit (loss) 235,606 (96,337) 468,464 (212,907)
Selling, marketing and product development costs (1,507,974) (1,546,462) (2,905,279) (3,051,657)
General and administrative expenses (945,417) (600,045) (1,454,433) (1,105,879)
-------------- --- ------------- -------------- --------------
Loss from operations (2,217,785) (2,242,844) (3,891,248) (4,370,443)
Other income (expense)
Interest income 7,832 7,646 8,262 40,779
Interest expense to third party (301,375) - (378,690) -
Interest expense to stockholders and directors (202,552) (113,010) (339,010) (252,527)
-------------- --- ------------- -------------- --------------
Total other income (expense) (496,095) (105,364) (709,438) (211,748)
-------------- --- ------------- -------------- --------------
Net loss $ (2,713,880) $(2,348,208) $ (4,600,686) $ (4,582,191)
============== ============= ============== ==============
Basic and diluted net loss per share $ (0.04) $ (0.04) $ (0.07) $ (0.08)
============== ============= ============== ==============
Shares used in per share calculations 66,053,573 59,421,866 63,534,944 59,411,863
============== ============= ============== ==============
See accompanying notes to condensed financial statements.
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Condensed Statements of Cash Flows
(Unaudited)
Six Months Ended
December 31,
2002 2001
------------------------ ----------------------
Net cash used in operating activities $ (2,630,454) $ (4,264,080)
------------------------ ----------------------
Cash flows used in investing activities:
Purchases of property and equipment (54,153) (220,131)
Maturities of short-term investments - 1,354,159
------------------------ ----------------------
Net cash provided (used) by investing activities (54,153) 1,134,028
------------------------ ----------------------
Cash flows from financing activities:
Proceeds from sale of common stock 3,872,067 -
Proceeds from exercise of options and warrants 19,211 24,628
Proceeds from notes payable to stockholders - 313,902
Proceeds from notes payable 1,000,000 -
Payments on notes payable to stockholders (193,000) -
------------------------ ----------------------
Net cash provided by financing activities 4,698,278 338,530
------------------------ ----------------------
Net increase (decrease) in cash and cash equivalents 2,013,671 (2,791,522)
Cash and cash equivalents at beginning of period 402,291 3,159,017
------------------------ ----------------------
Cash and cash equivalents at end of period $ 2,415,962 $ 367,495
======================== ======================
See accompanying notes to condensed financial statements.
ALTERNATIVE TECHNOLOGY RESOURCES, INC.
Notes to Condensed Financial Statements
December 31, 2002
(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 December 31,
2002 and June 30, 2002, results of operations for the three and six months ended
December 31, 2002 and 2001, and cash flows for the three and six months ended
December 31, 2002 and 2001. The results for the period ended December 31, 2002
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 $63,963,564 at December 31, 2002. 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 $3,872,067. 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.
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. 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 Warrant was issued on July 26, 2002 is
exercisable at any time on or before the expiration date. The Second Warrant
issued may only be exercisable if the Company does not repay the Note within 180
days from the issuance of the Note. 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 First Warrant, the Company
estimated the fair value of the First Warrant to be $198,000 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 $281,211 and $343,841
through interest expense for the three and six month periods respectively,
ending December 31, 2002 for a portion of the fair value of the First Warrant
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 $656,159 through interest expense until July 26, 2003 for the remaining
fair value of the First Warrant 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.
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 $3,872,067.
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
$2,873,691, 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 $2,681,415,
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.
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 end 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 December 3, 2002 and 2001
was $2,713,880, and $2,348,208, and $4,600,686 and $4,582,169 for the six months
ended December 31, 2002 and 2001 respectively. Other comprehensive income (loss)
represents the net change in unrealized gains (losses) on available-for-sale
securities.
Note 4 - Net Loss Per Share
Loss per share amounts for all periods have been presented in accordance with
Statement of Financial Accounting Standards Board No. 128, "Earnings 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 six
months ended December 31, 2002 and 2001 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.
Note 5 - Subsequent Events
Subsequent to December 31, 2002, in consideration of the contributions to the
Company 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 the common stock shall vest on January 31 of each
year through 2006.
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.
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-seven
markets in seventeen 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
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.
Stock-Based Compensation. The Company has elected to account for stock-based
compensation using the intrinsic value method prescribed by Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
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.
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 $2,013,671 since June 30, 2002 attributable
to cash proceeds of $3,872,067 received in the October 2002 Private Placement
partially offset by cash used in operations of $2,630,454 during the six months
ended December 31, 2002. At December 31, 2002, 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 six months ended December 31, 2002 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. During the three and six
month periods ending December 31, 2002, $877,993 and $1,654,553 of revenue was
recognized, respectively, as compared to $253,876 and $362,094 for the three and
six month periods ending December 31, 2001. 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. The costs for the three and six month
periods ending December 31, 2002 were $642,387 and $1,186,089, respectively, in
comparison to $350,213 and $575,001 for the three and six month periods ending
December 31, 2001. As of December 31, 2002, there were 36 operations staff
members responsible for the processing of bills submitted by Providers and
payments received from Purchasers, compared to 17 operations staff members as of
December 31, 2001.
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 six month periods
ending December 31, 2002 were $1,507,974 and $2,905,279, respectively, in
comparison to $1,546,462 and $3,051,657 for the three and six month periods
ending December 31, 2001. Costs for the three and six month periods were
relatively unchanged.
General and Administrative Expenses
General and administrative expenses were $945,417 and $1,454,433 for the three
and six month periods ended December 31, 2002, in comparison to $600,045 and
$1,105,879 for the three and six month periods ending December 31, 2001. The
increase was the result of compensation expense of $347,222 recorded during the
second 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.
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 six month period is the
result of reduced cash balances at December 31, 2002 as compared to the same
period in fiscal 2001.
Interest Expense to Third Party. Interest expense to third party of $301,375 and
$378,690, for the three and six month periods ending December 30, 2002, resulted
primarily from the fair value of a warrant 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, and the interest
accrued on the note. 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 of $202,552 and
$339,010 was recognized for the three and six month periods ending December 31,
2002 in comparison to $113,010 and $252,527 for the three and six month periods
ending December 31, 2001. This increase resulted primarily from the extension of
stockholder notes as of November 1, 2002, which included a 2% refinance 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.
Liquidity and Capital Resources
For the six month period ending December 31, 2002, the Company earned revenues
of $1,654,553 but incurred a net loss of $4,600,686. 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 $63,963,564 at December 31, 2002. The Company had
negative working capital at December 31, 2002 of $5,821,145.
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
$3,872,067. 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 may only be exercisable if the
Company does 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 First Warrant, the Company
estimated the fair value of the First Warrant to be $198,000 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 $281,211 and $343,841
through interest expense for the three and six month periods respectively,
ending December 31, 2002 for a portion of the fair value of the First Warrant
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 $656,159 through interest expense until July 26, 2003 for the remaining
fair value of the First Warrant 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 second 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 $2,873,691, 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 $2,681,415, 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.
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
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.
However, 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. The Company believes that it has raised additional
funds to finance its operations through fiscal 2003. However, the Company must
successfully implement its business plan and there can be no assurance that the
plan will be successfully implemented. If unsuccessful, the Company may be
required to reduce the development efforts or 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 $ 2,873,691 $ 2,873,691 $ - $ - $ -
Convertible notes payable to stockholder 2,681,415 2,681,415 - - -
Convertible note payable to third party 1,000,000 1,000,000 - - -
Operating leases - facilities - payable to
stockholder 130 120 10 - -
Operating leases - equipment 123,945 45,408 72,483 6,054 -
Application services provider 1,416,471 404,706 1,011,765 - -
--------------------------------------------- ------------------ --------------- --------------- -------------- ------------
Total contractual cash obligations $ 8,095,652 $ 7,005,340 $ 1,084,258 $ 6,054 $ -
--------------------------------------------- ------------------ --------------- --------------- -------------- ------------
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.
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
December 31, 2002 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. Disclosure 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.
Item 5. Pre-approval on 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 has
approved the following non-audit services: assistance with the filing of the
Company's registration statement on Form S-1 and related amendments. 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.
PART II. OTHER INFORMATION
Item 1 Legal Proceedings
None
Item 2 Changes in Securities and Use of Proceeds
(c)
(1) On July 26, 2002 the Company received short-term unsecured financing in the
form of a convertible note of $1,000,000 from an Accredited Investor. The
convertible note bears interest at 8% and is payable at the earlier of July 25,
2003 or when the Company, raises $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, if within 12 months the Company sells
additional shares in a financing at a price less than $1.00 per share, at that
lower price. 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 may only be exercisable if the Company does 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.
The issuance of the convertible note was exempt from registration pursuant to
Regulation D.
(2) During October 2002, the Company sold 4,125,000 shares of its common stock
at a purchase price of $1.00 per share to Accredited Investors. Net cash
proceeds from the offering were $3,872,067. 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. In addition, we paid a finder's
fee in connection with the October 2002 Private Placement in an amount of
$12,500 and a warrant to purchase 30,000 shares of common stock at an exercise
price of $1.00 per share. Further, 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 October 2002 and January
2002 Private Placements warrants to purchase 30% of their respective investment,
or an aggregate of 2,069,494 shares of common stock, at an exercise price of
$1.00 per share. The placement of the common stock and warrants was exempt from
registration pursuant to Regulation D.
(3) 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
to Accredited Investors. Pursuant to the terms of the private placement, in the
event that the Company sold shares of common stock, or securities exercisable or
convertible into common stock, at a price less than $2.25 per share within one
year from the final closing, 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. As previously disclosed, during October 2002, the
Company completed a private placement of 4,125,000 shares of its common stock at
$1.00 per share. As a result of the subsequent private placement at $1.00 per
share, the Company issued 1,540,729 additional shares to the investors of the
March 2002 private placement. Included in such total was 277,778 shares issued
the Company's Chairman of the Board who initially purchased 222,222 shares of
common stock in the March 2002 private placement. The placement of the common
stock was exempt from registration pursuant to Regulation D.
(4) Subsequent to December 31, 2002, 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
An annual meeting of stockholders was held November 19, 2002, at the Company's
offices in Sacramento, California. The stockholders voted on and approved the
following matters:
1. The election of James W. Cameron, Jr., Edward L. Lammerding, and Jeffrey S
McCormick as directors of the Company: 58,220,003 shares were received in
favor of Mr. Cameron, 6,747 shares were withheld; 58,220,003 shares were
received in favor of Mr. Lammerding, 6,747 shares were withheld; and
58,220,003 shares were received in favor of Mr. McCormick, 6,747 shares
were withheld.
2. The adoption of the Alternative Technology Resources 2002 Stock Option
Plan; 55,973,895 for the approval and 2,252,855 withheld.
Item 5 Other Information
None
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
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: February 14, 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
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
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: February 14, 2003
/S/ JEFFREY S. MCCORMICK
--------------------------------------------
Jeffrey s. McCormick, Chief Executive Officer
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
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: February 14, 2003
/S/ JAMES W. CAMERON, JR.
---------------------------------------
James W. Cameron, Jr., Chief Financial Officer