UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
Form
10-Q
QUARTERLY
REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE
ACT OF 1934
For
Quarter Ended September 30, 2006
Commission
File Number 0-21177
NETSMART
TECHNOLOGIES, INC.
(Exact
name of registrant as specified in its charter)
Delaware
|
13-3680154
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
or organization)
|
Identification
Number)
|
|
|
3500
Sunrise Highway, Great River, NY
|
11739
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant's
telephone number, including area code: (631) 968-2000
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.
xYes
oNo
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer or a non-accelerated filer. See definition of “accelerated
filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (check
one):
Large accelerated filer o |
Accelerated filer o |
Non-accelerated filer x |
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)
oYes xNo
Number of shares of common stock outstanding
as of November 14, 2006: |
6,547,937 |
Netsmart
Technologies, Inc. and Subsidiaries
Index
Part
I: -
Financial Information:
Item
1. Financial Statements:
|
Page
|
|
|
|
|
Condensed
Consolidated Balance Sheets - September 30, 2006
(Unaudited)
|
|
and
December 31, 2005
|
1-2
|
|
|
Condensed
Consolidated Statements of Income - (Unaudited)
|
|
Nine
Months Ended September 30, 2006 and 2005 and Three Months
|
|
Ended
September 30, 2006 and 2005
|
3
|
|
|
Condensed
Consolidated Statements of Cash Flows - (Unaudited)
|
|
Nine
Months Ended September 30, 2006 and 2005
|
4-5
|
|
|
Condensed
Consolidated Statement of Stockholders' Equity -
(Unaudited)
|
|
Nine
Months Ended September 30, 2006
|
6
|
|
|
Notes
to Condensed Consolidated Financial Statements
|
7-15
|
|
|
Item
2. Management's Discussion and Analysis of
|
|
Financial
Condition and Results of Operations
|
16-29
|
|
|
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
|
29
|
|
|
Item
4. Controls and Procedures
|
30
|
|
|
Part
II Other Information
|
|
|
|
Item
6. Exhibits and Reports on Form 8-K
|
31
|
Item
1. Financial Statements
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
September
30,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
Assets:
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
9,710,365
|
|
$
|
11,445,525
|
|
Accounts
Receivable - Net
|
|
|
15,551,760
|
|
|
11,524,811
|
|
Costs
and Estimated Profits in Excess
|
|
|
|
|
|
|
|
of
Interim Billings
|
|
|
2,674,065
|
|
|
1,811,986
|
|
Deferred
Taxes
|
|
|
2,112,197
|
|
|
1,594,863
|
|
Other
Current Assets
|
|
|
1,400,150
|
|
|
1,466,577
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
31,448,537
|
|
|
27,843,762
|
|
|
|
|
|
|
|
|
|
Property
and Equipment - Net
|
|
|
2,800,924
|
|
|
2,665,429
|
|
|
|
|
|
|
|
|
|
Other
Assets:
|
|
|
|
|
|
|
|
Goodwill
|
|
|
18,877,518
|
|
|
18,735,751
|
|
Capitalized
Software Costs - Net
|
|
|
7,589,123
|
|
|
6,534,551
|
|
Customer
Lists - Net
|
|
|
10,161,101
|
|
|
8,110,864
|
|
Contract
Backlog - Net
|
|
|
--
|
|
|
379,500
|
|
Other
Assets
|
|
|
148,768
|
|
|
351,997
|
|
|
|
|
|
|
|
|
|
Total
Other Assets
|
|
|
36,776,510
|
|
|
34,112,663
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$
|
71,025,971
|
|
$
|
64,621,854
|
|
See
Notes
to Condensed Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
September,
|
|
December
31,
|
|
|
|
2006
|
|
2005
|
|
|
|
(Unaudited)
|
|
|
|
Liabilities
and Stockholders' Equity:
|
|
|
|
|
|
|
|
CurrentLiabilities:
|
|
|
|
|
|
|
|
Current
Portion - Long Term Debt
|
|
$
|
942,610
|
|
$
|
833,369
|
|
Current
Portion Capital Lease Obligations
|
|
|
19,902
|
|
|
61,315
|
|
Accounts
Payable
|
|
|
2,048,505
|
|
|
2,013,968
|
|
Accrued
Expenses
|
|
|
4,020,312
|
|
|
2,916,021
|
|
Interim
Billings in Excess of Costs and Estimated
|
|
|
|
|
|
|
|
Profits
|
|
|
7,294,381
|
|
|
7,938,422
|
|
Deferred
Revenue
|
|
|
12,311,533
|
|
|
10,037,813
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
26,637,243
|
|
|
23,800,908
|
|
|
|
|
|
|
|
|
|
Long
Term Debt - Less Current Portion
|
|
|
2,498,785
|
|
|
1,916,667
|
|
Capital
Lease Obligations - Less Current Portion
|
|
|
--
|
|
|
9,521
|
|
Interest
Rate Swap at Fair Value
|
|
|
--
|
|
|
7,812
|
|
Deferred
Tax Liability
|
|
|
2,382,937
|
|
|
2,118,603
|
|
Deferred
Rent Payable
|
|
|
477,446
|
|
|
482,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Non Current Liabilities
|
|
|
5,359,168
|
|
|
4,534,651
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’
Equity:
|
|
|
|
|
|
|
|
Preferred
Stock - $.01 Par Value, 3,000,000
|
|
|
|
|
|
|
|
Shares
Authorized; None issued and outstanding
|
|
|
--
|
|
|
--
|
|
|
|
|
|
|
|
|
|
Common
Stock - $.01 Par Value; Authorized
|
|
|
|
|
|
|
|
15,000,000
Shares; Issued and Outstanding
|
|
|
|
|
|
|
|
6,780,150
and 6,547,937 Shares at
|
|
|
|
|
|
|
|
September
30, 2006 and 6,719,517 and 6,487,943
|
|
|
|
|
|
|
|
Shares
at December 31, 2005
|
|
|
67,801
|
|
|
67,195
|
|
|
|
|
|
|
|
|
|
Additional
Paid in Capital
|
|
|
40,464,977
|
|
|
39,997,558
|
|
Accumulated
Comprehensive Income (Loss) - Interest
|
|
|
|
|
|
|
|
Rate
Swap
|
|
|
5,861
|
|
|
(7,812
|
)
|
Retained
Earning (Accumulated Deficit)
|
|
|
265,635
|
|
|
(2,004,132
|
)
|
|
|
|
40,804,274
|
|
|
38,052,809
|
|
Less:
Cost of Shares of Common Stock Held
|
|
|
|
|
|
|
|
in
Treasury - 232,213 Shares at September 30, 2006
|
|
|
|
|
|
|
|
and
231,574 at December 31, 2005
|
|
|
1,774,714
|
|
|
1,766,514
|
|
|
|
|
|
|
|
|
|
Total
Stockholders’ Equity
|
|
|
39,029,560
|
|
|
36,286,295
|
|
|
|
|
|
|
|
|
|
Total
Liabilities and Stockholders’ Equity
|
|
$
|
71,025,971
|
|
$
|
64,621,854
|
|
See
Notes
to Condensed Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF INCOME - (Unaudited)
|
|
Nine
Months Ended
|
|
Three
Months Ended
|
|
|
|
September
30
|
|
September
30
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
Software
and Related
|
|
|
|
|
|
|
|
|
|
Systems
and Services:
|
|
|
|
|
|
|
|
|
|
Turnkey
Systems
|
|
$
|
20,082,200
|
|
$
|
13,462,087
|
|
$
|
7,161,968
|
|
$
|
4,798,426
|
|
Maintenance
Contract Services
|
|
|
19,518,635
|
|
|
7,076,606
|
|
|
6,862,328
|
|
|
2,631,573
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application
Service Provider Services
|
|
|
2,609,678
|
|
|
1,785,665
|
|
|
925,668
|
|
|
652,619
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data
Center Services
|
|
|
1,324,673
|
|
|
1,380,234
|
|
|
442,260
|
|
|
433,976
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Revenues
|
|
|
43,535,186
|
|
|
23,704,592
|
|
|
15,392,224
|
|
|
8,516,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Software
and Related
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Systems
and Services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Turnkey
Systems
|
|
|
12,959,076
|
|
|
7,288,864
|
|
|
4,450,066
|
|
|
2,788,201
|
|
Maintenance
Contract Services
|
|
|
6,732,971
|
|
|
3,237,724
|
|
|
2,360,572
|
|
|
1,126,343
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Application
Service Provider Services
|
|
|
1,564,837
|
|
|
1,143,147
|
|
|
597,119
|
|
|
479,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Data
Center Services
|
|
|
608,245
|
|
|
677,017
|
|
|
204,899
|
|
|
227,393
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Cost of Revenues
|
|
|
21,865,129
|
|
|
12,346,752
|
|
|
7,612,656
|
|
|
4,621,002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
Profit
|
|
|
21,670,057
|
|
|
11,357,840
|
|
|
7,779,568
|
|
|
3,895,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling,
General and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Administrative
Expenses
|
|
|
13,098,901
|
|
|
6,782,444
|
|
|
4,405,865
|
|
|
2,423,859
|
|
Research,
Development and Maintenance
|
|
|
4,571,060
|
|
|
2,855,906
|
|
|
1,600,276
|
|
|
886,603
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
17,669,961
|
|
|
9,638,350
|
|
|
6,006,141
|
|
|
3,310,462
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income
|
|
|
4,000,096
|
|
|
1,719,490
|
|
|
1,773,427
|
|
|
585,130
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and Other Income
|
|
|
274,418
|
|
|
246,257
|
|
|
96,412
|
|
|
100,563
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and Other Expense
|
|
|
(179,747
|
)
|
|
(52,369
|
)
|
|
(72,314
|
)
|
|
(14,936
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Income Tax
|
|
|
4,094,767
|
|
|
1,913,378
|
|
|
1,797,525
|
|
|
670,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Tax
|
|
|
1,825,000
|
|
|
722,000
|
|
|
772,000
|
|
|
292,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
2,269,767
|
|
$
|
1,191,378
|
|
$
|
1,025,525
|
|
$
|
378,757
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Share (“EPS”) of Common
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
Basic EPS
|
|
$
|
.35
|
|
$
|
.22
|
|
$
|
.16
|
|
$
|
.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Outstanding
|
|
|
6,522,215
|
|
|
5,409,836
|
|
|
6,547,937
|
|
|
5,537,862
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
EPS
|
|
$
|
.33
|
|
$
|
.21
|
|
$
|
.15
|
|
$
|
.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock and Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equivalents
Outstanding
|
|
|
6,813,735
|
|
|
5,655,631
|
|
|
6,835,360
|
|
|
5,798,017
|
|
See
Notes
to Condensed Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
Operating
Activities:
|
|
|
|
|
|
Net
Income
|
|
$
|
2,269,767
|
|
$
|
1,191,378
|
|
|
|
|
|
|
|
|
|
Adjustments
to Reconcile Net Income
|
|
|
|
|
|
|
|
to Net Cash Provided by Operating Activities:
|
|
|
|
|
|
|
|
Depreciation
and Amortization
|
|
|
3,260,621
|
|
|
1,418,549
|
|
Provision
for Doubtful Accounts
|
|
|
455,188
|
|
|
342,000
|
|
Deferred
Income Taxes
|
|
|
102,000
|
|
|
487,000
|
|
Vested
Option Expense
|
|
|
90,444
|
|
|
--
|
|
|
|
|
|
|
|
|
|
Changes
in Assets and Liabilities:
|
|
|
|
|
|
|
|
[Increase] Decrease in:
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
(4,482,137
|
)
|
|
2,407,906
|
|
Costs
and Estimated Profits in
|
|
|
|
|
|
|
|
Excess
of Interim Billings
|
|
|
(719,928
|
)
|
|
(433,954
|
)
|
Other
Current Assets
|
|
|
91,395
|
|
|
46,750
|
|
Other
Assets
|
|
|
221,382
|
|
|
(7,730
|
)
|
|
|
|
|
|
|
|
|
Increase
[Decrease] in:
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
|
(58,107
|
)
|
|
433,759
|
|
Accrued
Expenses
|
|
|
1,041,380
|
|
|
830,550
|
|
Interim
Billings in Excess of
|
|
|
|
|
|
|
|
Costs
and Estimated Profits
|
|
|
(644,041
|
)
|
|
(1,201,383
|
)
|
Deferred
Revenue
|
|
|
239,470
|
|
|
3,478
|
|
Deferred
Rent Payable
|
|
|
(4,602
|
)
|
|
21,600
|
|
|
|
|
|
|
|
|
|
Total
Adjustments
|
|
|
(406,935
|
)
|
|
4,348,525
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided by
|
|
|
|
|
|
|
|
Operating
Activities
|
|
|
1,862,832
|
|
|
5,539,903
|
|
|
|
|
|
|
|
|
|
Investing
Activities:
|
|
|
|
|
|
|
|
Acquisition
of Property, Equipment and Software
|
|
|
(941,614
|
)
|
|
(346,020
|
)
|
Capitalized
Software Development
|
|
|
--
|
|
|
(42,000
|
)
|
Business
Acquisitions
|
|
|
(2,186,184
|
)
|
|
(13,347,017
|
)
|
|
|
|
|
|
|
|
|
Net
Cash Used In Investing Activities
|
|
|
(3,127,798
|
)
|
|
(13,735,037
|
)
|
See
Notes
to Condensed Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS - (Unaudited)
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
Financing
Activities:
|
|
|
|
|
|
Payment
of Capitalized Lease Obligations
|
|
$
|
(50,934
|
)
|
$
|
(47,857
|
)
|
Net
Proceeds from Stock Options Exercised
|
|
|
482,730
|
|
|
186,590
|
|
Costs
Related to Private Placement
|
|
|
(158,349
|
)
|
|
--
|
|
Payments
of Term Loans
|
|
|
(743,641
|
)
|
|
(499,994
|
)
|
|
|
|
|
|
|
|
|
Net
Cash Used in Financing Activities
|
|
|
(470,194
|
)
|
|
(361,261
|
)
|
|
|
|
|
|
|
|
|
Net
Decrease in Cash and Cash Equivalents
|
|
|
(1,735,160
|
)
|
|
(8,556,395
|
)
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents -
|
|
|
|
|
|
|
|
Beginning
of Period
|
|
|
11,445,525
|
|
|
16,411,735
|
|
|
|
|
|
|
|
|
|
Cash
and Cash Equivalents -
|
|
|
|
|
|
|
|
End
of Period
|
|
$
|
9,710,365
|
|
$
|
7,855,340
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosure of Cash Flow Information:
|
|
|
|
|
|
|
|
Cash
paid during the period for:
|
|
|
|
|
|
|
|
Interest
|
|
$
|
163,573
|
|
$
|
55,110
|
|
Income
Taxes
|
|
$
|
1,223,181
|
|
$
|
242,458
|
|
Non
Cash Investing and Financing Activities:
The
fair
value of the interest rate swap increased by $13,673 for the nine months ended
September 30, 2006. The fair value of the interest rate swap increased by
$13,008 for the nine months ended September 30, 2005.
During
the nine months ended September 30, 2006, the Company received 639 shares of
its
common stock in consideration for the cashless exercise of certain stock
options. The value of the shares received was $8,200, which was the market
value
of the common stock on the date of exercise.
During
the nine month period ended September 30, 2006, the Company analyzed the value
of the assets previously acquired from CMHC and increased deferred revenue
by
$304,001 and accrued expenses by $192,766, offset by an increase in deferred
tax
assets of $355,000 resulting in a net increase to goodwill of
$141,767.
During
the nine months ended September 30, 2006, the Company acquired for $5,300,139
the software, customer lists and other assets of QS Technologies, Inc. The
consideration consisted of $1,900,000 in cash, $1,435,000 in a three year
promissory note, $212,789, in the assumption of certain accounts payable and
accrued expenses and $1,730,249 for certain liabilities for services to be
performed in the future and $22,101 of professional fees.
See
Notes
to Condensed Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY -
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid-in
|
|
Accumulated
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Capital
|
|
Deficit
/
|
|
Loss
|
|
|
|
|
|
|
|
Total
|
|
|
|
|
|
Common
|
|
Retained
|
|
Interest
Rate
|
|
Comprehensive
|
|
Treasury
Shares
|
|
Stockholders’
|
|
|
|
Shares
|
|
Amount
|
|
Stock
|
|
Earnings
|
|
Swap
|
|
Income
|
|
Shares
|
|
Amount
|
|
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- January 1, 2006
|
|
|
6,719,517
|
|
$
|
67,195
|
|
$
|
39,997,558
|
|
$
|
(2,004,132
|
)
|
$
|
(7,812
|
)
|
$
|
--
|
|
|
231,574
|
|
$
|
(1,766,514
|
)
|
$
|
36,286,295
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock Issued - Exercise of Options And
Warrants
|
|
|
57,144
|
|
|
571
|
|
|
490,359
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
639
|
|
|
(8,200
|
)
|
|
482,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Issued for Services
|
|
|
3,489
|
|
|
35
|
|
|
44,965
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change
in Fair Value of Interest Rate Swap
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
13,673
|
|
|
13,673
|
|
|
--
|
|
|
--
|
|
|
13,673
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
Related to 2005 Private Placement
|
|
|
--
|
|
|
--
|
|
|
(158,349
|
)
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
(158,349
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of Stock Compensation
|
|
|
--
|
|
|
--
|
|
|
90,444
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
90,444
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
--
|
|
|
--
|
|
|
--
|
|
|
2,269,767
|
|
|
--
|
|
|
2,269,767
|
|
|
--
|
|
|
--
|
|
|
2,269,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
- September 30, 2006
|
|
|
6,780,150
|
|
$
|
67,801
|
|
$
|
40,464,977
|
|
$
|
265,635
|
|
$
|
5,861
|
|
$
|
2,283,440
|
|
|
232,213
|
|
$
|
(1,774,714
|
)
|
$
|
39,029,560
|
|
See
Notes
to Consolidated Financial Statements.
NETSMART
TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The
accompanying condensed consolidated financial statements include the accounts
of
Netsmart Technologies, Inc. and its subsidiaries Netsmart New York, Inc.
(formerly Creative Socio-Medics Corporation), Netsmart Ohio, Inc. (formerly
CMHC
Systems, Inc.), and Netsmart Public Health, Inc. (which operates the business
of
QS Technologies, Inc.) (collectively, unless the context otherwise indicates,
the “Company”). All intercompany balances and transactions have been eliminated
in consolidation.
These
unaudited, condensed consolidated financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q. Accordingly, they do not
include all of the information and footnotes required by accounting principles
generally accepted in the United States of America for complete financial
statements. In the opinion of management all adjustments (consisting of normal
recurring adjustments) considered necessary for a fair presentation have been
included. The results of operations for any interim period are not necessarily
indicative of the results of operations to be expected for any other fiscal
period or the full fiscal year. For further information, refer to the
consolidated financial statements and accompanying footnotes included in the
Company’s annual report on Form 10-K for the year ended December 31,
2005.
(2)
Reclassification
In
the
current quarter we have reclassified certain components of our stockholders’
equity section to reflect the elimination of deferred compensation arising
from
unvested share-based compensation pursuant to the requirements of Staff
Accounting Bulletin No. 107, regarding Statement of Financial Accounting
Standards No. 123(R), “Share-Based Payment.” This deferred compensation was
previously recorded as an increase to additional paid-in capital with a
corresponding reduction to stockholders’ equity for such deferred compensation.
This reclassification has no effect on net income or total stockholders’ equity
as previously reported. The Company will record an increase to additional
paid-in capital as the share-based payments vest.
(3)
Earnings
Per Share
The
following table sets forth the components used in the computation of basic
and
diluted earnings per share:
|
|
Nine
Months Ended
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2005
|
|
2006
|
|
2005
|
|
Numerator:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$
|
2,269,767
|
|
$
|
1,191,378
|
|
$
|
1,025,525
|
|
$
|
378,757
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares
|
|
|
6,522,215
|
|
|
5,409,836
|
|
|
6,547,937
|
|
|
5,537,862
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee
stock options
|
|
|
267,644
|
|
|
245,795
|
|
|
262,637
|
|
|
260,155
|
|
Warrants
|
|
|
23,876
|
|
|
--
|
|
|
24,786
|
|
|
--
|
|
Denominator
for diluted earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
share-adjusted weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average
shares after assumed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
conversions
|
|
|
6,813,735
|
|
|
5,655,631
|
|
|
6,835,360
|
|
|
5,798,017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
to purchase 40,500 shares of the Company’s common stock that were outstanding as
of September 30, 2006 were not included in the calculation of diluted earnings
per share for the nine and three months ended September 30, 2006 since such
inclusion would have been antidilutive.
Options
to purchase 1,500 shares of the Company’s common stock that were outstanding as
of September 30, 2005 were not included in the calculation of diluted earnings
per share for the nine and three months ended September 30, 2005 since such
inclusion would have been antidilutive.
(4)
Stock
Options and Similar Equity Instruments
At
September 30, 2006, the Company had three stock-based employee compensation
plans: the 1998 Long-Term Incentive Plan (the “1998 Plan”), as amended, the 1999
Long-Term Incentive Plan (the “1999 Plan”) and the 2001 Long-Term Incentive Plan
(the “2001 Plan”), as amended. The 2001 Plan was approved by the stockholders on
March 7, 2002 and originally provided for the issuance of 180,000 shares of
common stock. In January 2003, the 2001 Plan was amended and approved by the
stockholders to provide for an increase in the number of shares subject to
the
plan from 180,000 to 550,000. In May 2004, the 2001 Plan was further amended
and
approved by the stockholders to provide an increase in the number of shares
subject to the plan from 550,000 to 950,000. In July 2005, the plan was amended
and approved by the stockholders to provide an increase in the number of shares
subject to the plan from 950,000 to 1,350,000. The maximum shares issuable
by
the Company are 790,000, 300,000 and 1,350,000 shares of Common Stock pursuant
to the 1998 Plan, the 1999 Plan and the 2001 Plan, respectively. The options,
when granted vest ratably over one year except
for the 400,000 options granted in July
2005, which vested prior to December 31, 2005. At September 30, 2006 there
were
no shares available for further issuance under any of the 1998 Plan, the 1999
Plan and 2001 Plan, respectively.
The
1998
Plan, the 1999 Plan and the 2001 Plan (collectively, the “Plans”) are
administered by the Compensation Committee of the board of directors. Officers
and other key employees, consultants and directors (other than non-employee
directors) are eligible to receive options or other equity-based incentives
under the Plans.
The
2001
Plan provides that each non-employee director automatically receives a
nonqualified stock option to purchase 6,000 shares of common stock and the
chairman of both the audit committee and the compensation committee will receive
a nonqualified stock option to purchase 7,500 shares of common stock on April
1
of each year. However, if there are not sufficient shares available under the
applicable Plan, the non-employee director will receive a lesser number of
shares.
Effective
January 1, 2006, the Company adopted the fair value recognition provisions
of
Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004),
“Share-Based Payment,” (“SFAS 123R”), using the modified-prospective-transition
method. As a result, the Company’s income before taxes for the nine and three
months ended September 30, 2006 is $90,444 and $20,875, respectively, lower
than
if it had continued to account for share-based compensation under Accounting
Principles Board (“APB”) Opinion No. 25.
The
Company has $173,958 of stock based compensation expense remaining to be
recognized over the period October 2006 through October 2008.
A
summary
of the option activity under the plans as of September 30, 2006, and changes
during the nine months ended September 30, 2006 is presented below:
Options
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Intrinsic
|
|
|
|
2006
|
|
Price
|
|
Term
|
|
Value
|
|
Outstanding
at January 1,
|
|
|
945,467
|
|
$
|
8.758
|
|
|
|
|
|
|
|
Granted
|
|
|
10,500
|
|
$
|
13.860
|
|
|
|
|
|
|
|
Exercised
|
|
|
(41,320
|
)
|
$
|
7.669
|
|
|
|
|
|
|
|
Forfeited
or Expired
|
|
|
--
|
|
$
|
--
|
|
|
|
|
|
|
|
Outstanding
at September 30,
|
|
|
914,647
|
|
$
|
8.865
|
|
|
3.11
Years
|
|
$
|
3,949,015
|
|
Exercisable
at September 30,
|
|
|
893,814
|
|
$
|
8.728
|
|
|
3.09
Years
|
|
$
|
3,949,015
|
|
A
summary
of the option activity of Nonvested Shares at September 30, 2006, and changes
during the nine months ended September 30, 2006 is presented below:
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
|
|
|
|
Grant
Date
|
|
|
|
2006
|
|
Fair
Value
|
|
Nonvested
at January 1,
|
|
|
28,333
|
|
$
|
14.770
|
|
Vested
|
|
|
(7,500
|
)
|
$
|
14.770
|
|
Forfeited
|
|
|
--
|
|
|
--
|
|
Nonvested
at September 30,
|
|
|
20,833
|
|
$
|
14.770
|
|
The
total
fair value of shares vested during the nine months ended September 30, 2006
was
$62,625.
The
fair
value of options at date of grant was estimated using the Black-Scholes fair
value based method during 2006 with the following weighted average
assumptions:
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2006
|
|
Expected
Life (Years)
|
|
|
1.77
|
|
Risk
Free Rate
|
|
|
4.82
|
%
|
Expected
Dividends
|
|
|
--
|
%
|
Volatility
|
|
|
29
|
%
|
|
|
|
|
|
The
weighted average fair value of options at date of grant using the fair value
based method during 2006 is estimated at $2.65. The total intrinsic value of
options exercised during the nine months ended September 30, 2006 was
$207,159.
As
permitted under Statement of Financial Accounting Standards No. 148, “Accounting
for Stock-Based Compensation--Transition and Disclosure”, which amended SFAS No.
123 (SFAS 123), “Accounting for Stock-Based Compensation,” the Company has
elected to continue to follow the intrinsic value method in accounting for
its
stock-based employee compensation arrangements, as defined by APB Opinion No.
25, “Accounting for Stock Issued to Employees,” and related interpretations
including Financial Accounting Standards Board Interpretation No. 44,
“Accounting for Certain Transactions Involving Stock Compensation,” an
interpretation of APB No. 25 for the periods up to and including December 31,
2005. No stock-based employee compensation cost is reflected in net income
for
periods prior to December 31, 2005, as all options granted under those plans
had
an exercise price equal to the market value of the underlying common stock
on
the date of grant. The following table illustrates the effect on net income
and
earnings per share if the Company had applied the fair value recognition
provisions of SFAS 123 to stock-based employee compensation for periods prior
to
December 31, 2005.
|
|
Nine
Months Ended
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2005
|
|
2005
|
|
|
|
(Unaudited)
|
|
(Unaudited)
|
|
|
|
|
|
|
|
Net
Income as Reported
|
|
$
|
1,191,378
|
|
$
|
378,757
|
|
|
|
|
|
|
|
|
|
Deduct:
Total stock-based employee
|
|
|
|
|
|
|
|
compensation
expense determined
|
|
|
|
|
|
|
|
under
fair value-based method for
|
|
|
|
|
|
|
|
all
awards, net of related tax effect
|
|
|
914,064
|
|
|
442,426
|
|
|
|
|
|
|
|
|
|
Pro
Forma Net Income (Loss)
|
|
$
|
277,314
|
|
$
|
(63,669
|
)
|
|
|
|
|
|
|
|
|
Basic
Net Income Per Share as Reported
|
|
$
|
.22
|
|
$
|
.07
|
|
|
|
|
|
|
|
|
|
Basic
Pro Forma Net Income (Loss) Per Share
|
|
$
|
.05
|
|
$
|
(.01
|
)
|
|
|
|
|
|
|
|
|
Diluted
Net Income Per Share as Reported
|
|
$
|
.21
|
|
$
|
.07
|
|
|
|
|
|
|
|
|
|
Diluted
Pro Forma Net Income (Loss) Per Share
|
|
$
|
.05
|
|
$
|
(.01
|
)
|
The
fair
value of options at date of grant was estimated using the Black-Scholes fair
value based method with the following weighted average assumptions:
|
|
Nine
Months Ended
|
|
|
|
September
30,
|
|
|
|
2005
|
|
Expected
Life (Years)
|
|
|
5
|
|
Interest
Rate
|
|
|
5.00
|
%
|
Annual
Rate of Dividends
|
|
|
0
|
%
|
Volatility
|
|
|
51
|
%
|
The
weighted average fair value of options at date of grant using the fair value
based method during 2005 is estimated at $4.20.
(5)
Acquisitions
In
2005,
the Company completed acquisitions of three companies with products and services
complementary to its existing offerings. The Company acquired Continued Learning
(“CL”), a Florida-based provider of online training services on April 28, 2005.
On June 20, 2005, the Company acquired Addiction Management Systems, Inc
(“AMS”). In September 2005, the Company completed the acquisition of CMHC
Systems (“CMHC”), a leading competitor in the behavioral healthcare software
market. During the nine-month period ended September 30, 2006, the Company
evaluated the assets and liabilities acquired from CMHC and increased deferred
revenue by $304,001 and accrued expenses by $192,766 offset by an increase
in
deferred tax asset of $355,000, resulting in a net increase to goodwill of
$141,767.
With
respect to the CL acquisition, the purchase agreement provided for a potential
additional purchase price payment of up to $250,000 if certain revenue targets
were met within one year. At December 31, 2005, the Company recognized the
full
$250,000 of this additional payment, which was included in accrued expenses.
This amount has been paid as of June 30, 2006.
On
August
1, 2006, the Company acquired certain assets, including computer software,
customer lists and computer equipment of QS Technologies, Inc. (“QS”). The
purchase price totaled approximately $5,300,000 as follows: an initial payment
of $1,900,000 in cash and a three year $1,435,000 promissory note paid monthly,
at an annual rate of 8.25% together with the assumption of approximately
$1,943,000 in net liabilities, consisting principally of deferred revenue,
and
acquisition costs of approximately $22,000. The transaction also provides for
potential additional payments to the seller of up to $1,450,000 in 2008,
contingent upon the attainment of performance milestones by the QS business
through 2007. The milestones would result from the attainment of maintenance
revenue, vital records contract awards, and other software contract awards.
Based on the Company’s analysis, the attainment of these milestones would result
in a contingent purchase price adjustment. The QS business delivers
enterprise-wide public health solutions and vital records software to 70 public
health agencies, including nine states. The Company also assumed the facility
lease of QS in Greenville, South Carolina. This lease has a total square footage
of 5,761, is non cancelable and expires on February 23, 2011. The annual rent
is
$80,106 and is subject to escalation clauses.
The
cost
of the QS acquisition was allocated as follows: $2,872,000 to customer lists,
$2,233,000 to purchased software, $167,000 to other current assets and $28,000
to properly and equipment. The Company is amortizing the customer list over
a
ten year life, the purchased software over a six year life and the properly
and
equipment over a two year life.
The
following unaudited proforma condensed consolidated statements of operations
assumes the CL, AMS, CMHC and QS acquisitions occurred on January 1, 2005.
In
the opinion of management, all adjustments necessary to present fairly such
unaudited proforma statements have been made. These proforma amounts may not
be
indicative of what would have occurred had the acquisitions been completed
on
January 1, 2005 or results which may occur in the future.
|
|
|
|
|
|
|
|
Nine
Months Ended
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2005
|
|
2005
|
|
|
|
(in
thousands except
|
|
(in
thousands except
|
|
|
|
share
and per share
|
|
share
and per share
|
|
|
|
amounts)
|
|
amounts)
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
45,323
|
|
$
|
14,885
|
|
Net
Income
|
|
|
1,185
|
|
|
13
|
|
Net
Income Per Share
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.18
|
|
$
|
0.00
|
|
Diluted
|
|
$
|
0.18
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares of Common Stock Outstanding
|
|
|
6,463,597
|
|
|
6,317,342
|
|
Weighted
Average Number of Shares of Common Stock and Common Stock Equivalents
Outstanding
|
|
|
6,723,752
|
|
|
6,530,183
|
|
|
|
Nine
Months Ended
|
|
Three
Months Ended
|
|
|
|
September
30,
|
|
September
30,
|
|
|
|
2006
|
|
2006
|
|
|
|
(in
thousands except
|
|
(in
thousands except
|
|
|
|
share
and per share
|
|
share
and per share
|
|
|
|
amounts)
|
|
amounts)
|
|
|
|
|
|
|
|
Revenue
|
|
$
|
45,469
|
|
$
|
15,916
|
|
Net
Income
|
|
|
2,206
|
|
|
845
|
|
Net
Income Per Share
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.34
|
|
$
|
0.13
|
|
Diluted
|
|
$
|
0.32
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
Weighted
Average Number of Shares of Common Stock Outstanding
|
|
|
6,522,215
|
|
|
6,547,937
|
|
Weighted
Average Number of Shares of Common Stock and Common Stock Equivalents
Outstanding
|
|
|
6,813,735
|
|
|
6,835,360
|
|
The
results of the acquisition of each of CL, AMS, CMHC and QS were included in
the
actual results of operations commencing with the respective date of
acquisition.
(6)
Income
Taxes
The
provision for income taxes for the nine months ended September 30, 2006 consists
of a current tax provision of $1,723,000 and a deferred tax provision of
approximately $102,000. The provision for income taxes for the nine months
ended
September 30, 2005 consists of a current tax provision of $235,000 and a
deferred tax provision of approximately $487,000. The provision for income
taxes
for the three months ended September 30, 2006 consists of a current tax
provision of $1,203,000 and a deferred tax credit of approximately $431,000.
The
provision for income taxes for the three months ended September 30, 2005
consists of a current tax provision of $96,000 and a deferred tax provision
of
approximately $196,000.
(7)
Stockholders’
Equity
During
the nine months ended September 30, 2006, options and warrants to purchase
57,144 shares were exercised and the Company received gross proceeds of
$490,930. Pursuant to option grants, employees have the right to pay for the
exercise price of the options by delivering “mature” shares of common stock
owned by them. Included in the proceeds received upon the exercise of options
was 639 shares of the Company’s common stock. The value of the shares received
was $8,200, which was based upon the market value of the common stock on the
date of exercise in accordance with the cashless exercise provisions of the
Company’s stock option plans.
On
April
1, 2006, 10,500 options were granted to outside members of our Board of
Directors, as stipulated in the 2001 Long - Term Incentive Plan. These options
were granted at a price of $13.86 per share for each option, which was equal
to
the fair market value at the date of grant, in accordance with the terms of
the
2001 Long-Term Incentive Plan. The options granted vested
immediately.
In
June
2006, the Company issued 3,489 shares of its common stock in connection with
an
investor relations agreement whereby the Company would pay consulting fees
in
addition to the stock. These shares, which were valued at $12.90, the fair
market value at the date of grant, represented the cost of the services based
upon the contractual agreement.
(8)
Operating
Segments
The
Company currently classifies its operations in five business segments: (1)
Software and Related Systems and Services - NY, (2) Software and Related Systems
and Services - Ohio, (3) Software and Related Systems and Services - Public
Health, (4) Data Center Services and (5) Application Service Provider Services
(“ASP”). Software and Related Systems and Services - Public Health is a new
segment resulting from the Company’s acquisition of QS in August 2006,
consisting of the subsidiary NTST - Public Health which delivers enterprise
wide
public health solutions and vital records software to public health agencies.
Software and Related Systems and Services - Ohio is a new segment resulting
from
the Company’s acquisition of CMHC in September 2005. NTST-Ohio offers a full
suite of behavioral healthcare information management software for mental
health, substance abuse and addiction services agencies, developmental
disability centers, and behavioral health-related managed care organizations.
Software and Related Systems and Services for each of the NY, Public Health
and
Ohio segments refers to the design, installation, implementation and maintenance
of computer information systems that provide comprehensive healthcare
information technology solutions including billing, patient tracking and
scheduling for inpatient and out patient environments, as well as clinical
documentation and medical record generation and management. Within these
segments are large turnkey and small turnkey components. The large turnkey
components consist mostly of the Avatar suite of products. When the Company
is
engaged in a fixed price arrangement, these installations will usually extend
over a six-month to a multi-year time period. The duration of the implementation
is dependent on the size and complexity of the customer organization and the
specifics of the implementation. The small turnkey components are usually
completed within a six-month period. Small turnkey contracts performed in the
New York segment are mostly related to the Avatar methadone related products.
The small turnkey contracts in the Ohio and Public Health segments are for
system installations for behavioral healthcare and public health information
management software for mental health, substance abuse and addiction services
agencies, developmental disability centers and behavioral health-related managed
care organizations.
Data
Center Services involve Company personnel performing data entry and data
processing services for customers. ASP services involve the Company offering
several of it software products on a virtual private network or internet
delivery approach, thereby allowing its customers to utilize the Company’s
products and pay on a monthly service basis.
Intersegment
sales and sales outside the United States are not material. Information
concerning the Company’s business segments is as follows:
|
|
Netsmart
-NY Software and Related Systems and Services
|
|
Data
Center
|
|
Application
Service Provider
|
|
Netsmart
- Ohio Software and Related Systems and Services
|
|
Netsmart
-Public Health Sofware and Related Systems and Services
|
|
Total
|
|
Nine
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
Turnkey
|
|
$
|
13,636,838
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
13,636,838
|
|
Small
Turnkey
|
|
|
1,362,337
|
|
|
-
|
|
|
-
|
|
|
4,905,550
|
|
|
177,475
|
|
|
6,445,362
|
|
Maintenance
|
|
|
8,115,539
|
|
|
-
|
|
|
-
|
|
|
11,059,943
|
|
|
343,153
|
|
|
19,518,635
|
|
Other
|
|
|
-
|
|
|
1,324,673
|
|
|
2,609,678
|
|
|
-
|
|
|
-
|
|
|
3,934,351
|
|
Total
|
|
$
|
23,114,714
|
|
$
|
1,324,673
|
|
$
|
2,609,678
|
|
$
|
15,965,493
|
|
$
|
520,628
|
|
$
|
43,535,186
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
$
|
1,519,779
|
|
$
|
278,283
|
|
$
|
(58,493
|
)
|
$
|
2,312,065
|
|
$
|
43,133
|
|
$
|
4,094,767
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Identifiable Assets at September 30, 2006
|
|
$
|
28,075,699
|
|
$
|
1,761,943
|
|
$
|
4,342,848
|
|
$
|
31,050,707
|
|
$
|
5,794,774
|
|
$
|
71,025,971
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine
Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
Turnkey
|
|
$
|
12,823,267
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
12,823,267
|
|
Small
Turnkey
|
|
|
638,820
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
638,820
|
|
Maintenance
|
|
|
7,076,606
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
7,076,606
|
|
Other
|
|
|
|
|
|
1,380,234
|
|
|
1,785,665
|
|
|
-
|
|
|
-
|
|
|
3,165,899
|
|
Total
|
|
$
|
20,538,693
|
|
$
|
1,380,234
|
|
$
|
1,785,665
|
|
$
|
-
|
|
$
|
-
|
|
$
|
23,704,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
$
|
1,532,217
|
|
$
|
368,892
|
|
$
|
12,269
|
|
$
|
-
|
|
$
|
-
|
|
$
|
1,913,378
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Identifiable Assets at September 30, 2005
|
|
$
|
55,440,331
|
|
$
|
1,478,805
|
|
$
|
3,324,638
|
|
$
|
-
|
|
$
|
-
|
|
$
|
60,243,774
|
|
|
|
Netsmart
-NY Software and Related Systems and Services
|
|
Data
Center
|
|
Application
Service Provider
|
|
Netsmart
- Ohio Software and Related Systems and Services
|
|
Netsmart
-Public Health Sofware and Related Systems and Services
|
|
Total
|
|
Three
Months Ended September 30, 2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
Turnkey
|
|
$
|
4,977,797
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,977,797
|
|
Small
Turnkey
|
|
|
541,972
|
|
|
-
|
|
|
-
|
|
|
1,464,724
|
|
|
177,475
|
|
|
2,184,171
|
|
Maintenance
|
|
|
2,792,780
|
|
|
-
|
|
|
-
|
|
|
3,726,395
|
|
|
343,153
|
|
|
6,862,328
|
|
Other
|
|
|
-
|
|
|
442,260
|
|
|
925,668
|
|
|
-
|
|
|
-
|
|
|
1,367,928
|
|
Total
|
|
$
|
8,312,549
|
|
$
|
442,260
|
|
$
|
925,668
|
|
$
|
5,191,119
|
|
$
|
520,628
|
|
$
|
15,392,224
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
$
|
827,894
|
|
$
|
92,992
|
|
$
|
(44,307
|
)
|
$
|
877,813
|
|
$
|
43,133
|
|
$
|
1,797,525
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30, 2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Large
Turnkey
|
|
$
|
4,531,903
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
4,531,903
|
|
Small
Turnkey
|
|
|
266,523
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
266,523
|
|
Maintenance
|
|
|
2,631,573
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
2,631,573
|
|
Other
|
|
|
-
|
|
|
433,976
|
|
|
652,619
|
|
|
-
|
|
|
|
|
|
1,086,595
|
|
Total
|
|
$
|
7,429,999
|
|
$
|
433,976
|
|
$
|
652,619
|
|
$
|
-
|
|
|
|
|
$
|
8,516,594
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before Income Taxes
|
|
$
|
604,978
|
|
$
|
101,905
|
|
$
|
(36,126
|
)
|
$
|
-
|
|
$
|
-
|
|
$
|
670,757
|
|
(9)
New
Accounting Pronouncements
In
March
2006, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 156,
“Accounting for Servicing of Financial Assets” (“SFAS 156”), which amends SFAS
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities,” with respect to the accounting for separately
recognized servicing assets and servicing liabilities. SFAS 156 permits the
choice of the amortization method or the fair value measurement method, with
changes in fair value recorded in income for the subsequent measurement for
each
class of separately recognized servicing assets and servicing liabilities.
The
statement is effective for years beginning after September 15, 2006, with
earlier adoption permitted. The Company does not expect SFAS 156 to have a
material impact on the Company's financial position or results of
operations.
In
July
2006, the FASB released FASB Interpretation No. 48, “Accounting for Uncertainty
in Income Taxes, an interpretation of FASB Statement No. 109” (“FIN 48”). FIN 48
clarifies the accounting and reporting for uncertainties in income tax law.
FIN
48 prescribes a comprehensive model for the financial statement recognition,
measurement, presentation and disclosure of uncertain tax positions taken or
expected to be taken in income tax returns. FIN 48 shall be effective for fiscal
years beginning after December 15, 2006. Earlier adoption is permitted as of
the
beginning of an enterprise’s fiscal year, provided the enterprise has not yet
issued financial statements, including financial statements for any interim
period for that fiscal year. The cumulative effects, if any, of applying FIN
48
will be recorded as an adjustment to retained earnings as of the beginning
of
the period of adoption. The Company has commenced the process of evaluating
the
expected effect of FIN 48 on its financial position and results of operations
and is currently unable to determine such effects.
In
September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS
157”). This statement defines fair value, establishes a framework for measuring
fair value in accordance with accounting principles generally accepted in the
United States (“GAAP”), and expands disclosures about fair value measurements.
SFAS 157 does not require any new fair value measurements. However, for some
entities, the application of SFAS 157 will change current practice. SFAS 157
is
effective for financial statements issued for fiscal years beginning after
November 15, 2007, and interim periods within those fiscal years, with earlier
application permitted. The Company does not expect SFAS 157 to have a material
impact on the Company’s financial position or results of
operations.
In
September 2006, the staff of the Securities and Exchange Commission issued
Staff
Accounting Bulletin No. 108 (“SAB 108”) which provides interpretive guidance on
how the effects of the carryover or reversal of prior year misstatements should
be considered in quantifying a current year misstatement. SAB 108 becomes
effective in fiscal 2007. Adoption of SAB 108 is not expected to have a material
impact on the Company’s consolidated financial position, results of operations
or cash flow.
Item
2. |
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
|
Overview
Our
operations are grouped into five segments:
|
§ |
Software
and Related Systems and Services - New
York
|
|
§ |
Software
and Related Systems and Services -
Ohio
|
|
§ |
Software
and Related Systems and Services - Public
Health
|
|
§
|
Data
Center Services (service bureau
services)
|
|
§ |
Application
Service Provider Services (“ASP”)
|
Software
and Related Systems and Services is the design, installation, implementation
and
maintenance of computer information systems that provide comprehensive
healthcare information technology solutions, including billing, patient tracking
and scheduling for inpatient and outpatient environments, as well as clinical
documentation and medical record generation and management. We perform these
services in each of the New York, Public Health and Ohio segments. Within these
segments, we recognize revenue based on the nature of the products and services
sold, for example, a turnkey system, a consulting contract or a maintenance
contract. Turnkey revenue includes turnkey systems labor revenue, third party
hardware and software revenue, license revenue and sales from our small turnkey
division. We further classify our revenue into large turnkey and small turnkey
components. The large turnkey components consist mostly of our Avatar suite
of
products. When we are engaged in fixed price arrangements for large turnkey
systems, the installations will usually extend over a six-month to a multi-year
time period. The duration of the implementation depends on the size and
complexity of the customer organization and the specifics of the implementation.
Installations of small turnkey components are usually completed within a
six-month period. Small turnkey contracts performed in the New York segment
are
mostly related to our Avatar methadone related products. The small turnkey
contracts in the Ohio segment are for system installations for behavioral
healthcare information management software for mental health, substance abuse,
and addiction services agencies, developmental disability centers and behavioral
health-related managed care organizations. The Software and Related Systems
and
Services - Ohio segment is a new segment established as a result of the
acquisition of Netsmart - Ohio, formerly CMHC Systems, Inc. This acquisition
occurred in October 2005 and consequently operations from this acquisition
are
included in the results of operations for the nine months ended September 30,
2006, but are not included in the comparable period for 2005. The small turnkey
contracts in the Public Health segment are for system installations for a
comprehensive set of public health and vital records solutions for public health
agencies of all sizes. The Software and Related Systems and Services - Public
Health segment is a new segment established as a result of the acquisition
of
the business of QS Technologies, Inc. by Netsmart - Public Health subsidiary.
This acquisition occurred in August 2006 and consequently operations from this
acquisition are included in the results of operations for the two months ended
September 30, 2006 but are not included in the comparable period for 2005.
Data
Center Services involves our personnel performing data entry and data processing
services for customers. Application Service Provider Services involves the
offering of our Avatar suite of products, our CareNet products, our InfoScribeR
products and our Netsmart University, products on a virtual private network
or
through an internet delivery approach, thereby allowing our customers to deploy
products and pay on a monthly service basis, thus eliminating capital intensive
system requirements for such services.
In
addition to our acquisition of CMHC, we made two other acquisitions in fiscal
2005. On April 28, 2005, we acquired substantially all of the assets, including
computer software, customer lists and computer equipment, of ContinuedLearning
LLC, a company that offered a comprehensive family of web-based training
products and services, including its Learning Management System. These products
are marketed as Netsmart University. On June 20, 2005, we acquired the assets
of
Addiction Management Systems, Inc (“AMS”). The results of operations from these
acquisitions are also included in the results of operations for the nine months
ended September 30, 2006 but not the comparable period for 2005.
Our
results of operations are subject to various risks and uncertainties, including
those described in Item 1A, “Risk Factors” in both this Form 10-Q and in our
Form 10-K for the fiscal year ended December 31, 2005, and the market risks
described in Item 7A, Quantitative and Qualitative Disclosures about Market
Risks in our Form 10-K for the fiscal year ended December 31, 2005.
Nine
Months Ended September 30, 2006 and 2005
Results
of Operations
Our
total
revenue for the nine months ended September 30, 2006 (“the “September 2006
period”) was $43,535,000, an increase of $19,830,000, or 84%, from our revenue
for the nine months ended September 30, 2005 (the “September 2005 period”) which
was $23,705,000. Revenue from the Netsmart - Ohio acquisition accounted for
$15,965,000 or 81% of the increase in revenue from the September 2006 period
to
the September 2005 period. Revenue from the AMS acquisition accounted for
$1,020,000 or 5% of the increase in revenue from the September 2006 period
to
the September 2005 period. Revenue from the Netsmart - Public Health acquisition
accounted for $521,000 or 3% of the increase from the September 2006 period
to
the September 2005 period.
Revenue
from contracts with state and local government agencies represented 39% of
revenue in the September 2006 period and 49% of revenue in the September 2005
period. This decrease was the result of the inclusion of the Netsmart - Ohio
revenue, approximately 20% of which is generated from contracts with state
and
local government agencies.
Fixed
price software development contracts, which include labor, licenses and third
party resale components, accounted for 15% and 31% of consolidated revenue
for
the September 2006 period and the September 2005 period, respectively. This
decrease is the result of a decrease in Software and Related Systems and
Services revenue generated from fixed price contracts and an increase in
Software and Related Systems and Services revenue generated on an as incurred
basis, as well as an increase in our recurring revenue components. Our recurring
revenue components, which include our maintenance contract services, our Data
Center and our ASP services, accounted for 54% of our consolidated revenue
for
the September 2006 period as compared to 43% of consolidated revenue for the
September 2005 period. This increase was primarily the result of an increase
in
maintenance revenue resulting from the inclusion of the operations of Netsmart
-
Ohio and Netsmart - Public Health, as well as an increase in both maintenance
and ASP revenue, exclusive of the Netsmart - Ohio and Netsmart - Public Health
acquisitions, which was partially offset by a decrease in Data Center
revenue.
Revenue
from large turnkey fixed price software development contracts is determined
using the percentage of completion method, which is based upon the time spent
by
our technical personnel on a project. Since the billing schedules under the
contracts differ from the recognition of revenue, at the end of any quarter,
these contracts generally result in either costs and estimated profits in excess
of billing or billing in excess of costs and estimated profits. Revenue from
our
small turnkey fixed price contracts is accounted for under the completed
contract method.
Software
and Related Systems and Services - New York
Our
Software and Related Systems and Services - New York revenue for the September
2006 period was $23,115,000, an increase of $2,576,000, or 13%, from our revenue
for the September 2005 period, which was $20,539,000. Software and Related
Systems and Services - New York revenue is comprised of turnkey systems labor
revenue, revenue from sales of third party hardware and software, license
revenue, maintenance revenue and revenue from small turnkey systems in the
markets in which we operated prior to our acquisition of our Ohio operations
in
September 2005.
Within
this segment are large turnkey and small turnkey components. The large turnkey
components consist mostly of our Avatar suite of products. When we are engaged
in fixed price arrangements for large turnkey systems, the installations will
usually extend over a six-month to a multi-year time period; these installations
are accounted for under the percentage of completion method. The duration of
the
implementation depends on the size and complexity of the customer organization
and the specifics of the implementation. Installations of small turnkey
components are usually completed within a six-month period; these installations
are accounted for under the completed contract method. Small turnkey contracts
performed in the New York segment are mostly related to our Avatar methadone
related products.
The
largest component of Software and Related Systems and Services - New York
revenue was maintenance revenue, which increased $1,039,000, or 15%, to
$8,116,000 in the September 2006 period from $7,077,000 in the September 2005
period. Revenue from the AMS acquisition accounted for approximately 74% of
this
increase. As turnkey systems are completed, they are transitioned to the
maintenance division, thereby increasing our installed base of recurring
revenue. Turnkey systems labor revenue increased $579,000, or 8%, to $7,829,000
in the September 2006 period from $7,250,000 in the September 2005 period.
Turnkey systems labor revenue refers to labor associated with turnkey
installations and includes categories such as training, installation, project
management and development. An increase of $856,000 in turnkey systems labor
revenue was primarily due to an increase in billable time spent on contracts.
This increase was partially offset by $277,000 due to a 5% decrease in our
average daily billing rate. Revenue from third party hardware and software
increased 9% to $4,235,000 in the September 2006 period, from $3,882,000 in
the
September 2005 period. Sales of third party hardware and software, such as
pharmacy and database software, are made in connection with the sales of turnkey
systems. These sales are typically made at lower gross margins than our software
and related systems and services revenue. During the September 2006 period,
the
increase in revenue from third party hardware and software was the result of
an
increase in database software sales and pharmacy related sales to various
customers. License revenue decreased 7% to $1,573,000 in the September 2006
period from $1,691,000 in the September 2005 period. License revenue is
generated as part of a sale of a human services information system pursuant
to a
contract or purchase order that includes delivery of the system and maintenance.
The decrease in revenue is substantially the result of a decrease in customer
user count upgrade sales, as well as a decrease in large system license sales.
Revenue from the sales of our small turnkey contracts increased 113% to
$1,362,000 in the September 2006 period from $639,000 in the September 2005
period. Small turnkey contract sales relate to turnkey contracts that are less
than $50,000 and are usually completed within one to six months. The increase
in
our small turnkey revenue for the September 2006 period is substantially due
to
the inclusion of sales of AMS products and the completion of a substantial
Avatar methadone installation.
Gross
profit increased 8% to $10,808,000 in the September 2006 period from $10,012,000
in the September 2005 period. Our gross profit percentage decreased to 47%
in
the September 2006 period from 49% in the September 2005 period. Our gross
profit percentage decreased as a result of the decrease in license revenue,
as
well as an increase in our third party hardware and software revenue, which
are
typically made at lower gross margins than our other revenue components. This
decrease was partially offset by improved efficiency from our maintenance
division.
Software
and Related Systems and Services - Ohio
The
Software and Related Systems and Services-Ohio segment is a new segment
established as a result of the acquisition of Netsmart - Ohio, formerly CMHC
Systems, Inc. The Ohio operations commenced October 1, 2005. Netsmart - Ohio
offers a full suite of behavioral healthcare information management software
for
mental health, substance abuse, and addiction services agencies, developmental
disability centers, and behavioral health-related managed care organizations.
The small turnkey contracts in the Ohio segment are for system installations
for
behavioral healthcare information management software for mental health,
substance abuse, and addiction services agencies, developmental disability
centers and behavioral health-related managed care organizations. The small
turnkey contracts are usually completed within a six-month period.
Revenue
for the September 2006 period consisted of the following components: Maintenance
revenue of $11,060,000, third party hardware and software revenue of $1,339,000,
turnkey systems labor revenue of $2,026,000 and license revenue of
$1,541,000.
Gross
profit for the September 2006 period was $8,822,000 and our gross profit
percentage was 55%.
Software
and Related Systems and Services - Public Health
The
Software and Related Systems and Services-Public segment is a new segment
established as a result of the acquisition of the business of QS Technologies,
Inc. by Netsmart - Public Health. The Public Health operations commenced August
2, 2006. Netsmart - Public Health delivers enterprise-wide public health
solutions and vital records software to 70 public health agencies, including
nine states. The small turnkey contracts in the Public Health segment are for
system installations for Public Health information management software and
vital
records software for public health agencies. The small turnkey contracts are
usually completed within a six-month period.
Revenue
for the September 2006 period consisted of the following components: Maintenance
revenue of $343,000, third party reimbursable revenue of $3,000, turnkey systems
labor revenue of $13,000 and license revenue of $161,000.
Gross
profit for the September 2006 period was $278,000 and our gross profit
percentage was 53%.
Data
Center Services (Service Bureau)
Data
center clients typically generate approximately the same amount of revenue
each
year. We bill on a transaction basis or on a fixed fee arrangement.
Historically, each year we increase the transaction or fixed fee by an amount
that approximates the New York urban consumer price index increase. The data
center revenue decreased to $1,325,000 in the September 2006 period from
$1,380,000 in the September 2005 period, representing a decrease of $55,000,
or
4%. This decrease was the result of one customer discontinuing the use of our
services.
Gross
profit increased 2% to $716,000 in the September 2006 period from $703,000
in
the September 2005 period. Our gross margin percentage increased to 54% in
the
September 2006 period from 51% in the September 2005 period. This increase
in
gross margin percentage was the result of a reduction in the following costs:
communication costs decreased $32,000, supplies decreased $13,000 and support
overhead and facility costs decreased $43,000. These decreases in costs, which
increased our gross margin percentage, were partially offset by a $22,000
increase in salary and fringe cost, as well as the decrease in revenue mentioned
above.
Application
Service Provider Services (“ASP”)
ASP
Services involves the offering of our Avatar suite of products, our CareNet
products, our Netsmart University products and our InfoScribeR products on
a
virtual private network or through an internet delivery approach, thereby
allowing our customers to rapidly deploy products and pay on a monthly service
basis, thus eliminating capital intensive system requirements for such services.
ASP
revenue increased to $2,610,000 in the September 2006 period from $1,786,000
in
the September 2005 period, representing an increase of $824,000 or 46%. This
increase is primarily the result of the inclusion of our Netsmart University
revenue, as well as increases in our CareNet, Avatar ASP services and
InfoScriber customer base.
Gross
profit for the September 2006 period was $1,045,000 and for the September 2005
period was $643,000, representing an increase of $402,000, or 63%. The gross
margin percentage was 40% for the September 2006 period and 36% for the
September 2005 period. Although revenue increased, the gross profit and gross
margin percentage did not increase proportionally due to the increased costs
associated with the Netsmart University operations, which amounted to $316,000
in the September 2006 period. These costs represent the required baseline costs
to support the Netsmart University operation, as well as a provision for bonus
of $50,000 in accordance with the provisions of an employment contract with
the
principal of Netsmart University. We expect that as revenue from Netsmart
University increases, gross profit and margins for this segment will increase
accordingly.
Operating
Expenses
Selling,
general and administrative expenses were $13,099,000 in the September 2006
period, reflecting an increase of $6,316,000, or 93%, from $6,783,000 in the
September 2005 period. Approximately $4,255,000 or 67% of this increase was
related to the sales and marketing and general and administrative costs
associated with Netsmart - Ohio. These costs consist of : (1) general and
administrative costs totaling $1,977,000, of which the major cost components
are
as follows - accounting, human resources and administrative salaries and fringe
costs $393,000, rent and real estate taxes related to the Ohio facility
$405,000, reserve for bad debts $159,000, customer list and contract backlog
amortization $580,000, accounting fees $76,000 and equipment costs and
maintenance $112,000 and (2) sales and marketing costs totaling $2,278,000,
of
which the major cost components are as follows - salaries and fringe benefits
$1,401,000, commissions $285,000, trade shows $160,000 and travel and lodging
$202,000. The remaining 33% of the increases in selling, general and
administrative costs beyond the Netsmart - Ohio costs were in: sales and
marketing salaries and fringe benefit costs, which increased by $428,000;
commissions, which increased $345,000; sales and marketing costs associated
with
travel and lodging which increased by $81,000, advertising and promotion costs,
which increased by $69,000; general administrative salaries and fringe benefits
costs, which increased $299,000; general insurance costs which increased by
$104,000; accounting costs which increased by $144,000; and provision for
bonuses which increased by $185,000.
We
incurred research, development and maintenance expenses of $4,571,000 in the
September 2006 period, an increase of $1,715,000, or 60%, from $2,856,000 in
the
September 2005 period. Approximately $1,587,000 of research, development and
maintenance expenses related to the Netsmart - Ohio operations and $120,000
related to the Netsmart Public Health operations. The Netsmart -New York
research, development and maintenance expenses remained relatively unchanged
in
the September 2006 period as compared to the September 2005 period.
Interest
expense was $180,000 in the September 2006 period, an increase of $128,000,
or
243%, from the $52,000 in September 2005 period. On October 7, 2005, we borrowed
$2,500,000 pursuant to a term loan advanced under a new revolving credit and
term loan agreement. The increase in interest expense was partially the result
of the increased borrowings under this term loan. In August 2006, in connection
with the acquisition of Netsmart - Public Health, we issued a three year
promissory note in the amount of $1,435,000. The increase in interest expense
was partially the result of the increased borrowings related to this
note.
Interest
income was $274,000 in the September 2006 period, an increase of $28,000, or
11%, from $246,000 in the September 2005 period. This increase is the result
an
increase in interest rates. Interest income is generated from short-term
investments made with a substantial portion of the proceeds received from our
term loan, as well as cash generated from operations.
We
have a
net operating loss tax carry forward of approximately $3.5 million at September
30, 2006. In the September 2006 period, we recorded a current income tax expense
of $1,723,000, which related to various state and local taxes, as well as a
provision for the Federal income tax. The income tax provision also consists
of
a deferred tax provision of $102,000. In the September 2005 period, we recorded
a current income tax expense of $235,000, which related to various state and
local taxes, as well as a provision for the Federal alternative minimum tax.
The
income tax provision also consists of a deferred tax provision of
$487,000.
As
a
result of the foregoing factors, in the September 2006 period, we had net income
of $2,270,000, or $.35 per share basic and $.33 per share diluted. For the
September 2005 period, we had net income of $1,191,000, or $.22 per share basic
and $.21 per share diluted.
Three
Months Ended September 30, 2006 and 2005
Results
of Operations
Our
total
revenue for the three months ended September 30, 2006 (“the “September 2006
quarter”) was $15,392,000, an increase of $6,875,000, or 81%, from our revenue
for the three months ended September 30, 2005 (the “September 2005 quarter”)
which was $8,517,000. Revenue from the Netsmart - Ohio acquisition accounted
for
$5,191,000 or 76% of the increase in revenue from the September 2006 quarter
to
the September 2005 quarter. Revenue from the Netsmart - Public Health
acquisition accounted for $521,000 or 8% of the increase from the September
2006
quarter to the September 2005 quarter.
Revenue
from contracts with state and local government agencies represented 38% of
revenue in the September 2006 quarter and 44% of revenue in the September 2005
quarter. This decrease was the result of the inclusion of the Netsmart - Ohio
revenue, approximately 20% of which is generated from contracts with state
and
local government agencies.
Fixed
price software development contracts, which include labor, licenses and third
party resale components, accounted for 15% and 27% of consolidated revenue
for
the September 2006 quarter and the September 2005 quarter, respectively. This
decrease is the result of a decrease in Software and Related Systems and
Services revenue generated from fixed price contracts and an increase in
Software and Related Systems and Services revenue generated on an as incurred
basis. Our recurring revenue components, which include our maintenance contract
services, our Data Center and our ASP services, accounted for 53% of our
consolidated revenue for the September 2006 quarter as compared to 44% of
consolidated revenue for the September 2005 quarter. This increase was primarily
the result of an increase in maintenance revenue resulting from the inclusion
of
the operations of Netsmart - Ohio and Netsmart - Public Health, as well as
an
increase in our maintenance Data Center and ASP revenue, exclusive of the
Netsmart - Ohio and Netsmart - Public Health acquisitions.
Revenue
from large turnkey fixed price software development contracts is determined
using the percentage of completion method, which is based upon the time spent
by
our technical personnel on a project. Since the billing schedules under the
contracts differ from the recognition of revenue, at the end of any quarter,
these contracts generally result in either costs and estimated profits in excess
of billing or billing in excess of costs and estimated profits. Revenue from
our
small turnkey fixed price contracts is accounted for under the completed
contract method.
Software
and Related Systems and Services - New York
Our
Software and Related Systems and Services - New York revenue for the September
2006 quarter was $8,313,000, an increase of $883,000, or 12%, from our revenue
for the September 2005 quarter, which was $7,430,000. Software and Related
Systems and Services - New York revenue is comprised of turnkey systems labor
revenue, revenue from sales of third party hardware and software, license
revenue, maintenance revenue and revenue from small turnkey systems in the
markets in which we operated prior to our acquisition of our Ohio operations
in
September 2005.
Within
this segment are large turnkey and small turnkey components. The large turnkey
components consist mostly of our Avatar suite of products. When we are engaged
in fixed price arrangements for large turnkey systems, the installations will
usually extend over a six-month to a multi-year time period; these installations
are accounted for under the percentage of completion method. The duration of
the
implementation depends on the size and complexity of the customer organization
and the specifics of the implementation. Installations of small turnkey
components are usually completed within a six-month period; these installations
are accounted for under the completed contract method. Small turnkey contracts
performed in the New York segment are mostly related to our Avatar methadone
related products.
The
largest component of Software and Related Systems and Services - New York
revenue was maintenance revenue, which increased $161,000, or 6%, to $2,793,000
in the September 2006 quarter from $2,632,000 in the September 2005 quarter.
As
turnkey systems are completed, customers are transitioned to the maintenance
division, thereby increasing our installed base of recurring revenue. Turnkey
systems labor revenue increased $404,000 to $2,645,000 in the September 2006
quarter from $2,241,000 in the September 2005 quarter. Turnkey systems labor
revenue refers to labor associated with turnkey installations and includes
categories such as training, installation, project management and development.
An increase of $636,000 in turnkey systems labor revenue was primarily due
to an
increase in billable time spent on contracts. This increase was partially offset
by $232,000 due to an 11% decrease in our average daily billing rate. Revenue
from third party hardware and software increased 5% to $1,674,000 in the
September 2006 quarter, from $1,588,000 in the September 2005 quarter. Sales
of
third party hardware and software, such as pharmacy and database software,
are
made in connection with the sales of turnkey systems. These sales are typically
made at lower gross margins than our software and related systems and services
revenue. During the September 2006 quarter, the increase in revenue from third
party hardware and software was the result of an increase in pharmacy related
sales to various customers. License revenue decreased 6% to $659,000 in the
September 2006 quarter from $702,000 in the September 2005 quarter. License
revenue is generated as part of a sale of a human services information system
pursuant to a contract or purchase order that includes delivery of the system
and maintenance. The decrease in revenue is substantially the result of a
decrease in customer user count upgrade sales, as well as a decrease in large
system license sales. Revenue from the sales of our small turnkey contracts
increased 103% to $542,000 in the September 2006 quarter from $267,000 in the
September 2005 quarter. Small turnkey contract sales relate to turnkey contracts
that are less than $50,000 and are usually completed within one to six months.
The increase in our small turnkey revenue for the September 2006 quarter is
substantially due to increased activity in contract closings and implementation
efforts.
Gross
profit increased 13% to $3,967,000 in the September 2006 quarter from $3,515,000
in the September 2005 quarter. Our gross profit percentage increased to 48%
in
the September 2006 quarter from 47% in the September 2005 quarter. Our gross
profit percentage increased as a result improved efficiency from our maintenance
division.
Software
and Related Systems and Services - Ohio
The
Software and Related Systems and Services-Ohio segment is a new segment
established as a result of the acquisition of Netsmart - Ohio, formerly CMHC
Systems, Inc. The Ohio operations commenced October 1, 2005. Netsmart - Ohio
offers a full suite of behavioral healthcare information management software
for
mental health, substance abuse, and addiction services agencies, developmental
disability centers, and behavioral health-related managed care organizations.
The small turnkey contracts in the Ohio segment are for system installations
for
behavioral healthcare information management software for mental health,
substance abuse, and addiction services agencies, developmental disability
centers and behavioral health-related managed care organizations. The small
turnkey contracts are usually completed within a six-month period.
Revenue
for the September 2006 quarter consisted of the following components:
Maintenance revenue of $3,727,000, third party hardware and software revenue
of
$440,000, turnkey systems labor revenue of $643,000 and license revenue of
$382,000.
Gross
profit for the September 2006 quarter was $2,969,000 and our gross profit
percentage was 57%.
Software
and Related Systems and Services - Public Health
The
Software and Related Systems and Services-Public Health segment is a new segment
established as a result of the acquisition of the business of QS Technologies,
Inc by Netsmart - Public Health. The Public Health operations commenced August
2, 2006. Netsmart - Public Health delivers enterprise-wide public health
solutions and vital records software to 70 public health agencies, including
nine states. The small turnkey contracts in the Public Health segment are for
system installations for Public Health information management software and
vital
records software for public health agencies. The small turnkey contracts are
usually completed within a six-month period.
Revenue
for the September 2006 period consisted of the following components: Maintenance
revenue of $343,000, third party reimbursable revenue of $3,000, turnkey systems
labor revenue of $13,000 and license revenue of $161,000.
Gross
profit for the September 2006 period was $278,000 and our gross profit
percentage was 53%.
Data
Center Services (Service Bureau)
Data
center clients typically generate approximately the same amount of revenue
each
year. We bill on a transaction basis or on a fixed fee arrangement.
Historically, each year we increase the transaction or fixed fee by an amount
that approximates the New York urban consumer price index increase. The data
center revenue increased to $442,000 in the September 2006 quarter from $434,000
in the September 2005 quarter, representing an increase of $8,000, or 2%.
Gross
profit increased 15% to $237,000 in the September 2006 quarter from $207,000
in
the September 2005 quarter. Our gross margin percentage increased to 54% in
the
September 2006 quarter from 48% in the September 2005 quarter. This increase
in
gross margin percentage was the result of an increase in revenue as well as
a
reduction in the following costs: communication costs decreased $8,000, supplies
decreased $11,000 and support overhead and facility costs decreased $13,000.
These decreases in costs, which increased our gross margin percentage, were
partially offset by a $12,000 increase in salary and fringe benefit
costs.
Application
Service Provider Services (“ASP”)
ASP
Services involves the offering of our Avatar suite of products, our CareNet
products, our Netsmart University products and our InfoScribeR products on
a
virtual private network or through an internet delivery approach, thereby
allowing our customers to rapidly deploy products and pay on a monthly service
basis, thus eliminating capital intensive system requirements for such services.
ASP
revenue increased to $926,000 in the September 2006 quarter from $653,000 in
the
September 2005 quarter, representing an increase of $273,000 or 42%. This
increase is primarily the result of increases Netsmart University, CareNet
and
Infoscriber revenue.
Gross
profit for the September 2006 quarter was $329,000 and for the September 2005
quarter was $174,000, representing an increase of $155,000, or 89%. The gross
margin percentage was 36% for the September 2006 quarter and 27% for the
September 2005 quarter. Although revenue increased, the gross profit and gross
margin percentage did not increase proportionally due to the increased costs
associated with the Netsmart University operations, which amounted to $97,000
in
the September 2006 quarter. These costs represent the required baseline costs
to
support the Netsmart University operation as well as a provision for bonus
of
$50,000 payable in accordance with the terms of an employment contract with
the
principal of Netsmart University. We expect that as revenue from Netsmart
University increases, gross profit and margins for this segment will increase
accordingly.
Operating
Expenses
Selling,
general and administrative expenses were $4,406,000 in the September 2006
quarter, reflecting an increase of $1,982,000, or 82%, from $2,424,000 in the
September 2005 quarter. Approximately $1,329,000 or 67% of this increase was
related to the selling, marketing and general and administrative costs
associated with Netsmart - Ohio. These costs consist of : (1) general and
administrative costs totaling $645,000, of which the major cost components
are
as follows - accounting, human resources and administrative salaries and fringe
benefit costs $141,000, rent and real estate taxes related to the Ohio facility
$111,000, reserve for bad debts $82,000, customer list and contract backlog
amortization $193,000 and accounting fees $40,000 and (2) sales and marketing
costs totaling $684,000, of which the major cost components are as follows
-
salaries and fringe benefit costs $455,000, commissions $84,000 and travel
and
lodging $75,000. Approximately $123,000 was related to the selling and general
and administrative costs associated with the Netsmart - Public Health
acquisition made in August 2006. The remaining increases beyond the Netsmart
-
Ohio and Netsmart - Public Health costs were in: sales and marketing salaries
and fringe costs, which increased by $104,000; commissions, which increased
$170,000; provision for bonuses which increased by $72,000; legal costs which
increased by $77,000, and reserve for bad debts which increased by $106,000.
We
incurred research, development and maintenance expenses of $1,600,000 in the
September 2006 quarter, an increase of $713,000, or 80%, from $887,000 in the
September 2005 quarter. Approximately $510,000 of research, development and
maintenance expenses related to the Netsmart - Ohio operations and $120,000
related to the Netsmart Public Health operations. The Netsmart -New York
research, development and maintenance expenses increased by approximately
$83,000 as a result of efforts towards routine product maintenance.
Interest
expense was $72,000 in the September 2006 quarter, an increase of $57,000,
or
380%, from $15,000 in September 2005 quarter. On October 7, 2005, we borrowed
$2,500,000 pursuant to a term loan advanced under a new revolving credit and
term loan agreement. The increase in interest expense was primarily the result
of the increased borrowings under this term loan. In August 2006, in connection
with the acquisition of Netsmart - Public Health, we issued a three year
promissory note in the amount of $1,435,000. The increase in interest expense
was partially the result of the increased borrowings related to this
note.
Interest
income remained relatively constant at $96,000 for the September 2006 quarter
and $101,000 for the September 2005 quarter. Interest income is generated from
short-term investments made with a substantial portion of the proceeds received
from our term loan, as well as cash generated from operations.
At
September 30, 2006, we had approximately $3.53M in federal and $2.82M in various
state net operating loss carryforwards. The federal and Ohio state loss
carryforward is limited to approximately $830,000 per year. In the September
2006 quarter, we recorded a current tax expense of $1,203,000, which relates
to
federal, state, and local tax. The income tax provision also consists of a
deferred tax benefit of $431,000 resulting in a net income tax provision of
$772,000. In the quarter ending September 30, 2006, we determined that an Ohio
combined tax return should be filed for 2006. As a result, our tax provision
was
reduced by $127,000 and our effective tax rate has decreased approximately
3.1% in the quarter ended September 30th,
2006.
In addition, we performed normal tax provision true-up calculations based on
the
filing of our tax returns which resulted in a decrease in tax of approximately
of $103,000 or an effective tax rate decrease for the quarter ending September
30, 2006 of 2.5%.
During
the September 30, 2006 quarter, we trued up the deferred tax asset account
for
NTST-Ohio at September 28, 2005, the date of the CMHC acquisition. Based on
this true up calculation, we decreased our Goodwill by approximately
$355,000.
As
a
result of the foregoing factors, in the September 2006 quarter, we had net
income of $1,025,525, or $.16 per share basic and $.15 per share diluted. For
the September 2005 quarter, we had net income of $379,000, or $.07 per share,
basic and diluted.
Liquidity
and Capital Resources
We
had
working capital of approximately $4.8 million at September 30, 2006 as compared
to working capital of approximately $4.0 million at December 31, 2005. This
increase of approximately $800,000 in working capital was the result of the
following: our net income, after adding back depreciation and amortization,
which totaled $5,621,000; $570,000 for a goodwill adjustment relating to
deferred revenue and accrued liabilities; and net proceeds from the exercise
of
stock options and warrants in the amount of $483,000. These increases were
partially offset by $4,091,000 in cash used in, and the assumption of net
current liabilities associated with, the Netsmart - Public Health acquisition;
$942,000 for the acquisition of equipment; $744,000 related to current income
taxes payable and $159,000 of additional costs related to the private placement
effort completed in 2005. The remaining increase in working capital of $30,000
was due to changes in other current assets and liabilities.
In
October 2005, we entered into a revolving credit and term loan agreement with
the Bank of America, which was amended as of December 31, 2005, and further
amended as of September 29, 2006 (as so amended, the “Credit Agreement”). This
financing provides us with a five-year term loan of $2.5 million. The term
loan
bears interest at LIBOR plus 2.25%. We have entered into an interest rate swap
agreement with the Bank for the amount outstanding under the term loan whereby
we converted our variable rate on the term loan to a fixed rate of 7.1% in
order
to reduce the interest rate risk associated with these borrowings. On October
7,
2005, we borrowed the full amount of the $2,500,000 term loan. The revolving
credit facility provides for borrowings of up to $2,500,000. Any amounts
borrowed under this arrangement will bear interest at a rate per annum to be
elected by us, equal to either (1) the LIBOR Rate plus 2.5% or (2) the Bank's
prime rate. We have not borrowed any amounts under the revolving credit facility
and there is no amount outstanding as of September 30, 2006. The amount
outstanding under the Credit Agreement at September 30, 2006 is
$2,042,000.
The
terms
of the Credit Agreement require compliance with certain covenants, including
maintaining a minimum tangible net worth of a negative $2,250,000 until December
30, 2006 with provisions for increases in future periods, minimum cash reserves
of $5,000,000, maintenance of certain financial ratios, limitations on capital
expenditures and indebtedness and prohibition of the payment of cash dividends.
As of September 30, 2006, the Company was in compliance with the financial
covenants of the Credit Agreement.
A
part of
our growth strategy is to acquire other businesses that are related to our
current business. Such acquisitions may be made with cash, our securities,
or a
combination of cash and securities. If we fail to make any acquisitions our
future growth will be limited to only internal growth. We are continually
seeking acquisitions that will add complementary products to our offerings
and
that will provide value for the markets we serve. As of the date of this Form
10-Q quarterly report, we did not have any formal or informal agreements or
understandings with respect to any material acquisition by us.
On
August
1 2006, we acquired certain assets, including computer software, customer lists
and computer equipment of QS Technologies, Inc. (“QS”) for an initial payment of
$1,900,000 in cash and a $1,435,000 promissory note, together with the
assumption of approximately $1,943,000 in net liabilities, consisting
principally of deferred revenue. The transaction also provides for potential
additional payments to the seller of up to $1,450,000 in 2008, contingent upon
the attainment of performance milestones by the QS business through 2007. The
acquired QS business delivers enterprise-wide public health solutions and vital
records software to 70 public health agencies, including nine states. We also
assumed the facility lease of QS in Greenville, South Carolina. This lease
has a
total square footage of 5,761, is non-cancelable and expires on February 23,
2011. The annual rent is $80,106 and is subject to escalation clauses. The
amount outstanding under the promissory note at September 30, 2006 was
$1,400,000.
Based
on
our outstanding contracts and our continuing business, we believe that our
cash
flow from operations and our cash on hand will be sufficient to enable us to
fund our operations for at least the next twelve months. It is possible that
we
may need additional funding if we pursue certain acquisitions or if our business
does not develop as we anticipate, or if our expenses, including our software
development costs relating to our expansion of our product line and our
marketing costs for seeking to expand the market for our products and services
to include smaller clinics and facilities and sole group practitioners, exceed
our expectations.
Based
on
our market capitalization on June 30, 2006, the last day of our second fiscal
quarter, we will become an “accelerated filer” for our fiscal year ending
December 31, 2006. Our status as an accelerated filer will require us to comply
with Section 404 of the Sarbanes-Oxley Act of 2002 for our next fiscal year,
which requires management certification with respect to internal controls over
financial reporting. In anticipation of the change to accelerated filer status,
we have substantially completed the steps necessary to enable management to
evaluate such internal controls. Consequently, we do not expect to make material
expenditures in connection with our Section 404 compliance, other than the
attestation by our independent registered accountants.
Off-Balance
Sheet Arrangements
We
are
not a party to any off-balance sheet arrangements.
Contractual
Obligations
The
following table summarizes, as of September 30, 2006, our obligations and
commitments to make future payments under debt, capital leases, operating leases
and other long-term liabilities:
Contractual
Obligations
|
|
Payments
Due by Period
|
|
|
|
|
|
|
|
|
|
Total
|
|
Less
than
1
year
|
|
1
- 3 years
|
|
4
- 5 years
|
|
Over
5 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long
Term Debt1
|
|
$
|
2,041,667
|
|
$
|
500,000
|
|
$
|
1,000,000
|
|
$
|
541,667
|
|
$
|
--
|
|
Asset purchase
agreement4 |
|
|
1,399,732
|
|
|
442,610
|
|
|
957,122
|
|
|
--
|
|
|
--
|
|
Capital
Lease Obligations2
|
|
|
19,902
|
|
|
19,902
|
|
|
--
|
|
|
--
|
|
|
--
|
|
Operating
Leases3
|
|
|
8,830,339
|
|
|
1,310,028
|
|
|
2,354,563
|
|
|
2,195,318
|
|
|
2,970,430
|
|
Other
Long-Term Liabilities3
|
|
|
1,207,519
|
|
|
812,053
|
|
|
352,966
|
|
|
42,500
|
|
|
--
|
|
Total
Contractual and Other Long-Term
Obligations
|
|
$
|
13,499,159
|
|
$
|
3,084,593
|
|
$
|
4,664,651
|
|
$
|
2,779,485
|
|
$
|
2,970,430
|
|
1
See Note
7 to Netsmart’s Consolidated Financial Statements for the years ended December
31, 2005, 2004 and 2003, which describes the Company’s financing
agreements.
2
See Note
10 to Netsmart’s Consolidated Financial Statements for the years ended December
31, 2005, 2004 and 2003, which describes the Company’s Capital Lease
Obligation.
3
See Note
12 to Netsmart’s Consolidated Financial Statements for the years ended December
31, 2005, 2004 and 2003 which describes the Company’s Operating Lease and other
Contractual Obligations.
4
See
note
5 to
Netsmart’s Form 10Q for the Nine Months Ended September 30, 2006
Critical
Accounting Policies and Estimates
Our
Consolidated Financial Statements are prepared in accordance with accounting
principles generally accepted in the United States of America. These accounting
principles require us to make certain estimates, judgments and assumptions.
We
believe that the estimates, judgments and assumptions upon which we rely are
reasonable based upon information available to us at the time that these
estimates, judgments and assumptions are made. These estimates, judgments and
assumptions can affect the reported amounts of assets and liabilities as of
the
date of the financial statements, as well as the reported amounts of revenues
and expenses during the periods presented. Among other things, estimates are
used in accounting for allowances for bad debts, deferred income taxes, expected
realizable values of assets (primarily capitalized software development costs
and customer lists) and revenue recognition. To the extent there are material
differences between these estimates, judgments or assumptions and actual
results, our financial statements will be affected. Following is a discussion
of
the significant accounting policies and the significant estimates that we
believe are the most critical to aid in fully understanding and evaluating
our
reported financial results:
Revenue
Recognition
Capitalized
Software Development Costs
Impairment
of Customer Lists
Bad
Debts
Fair
Value of Acquired Deferred Post-Contract Customer Support
Valuation
Allowance for Deferred Income Tax Assets
Purchase
Price Allocation of Netsmart Ohio and QS Technologies Acquisitions
Revenue
Recognition
- We
recognize large turnkey revenue from long-term (six months or longer), fixed
price contracts for financial statement purposes under the percentage of
completion method when significant modification of the software package is
required to meet the customer specifications. The percentage of completion
method takes into account progress towards completion of a contract using time
spent by technical personnel on a particular project as the measuring standard.
Revisions in cost estimates and recognition of losses on these contracts are
reflected in the accounting period in which the facts become known. Contract
terms provide for billing schedules that differ from revenue recognition and
give rise to costs and estimated profits in excess of billings, and billings
in
excess of costs and estimated profits.
We
recognize small turnkey revenue from short-term (less than six months), fixed
price contracts for financial statement purposes under the completed contract
method. Payments received in advance by customers are deferred until earned
and
represented as deferred revenue in the accompanying balance sheet.
Revenue
associated with fixed price turnkey sales consists of the following components:
licensing of software, labor associated with the installation and implementation
of the software; and maintenance services rendered in connection with such
licensing activities. The complexity of the estimation process and issues
related to the assumptions, risks and uncertainties inherent with the
application of the percentage of completion method of accounting affect the
amounts of revenue and related expenses reported in our Consolidated Financial
Statements. A number of internal and external factors can affect our estimates,
including labor rates, utilization and efficiency variances and specification
and testing requirement changes. Maintenance contract revenue is recognized
on a
straight-line basis over the life of the respective contract. We also derive
revenue from the sale of third party hardware and software which is recognized
based upon the terms of each contract. Consulting revenue is recognized when
the
services are rendered. Data Center revenue and Application Service Provider
revenue are recognized in the period in which the services are provided. The
above sources of revenue are recognized when persuasive evidence of an
arrangement exists, delivery has occurred, the fee is fixed and determinable
and
collectibility is probable.
Contract
terms often provide for billing schedules that differ from revenue recognition
and give rise to costs and estimated profits in excess of billings, and billings
in excess of costs and estimated profits.
Deferred
revenue represents revenue billed and collected but not yet earned.
The
cost
of maintenance revenue, which consists solely of staff payroll and applicable
overhead, is expensed as incurred.
Capitalized
Software Development Costs
-
Capitalization of computer software development costs begins upon the
establishment of technological feasibility and ends upon its availability for
general release to customers. Technological feasibility for our computer
software products is generally based upon achievement of a detail program design
free of high risk development issues. We capitalize only those costs directly
attributable to the development of the software. The establishment of
technological feasibility and the ongoing assessment of recoverability of
capitalized computer software development costs require considerable judgment
by
management with respect to certain external factors, including, but not limited
to, technological feasibility, anticipated future gross revenue, estimated
economic life and changes in software and hardware technology. Prior to reaching
technological feasibility these costs are expensed as incurred and included
in
research, development and maintenance. Activities undertaken after the products
are available for general release to customers to correct errors or keep the
product updated are expensed as incurred and included in research, development
and maintenance. Amortization of capitalized computer software development
costs
commences when the related products become available for general release to
customers. Amortization is provided on a product by product basis. The annual
amortization is the greater of the amount computed using (a) the ratio that
current gross revenue for a product bears to the total of current and
anticipated future gross revenue for that product or (b) the straight-line
method over the remaining estimated economic life of the product. The estimated
life of these products range from 3 to 8 years.
We
periodically perform reviews of the recoverability of such capitalized software
costs. At the time a determination is made that capitalized amounts are not
recoverable based on the estimated cash flows to be generated from the
applicable software, any remaining capitalized amounts are written
off.
Impairment
of Customer Lists
-
Pursuant to SFAS No. 144, “Accounting for the Impairment or Disposal of
Long-Lived Assets”, we evaluate our long-lived assets for financial impairment,
and continue to evaluate them as events or changes in circumstances indicate
that the carrying amount of such assets may not be fully recoverable. We
evaluate the recoverability of long-lived assets by measuring the carrying
amount of the assets against the estimated undiscounted future cash flows
associated with them. At the time such evaluations indicate that the future
undiscounted cash flows of certain long-lived assets are not sufficient to
recover the carrying amount of such assets, the assets are adjusted to their
fair values.
Bad
Debts - We
maintain allowances for doubtful accounts for estimated bad debts. Our practice
is to specifically identify clients and invoices where we believe collection
may
be at risk and provide for these on a current basis. If the financial condition
of our customers were to deteriorate, resulting in an impairment of their
ability to make payments, additional allowances might be required. In addition,
since we evaluate each account and invoice on a case-by-case basis, the
provision could vary from period to period.
Fair
value of acquired deferred post-contract customer support
(“PCS”)
- We
value PCS in accordance with View B of Emerging Issues Task Force (“EITF”)
04-11. In order to remain competitive and maintain our existing customer base,
we upgrade and maintain software for purposes of bug fixes and ongoing
regulatory changes, as well as software corrections and enhancements. These
services are not sold separately and are therefore fair valued as a single
unit.
Although these services are provided on a when-and-if-available basis, we have
an obligation to our existing customer base to develop upgrades and enhancements
in order to maintain our customer relationships, as well as increase future
revenue. The fair value of this liability is estimated using the value of the
services provided using an estimated fulfillment margin. We intend to fulfill
100% of our obligations under these assumed PCS obligations
assumed.
Valuation
Allowance for Deferred Income Tax Assets
-- We
measure deferred income taxes using enacted tax rates and laws that we expect
will be in effect when the underlying assets or liabilities settle. We record
a
valuation allowance against our deferred income tax assets balance when it
is
more likely than not that the benefits of the net tax asset balance will not
be
realized, and record a corresponding charge to income tax expense. Our ability
to reduce the valuation allowance for deferred income tax assets depends on
our
ability to generate taxable income in the future. Based on our projection of
our
future taxable income we have determined that a valuation allowance is no longer
required.
Purchase
Price Allocations of Netsmart Ohio and QS Technologies Acquisitions
-
Purchase
price allocations are subject to change. Changes could include a reallocation
of
intangible assets which would likely have the effect of increasing or decreasing
future amortization expense, since the intangible assets are initially assigned
varied lives. Additionally, the lives assigned to the identifiable intangible
assets represent management’s best estimates of the time periods in which it
will continue to receive benefits from these assets. The useful lives may need
to be adjusted in the future based upon changes to the expected useful lives
of
such assets.
ISSUES
AND UNCERTAINTIES
This
Quarterly Report on Form 10-Q contains statements that are forward-looking.
These statements are based on current expectations and assumptions that are
subject to risks and uncertainties. Actual results could differ materially
because of issues and uncertainties such as those described under Item 1A.
“Risk
Factors” in this Form 10-Q and our Form 10-K for 2005 and those described
elsewhere in this report, which, among others, should be considered in
evaluating our financial outlook.
See also
“Forward-Looking Statements” below.
Forward-Looking
Statements
Statements
in this Form 10-Q quarterly report may be “forward-looking statements” within
the meaning of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements include, but are not limited to, statements that
express our intentions, beliefs, expectations, strategies, predictions or any
other statements relating to our future activities or other future events or
conditions. These statements are based on current expectations, estimates and
projections about our business based, in part, on assumptions made by
management. These statements are not guarantees of future performance and
involve risks, uncertainties and assumptions that are difficult to predict.
Therefore, actual outcomes and results may differ materially from what is
expressed or forecasted in the forward-looking statements due to numerous
factors, including those described in this Form 10-Q and in our Form 10-K annual
report for the year ended December 31, 2005 and in other documents which we
file
with the Securities and Exchange Commission. In addition, such statements could
be affected by risks and uncertainties related to product demand, market and
customer acceptance, competition, government regulations and requirements,
pricing and development difficulties, as well as general industry and market
conditions and growth rates, and general economic conditions. Any
forward-looking statements speak only as of the date on which they are made,
and
we do not undertake any obligation to update any forward-looking statement
to
reflect events or circumstances after the date of this Form 10-Q.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk
We
are
exposed to market risks related to changes in interest rates. Our debt is at
fixed rates of interest after completing an interest rate swap agreement, which
effectively converted our variable rate debt at September 30, 2006 into a fixed
rate debt of 7.1%. Therefore, if the LIBOR rate plus 2.5% increases above 7.1%,
it may have a positive effect on our comprehensive income.
Most
of
our cash and cash equivalents, which are invested in money market accounts
and
commercial paper, are at variable rates of interest. If short-term market
interest rates decrease by 10% from the levels at September 30, 2006, the effect
on our net income would be a decrease of approximately $36,000 per
year.
Item
4. Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of the design
and operation of our disclosure controls and procedures, as required by Exchange
Act Rule 13a-15. Our disclosure controls and procedures are designed to ensure
that information required to be disclosed by us in the reports that we file
or
submit to the Securities and Exchange Commission under the Securities Exchange
Act of 1934, as amended, is recorded, processed, summarized and reported within
the time periods specified by the Commission’s rules and forms, and that
information is accumulated and communicated to our management, including our
Chief Executive Officer and our Chief Financial Officer, as appropriate to
allow
timely decisions regarding required disclosure. Based upon the evaluation that
was conducted, the Chief Executive Officer and Chief Financial Officer have
concluded that as of the end of the period covered by this report our disclosure
controls and procedures were effective.
Changes
in Internal Controls
During
the quarter ended September 30, 2006, we continued integrating the New York
and
Ohio operations. We have chosen to use the most efficient processes and internal
controls of the two operations in each location. During the quarter ended
September 30, 2006, we completed the implementation of same accounting system
in
Ohio as we use in New York. We are or will be in the process of implementing
the
billing and cash receipts procedures.
Also
during the period ended September 30, 2006, in connection with the QS
Technologies, Inc. (“QS”) acquisition we have integrated the QS accounting into
our New York accounting system and related controls.
Limitations
on the Effectiveness of Controls
We
believe that a control system, no matter how well designed and operated, cannot
provide absolute assurance that the objectives of the control system are met,
and no evaluation of controls can provide absolute assurance that all controls
issues and instances of fraud, if any, within a company have been detected.
Our
disclosure controls and procedures are designed to provide a reasonable
assurance of achieving their objectives and our Chief Executive Officer and
Chief Financial Officer have concluded that the controls and procedures
evaluated are effective at the “reasonable assurance” level.
PART
II
OTHER INFORMATION
Item
1A. Risk Factors
Our
business, financial condition, operating results and cash flows can be impacted
by a number of factors, including, but not limited to those set forth below,
any
one of which could cause our actual results to vary materially from recent
results or from our anticipated future results. For a discussion identifying
additional risk factors and important factors that could cause actual results
to
differ materially from those anticipated, see the discussions in “Risk Factors,
“ “Forward-Looking Statements,” “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” and “Notes to Consolidated
Financial Statements” in our Form 10-K for 2005 and in this Form
10-Q.
Because
we are particularly dependent upon government contracts, any decrease in funding
for entitlement programs could result in decreased
revenue.
We
market
our health information systems principally to behavioral health facilities,
many
of which are operated by state and local government entities and include
entitlement programs. During the September 2006 period, we generated 39% of
our
revenue from contracts that are directly or indirectly with government agencies,
as compared to 49% in the September 2005 period. Government agencies generally
have the right to cancel certain contracts at their convenience. Our ability
to
generate business from government agencies is affected by funding for
entitlement programs, and our revenue would decline if state agencies reduce
this funding.
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds.
None.
Item
6. Exhibits
Exhibit
No.
|
Description
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
8
U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
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.
NETSMART
TECHNOLOGIES, INC.
/s/
James L. Conway
|
|
Chief
Executive Officer
|
|
November
14, 2006
|
James
L. Conway
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
/s/
Anthony F. Grisanti
|
|
Chief
Financial Officer
|
|
November
14, 2006
|
Anthony
F. Grisanti
|
|
(Principal
Financial and
|
|
|
|
|
Accounting
Officer)
|
|
|
Index
of Exhibits
Exhibit
No.
|
Description
|
31.1
|
Certification
of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
31.2
|
Certification
of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
32.1
|
Certification
of Chief Executive Officer and Chief Financial Officer pursuant to
8
U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|